By Nick Rokke, analyst, The Palm Beach Daily
At the Daily, we don’t mind going back to the well. As long as there are profits down there, we’ll keep lowering the bucket.
Today, we’re dipping back into the biotech sector. Here’s why…
Juno Therapeutics is up 75% in a week
Bioverativ is up 60% virtually overnight
Longtime readers know we’re fans of biotech. We told you last year that the sector would get a boost from the failure of Trumpcare (see here and here).
Trump’s inability to repeal and replace Obamacare was one tailwind for biotech companies. But the president got tax reform passed in December 2017. And that could be an even bigger tailwind for the sector moving forward.
You see, Trump’s tax law included a one-time 15% tax rate on repatriating foreign profits. That’s much lower than the current 39% corporate tax rate. Apple, for example, is taking advantage of this lower tax rate to bring home $245 billion in overseas cash.
Like Apple, pharmaceutical companies stash a lot of profits overseas. For instance, Pfizer has about $200 billion in overseas cash.
Big pharma will use this cash infusion to buy smaller biotech firms like Juno and Bioverativ (more on that in a moment).
This is great news for investors… There aren’t many ways to make big money faster than owning biotech companies that get a buyout bid.
Buyouts Are a Safer Bet
As we told you last week, the one-time corporate tax will be win-win for investors.
Some companies will use it to pay dividends or buy back shares. Others will increase research and development.
But I think most large drug companies will buy out smaller competitors.
That’s because developing drugs is expensive… lengthy… and risky.
According to a recent study by the Biotechnology Innovation Organization (BIO), only about 10% of drugs make it through FDA trials. (BIO is the world’s largest biotech trade group.)
That means nine out of 10 drugs fail. Those trials can take years. And they’re not cheap. Estimates range from $648 million to $1.4 billion per failure.
So if a company isn’t careful, a string of failures could bankrupt it.
That’s why buying competitors is a safer strategy.
The Biotech Shopping Spree Is Just Getting Started
Few companies will gamble their entire existence on a 10% proposition. So, they look for companies that have recently completed trials… or are close to completing them.
Juno fits the bill. It has a promising lineup of treatments that use human cells to fight cancer. (Doctors call this immunotherapy.)
Pharma giant Celgene already owns the rights to market these treatments outside of the U.S. and China.
Celgene must have seen something it liked because it pulled the trigger to buy Juno on January 22. Celgene already owned about 10% of Juno and will pay $9 billion (or $87 per share) to buy the rest.
Juno’s stock rose 75% in a week on the news.
Celgene believes the FDA will approve Juno’s drugs sometime this year. And by 2020, they will bring in $3 billion in revenue. (Juno also has 11 other drugs in some phase of FDA trials.)
French pharmaceutical firm Sanofi announced it would buy Bioverativ on January 21. The stock shot up overnight.
Bioverativ already marketed two hemophilia drugs that generated about $800 million last year. And it has another 11 drugs in the pipeline, too.
Sanofi paid $11.6 billion to buy Bioverativ, which comes out to $105 per share—a 60% premium. Buying Bioverativ is likely a safer bet for Sanofi than developing hemophilia drugs on its own.
This is just the tip of the iceberg for biotech buyouts. There will be more… And every buyout will push up the biotech index even further. (The two recent buyouts sparked a two-day, 5% rally.)
As you can see below, the iShares Nasdaq Biotechnology ETF (IBB) is up 21% since we first told you about it back in March 2017.
Bottom line: The one-time tax break will inject a huge infusion of cash into biotech… And it’s going to lead to a takeover boom and a big rally in the entire sector.
It’s still not too late to get in.
Nick Rokke, CFA
Analyst, The Palm Beach Daily
P.S. Biotech is one of the big trends we’ll be following in the Daily this year. Have you started preparing your portfolio for it? Let us know right here.
From Karen B.: I’m glad to see new Palm Beach Confidential analyst Chris Wood come onto the scene (see Chris’ essay “How to Play the Crypto Boom on Wall Street”).
I’m sure there are a lot of risk-takers out there who have made millions in cryptocurrencies, but they’re not for us. We are in our later years and have to be more conservative. So we’re interested in blockchain company stocks Chris recommends… We can see that it’s going to be important technology. And stocks are easier for us to buy than cryptos.
From Vicki L.: Your newsletter is 100% useless for me, as I have neither the time nor the inclination to listen to lengthy presentations that include no usable information. Send me real information that I can use.
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