Biotech drugs to prompt sector

LONDON: European biotechnology stocks are set to out-perform as new drugs buoy company profits, possibly triggering mergers and acquisitions in the sector, a fund manager at SV Life Sciences said.

David Pinniger, who runs the 100 million pound ($163.5 million) International Biotechnology Trust, told Reuters that "due to exciting new drugs which have multibillion-dollar sales potential", the outlook for several companies has changed dramatically.

"These companies have become extremely profitable very quickly and they have become targets for big pharmaceutical groups desperate to restock their pipelines," he said.

The global fund has only around 20 percent invested in Europe and, although M&A talk in the sector is not new, Pinniger said renewed acquisition interest would lead to out-performance in share prices.

He sees Swiss biotech group Basilea, which Pinniger has a small position in, as a possible target.

"Basilea could be worth more than 100 Swiss francs per share should their antibiotic drug in late-stage development prove successful," the fund manager said. "There could be M&A interest."

The stock is currently priced at around 72 Swiss francs ($85.45).

He also invests in Swiss-based Actelion and said Europe's largest biotech firm is "worth 70 Swiss francs a share at a minimum for their main drug Tracleer plus the late stage R&D pipeline".

The stock, currently priced around 46 Swiss francs, saw its share price fall 9 percent in May, when shareholders rejected Elliot Advisors' call to remove current chairman Robert Cawthorn from the board and after a jury awarded Japanese group Asahi Kasei $547 million in a licensing dispute.

Pinniger likes it because of hopes that clinical data for a potential successor to the company's top-selling heart and lung drug Tracleer will prove successful and boost profitability.

A UK company that Pinniger favours is Shire, which has already jumped 25 percent this year and is a perennial subject of takeover talk.

Although he said the company could be vulnerable to profit taking in the short-term as it has performed well from a long-term perspective, M&A speculation was likely to give the stock further uplift.

"The firm is achieving great success in its genetic therapy drugs and there has been ongoing talk it is a potential merger and acquisition candidate," he said.

"Everyone is talking that big name drug-makers like GlaxoSmithKline and AstraZeneca could take over Shire," he added.

GSK and Astra have declined to comment in the past on such talk.

A company that Pinniger could be potentially interested in is Norwegian firm Algeta, but he said at the moment it is too risky as the firm is in the process of testing a drug and if it does not prove successful then its assets would prove worthless.

Algeta's big new drug hope is Alpharadin for cancer.

Pinniger's trust has returned 32 percent versus the FTSE All Share index which produced a total return of 14 percent over three years to end of April.

Copyright Reuters, 2011