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Money News

Why Is Biotech So Hot Right Now?

January 23, 2018

  • The value of many biotech stocks and funds increased this week
  • Changes to tax laws have driven some industry mergers
  • Biotech companies can repatriate billions of dollars from overseas

 

3 min read

What’s behind the surge in the biotech sector? The answer has nothing to do with a cure for the common cold.

Driven largely by a major overhaul to tax laws in December, biotech stocks have been posting sizable increases this week, as companies in this industry have pursued high-profile mergers and acquisitions that investors seem to find promising.

What is biotech?

Biotech companies produce medicines, therapeutic treatments, and other medical products through the development of biological and chemical processes.

Companies in the industry include some pretty big names you’ve probably heard of, including Pfizer, Amgen, Gilead, and Merck.

What do tax laws have to do with the market?

The changes to tax law, which include a steep cut to the corporate tax rate and an incentive to move cash from overseas to the U.S., are two big reasons why the sector is heating up, according to some experts.

Here’s why:

So how much money are we talking about?

The following is an estimate of what some of the largest biotech companies have stashed overseas:

Source: Bloomberg, June, 2017

With all that extra cash potentially coming back to the U.S., it makes sense that biotech companies might use some of it for mergers and acquisitions.

When a company acquires or merges with another company, it usually puts the combined businesses in a stronger position competitively. Companies buy other companies if they have something they need. That could be products, or services or even important research, which is the case in many pharmaceutical deals.

Fun fact: When people talk about M&A, they’re talking about mergers and acquisitions.

Deals in play

With that in mind, here’s a look at what biotech companies announced this week, subject to regulatory approval:

The M&A activity over the past few days follows a period of fewer acquisitions in the industry, according to reports. One exception is Gilead, which purchased Kite Pharma for close to $12 billion in September, 2017, in a bid to develop immunotherapy drugs. In October, the Food and Drug Administration gave the green light to Kite’s new cancer-fighting immunotherapy.

So what happened?

Here’s what happened to stocks and stock fund values after the mergers and acquisitions were announced:

Modern Meds (XBI), whose underlying fund is SPDR S&P Biotech ETF, surged 5% by Tuesday.*

Similarly, iShares Nasdaq Biotechnology ETF, also posted an increase of nearly 5%.*

Good to know: When one company announces it will buy another, it usually affects the share price of one or both companies. If investors favor the deal, generally speaking stock prices will move up. If they don’t, stock prices will move down.

For example: Celgene’s stock was up 3% on Tuesday, while Juno’s stock was down .06%.**

*Source: Yahoo Finance, January 23, 2018

**Source: MarketWatch, January 23, 2018

By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

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