This article was originally published on ETFTrends.com.
According to a report by the Silicon Valley Bank, biopharma deals in 2018 totaled $49 billion and more mergers in 2019 could continue providing growth in the industry, fueling ETFs like Daily Pharmaceutical & Medical Bull 3X Shares (PILL) and Direxion Daily S&P Biotech Bull 3X ETF (LABU) .
This was evident early in the new year as the biopharma space began 2019 with Bristol-Myers Squibb offering $74 billion to take over Celgene--a deal that could allow Bristol to become a top five pharmaceutical giant. In addition, Eli Lilly offered $8 billion to purchase Loxo Oncology.
RBC Capital Markets analyst Brian Abrahams said there's "a strong need to diversify around maturing franchises with (patents expiring) and biotech valuations having come down. Our thesis remains — reaffirmed by (Bristol's) deal—that M&A in the space will pick up considerably in 2019."
"We believe (the) deal indeed indicates an appetite among pharma for such larger companies whose assets and pipeline can be accretive, meaningfully move the needle on their sizable revenue bases and where synergies can be generated," Abrahams added.
PILL seeks investment results equal to 300% of the daily performance of the Dynamic Pharmaceutical Intellidex Index and concentrates its allocations towards securities of the index and other financial instruments that provide daily leveraged exposure to the index. As such, PILL focuses on equity holdings engaged in research, development, manufacture, sale or distribution of pharmaceuticals and drugs of all types.
LABU seeks daily investment results that are equal to 300% of the daily performance of the S&P Biotechnology Select Industry Index with the majority of its allocations going towards securities of the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. Furthermore, the index is designed to measure the performance of the biotechnology sub-industry based on the Global Industry Classification Standards.
Related: Biotech ETFs Climb on Biogen’s Promising Clinical Trial
Tax Breaks Fueled Industry in 2018
Per a blog post from Direxion Investments, one of the main drivers in 2018 driving the biotech and pharmaceutical industry was a lower corporate tax rate. As such, these corporate tax breaks helped spur the number of mergers and acquisitions in biopharma.
According to Direxion Investments, "the primary catalyst behind this spending spree is the windfall many of these companies gained from the new U.S. tax structure that lowered corporate tax rate from 35 to 21 percent while also permitting companies to repatriate revenue stockpiled offshore at the lower rate. This is enormously beneficial to pharmaceutical companies, who tend to hoard offshore profits. The last time companies experienced such a tax holiday in 2004, Pfizer Inc. repatriated $37 billion for dividend and stock buyback programs."
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