Brexit could boost pharma investment and M&A

Brexit may lead to more investment in pharma and M&A in the sector may continue, as interest rates remain low for longer amid the political upheaval, according to a report from Bloomberg Intelligence.

In Bloomberg’s Pharmaceuticals 2016 Midyear Outlook report, Sam Fazeli, senior industry analyst, said pharma companies such as GlaxoSmithKline and Johnson & Johnson have become a “Brexit Haven” as investors flee to defensive stocks.

The analysis may surprise some in the UK pharma industry, who had been resolute in their campaigning in favour of remaining in the EU.

On June 24, the day after the vote, pharma stocks outperformed their local markets by 1.9%, according to Bloomberg data.

In the longer term, pharma will remain attractive as the sector’s dividend yield of 3.5% is likely to outstrip bank interest rates at a time when monetary policy will remain loose.

Brexit has boosted profit/earning ratios, with Bristol-Myers Squibb and Novo Nordisk the highest valued companies, while AbbVie, Bayer and Sanofi are the lowest.

Big pharma is likely to remain focused on smaller deals in the second half of the year, with low biotech valuations likely to open the door to discussions, according to the report.

Access to cheap cash is likely to drive M&A – and the UK’s decision to leave the EU may prolong the period of low borrowing while biotech valuations are to remain low due to aversion of risky stocks.

Pharma companies could borrow up to $170 billion to fund M&A, with J&J having the strongest credit line of up to $60 billion, followed by Roche, which could borrow up to $54 billion..

AbbVie has the most restricted balance sheet and may risk its credit rating with any further M&A, following its $5.8 billion acquisition of Stemcentrx in April.

Conversely, Novartis may decide to sell off its troubled ophthalmology unit, Alcon, while Sanofi may rid itself of its generics business after swapping its Merial animal health business for Boehringer’s consumer health business at the end of 2015.

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