There’s a “feeding frenzy” among biotech companies.
In 2014, there were 45 transactions totaling $US141 billion, the highest on record, according to Jefferies.
And 2015 is already busy, with at least 16 transactions already announced before the middle of the year.
In a research note published Thursday, analysts at
Jeffries note that one of the main drivers of this frenzy has been low borrowing costs.
The Federal Reserve has kept interest rates near 0% since 2008, reducing borrowing costs, and making it cheaper for companies to access debt for deals.
And this, it seems, could be coming to an end, with a rate hike from the Federal Reserve coming likely later this year, marking a potential game-changer for biotech M&A activity.
“Importantly, any significant uptick in rates could potentially dampen the pace of consolidation — particularly for larger transactions — as leverage ratios continue to climb and higher anticipated interest expense payments could limit transaction accretion. And of course, equity valuations need to remain relatively stable — which is never a sure thing given the turbulent global macro and geopolitical environment. Furthermore, while currency considerations could have a favourable impact on acquisitions of foreign assets — given the significant strengthening of the US dollar observed starting in late 2014 — a reversal of this trend could diminish the purchasing power of US consolidators.”
The iShares Nasdaq Biotechnology Index, which tracks biotech and pharma companies, has rallied 52% over the past 12 months.
In the broader stock market, we saw stocks sell off on Friday after Yellen gave the most explicit indication yet on the timing of the first rate hike.
Here’s Jefferies again:
“Within the healthcare segment, companies have used the proceeds to help accelerate earnings growth — i.e., acquisitions, share repurchases, etc. And many operating companies have increased the utilization of debt as a financing vehicle. No surprise then that the vast majority (~85%) of announced transactions in the past six years have been completed using all cash, with very few mergers utilising equity as source of funds.”
And so biotech stocks could then face a one-two punch if the Fed changes course. Not only could a rate hike hurt biotech stocks amid market turbulence, but again, higher borrowing costs might make it more difficult to fund the huge deals that we’ve seen in recent years.
Here’s a one-year chart of the iShares Nasdaq Biotechnology Index.