Perfect storm of patent expiries and M&A will see biotech stocks outperform, says broker

Tue 1:45 Pm By Ian LyallThe biotechnology and healthcare sector has entered a “sustained period of momentum', according to City broker Cenkos.The biotechnology and healthcare sector has entered a “sustained period of momentum", according to City broker Cenkos.

The biotechnology and healthcare sector has entered a “sustained period of momentum underpinned by a perfect storm" of events, according to City broker Cenkos.

In a note to clients it pointed out that large-cap pharma and diagnostic companies are hitting what’s called the patent cliff.

This describes the painful and expensive process that sees patent protected cash-cow products opened to cheap, copycat competition.

Meanwhile, the replacements are “sub-scale and generally lacking innovation”, it adds, while pricing pressure is rife, the note added.

The regulatory authorities, and specifically the all-powerful US Food & Drug administration, seem much more inclined to give approval to new pills and potions that have come through the clinical trials process, the Cenkos note said.

At the same time the need to replenish empty product pipeline has seen takeover activity in the sector spike, it pointed out.

All of these factors are positive for the up-and-coming stocks in the sector, creating the aforementioned perfect storm, according to the broker’s head of research, Navid Malik.

“We expect the coming decade will generate super-normal returns in the sector, and would be long of it,” he said.

Conventional logic suggests companies with assets in the late stage of development, therefore de-risked, make the best investments.

However, Malik pointed out: “Last year proved beyond doubt, that what really drives superior returns is not the stage at which a clinical programme is, but the tendency to surprise the market with data which can rapidly de-risk a programme irrespective of its market or stage of development.”