Drug companies will slow their stock buybacks after the Covid-19 crisis and spend their money instead on buying each other, according to a Friday note from RBC Capital Markets.
Strong cash flows and looming patent expirations will drive Big Pharma to fill its medicine chests through mergers and acquisitions, wrote analyst Randall Stanicky. “We think M&A is set to ‘re-emerge’ as one of the bigger themes post pandemic,” Stanicky said.
The companies most likely to be on the prowl for acquisitions, he believes, are Merck (ticker: MRK), Pfizer (PFE), AbbVie (ABBV) and Johnson & Johnson (JNJ).
Even if the coronavirus crunch takes away some revenue in the next year, the industry will have plenty of cash. Merck and Pfizer alone will generate $100 billion between them in the next five years, after dividends, the analyst said.
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Big drugmakers spent a third of their capital on share buybacks in the last decade, but Covid-crisis government bailouts and drug development have made stock buybacks look unseemly for now . That will leave more cash for drug companies to use in filling gaps left when products that are currently selling big lose market exclusivity.
AbbVie has the nearest need: Its arthritis treatment Humira, a huge seller, will face competition from biosimilar rivals in 2023. Stanicky said that Pfizer and Merck could lose exclusivity on important products in 2026 and 2028, respectively.
At one of Wall Street’s last conferences before the lockdowns, in March, Merck financial chief Robert Davis mentioned his company’s “urgency” in augmenting its product pipeline. Johnson & Johnson discussed its interest in acquisitions when it reported strong earnings last week .
The RBC analyst says investors will learn more about Big Pharma’s acquisition aims as companies report their March-quarter results. Pfizer’s and Merck’s are each due on Tuesday, and AbbVie’s arrive on May 1.