Morgan Stanley believes that the Fed rate cut and increased M&A activities will drive a rebound in US biotech stocks, outperforming the overall market. Morgan Stanley expects the Fed to cut rates for the first time in June and predicts a 20% to 30% upside potential for biotech stocks in the next 6 to 12 months. At the same time, Morgan Stanley estimates that by 2030, drugs with revenues of $182 billion in 2024 will lose patent protection, leading to M&A demand for large biopharmaceutical companies. Morgan Stanley believes that oncology and immunotherapy assets are the areas of greatest interest to potential acquirers. Furthermore, Morgan Stanley also believes that the entire biotech industry will continue to focus on companies valued at less than $5 billion
Morgan Stanley believes that US biotech stocks are expected to rebound as the Federal Reserve is expected to cut interest rates, and M&A activities will increase, driving biotech stocks to outperform the market.
In a recent report, Morgan Stanley stated that a review of historical data shows that the biotechnology sector has consistently outperformed the market in the months leading up to the first rate cut, followed by a period of underperformance for about a month. Shortly after, stock prices begin to rise again, with the industry typically seeing an appreciation of around 20% to 30% over the next 6 to 12 months.
The bank expects the Federal Reserve to make its first rate cut in June, with a total of 4 rate cuts by 2024, each at 25 basis points.
Historically, lower interest rates have been accompanied by an increase in M&A activity. In recent months, significant M&A activities have occurred as large pharmaceutical companies begin to supplement their product portfolios.
The bank stated: "In addition to the interest rate outlook, we believe there is still fundamental demand for SMID (small and medium-sized market capitalization) biotech M&A, as large biopharmaceutical companies are expected to face patent expirations by the end of this decade, and their businesses have a high cash generation capability."
Morgan Stanley estimates that by 2030, drugs with revenues of $182 billion in 2024 (accounting for 41% of total revenue in 2024) will lose patent protection. Amgen (AMGN.US) faces the largest percentage loss, accounting for 68% of its 2024 revenue, followed by Bristol Myers Squibb (BMY.US) at 64%, Merck (MRK.US) at 56%, Johnson & Johnson's pharmaceutical division at 51%, and Pfizer (PFE.US) at 40% (excluding COVID-19 products).
At the same time, Morgan Stanley believes the industry has a merger capacity of $468 billion. Johnson & Johnson (JNJ.US) tops the list of potential acquirers, followed by Novo Nordisk (NVO.US), Merck, Roche, and Novartis (NVS.US) in the top five.
Morgan Stanley believes that oncology and immunotherapy assets will continue to be the most sought-after areas for potential acquirers, with central nervous system/neuroscience also attracting attention. The bank also believes that companies in the industry will continue to focus on strengthening transactions valued at less than $5 billion.
Morgan Stanley stated: "Among the US biopharmaceutical stocks we cover, we note that Merck will continue to need to offset the loss of Keytruda exclusivity and meaningful balance sheet capacity." The bank added that recent dealmakers AbbVie (ABBV.US), Bristol Myers Squibb, and Pfizer are "more likely to become acquirers in the mid-term."