Acquisitions help define performance of mid and small cap stocks

While data readouts have played their usual part in shaping the share price winners and losers among mid and small-cap companies in the first nine months of the year, the fortunes of some shares have been firmly based on M&A – or, in the case of Thrombogenics, the lack of it.

Conversely, some in the sector have seen their share prices rocket as companies have either offered to buy rivals to shore up their pipelines, a la Roche and Intermune, or to fend off the unwelcome attention of rivals, a strategy from which Salix Pharmaceuticals has benefited (see tables below).

Buying success

Among the mid-caps, Salix’s rise this year has been one of two halves. The group’s shares first picked up momentum because of trial success for Xifaxan in diarrhoea-predominate irritable bowel, but in the last few months Salix has been the subject of various share price-moving takeout rumours. The needle was moved most by whispers that Allergan was planning on making an offer, a decision many saw as its own defence against Valeant’s interest. Since then Salix has been linked with Actavis and has abandoned its plans to acquire Cosmo Pharmaceuticals. This was the second factor that explains its share price rise.

The relatively unusual appearance of several Indian generic companies including Cipla and Lupin in the risers was largely attributable to hopes they might be recipients of some of the wealth being generated by Gilead Science’s Sovaldi, following reports that the US group was looking for manufacturers for cheap versions of the hepatitis C drug in emerging markets.

Companies can also be victims of M&A. One such in the mid-caps was Grifols, which saw its shares slide after it was hurt by larger than expected costs following its purchase of a Novartis diagnostics unit. Another big faller, Dainippon Sumitomo Pharma, decided to disappoint the old-fashioned way. The stock was hit hard after it stopped a phase III trial for colorectal cancer drug BBI608.

By any means

InterMune’s elevation to the largest small cap riser come courtesy of the surprisingly large amount of money Roche decided to splash out to buy the company – a whopping $8.3bn – igniting fears that the industry is again in the grip of biotech fever with its puzzling valuations for companies.

As for the rest, it was a mixture of either clinical or regulatory success, largely in liver-related treatments, that drove their stock movements. Achillion was able to shake of some of its ‘also-ran’ label in the hep C race after the FDA announced it was lifting the clinical hold on lead project sovaprevir, which in turn reignited hopes that the company might follow in the footsteps of Idenix Pharmaceuticals and fall into the arms of a big pharma player. Unfortunately, Achillion remains the bridesmaid of the hep C drug developers.

Intercept continued to ride the wave of success for its liver disease drug, while GENFIT saw the FDA grant fast track designation to its non-alcoholic steato-hepatitis treatment, GFT505. Avanir scored a big win that had investors laughing all the way to bank, for apparent progress in the tricky field of Alzheimer’s, using its pseudobulbar treatment Nuedexta to treat agitation.

Although there were grounds for suspicion that Exelixis’ Cometriq might not do well in prostate cancer when the Comet-1 trial was not stopped early, news last month that the drug had failed to show any benefit over prednisone, not only caused the shares to tank, but 70% of the workforce to lose their jobs.

Clinical failures were also behind Kamada and Prana Biotechnology’s share price declines, while Thrombogenics’ failure to find a buyer was the reason for more than half a billion being wiped off its valuation.

How many zeros?

Even with the volatility to which smaller stocks are prone, and which can cause stratospheric gains and losses, anyone who invested in Santhera Pharmaceuticals at the start of the year might be surprised by the 2,237% rise in the shares over the last nine months. The stock has benefited from the company showing that idebenone helped preserve respiratory function in Duchenne muscular dystrophy.

The more modest 530% rise from Adocia was due to positive phase IIa results for its ultra-fast formulation of insulin lispro.

On the other end of the scale QRxPharma saw its shares tank after an FDA advisory panel said a unanimous no to the group’s opioid combo Moxduo. Clinical failure was the reason Oncolytics joined the fallers, following the failure of Reolysin to show any progression free survival advantage in a phase II study.

Although the moves at the smaller end of the market have so far been due to the usual drivers of clinical success and failure, future share price movement here may be more driven by big pharma continuing to feed pipelines through M&A, and asset prices continuing to rise.

To contact the writer of this story email Lisa Urquhart in London at [email protected] or follow @LisaEPVantage on Twitter