Biotech Stocks to Watch: Part 1

We kick off a holiday-shortened trading week today in front of Thanksgiving Thursday. In my two columns this week, I will be covering the state of biotech industry as we look to close out 2017 over the next six weeks. Today, we will look where biotech currently stands in the market. Wednesday, we will look deeper at a theme I think will play out in 2018: M&A. Let's get started. Overall, the sector has had a solid, but not spectacular, year so far in 2017. The broader biotech indices have risen in the mid-teens so far this year, even if they are down some 7% during the fourth quarter. The change in FDA leadership has reverberated across the industry. The agency has been most kind to smaller developmental concerns by clearing out applications for Orphan Drug status and has vowed to streamline the drug development and approval process, making it less time consuming and costly going forward. Amicus Therapeutics was one early beneficiary of this change in philosophy, as it no longer will have to conduct a lengthy and time-consuming trial around its compound, galafold, before filing for approval in the U.S. The drug was approved in Europe in May of 2016 for Fabry Disease. FDA approvals have picked up nicely in 2017 after a big lull in 2016 under previous leadership. On the flip side, generic drug manufacturers like Teva Pharmaceuticals have seen the sand shift beneath their feet. The FDA commissioner has stated that he wants at least three providers of every off-patent drug. This new competition should, over time, significantly lower prices on products that have been on the market past their patent periods. The business model that Valeant Pharmaceuticals used for years, of buying makers of existing drugs and raising prices, is dead and buried. If this wasn't obvious before, it certainly was after third quarter earnings season. The drug and biotech giants are having substantial problems with driving organic growth -- outside some exceptions, like Regeneron . With any kind of price hike coming under increasing political and regulatory scrutiny, the primary way to deliver growth going forward is going to be via new drugs. The problem is the drug and biotech stalwarts' pipelines are pretty sparse, overall. Despite huge free cash flow and some rock-solid balance sheets among most of the stalwarts in the space, M&A activity is at multi-year lows -- as 2017 has looked like 2013 so far after several good years. My opinion is that the industry has been waiting to see what, if any, tax reform will be enacted out of Washington. Goldman Sachs did raise its forecast of some sort of tax legislation passing in the near future -- from 65% to 80% last week. Passage would also set up the biotech sector for a much-anticipated and much-needed increase in M&A activity, given the hundreds of billions of dollars that the industry has stranded in it its overseas operations. Once the rules of the road are known -- particularly on any tax repatriation holiday -- I think we will see a flurry of deals come 2018. This should provide a nice tailwind for the small-cap and mid-cap parts of the sector, where most of these deals will occur. In Wednesday's column, we will look at some names that should be near the top of Big Pharma and biotech's shopping list as we enter the New Year.

Biotech Stocks to Watch: Part 1

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