The biotech and pharmaceutical sector had a generally good run last year. Many biotech companies experienced a tremendous bull run in the stock market, bringing in double- or even triple-digits percentage returns of the year for the top performers.

However, stock prices of biotech companies are vulnerable to speculation and wild swings in valuations that closely follow the results of drug trials. Thus, conventional wisdom dictates that any particular stock price will not increase forever.

Is there just a market correction?

Earlier this year, the biotech stock market underwent a significant dip in February. Allison Gatlin from Investor's Business Daily (IBD) reported that investors had, in total, pulled USD1.21 billion worth of funding out from the biotech sector for the week ending on 7 February. The market was described as having a "correction" after it had a strong run in 2017 where "the market in general had not had a cumulative pullback of even 4 percent since the [US] presidential election," as reported by the IBD.

The sector tends to react with a much greater magnitude to the general market movements, exhibiting the typical characteristics of a volatile market. Brad Loncar, a portfolio manager for a cancer immunotherapy-based fund, said: "I believe this is totally normal and I think that biotech is just doing so terrible this week because it's a volatile sector and when the entire stock market has a bad week like this, biotechs are likely to do a little bit worse."

As the market progressed to regain its losses, larger concerns loom over the future of biotech and pharmaceutical companies, especially for the major players in the sector.

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A year for biotech mergers

Reports indicate that larger biotech and pharmaceutical companies may be looking at a lacklustre new year, as they face increasing pressure from competitors.

As the US Food and Drug Administration continues to speed up the approval process for new and generic drugs, the revenue trajectories for many pharmaceutical companies slums in response to fierce competitive pressure – both from rival companies and botched clinical trials.

“Despite the near-record number of drug approvals, the large-cap biopharmaceutical sector fell out of a favour with investors, with no names more punished than those with concentrated product portfolios and looming branded or generic competitors,” said Geoffrey Porges, a Leerink analyst.

Large-cap pharma companies are poised for a merger and acquisition spree as they look to diversify existing portfolio and improve competitiveness
Large-cap pharma companies are poised for a merger and acquisition spree as they look to diversify existing portfolio and improve competitiveness

In order to diversify their drug portfolio, many pharma companies resorted to acquiring competitors with a promising pipeline. A buying spree within the biotech and pharmaceutical market began late last year when Gilead Sciences acquired Kite Pharma. Thus, taking over the right to the new CAR-T cancer medications, and allow Gilead to diversify out of its hepatitis C franchise.

The acquisition trend continues in 2018, as Celgene announced in January that it will buy Juno Therapeutics; Sanofi plans to acquire Bioverativ, a spinoff company from Biogen and Belgium’s Ablynx, as reported by IBD.

“…… the larger companies have slowing growth so they need to buy growth and they need to buy innovation,” said Loncar.

Geopolitical Issues

C-suite executives from the sector are also bracing for an uncertain future as the Americans will cast their votes again in the coming congressional midterm elections in November. Many giant pharmaceutical companies are likely to face political pressures, especially when it comes to the sensitive issue of drug pricing.

“By midyear the congressional midterm elections will be underway, and these campaigns are likely to renew the focus on pharmaceutical companies and their pricing policies,” said Porges. MIMS

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