Maksim Labkouski
Morgan Stanley sees biotech stocks poised to rally, with outperformance fueled by an expected Fed rate cut and uptick in M&A activity.
In a recent note, Morgan Stanley said a review of historical data shows the biotech sector has consistently appeared to outperform the market in the months leading up to an initial cut, followed by roughly a month of underperformance. Stock prices begin to climb again shortly thereafter, with the sector generally seeing appreciation of around 20% to 30% six to 12 months out.
The bank said that it expects to see the first rate cut in June, with four 25bp cuts in total for 2024.
Lower rates have also historically coincided with increased M&A, which has already seen significant action in recent months as major drugmakers move to replenish product portfolios.
“Outside of the interest rate outlook, we believe that there remains a fundamental need for SMID biotech M&A, which is driven by the patent expirations that the large cap biopharma companies are expected to face in the end of this decade and the highly cash generative nature of their businesses,” the bank said.
Morgan Stanley estimates that $182B in 2024 revenue, or 41% of total 2024 revenue, is slated to lose patent protection by 2030. Amgen is facing the steepest percentage drop, with 68% of its 2024 revenue at stake, followed by Bristol Myers (BMY) with 64%, Merck (NYSE:MRK) with 56%, Johnson & Johnson’s pharma division with 51%, and Pfizer (PFE), ex-COVID, at 40%.
Meanwhile, the bank pegs the sector’s M&A capacity at $468B, which it calculates as 2.5x net debt/2024E EBIDTA. Johnson & Johnson (JNJ) tops the bank’s potential M&A capacity list, with Novo Nordisk (NVO), Merck (MRK), Roche (OTCQX:RHHBY) and Novartis (NVS) rounding out the top five.
Morgan Stanley sees oncology and immunology assets continuing to generate the most interest among potential acquirers, with CNS/neuroscience also attracting attention in the wake of the Bristol Myers/Karuna and AbbVie/Cerevel deals. It also sees companies across the sector continuing to focus on bolt-on deals valued at under $5B.
“Over the near term within out US biopharma coverage, we note Merck continues to have the combination of need to offset the Keytruda loss of exclusivity and meaningful balance sheet capacity,” the bank said, adding that it saw AbbVie (ABBV), Bristol Myers and Pfizer, which have all recently conducted deals, as “more likely to be acquirers over the medium-term.”