This year has been disappointing for biotech investors, but Pfizer’s planned acquisition of Trillium Therapeutics shows things aren’t as bleak as they seem.
By guest author Charley Grant from The Wall Street Journal.
Can the acquisition of a small biotech company help turn around a disappointing year for the entire sector?
The question is worth asking after Pfizer PFEannounced a buyout of Trillium Therapeutics, TRIL a developer of cancer drugs, for USD 2.26 billion in cash. That price is more than three times Trillium’s market value as of last Friday. A broad index of small and midsize biotech companies rallied more than 4 % on Monday, August 23, 2022.
That burst of euphoria was badly needed for a sector that has struggled even as most growth stocks are thriving. The biotech index is still down about 9 % so far this year and has shed nearly 30 % from February’s record.
There are clear reasons for that soggy performance. The lingering Covid-19 pandemic has been a bonanza for vaccine developers, but delays in routine care for most patients have resulted in fewer new prescriptions and a slower pace of clinical-trial enrollment.
Regulatory concerns aren’t helping matters. Budgetary negotiations in Congress could potentially lead to tougher regulations on prescription-drug prices. Meanwhile, the Biden administration has yet to nominate a full-time commissioner for the Food and Drug Administration.
On the bright side, even though Pfizer’s acquisition of Trillium was fairly small, it signals that big drugmakers might not be as worried about those long-term risks as are investors. And when valuing smaller biotech companies, which typically don’t generate meaningful sales and don’t make money, the opinions of the Pfizers or Johnson & Johnsons of the world carry immense weight. So far this year, there have been more than a thousand deals valued at a total of about USD 236 billion across the drug industry, according to Dealogic. That pace is comparable to the record of USD 380 billion set in 2019.
Deal premiums of the size that Pfizer shelled out for Trillium are bound to invite claims that Pfizer overpaid, but recent history suggests otherwise. Trillium shares traded as high as
USD 20 last November, while Pfizer agreed to pay USD 18.50 a share. Indeed, that price will look like a steal if Trillium’s experimental drugs become blockbusters. And while Trillium’s products could turn out to be a commercial dud, that is true for all drug candidates that haven’t yet reached the market. And across the industry, big drugmakers still have a constant need to find new drug candidates with potential and are willing to pay up when they find one.
For small investors, even in the face of a nasty slump for biotech stocks, that means patience will likely pay off.