String of acquisitions fuels biotech optimism

After nearly five years in the doldrums, a string of recent Big Pharma acquisition announcements has fueled a rally in biotech stocks.

Because biotechs often have no revenues and use borrowed money to develop new, potentially lucrative treatments for diseases, the stocks tend to shoot up when one of two things happens: they report encouraging trial results, or they are acquired by a large drugmaker. Lately, the latter has been dominating headlines in the sector.

Pfizer announced last month that it would acquire obesity startup Metsera for $7.3 billion. Last week, Novo Nordisk announced that it was buying up Akero Therapeutics, which is working on liver disease treatments, for up to $5.2 billion. Johnson & Johnson is in talks to buy Protagonist Therapeutics, The Wall Street Journal reported Friday.

The SPDR S&P Biotech ETF surpassed its March 2020 levels last month and has continued to climb higher. It is now up more than 15% for the year, outperforming both the Russell 2000 and S&P 500.

Investors poured money into biotechs in 2020 as the COVID-19 pandemic hit. Many of those companies did not deliver on the treatments they were developing, and faced with rising inflation, the Federal Reserve began hiking interest rates in 2022.

Now, interest rates are coming down and Big Pharma has gained more regulatory clarity, which may put companies in a better position to acquire biotechs. Many large drugmakers are also facing a patent cliff, which increases pressure to add new drugs to their portfolio.