Let's go to to my Biotech Mailbag to answer two of the common questions we have received so far in March.
What Will It Take for Biotech to Break Out?
The main biotech indices are near highs they have not been able to decisively break above since late 2015. This was approximately half way through a bear market that took the sector down some 40% from peak to trough.
The sector has had a decent 2018 to date but is once again just below what have been strong resistance levels. Since I don't see a big rally in the cards for the overall market, something specific will have to happen for this high-beta part of the market to finally break through its current ceiling.
In my view, that would have to be the return of M&A across the industry. We had a good start to the year with some $30 billion of deals announced in the first five weeks of the year, but deals have been largely dormant since. Until we see transactions picking up again, the sector could remain in a trading range.
What Part of the Industry Is Ripe for Acquisitions?
I think the drug and pharma giants will pick up the pace of deals in the quarters ahead. They have clarity now thanks to tax reform and hundreds of billions of dollars from their overseas operations to "repatriate." They also have solid cash flow as well as an increasingly urgent need to replenish pipelines. Oncology has been one of the hottest sub-sectors in the industry for deals for quite some time. Medivation (MDVN) was acquired by Pfizer (PFE) in a bidding war for some $14 billion in August of 2016.
More recently Kite Pharma (KITE) was purchased by Gilead Sciences (GILD) for $12 billion late last summer which was followed by Celgene's (CELG) $9 billion deal for Juno Therapeutics JUNO to open this year. These were both in the emerging CAR-T space where Kite and Juno were two of the largest stand-alone plays.
The logical next "domino" to fall should be bluebird bio (BLUE) which has had a nice rally, in part because of the purchases of its brethren. However, Celgene has a huge collaboration with bluebird, which probably would scare off other likely suitors. I also think Celgene will spend some time digesting Juno before doing another significant acquisition.
Of the more traditional oncology plays, Tesaro (TSRO) , has been open to exploring strategic options. The stock is also seeing some major insider buying after a big recent decline in its shares. A likely acquirer might be concerned around slow initial sales of ZELUJA. I think Clovis Oncology (CLVS) is probably a more logical buyout target. The name also seems to near the top of every analyst firm's top potential biotech buyout list. In addition, they see a nice ramp up of indications Rubraca will be approved for in the years ahead.
Exelixis (EXEL) , whose drug Cabozantinib has taken market share much faster than initially expected, would be another potential logical target in the space.
This is an excerpt from Jensen's regular biotech mailbag column on Real Money Pro, our sister site for Wall Street professionals. Click here to check out more great columns from him, Doug Kass and other Real Money Pro writers.