The start of 2017 spells increased M&A for biotech as Trump’s win has alleviated the recent negative sentiment towards the sector, according to Citywire AA-rated David Pinniger.
The manager on the Polar Capital Biotechnology fund expects a post-election pickup in M&A and a significant rally in the sector, which should surface either towards the end of the year or early 2017 as a result of political clarity.
‘Big companies still need big new products to drive growth profitability,’ he said. ‘These products are coming from smaller, more nimble, more innovative biotech companies.
‘The now widely expected tax reform in the US may involve some kind of repatriation holiday that cash-rich biopharmaceutical companies may exploit to execute M&A transactions.’
All the same, the sector will experience follow-through action in terms of some of the egregious pricing practices called out over the past year, according to the manager.
‘The recent anti-drug industry rhetoric over pricing practices should ease with the main Democrat agitators now silenced, but more importantly, with the Republicans in control, it seems unlikely aggressive government intervention with respect to drug pricing will come to pass in the near-term.’
Highlighting the third quarter results, the manager said: ‘They have shown that in some of the bigger crowded therapeutic categories, industry participants with undifferentiated products are increasingly feeling market-driven pricing pressure as the gatekeepers of medicinal drug usage flex their purchasing muscles.’
Over the coming months, Pinniger said investors should avoid companies with mature undifferentiated products, but also firms whose biggest products are growing through price rather than volume.
‘We believe that companies setting financial guidance for FY17 – typically through January and February – could be an important catalyst for the sector.’
As November marks the Polar Capital fund’s three year anniversary, the manager said market sentiment is very pessimistic about the potential growth and profitability of many stocks in the sector.
Although many investors were defensive, Pinniger was positioned neutrally in terms of risk ahead of the US election, pushing into some of the smaller companies in the space.
‘We are not expecting a huge amount of heavy-handed political intervention in how the industry prices its drugs.’
Predicting a recovery in the sector, Pinniger explained it is not a time to be defensive. ‘In biotech, being cautious typically means owning the larger-cap companies and for us, a lot of the larger caps have got challenges with respect to growth. You really want to be among the mid and smaller cap, which are generally perceived to be the high-risk names.’
The main beneficiaries of a shift are likely to be the smaller more innovative biotechnology companies.
‘Given the fact that those companies have sold off hard over the past 18 months, those are exactly the sorts of companies you want to be in right now as some of those concerns dissipate,’ he said.