Maxim Labkouski
Morgan Stanley believes biotech stocks are poised to rally, with outperformance fueled by an expected Fed rate cut and increased merger and acquisition activity.
In a recent note, Morgan Stanley said that an analysis of historical data shows that the biotech sector has consistently appeared outperform the market in the months leading up to the initial cut, followed by approximately a month of underperformance. Stock prices begin to rise again shortly thereafter, with the sector typically seeing approximately 20% to 30% appreciation between six and twelve months.
The bank said it expects to see the first rate cut in June, with four cuts of 25 basis points in total for 2024.
Historically, lower rates have also coincided with an increase in mergers and acquisitions, which have already seen significant action in recent months as major pharmaceutical companies move to replenish product portfolios.
“Outside of the interest rate outlook, we believe there remains a fundamental need for SMID biotech M&A, which is driven by the patent expirations that large-cap biopharmaceutical companies are expected to face at the end of this decade and the nature highly liquidity-generating of their assets,” the bank said.
Morgan Stanley estimates that $182 billion in 2024 revenue, or 41% of total 2024 revenue, will lose patent protection by 2030. Amgen faces the steepest percentage decline, with 68% of its 2024 revenue, followed by Bristol Myers ( BMY ) with 64%, Merck (NYSE:MRK) with 56%, Johnson & Johnson’s pharmaceutical division with 51%, and Pfizer (PFE), ex-COVID, with 40%.
Meanwhile, the bank pegs the industry’s M&A capacity at $468 billion, which it calculates as 2.5x 2024E net debt/EBIDTA. Johnson & Johnson (JNJ) tops the bank’s list of potential M&A capabilities, with Novo Nordisk (NVO), Merck (MRK), Roche (OTCQX:RHHBY) and Novartis (NVS) rounding out the top five.
Morgan Stanley believes oncology and immunology assets continue to generate the most interest among potential buyers, with the CNS/neurosciences sector attracting attention on the back of the Bristol Myers/Karuna and AbbVie/Cerevel deals. Companies across the industry are also expected to continue to focus on additional deals valued under $5 billion.
“In the near term, within US biopharmaceutical coverage, we see that Merck continues to have the combination of the need to offset the loss of exclusivity of Keytruda and significant balance sheet capacity,” the bank said, adding that it had seen AbbVie (ABBV), Bristol Myers and Pfizer, all of which have recently concluded deals, as they are “more likely to become acquirers in the medium term”.