After a record-breaking 2014, 2015 is shaping up to be another momentous year for biotech.Â
During the first few months of 2015 to the beginning of March, the value of M&A deals in the pharma sector hit $59.3bn, up 94% year on year. Over the past four weeks, at least four more multi-billion dollar deals have been announced.Â
And for investors that are looking to play this trend, three of the best picks are Vectura (LSE: VEC), Hikma Pharmaceuticals (LSE: HIK) and Indivior (LSE: INDV).Â
In demandÂ
Early-stage respiratory drug specialist Vectura has struggled to impress over the past five years, but the company is finally starting to show signs of progress.Â
The company has sealed a number of deals with key partners over the past 12 months. These include a collaboration deal for the company’s latest asthma product, VR506, signed with an undisclosed US partner. And a global development and licence agreement with Janssen Biotech Inc, a unit of US healthcare group Johnson & Johnson.
What’s more, Vectura has nine products in its pipeline, which are expected to come to market during 2021. Â
As Vectura’s deals add up, City analysts expect the group to report a pre-tax profit of ÂŁ1.6m this year — its first profit for several years. Then, during 2016 and 2017, City analysts expect Vectura’s earnings to take off. Analysts expect the company’s earnings to expand by 200% during 2016 and 260% during 2017.
Generic producerÂ
Generic drug production is one of the biotech market’s hottest industries. Indeed, as consumers around the world switch to low-cost generic drugs to combat ever-higher medical bills, generic producers have struggled to meet demand.
Hikma is one of the companies that has been able to benefit from this trend.Â
Over the past five years Hikma’s earnings have tripled and the company has recently been promoted to the FTSE 100 index. That said, earnings are set to contract by 7% this year, although during 2016, City analysts believe that Hikma’s earnings will rebound by 18%, more than making up for this year’s decline.
Hikma is currently trading at a 2016 P/E of 19.7, compared to the biotech sector average P/E of 31.
Unwanted spin-off
Reckitt Benckiser‘s spin-off Indivior is probably one of the cheapest biotech companies in the world. After failing to find a buyer for Indivior, Reckitt spun the company off at an astonishingly low valuation, due to the fact that Indivior’s sales were coming under pressure from generic competitors.
Unfortunately, City analysts expect the company’s sales to remain under pressure for some time. Â Revenue fell 8% during 2014 and is set to fall another 4% this year. Nevertheless, due to these low expectations Indivior is trading at a forward P/E of 14.2, around half the sector’s average valuation. The company is set to offer a dividend yield of 3% this year.