3 Bold Biotech Predictions For 2018 !
The biotech sector largely performed in line with the overall market in 2017, after under performing in 2015 and 2016. There are several reasons to believe that M&A activity picks up markedly in the New Year which will be a tailwind for the sector. What else lies ahead for biotech in 2018? We make three predictions for the industry in year ahead below. This idea was discussed in more depth with members of my private investing community, The Biotech Forum.
It is hard to believe but 2017 is rapidly coming to a close. It has been a solid year for biotech investors. After under performing the overall market significantly in 2015 and 2016, the biotech sector largely performed in line with the S&P 500 which is up just over 20% for the year including dividends. So what will 2018 bring to this high beta sector? We make three predictions for biotech investors in the New Year below.
Prediction #1 - Biotech M&A Volume Will Jump In 2018
The healthcare sector overall was very active as far as acquisitions and mergers were concerned in 2017. This was culminated by the over the $75 billion buyout of Aetna (AET) by CVS Health (CVS) this month. However, deal volume in the biotech and pharma space was at its lowest levels in many years and about half the level of the boom years of 2014 & 2015. There were some exceptions to the lack of significant deals including Gilead Sciences (GILD) purchasing Kite Pharma (KITE) for ~$12 billion at the end of August. However, it was a punk year if you were an investment banker in this space.
Many drug and biotech giants appeared to sit on their hands while tax reform wound its ways through congress. However, now that clarity has been provided around repatriation and with the corporate tax rate dropping to 21% from 35% as well as R&D write off criteria being defined; the lay of the land is known. Large industry concerns have hundreds of billions of dollars 'stashed' in their overseas operations. A significant portion of that could make its way home and provide fuel for M&A in the New Year. Amgen (AMGN) has already said it expected to pay $6 billion to $6.5 billion in taxes over time as the company incrementally brings home the ~$38.9 billion it currently has residing overseas.
Combined this will the dearth of internal growth at many drug and biotech giants including Gilead, Pfizer (PFE), Amgen, etc...you can see why acquisitions should pick up as the giants use their financial flexibility to purchase new growth engines and replenish pipelines. A lower effective tax rate on those future profits also should be a positive driver. My view is that 2018 will look a lot more like 2014 & 2015 than 2017 as far as M&A is concerned.
Prediction #2 - FDA Approves A Record Amount Of New Drugs In 2018
This is not stepping that much out on a limb. New leadership at the FDA in 2017 was a breathe of fresh air to developmental firms. While pushing hard to increase competition in the production of off patent drugs, the FDA has also focused on making drug discovery less costly and time consuming. This is especially true in the rare disease area where the agency has leaned heavily towards approval of drugs for indications with no other effective treatments.
The FDA did a great job over the summer of clearing out a backlog of Orphan Drug status applications and has even approved some compounds a couple of months before their PDUFA dates in December such as Rhopressa from Aerie Pharmaceuticals (AERI) last week. The FDA has approved 46 new compounds this year, above the 10-year high of 45 and double the amount of 2016. Expect a similar or slightly higher amount of approvals in 2018.
Prediction #3 - Biotech Will Return 20% Or Better In 2018
Because of the two factors above I believe the biotech sector is set up for a very solid 2018, with small caps outperforming their larger brethren. After under performing the overall market in 2015 & 2016 and performing in line in 2017, I think the sector is set up to be one of the stronger performing sectors in the market in 2018.
GDP growth should come in over the 3% level for the third straight quarter when fourth quarter numbers hit in January. This would be first time this has occurred since 2004/2005. With the tax legislation just passed and global growth posting its best levels in years, I expect earnings growth to come in within the 10% to 15% range in 2018. I believe the market could climb a similar amount. Given I think biotech will outperform the overall market, a 20% rise seems a good bogey. I don't think this is an outlandish prediction. If biotech rallies 20% in the next year, it will still be roughly 10% below its last peak in the summer of 2015.And those are some quick predictions for the biotech sector in the year ahead. I hope the entire Seeking Alpha community had a joyous holiday season. May 2018 bring good tidings to you and yours !
- Bret Jensen -
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