Recently, I predicted we were on the cusp of a breakout for biotech stocks.

Underpinning my conviction was the record amount of venture funding, a strong IPO market, plus countless biotech companies reporting promising data for new drugs that will literally save lives — and in turn, be worth billions.

Furthermore, the 25% pullback in the biotech sector since February dropped valuations into bargain territory. And ultimately, I believed potential suitors would find those valuations irresistible.

Turns out, I was right.

Not only is the breakout happening, with the major biotech indexes now back in rally mode. But the catalyst behind this move is the most promising one we could hope for.

Let me explain…

Merger Mondays Are Back!

Last Monday, Pfizer Inc. (PFE) sent shockwaves through the biotech industry when it announced the acquisition of Trillium Therapeutics (TRIL).

But what’s the big deal? I mean, big pharma acquires tiny biotech companies all the time, right?

They do. But not at the premium that Pfizer is paying! You see, Pfizer is paying a whopping premium of 203.8% over Trillium’s previous closing price.

That’s right. Shareholders of Trillium woke up to almost a 200% gain in a single day.

The only time I’ve seen deal premiums reach anywhere close to that level was at the end of 2019.

For most of 2019, the average takeover premium hovered around 100%. Then in December, it bolted up to 140%.

Pfizer’s rich takeover offer sends a clear signal that we’re at the start of a new phase of big biotech takeouts.

And the data confirms it could last for a while...

Survey Says?!

About a month ago, the number crunchers over at investment bank Jefferies evaluated what happened in the biotech market after quick and large pullbacks in price.

Their findings? In short, when valuations drop too far, too fast, big pharma companies step up in a big way to acquire smaller companies. But only after the price declines reverse course.

More specifically, Jefferies found that “Large-scale M&A occurred during the upswings of Jan 2013-July 2015, Feb 2016-Aug 2018, and Dec 2018-Jan 2021, while M&A virtually dried up during stretches of correction between July 2015-Jan 2016 and Aug-Dec 2018.”

In other words, with biotech back in rally mode, history suggests that more and more takeovers will be announced.

I can practically guarantee it. Why? Because, as I’ve long contested, dealmaking always begets more dealmaking.

And I say “always” because dealmaking is the only way to stay competitive in a consolidating industry.

Consider: If your top competitor makes an acquisition that instantly doubles its product or drug portfolio and/or market share, there’s no way to catch up without making an acquisition of your own. Period.

With Pfizer stepping up in a big way to acquire Trillium, it’s only a matter of time before countless big pharma companies make offers for other compelling small biotechs.

The rich premium Pfizer paid is the new benchmark, too — which means investors that identify biotech takeover targets in advance could be set to enjoy record profits.

Bottom line: With another biotech buyout boom imminent, we’d be foolish not to add a biotech takeover target (or two) to our portfolios.

Ahead of the tape,

Tags: biotech mergers-and-acquisitions