From Bust to Boom – How to Play the Biotech Breakout

Michael Robinson

Tuesday, March 14, 2023

When it comes to blockbuster biotech mergers, last year was a bit of a bust.

According to an Ernst & Young ("EY") report cited by the Wall Street Journal, 2022 saw $88 billion worth of mergers and acquisitions (M&A), the lowest figure since 2017.

Among those $88 billion in deals, only 75 involved biotech and pharmaceutical companies worth at least $100 million.

That, too, was noticeably low. You see, big pharma companies like to complete buyouts so they can ramp up new growth with new products. So, is this year expected to be any better?

Absolutely. In fact, with big pharma sitting on more than $1.4 trillion in cash, EY predicts more M&A activity on the horizon.

Today, I want to introduce you to an investment that's poised to capture as much of this activity as possible.

Always Hungry for Deals

The reason big pharmaceutical companies scoop up smaller ones is pretty straightforward. Doing so saves the burden of running extensive trials, which can cost billions and often end up failing.

Instead, a larger company can simply acquire a smaller competitor that's already done this legwork and created an approved, ready-to-market drug.

Drug giants are always hungry for deals. Consider Pfizer (PFE), for example. This company has set a goal of adding $25 billion in revenue by 2030 from business development moves, aka acquisitions.

Pfizer sure seems motivated. The company needs to offset an estimated drop of $17 billion in sales from expired patents in the years ahead.

For its part, Novartis (NVS) is looking at patent expirations, too, ones that could total some $25 billion this decade. It's looking at buyouts that could fetch biotech companies valued at $5 billion or lower with drugs in early- to mid-stage development.

These two examples alone demonstrate why it's so hard for investors to predict which smaller firms the giants are going to swallow up, meaning trying to decide which company to invest in is quite the challenge.

That's why I've got a better idea...

A Who's Who of Biotech

Let's invest in the iShares Biotechnology ETF (Nasdaq: IBB). This cost-effective fund gives us a broad exposure to an essential sector poised for growth, both with respect to potential M&A and the industry's fundamentals.

IBB's main holdings are a who's who of the biotech industry's best performers and cover an astounding 280 stocks. More than half of the fund's capital is invested in big-cap firms that have successful products on the market.

These companies also have solid track records of getting approvals from the Food and Drug Administration ("FDA"), a process that can take 10 years and cost billions. They also have strong balance sheets. Take a look...

Inside the Fund

  • Moderna (MRNA). This pioneer in RNA technology hardly needs an introduction. In addition to its Covid vaccine, this company boasts 44 candidates for treatments and vaccines, 21 of which are in clinical trials. With a market cap of $64 billion, it has operating margins of 55% and free cash flow of about $13 billion. Moderna's huge number of drugs in its pipeline should boost those numbers soon.
  • Biogen (BIIB). This $40 billion market cap biotech specializes in drugs for neurological conditions and has released successful drugs for multiple sclerosis, nerve pain, and muscular atrophy. This company is perhaps best known for Aduhelm, the first drug approved to treat Alzheimer's in the U.S. since 2003.
  • Vertex Pharmaceuticals (VRTX). The company that pioneered the process of developing drugs by targeting specific compounds in the body, Vertex has made its name creating "orphan drugs" for conditions without other treatments. It's also one of the first companies to receive approval for CRISPR-based gene therapy to treat rare blood diseases.
  • IQVIA (IQV). IQVIA is one of the largest contractors to other biotech companies. This $40 billion market cap firm specializes in organizing and running clinical trials and handling data for pharmaceutical companies, making money even from trials that may not yield positive results.

These top four holdings alone give us a broad reach into the next generation of biotech breakthroughs. These companies often collaborate with early-stage companies and university researchers. They also fund a wide range of new product clinical trials...

Or they simply buy up the most successful biotech startups when their new treatments have gotten past the costly and risky development stage.

Two Options

Add it up, and IBB removes much of the risk that average investors have in targeting the biotech sector – where many stocks offer tremendous upside but are highly volatile.

Over the past year, the S&P 500 is down roughly 3.2%. IBB, in contrast, is up more than 7%, and I believe there's more upside ahead.

This is exactly the type of strategic play every investor should be making.

But maybe you're interested in taking a bolder path. Maybe you want to target a specific biotech company and reap the rewards if it's successful.

If that's the case, I've got a tremendous idea for you – a company in position to develop the next blockbuster drug – but it's only for my "Pro" readers. Don't miss out!



>>>>>>>>>> Learn more <<<<<<<<<<

Cheers and Good Investing,

Chief Investment Officer
Trend Trader Daily

Tags: big-pharma biotech