Return to site

Biotech and rates: A correlation unlikely to last

by Leonardo Reos, FRM

· Biotech Industry

There has been a lot of noise during the past few months on the biotech industry woes under the current administration, its negative publicity and its looming consolidation challenges facing the industry due to a lack of highly profitable potential products in the pipeline, the ones that will become a blockbuster once it hits the markets.

As the attached WSJ article explains, higher projected rates also pose a threat to the industry recovery from the slump in mid-2015. As such, higher long term rates can negatively impact expected cash flows from product pipeline, making particularly expensive drugs with long and back ended weighed cash flows completely unprofitable in present dollar returns.

Also, big pharma companies tend to acquire other companies through the use of levered deals (eg. leveraged syndicated loans or LBOs). These financings, especially the large ones, involve the acquisition of smaller rivals or lines of products in late research stages as well as developers of particular type of product portfolios. However, they are funded through the use of senior secured loans, with variable interest rates usually tied to Libor (or prime) rates plus a negotiated spread. Therefore, higher rates, especially short term (heavily influenced by the Fed fuds rate) will make deals less attractive.

Having said that, this doesn’t necessarily mean the industry will start shrink, but these headwinds mean harder consolidation deals and product development. So, besides developing bigger and better products and lobby current regulators for ease on the price control push, big and small players in the industry need to find other markets for new type of treatments or geographical regions to penetrate their pipeline of new products and/or renegotiate contracts with government and private health insurance companies if they want to keep investors and analysts backing a long term bullish view, which ultimately is supported by the wave of baby boomers entering the market.

All Posts
×

Almost done…

We just sent you an email. Please click the link in the email to confirm your subscription!

OK