Last year, the Biotech industry as a whole achieved a much better performance than the market. Both the NASDAQ Biotech Index and AMEX Biotech Index outperformed all three major market indices (Dow Jones Industrial Average, NASDAQ Composite and S&P 500) in a large margin. The major indices declined as much as 40% while the NASDAQ Biotech Index declined only 12.6% and the AMEX Biotech Index was down 17.7%.
However, when the recession enters into its third year, the Biotech industry is not doing better than the market, which has been evident by the indices' performances. As of April 9, 2009, AMEX Biotech Index declined 3%, and the broader NASDAQ Biotech Index was down 6.8% (AMEX Biotech has 20 biotech companies while NASDAQ Biotech Index includes over 130 component companies). Although the Dow and S&P 500 also declined a similar percentage, technology-laden NASDAQ actually has a gain of 4.8%, which is more comparable to the biotech indices. See the table below for details.
Biotech Industry Performance Versus the Market
This can partly be explained that when the recession gets deeper, even large-cap biotech companies will feel the pinch while the smaller ones are still struggling with survival. The recent story with Celgene Corp. (CELG
) served a good example. Celgene dished out a less-than-expected new guidance for the 1Q09 on March 31, 2009 in a news release related to a conference presentation due to challenges from the global economic environment. We may see industry-wide impact in 2009.
Valuation is attractive, though. The industry's average P/E (trailing 12-month) ratio has declined to 16x from its historical 35x to 40x. The five-year PEG ratio is less than 1 at 0.96 according to Yahoo Finance.
We continue to expect M&A spree in the remainder of the year. Recent mega deals include the acquisition of Wyeth (WYE
) by Pfizer (PFE
), the acquisition of Schering-Plough Corp. (SGP
) by Merck & Co. (MRK
) and the acquisition of Genentech (DNA
) by Swiss drug maker Roche. Also, on March 12, Gilead Science (GILD
) announced it will buy CV Therapeutics (CVTX
) for $1.4 billion, exceeding Japan's Astellas' proposed offering price of $1 billion.
We believe the current market environment in the pharma/biotech industry is favorable for M&A activity. Big pharma and biotech companies still face three major challenges: patent expiration, low research and development productivity, and generic competition.
With very active M&As in the pharma/biotech sector, investors have every reason to speculate on buyout targets.