BioPharma M&A premiums could moderate amid rate hikes – Wells Fargo
Atstock Productions/iStock via Getty Images

Citing data from 1995, Wells Fargo argues that for every half a percentage point increase in treasury yield, there is a 5.6% decrease in the average deal premium paid in biopharma acquisitions, a trend favoring large-cap pharma as the Fed hikes interest rates.
Wells Fargo noted the relationship using data for 30-year treasury yields and premiums offered for US/EU publicly-traded biotech and pharma targets across deals valued at $100M â $20B (compared to the 90-day average price).
âThis may be consequential as rates have come up from decade lows,â the analysts led by Mohit Bansal argued in a note this week.
Despite the long-term relationship between rates and premiums, the treasury yields and the Federal Funds rate have no value in predicting M&A premiums, they cautioned, citing a statistical analysis.
The companies in their coverage have significant liquidity levels for potential business development opportunities to address the loss of exclusivity of key drugs in 2025 â 2030, they added.
The return of deal premiums to a more normal level of 50-65% will allow more flexibility to acquirers in capital deployment opportunities such as share buybacks, the analysts argue.
Wells Fargo's comments coincide with a sector-wide selloff in biotech while beneficiaries of the pandemic, such as Pfizer (NYSE:PFE), Merck (MRK), and Regeneron (REGN), have loaded up record levels of cash.
Highlighting the contrast, VanEck Vectors Pharmaceutical ETF (PPH), representing 25 of the largest global pharma stocks, has outperformed the broader market with an 11% gain over the past year, while SPDR S&P Biotech ETF (XBI) has lost ~45%, as shown in this graph.
Meanwhile, the Federal Reserve has signaled more rate hikes for this year. The Fed raised the benchmark interest rate by half a percentage point early this month, the largest hike since 2000, as inflation reached a 40-year high.