The wave that surged on the back of hepatitis C mania at the beginning of 2012 is proving hard to stop as the year draws to a close. October’s dip had many calling the top of the market, but the Nasdaq biotech index is coming back with a vengeance and currently stands 34% up since January 1.
True, a closer look at the index’s 120 constituents reveals that it has not all been plain sailing; a third of the companies are down on the year, and the index remains buoyant thanks largely to a handful of big-cap stocks. But last month’s early reports of the death of biotech were greatly exaggerated.
Like any index whose constituents are weighted by their market capitalisations, the Nasdaq biotech index is prone to being driven up or down by share price movements in just a handful of companies.
In this case that means its three top constituents, Amgen, Gilead Sciences and Biogen Idec, which are up 38%, 84% and 37% respectively on the year so far. The seemingly unstoppable surge in the share price of Gilead and the 239% rise in Regeneron Pharmaceuticals stock are among the main reasons why US biotech has continued to deliver.
Still, it is worth pausing to consider just how sustainable this situation is. Gilead is a case in point: its hepatitis C project sofosbuvir (GS-7977) recently became the industry’s most valuable R&D asset, as ranked by EvaluatePharma’s 2018 consensus sales estimates.
Gilead has surged on hopes that the one-pill, once-a-day, interferon-free regimen could revolutionise the treatment of hepatitis C (AASLD – Gilead hits new high with a little help from its friends, November 13, 2012). But it is clear that the hep C space is overheating on the back of ever more bullish market size forecasts, and the true picture – including the opportunity presented by currently “warehoused” patients – will not emerge until sofosbuvir is launched in 2014.
Investors willing to take a step back will note how much a company whose pill has been dubbed “perfectivir” has to live up to.
Although knocked out of first place, dimethyl fumarate (BG-12) continues to drive Biogen Idec. The molecule, used for decades as a steriliser in the leather industry, is expected to become a blockbuster in treating multiple sclerosis.
The ticklishness of the situation was highlighted when the project’s FDA review was postponed by three months, and it was suggested that the failure of Abbott Laboratories’ bardoxolone had a mechanistic read-across to dimethyl fumarate. Although the charge was hotly denied by Biogen its stock dipped, and along with it went the index.
|Who's pulling the cart? Some prominent winners of 2012…|
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Amgen, the biggest company technically defined as a biotech, has largely benefited from a $5bn share buyback, and as such its significance to the rest of the sector is limited. Neither would several strongly performing companies in the index, such as Grifols and Illumina, fit most people’s definition of biotech.
Among mid-sized biotechs, Arena Pharmaceuticals is up 384% on the potential of its soon-to-be-launched obesity drug Belviq, although the actual market potential for a drug with poor efficacy remains a huge question mark.
To get an idea of its potential voilatility, just look at its competitor Vivus. Vivus had peaked in July, climbing threefold over the year to date, but is now almost back to where it was in January – a stark reminder to Arena bulls that, at least in obesity, the proof of the pudding lies in a drug’s commercial performance (Arena says the magic combo word as reality hits Vivus, November 7, 2012).
And do not discount the power of the M&A hypothesis in keeping stocks riding high. Long-time oncology outperformers Onyx Pharmaceuticals and Medivation continue to make gains, helped largely by takeover rumours that seem to have little basis in fact.
Also in the speculative camp is Sarepta Therapeutics, which, based on mixed data from a small Duchenne muscular dystrophy trial, is the Nasdaq biotech index’s surprise star performer of 2012. Still, even considering the 553% surge, given Sarepta’s market cap the stock has a limited effect on the index overall.
Much more important to driving the index are bigger stocks such as Alexion Pharmaceuticals and Celgene, which lost ground last month after reporting weaker than expected sales of its all-important Revlimid (Event – Celgene looks to poma to pick up some Revlimid slack, November 20, 2012). But a loss can sometimes lead to a win, and share price gains made subsequently as investors saw the declines in Celgene and Biogen as buying opportunities have prompted the recent recovery in the Nasdaq biotech index.
Of course, some of the sector’s duds seem immune to the “buy on the dip” thesis, and it is worth noting that 40 of the index’s 120 constituents are down on the year so far – some considerably so.
One need look no further than Questcor Pharmaceuticals, trashed when its Acthar dream unravelled in September, or Dendreon, the company whose hugely hyped prostate cancer autologous immunotherapy Provenge stands as one of the most disappointing product launches of recent years; two years on from Provenge’s introduction investors are still feeling the pain.
|…and a selection of those in trouble|
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And then there is Aveo Oncology, which somehow cannot seem able to persuade the market of the potential of its filed kidney cancer candidate tivozanib, and ArQule, which looks set to crash out of the index, its market cap having fallen below the required $200m threshold (Double clue dashes ArQule’s lung cancer hopes, October 3, 2012).
While the setbacks of these relatively small stocks have had a limited effect on the index as a whole, it is worth remembering that it would only take a couple of misses by one of the big guns for the picture to change profoundly. Biotech might have been given a new lease of life, but October’s dip has to be seen as a yellow card.
Those investors banking on the sector continuing to defy gravity might want to consider the precariousness of the situation.
To contact the writer of this story email Jacob Plieth in London at firstname.lastname@example.org