Drug approvals and M&A drive strong month for biotech

I am pleased to present International Biotechnology Trust’s factsheet for November 2019

Regular readers will remember that in early November I discussed how the biotechnology sector had consolidated over the last four years. I said that an undervaluation of our sector versus the wider market may have represented a favourable entry point. Subsequently, the sector experienced a 12% rally and P/E multiples have expanded similarly. Despite this impressive rally, much of what I said a month ago still stands. The biotech sector is within the consolidation of the last four years, not surpassing the 2015 high, and multiples are still attractive versus the broader market. So, from both technical and valuation points, I think the sector still has room to run.

Figure 1: 10-year performance of the NASDAQ Biotechnology Index to 12 December 2019 (Bloomberg)

However, I’m also cognisant of the 2020 presidential election. As a team, we adhere to the consensus view that equity markets will be volatile until the election and more consistent growth will return afterwards. There are three possible scenarios:

1. A left-wing Democratic candidate is selected and then goes on to win the election. Whilst it is the worst-case scenario for our sector, opinion polls and bookmakers show it is unlikely such a hard-left candidate will be selected and less likely that he or she will win, just as we witnessed in the UK last week. Once ruled out, markets will react positively.
2. The Democratic Party is represented by a centrist candidate. Even if such a candidate were to be elected to The White House, it is unlikely they would implement any seismic changes so markets should react positively.
3. The current US President is re-elected. Whilst Donald Trump may have been impeached it remains unlikely that he will be removed from power as a two-thirds majority, in what is a Republican controlled senate, is required to convict. Moreover, should he survive the trial, in the 35 US presidential elections in which the incumbent president has run for re-election, that candidate has been successful on 21 occasions. Leaving political and personal preferences to one side, Trump’s re-election would see an immediate positive impact on global equity markets.

It is easy to understand why our sector would react so positively. Under the current political and regulatory framework, the US Food and Drug Administration are approving drugs at a better rate than ever before. Eleven new drugs were approved in the last five weeks, taking us to 42 new drug approvals in 2019 as at 12 December 2019.

Figure 2: US FDA Approvals 1998 to 12 December 2019

It has also been a busy month for biotechnology mergers and acquisitions. Firstly, the Bristol Myers Squibb-Celgene mega-merger finally closed. Secondly, there were several new transactions announced. Novartis entered into a definitive agreement to acquire The Medicines Company for $9.7bn, primarily to secure a late stage drug candidate for high blood cholesterol. Roche entered into a $1.4bn agreement to acquire Promedior, a private company with a drug candidate to treat IPF (idiopathic pulmonary fibrosis). And in early December, Merck announced the $2.4bn acquisition of Arqule, a company with drugs in development for the treatment of blood malignancies, whilst Sanofi bolstered its immuno-oncology pipeline with the $2.5bn acquisition of Synthorx.

International Biotechnology Trust held positions in each of Celgene, The Medicines Company and Arqule.

These transactions illustrate the extent to which large biopharmaceutical companies, more than ever before, need to replenish their pipelines with innovative treatments in order to underpin their future earnings growth. The depressed sector valuations help to catalyse such deals and I expect to see more M&A transactions in 2020. Combined with the launches of all the recently approved drugs and the prospect of even more approvals in the new year, 2020 should be one to look forward to regardless of what happens at The White House.

Finally, thank you for taking the time to read my thoughts throughout 2019. I enjoyed seeing many of you at our 2019 AGM last week and I am pleased that shareholders voted to allow the Trust to continue for a further two years.

I wish you the happiest of holiday seasons and I look forward to sharing my first thoughts of 2020 early in January.

Thank you for taking the time to read our factsheet.

November Factsheet (click link to open)