Hello, Reader.
Fifty years ago, Dr. Seuss published his classic story “Did I Ever Tell You How Lucky You Are?”
Throughout the narrative, he encourages readers to count their blessings and to be grateful they did not draw an unlucky lot in life …
Poor Mr. Potter,
T-crosser,
I-dotter.
He has to cross t’s
and he has to dot i’s
in an I-and-T factory
out in Van Nuys!
If Dr. Seuss had produced this classic today, he might have included a few lines about “Poor Mr. Pharma.”
Be happy you’re not poor Mr. Pharma,
who desperately needs a big dose of good karma.
As much as he tries, he so often fails
to discover the drugs that bring blockbuster sales.
The pharmaceutical business is not an easy one. Drug companies spend billions of dollars to bring new medicines to market, and they fail far more often than they succeed.
In very recent history, Eli Lilly & Co. (LLY) struggled for nearly a decade to generate meaningful income growth. In 2010, the pharmaceutical giant booked a net profit of $5.3 billion. Nine long years later, it booked a nearly identical net profit of $5.5 billion.
Historically, pharmaceutical companies have worked their way through their down cycles by painstakingly developing new drugs, one by one, in the hopes that some of them become future blockbusters.
Most pharmaceutical companies are still pursuing a version of that strategy today.
But a powerful a new trend is emerging: fast-tracking drug development cycles by acquiring small biotech companies that have discovered promising therapies.
In today’s Smart Money, first we’ll explore this new biotech “takeover boom” that’s reshaping the pharmaceutical landscape.
Then, I’ll share where you can find the best biopharma plays.
Take a look…
Key Acquisitions Are… Key
This trend I’ve been closely following this year has been gaining momentum for several months now, with major players making bold moves.
Last month, for example, Novartis AG (NVS) paid $3 billion to acquire MorphoSys AG (MOR), an early-stage biotech company focused on innovative cancer therapies.
On the surface, that purchase price seems quite rich for a company that generated just $220 million in sales during the last 12 months. But Novartis is clearly eyeing the future of MorphoSys, not its past. This acquisition gives Novartis access to Pelabresib, a new treatment for myelofibrosis blood cancer that should receive U.S. Food and Drug Administration (FDA) approval later this year. Novartis also gains access to Tulmimetostat, a potential new therapy for uterine cancer.
Most other major pharmaceutical companies are attempting similar “bolt-on” acquisitions that target a specific drug under development and bolster its product pipeline.
Bristol-Myers Squibb Co. (BMY) is a textbook example. The company is currently facing one of the steepest “patent cliffs” in the history of the pharmaceutical industry. As several of Bristol’s top selling drugs lose patent protection during the next five years, the company will see half of its current revenue disappear.
That’s why the company is making key acquisitions. Last December, for example, the company spent $12.7 billion to acquire Karuna Therapeutics – mostly to get its hand on that company’s breakthrough schizophrenia drug candidate, KarXT. Bristol expects the FDA to give a thumbs up to KarXT by September. Assuming that approval occurs, Bristol would be adding a new blockbuster to its quiver and lessen some of the anxiety surrounding its patent cliff.
Bristol has also been striking numerous early-stage royalty and licensing deals. In these arrangements, Bristol pays upfront cash to a biopharmaceutical company in exchange for future royalties or licensing options on a specific drug in development. During the last five years, Bristol has inked 81 separate licensing deals – making it the most active dealmaker among the large pharma companies.
AI Opportunities in the Biotech Boom
So far this year, Big Pharma companies have snapped up six biotech companies worth more than $1 billion.
Artificial intelligence is further fueling this takeover boom. Because of AI’s potential to accelerate drug discovery, many large pharma companies fear falling behind if they don’t make key acquisitions. So, in order to stay competitive, “Poor Mr. Pharma” is becoming “More Mr. Pharma.”
And the history of pharma company boom-bust cycles shows that the bust phases often create great buying opportunities.
In fact, I strongly recommend several biopharma plays in my Fry’s Investment Report portfolio. As a group, I expect these stocks to deliver very strong, market-beating gains over the next few years.
Regards,
Eric Fry
