Since yesterday, Celgene CELG), Gilead (GILD) and Merck (MRK) all hinted that they will be looking to business development to enhance their pipelines. That is no surprise, because it is part of the biotech sector dynamic.
M&A is a critical part of the business model for the biotech sector where there are growth-hungry giants flush with cash, looking to improve their outlook. Science is rapidly improving and it takes a lot of time and money to bring new drugs to market. Smaller biotech companies constantly need to raise cash to fund R&D, so it is their fiduciary duty to sell their assets for a premium if there is demand when there is no guarantee about the potential for their drug. Plus, smaller players don't even have the capacity to market drugs and licensing/marketing partnerships are a lower risk way for the big guys to gain some exposure to what could be the next blockbuster drug.
One or two years ago, when biotech stocks were out of favor, biotech CEOs said valuations were stretched, which reflected poor sentiment. They said M&A opportunities were limited. As a result, biotech CEOs were looking for more late stage assets (think Phase 2/3), where assets are lower risk and closer to approval with more visibility to market, somewhat justifying the high valuations.
Despite the recent pullback, biotech stocks are back near the 2015 highs, and yet the big players are more hungry than ever to improve their pipelines.
Check out the staggering amount of cash sitting the balance sheets of the largest bio-pharma companies in the US and Europe -- there is ~$160 billion in cash/equivalents in just the top 10 biopharma stocks (note the dollar amounts are in millions)