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Merger and acquisition activity is positive for the overall market.
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AbbVie made a big purchase overnight. Source: AbbVie.
As the stock market has climbed, many investors have become increasingly concerned about whether its gains are sustainable. One key signal that can determine whether stocks are overpriced comes from mergers and acquisitions. When potential target companies seem expensive, fewer acquirers are interested in making high-priced buyouts. But accelerating M&A activity suggests stocks are still cheap, and two sizable deals in the healthcare industry are sounding a bullish tone that helped lift the overall market Thursday. As of 11 a.m. EST, the Dow Jones Industrials (DJINDICES: ^DJI) were up 46 points, looking to avoid a three-day losing streak.
The biggest M&A announcement came from AbbVie (ABBV +0.01%), which late Wednesday announced a massive $21 billion purchase of biotech cancer-specialist Pharmacyclics (NASDAQ: PCYC). Under the deal, AbbVie will pay $261.25 for every share of Pharmacyclics, with AbbVie using an unspecified mix of cash and stock to pay for the transaction. In response, Pharmacyclics shares jumped 10.5% today, while AbbVie slumped 3.3% as shareholders considered the dilutive impact of the equity portion of the buyout. The deal gives AbbVie some much-needed diversification beyond its current blockbuster Humira, which is slated to lose some patent protection in the near future. Pharmacyclics makes the oncology treatment Imbruvica, which has multiple approvals for treating blood cancer and has advantages over similar treatments by avoiding some of the worst side effects of traditional chemotherapy. AbbVie will also get a promising pipeline of further potential blockbuster treatments. Given the patent challenges facing many drugmakers, acquisitions like this one are likely to continue throughout the industry.
Source: Mallinckrodt.
Elsewhere in the healthcare field, drug company Mallinckrodt (MNK +0.00%) agreed to purchase Ikaria for $2.3 billion from a private equity-led investor group. The move continues a long string of acquisitions for the St. Louis company, which recently spent about $7 billion in total to acquire Cadence Pharmaceuticals and Questcor Pharmaceuticals. Ikaria specializes in therapies to help critically ill infants in hospital neonatal intensive care units; according to Mallinckrodt, the buyout will expand the company's presence in hospital facilities while giving it another opportunity to broaden its overall offerings of products and treatments. Ikaria's mission to provide critical care in areas of what it calls "high unmet medical need" is directly in line with Mallinckrodt's overall aim to grow its business, and that makes the buyout worthy of Mallinckrodt's characterization of it as a "strategically compelling transaction."
Merger and acquisition activity typically won't alone lift the market. But as a sign that companies are still interested in making smart strategic purchases at current levels, healthy numbers of buyouts point to the potential for further stock market growth despite the big gains since 2009.