Biotech companies are some of the riskiest in the market and may be getting riskier. That is one reason for the recent drought in big biotech deals. So far this year, there have been four U.S. biotech acquisitions of publicly traded companies worth more than $100 million and none since May, according to Jefferies data. There were five last year and eight in 2016. While that is still fairly brisk activity by historical standards, many investors had expected a busier year. High valuations for companies with no revenue is one good reason for the paucity of deals, but that doesn’t fully explain the lull. The S&P Biotechnology Select Sector index is nearly 10% below its record, so high valuations aren’t scaring away buyers. The deals that have happened, such as Gilead Sciences ’s acquisition of cancer specialist Kite Pharma for $11.9 billion last summer, have closed at high prices. Instead, the rapid pace of scientific innovation in areas such as gene therapy or CAR-T cancer treatments may actually be causing pharmaceutical companies to hold off on deals for now. Many of the likely takeover candidates are focused on these categories; they may be exciting investment opportunities but stand out for their riskiness. That is often because investors in those fields are making judgments based on very small sets of patient data. “What appears to be a best-in-class drug on a Monday can often be deemed obsolete headed into the weekend, given the pace of development,” Jefferies health-care trader Jared Holz wrote in a recent note to clients. In gene therapy, “we do not think we have seen nearly enough data to make a call on the long-term viability of assets,” he added. At the current high valuations, buyers aren’t compensated for taking on increased risk. That encourages patience, since risks should drop as more clinical data becomes available. Another reason for the deal scarcity is that other investors are less worried about risk, allowing the biotechs to raise capital easily. GW Pharmaceuticals , a biotech that is developing a platform of cannabinoid-based drugs, issued $300 million in stock Wednesday. Genetic-disease specialist Bluebird Bio raised $550 million in the equity market over the summer. For development-stage companies that aren’t generating profits, that kind of cash can fund operations for a long time, which only adds to the incentive to stay independent. Biotech stocks offer investors some of the best growth potential to be found, but right now it is particularly hard to choose winners and losers. That means investors picking biotech stocks shouldn’t count on a buyout anytime soon. Write to Charley Grant at charles.grant@wsj.com
The speed of scientific innovations may be dissuading some biotech firms from merger and acquisition deals, according to researchers at Jefferies. The number of deals this year has fallen short of expectations, with Five US biotech deals over $100m before May but none since. four deals took place in 2017 and eight in 2016. Apart from caution over the pace of technological advances, a second reason for a fall in deals may be that that they are seen as risky investments which are getting riskier as they tend to involve high valuations for firms with no revenue stream, Jefferies said.