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Three stocks to profit from the boom in pharma M&A

Ailsa Craig picks three stocks that should capitalise on the M&A trend in the pharmaceutical sector, either as potential targets or as well-established acquirers of other rivals.

Each week, a professional investor tells us where she'd put her money. This week: Ailsa Craig of the International Biotechnology Trust.

We expect that mergers and acquisitions (M&A) activity will remain at high levels in the biotechnology sector over the next few months. Larger pharmaceutical and biotechnology companies will continue to snap up smaller rivals because these small companies are better at developing innovative drugs. Despite Donald Trump's recent comments about the high price of US drugs, it will be difficult to implement policies that force healthcare companies to reduce the cost of medicines. However, increased scrutiny may persuade firms not to increase prices as much as they would have done. That would provide an additional incentive for large companies to acquire smaller firms in a bid to increase earnings, as price curbs will otherwise have a negative impact on sales and profit growth. We have chosen three companies that capitalise on this M&A trend, either as potential targets or as well-established acquirers of other rivals.

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Genmab (Copenhagen: GEN) is a Danish firm that specialises in producing drugs to treat cancer. It developed Darzalex, which is used to treat multiple myeloma a form of bone-marrow cancer. The drug does not cure the disease, but it significantly improves the chances of survival. Genmab formed a partnership with Johnson & Johnson to help develop, manufacture and market the drug worldwide. Since the launch of Darzalex in the US at the end of 2015, its sales have beaten expectations, and the outlook is extremely positive as it will not face a competing product over the near to medium term. The drug may also prove efficacious at earlier stages of the disease as well as being used in other forms of cancer. The strength of Darzalex's position may make it compelling for Johnson & Johnson to acquire Genmab.

Shire (LSE: SHP) owes its success to Adderall, a treatment for attention-deficit-hyperactivity disorder. This franchise has been very lucrative, but the company's reliance on Adderall meant that the expiry of its patents had the potential to be disastrous. So Shire has embarked on a series of acquisitions, including Dyax, ViroPharma and Baxalta, which specialise in rare diseases and haematology. It has developed and launched Xiidra, an ophthalmology drug, which is expected to do well. Shire is attractively valued, has strong earnings growth and is likely to continue to be interested in acquiring smaller firms.

Incyte (Nasdaq: INCY) has seen strong sales for Jakafi, a treatment for myelofibrosis, which launched in partnership with Novartis. The firm is set to launch baricitinib, in partnership with Eli Lilly, to treat rheumatoid arthritis. It also has a late-stage oncology drug called IDO, which is being tested in combination with a number of oncology drugs in non-exclusive deals with major pharmaceutical firms. Incyte's product pipeline makes it a desirable acquisition target and Gilead Sciences is rumoured to be interested in buying the company.

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