Driven largely by a major overhaul to tax laws in December, biotech stocks have been posting sizable increases this week, as companies in this industry have pursued high-profile mergers and acquisitions that investors seem to find promising.

What is biotech?

Biotech companies produce medicines, therapeutic treatments, and other medical products through the development of biological and chemical processes.

Companies in the industry include some pretty big names you’ve probably heard of, including Pfizer, Amgen, Gilead, and Merck.

What do tax laws have to do with the market?

The changes to tax law, which include a steep cut to the corporate tax rate and an incentive to move cash from overseas to the U.S., are two big reasons why the sector is heating up, according to some experts.

Here’s why:

• The updated tax law slashes the corporate tax rate by nearly in half, to 21% from a previous rate of 35%, meaning companies–including biotech firms–are likely to have more cash on hand in 2018 to buy other companies.
• U.S. companies hold a staggering $2.8 trillion of profit overseas. The two main industries collecting cash overseas are biotech and technology, including companies such as Apple, Microsoft, and Cisco, according to the New York Times.
• Many biotech companies have set up operations internationally to avoid paying high corporate taxes in the U.S., and now hold billions of dollars overseas. However, the new tax law will allow them to “repatriate” that cash at a very low tax rate. That means they can bring the cash back to the U.S., and pay taxes as low as 8%, according to reports.

So how much money are we talking about?

The following is an estimate of what some of the largest biotech companies have stashed overseas:

• Gilead: $29.3 billion
• Bristol-Meyers Squibb: $8.4 billion
• Celgene: $6.9 billion
• Biogen: $4.3 billion

Source: Bloomberg, June, 2017

With all that extra cash potentially coming back to the U.S., it makes sense that biotech companies might use some of it for mergers and acquisitions.

When a company acquires or merges with another company, it usually puts the combined businesses in a stronger position competitively. Companies buy other companies if they have something they need. That could be products, or services or even important research, which is the case in many pharmaceutical deals.

Fun fact: When people talk about M&A, they’re talking about mergers and acquisitions.

Deals in play

With that in mind, here’s a look at what biotech companies announced this week, subject to regulatory approval:

• Celgene announced it planned to acquired Juno Therapeutics for $9 billion.
• French company Sanofi said it would purchase U.S. drugmaker Bioverativ for $11.6 billion.
• Also this week, BioCryst Pharmaceuticals said it would merge with Idera Pharmaceuticals through an exchange of stock.

The M&A activity over the past few days follows a period of fewer acquisitions in the industry, according to reports. One exception is Gilead, which purchased Kite Pharma for close to $12 billion in September, 2017, in a bid to develop immunotherapy drugs. In October, the Food and Drug Administration gave the green light to Kite’s new cancer-fighting immunotherapy.

So what happened?

Here’s what happened to stocks and stock fund values after the mergers and acquisitions were announced:

Modern Meds (XBI), whose underlying fund is SPDR S&P Biotech ETF, surged 5% by Tuesday.*

Similarly, iShares Nasdaq Biotechnology ETF, also posted an increase of nearly 5%.*

Good to know: When one company announces it will buy another, it usually affects the share price of one or both companies. If investors favor the deal, generally speaking stock prices will move up. If they don’t, stock prices will move down.

For example: Celgene’s stock was up 3% on Tuesday, while Juno’s stock was down .06%.**

*Source: Yahoo Finance, January 23, 2018

**Source: MarketWatch, January 23, 2018

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That’s one reason you may want to pay attention to drug company Gilead Sciences, which announced on Monday that it will purchase Kite Pharma, in a deal worth nearly $12 billion.

Kite, based in Santa Monica, California, produces an immunotherapy drug that reportedly stimulates the body to fight cancer with its own cells.

Why is this a big deal?

• Gilead is one of the largest pharmaceutical drug makers in the world. And by focusing on a biotech company that has pioneered novel therapies for cancer treatment, it’s taking a bet on a new market with a huge potential for growth.
• The biotech market has shown a lot of strength this year, with major indexes that include pharmaceutical stocks increasing in the double-digits. One reason for the gains, financial experts say, is the potentially favorable environment for drug companies created by the Trump administration, which continues to roll back business regulations, and a Food and Drug Administration chief who has promised to speed the approval process for new drugs.
• Gilead hasn’t made a major acquisition of another business since 2011, and this is the company’s largest purchase to date.
• Gilead has reportedly amassed billions of dollars in recent years from top-selling antiviral drugs that help fight HIV, hepatitis B and C, and the influenza.

“The acquisition of Kite establishes Gilead as a leader in cellular therapy and provides a foundation from which to drive continued innovation for people with advanced cancers,” Gilead chief executive officer John Milligan said in press release on Monday.

Key Takeaways: Gilead is one of the largest drug manufacturers in the world, and it’s developed critical drugs to fight HIV, hepatitis B and C, and influenza. Its multi-billion dollar purchase of Kite is a significant bet on new advances in fighting cancer, as well as a further demonstration of the strength of the pharmaceutical industry in recent months.

Want to learn more about investing in healthcare?

Check out the Modern Meds and Doctor, Doctor ETFs on Stash.

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