Biotech stock swoon sparks buyout interest: investor

A person holds pharmaceutical tablets and capsules in this picture illustration taken in Ljubljana September 18, 2013.   REUTERS/Srdjan Zivulovic

A brutal start to the year for biotech stocks could pave the way for more deal-making in the sector, with premiums of potentially 50 percent to 100 percent above depressed share prices, according to a top healthcare investor.

The Nasdaq Biotechnology index .NBI fell 23 percent in the first three months of 2016, its worst quarterly performance since 2002, and remains down one-third from its all-time high last July. Drug pricing practices in the United States and setbacks for a few promising experimental drugs have taken a toll on shares.

Andy Acker, a portfolio manager at Janus Capital Group who helps oversee $7 billion in healthcare assets, says the sell-off led to a steep discount to the sector’s value, especially at a time of major innovation in developing treatments for cancer, heart disease and other illnesses that affect millions.

In the wake of the declines, large pharmaceutical and biotech companies appear ready to resume deal-making.

“Buyers are starting to get interested,” Acker said in an interview this week.

Last week, AbbVie Inc (ABBV.N) said it would spend $5.8 billion for privately-held Stemcentrx, which is developing a lung cancer treatment, while France’s Sanofi SA (SASY.PA) went public with a $9.3 billion offer for cancer drug maker Medivation Inc (MDVN.O).

Janus was the 10th-biggest investor in Medivation as of the end of the year, according to Thomson Reuters data, and Acker said multiple bidders could be interested in the company.

Reuters, citing people familiar with the matter, reported late on Tuesday that Pfizer Inc (PFE.N) had approached Medivation to express interest in an acquisition.

The U.S. government’s derailment of Pfizer’s $160 billion acquisition of Allergan Plc (AGN.N) last month has raised expectations that both drugmakers will now seek smaller transactions. Allergan will be flush with cash if its $40 billion sale of its generics unit to Teva Pharmaceutical Industries Ltd (TEVA.TA) wins U.S. antitrust approval.

One potential target for Allergan, Acker said, is Ironwood Pharmaceuticals Inc (IRWD.O), which is partnering with Allergan on an irritable bowel syndrome medicine. Another possibility is Anacor Pharmaceuticals Inc (ANAC.O), which is developing a nonsteroidal topical ointment for eczema, Acker said.

As of the end of the year, Janus was Ironwood’s third-biggest shareholder and Anacor’s ninth-biggest. Janus is also a major investor in Allergan.

Acker co-manages the Janus Global Life Sciences Fund, which has returned 19.35 percent a year on average over the past five years, beating 90 percent of peers, according to Morningstar.

He said additional deals could take time because sellers may be reluctant to accept a buyout based on depressed prices. But takeovers eventually could be consummated at premiums of 50 percent to 100 percent above where target company shares bottomed recently.

Biotech investors would welcome such deals, which could help boost valuations for rivals to a buyout target.

Investor concerns about whether the winner of this year’s U.S. presidential election will take steps to curb drug costs are likely to weigh, Acker said.

“There will be some uncertainty through the election,” Acker said.