Biotech M&A In 2018: A Tsunami Or A Ripple?

It was a great day for biotech stocks. Merger mania has struck once again, sending the iShares Nasdaq Biotechnology ETF up more than 3.1% Monday after a pair of multi-million deals reinforced the Street’s belief that 2018 will be a lucrative year for biotech deal making.

Sanofi agreed to pay $11.5 billion for the hemophilia drug maker Bioverativ, while Celgene paid $9 billion for cell-therapy pioneer Juno Therapeutics.

It’s an old story. Big drug makers snap up smaller companies with innovative offerings to juice their product portfolios and research pipelines. Given the rash of deal making in recent years, there is more competition for fewer worthy targets, which means that buyers often pay a sizable premium.

Last year, M&A deals in the life sciences arena totaled $200 billion, led by Johnson & Johnson’s $30 billion acquisition of Actelion and Gilead Science’s nearly $12 billion deal for Kite Pharma. According to a report published earlier this month by consultancy EY, deal making in 2018 could exceed that mark.

"Many of the largest, most cash-rich companies in the industry have not even begun to participate in M&A, and when they do, prices and deal volumes could step up significantly," Leerink Partners analyst Geoffrey Porges wrote Monday in a note to investors.

Helping things along is corporate America’s bolstered financial firepower following the recent U.S. tax overhaul, which lowered the tax rate for repatriating cash held overseas.

"Fundamentally, large cap pharma and biotech companies face maturing markets and need to access new growth opportunities. In 2017 and into 2018, the market eagerly anticipated biotech M&A, while uncertainty over tax reform held back deal making," says Marshall Gordon, a health-care analyst at ClearBridge Investments. "Now that Congress has passed tax reform, buyers and sellers have clarity on tax rates and unfettered access to cash."