Even drug firms think they are overvalued

The Covid-19 pandemic hasn’t been bad for the industry, which has become central to treating and curing the disease that has crippled global economies

  
A pharmacy worker shows pills of hydroxychloroquine used to treat the coronavirus disease (COVID-19) at the CHR Centre Hospitalier Regional de la Citadelle Hospital in Liege, Belgium, April 22, 2020. Image used for illustrative purpose.

A pharmacy worker shows pills of hydroxychloroquine used to treat the coronavirus disease (COVID-19) at the CHR Centre Hospitalier Regional de la Citadelle Hospital in Liege, Belgium, April 22, 2020. Image used for illustrative purpose.

REUTERS/Yves Herman

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

NEW YORK  - Drug firms are acting like they think their sector is overvalued. Last year, healthcare companies raised over $20 billion globally in initial public offerings, twice as much as any other year in two decades, according to Refinitiv data. Yet the value of mergers in the sector, driven primarily by drug firms, fell by nearly half, and the trend continued into the start of this year. Stretched valuations may explain why.

The Covid-19 pandemic hasn’t been bad for the industry, which has become central to treating and curing the disease that has crippled global economies. While America’s gross domestic product fell 2.8% in the first three quarters of 2020, healthcare spending only fell 0.5% according to Peterson-KFF research.

The success of Moderna and BioNTech  in developing Covid-19 vaccines in record time attracted money into smaller and more speculative companies. Moderna, for example, saw its value rise over fivefold to about $50 billion over the past 12 months. While Big Pharma’s trailing price-to-earnings ratio didn’t change much, the value of biotechnology companies, which often have no revenue, has risen sharply. The current average market capitalization for companies listed in recent years is two to three times higher than at IPO, even if they floated in 2020, points out Jefferies.

That has inspired lots of startups, which previously would have found acquisition interest from Big Pharma, to float. There are over 600 public pharmaceutical companies now, compared to about 400 in 2015. Meantime mergers dwindled. Global deals were at their second lowest point since 2014 and deals in the pharma and life sciences business were at one of the lowest in almost a decade according to PwC.

Pharma firms can’t sit it out forever. Over the past several years, they have increasingly outsourced research and development to smaller companies with more productive labs. While these smaller firms often fund themselves with venture capital cash or public equity, bigger firms scoop them up as their older patents lapse and they need to replenish the pipeline. If valuations don’t fall soon, Big Pharma could be forced to chase the high.

CONTEXT NEWS

- Last year, 100 healthcare companies had initial public offerings globally, raising $20.5 billion according to Refinitiv. The previous record for the sector in the past two decades was 108 firms went public in 2014, raising $10 billion.

- In 2020, $299 billion of healthcare M&A was announced, compared to $530 billion in the previous year, according to Refinitiv.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Lauren Silva Laughlin and Amanda Gomez) ((robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))

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