Big pharma benefits from biotech carnage in Q1

If gains were shared rather broadly across the pharma and biotech sector in 2013, the story so far in 2014 is about the stock market correction of March.

While nearly every indicator of market valuation has risen from January 1, the gains have been tempered by a shift away from high-growth companies. Within the sector, meanwhile, worries about drug price sustainability have silenced what had been untempered exuberance. The result has been that formerly can’t-lose darlings like Celgene and Gilead Sciences now find themselves on the losing end of the large-cap league standings (see tables).

Stock index % change in Q1 2014
NASDAQ Biotechnology (US) 4%
Dow Jones Pharma and Biotech (US)   5%
TOPIX Pharmaceutical Index (Japan)  (2%)
S&P Pharmaceuticals (US)  7%
S&P 500 2%
Thomson Reuters Europe Healthcare (EU) 3%
DJIA (1%)
Dow Jones STOXX Healthcare (EU)   5%
Euro STOXX 50 2%
FTSE-100 (2%)

Still, for the pall that fell over the sector as the quarter ended, biotech still outperformed the broader indices – just not by as much as investors had grown accustomed to over 2012 and 2013. Only one pharma-related index was in negative numbers – Japan’s TOPIX Pharmaceuticals shrank 2% owing to volatility in that region – and the rest beat the biggest gainer of the broad indices, the Euro STOXX 50.

But the separation of the curves between the Nasdaq biotechnology index and Dow Jones Industrial Average, for example, was not as pronounced as in 2012 and 2013, after the biotech bull run was triggered by Gilead’s acquisition of Pharmasset for the blockbuster now known as Sovaldi.  Interestingly enough, it was the broader Dow pharma index that started showing signs of life just as the Nasdaq’s biotech index faltered.

This bears out an observation made by several analysts: that macroeconomic issues like fears of higher interest rates have caused institutional investors to pull money from high-growth, higher-risk stocks and put it in safer homes like big pharma. A milestone was reached on Friday, when the closely watched Nasdaq-based iShares Biotech exchange traded fund dipped into negative territory, along with Nasdaq biotechnology.

Against that background, the winners and losers in large cap pharma and biotech seem somewhat predictable. Novo Nordisk and Lilly, which made the list of the worst performers of 2013, were the top two in Q1, benefiting from their cash-generating insulin businesses. They were joined by Merck & Co, which was no standout in 2013. Celgene and Gilead were the victims of the shift in sentiment, joined by Bayer, which had been an impressive performer in 2013 (Bayer shows big pharma that a conglomerate can do it too, October 10, 2013).

Big pharma companies: top risers and fallers in Q1
Share price (local currency) Market capitalisation ($bn)
Rank Top 3 risers YE 2013 Q1 2014 Change YE 2013 Q1 2014
1 Novo Nordisk DKr198.80 DKr246.80 24% 80.47 99.64
2 Eli Lilly $51.00 $58.86 15% 57.46 65.91
3 Merck & Co $50.05 $56.77 13% 146.24 166.94
Rank Top 3 fallers
1 Celgene $168.97 $139.60  (17%) 69.63 56.68
2 Gilead Sciences $75.10 $70.86  (6%) 115.15 108.97
3 Bayer €102.10 €98.38  (4%) 115.20 110.76

Outside the realm of big pharma and biotech, speciality, generics and regional majors also had their shifts in investor preferences in Q1. This is a group whose investors behave differently from those of big pharma and biotech, so for this evaluation EP Vantage has decided to analyse this group separately.

Snake-bitten Teva Pharmaceutical Industries staged an impressive turnaround. The appointment of a new chief executive, Erez Vigodman, after executive suite turmoil certainly helped shake Teva out of its market doldrums. A late March boost in the form of a US Supreme Court hearing of its Copaxone patent appeal vaulted it to the top step of the podium (Copaxone not dead yet as Teva appeal lives on, April 1, 2014).

The acquisitive Actavis pleased its investors once more – the acquisition of Forest Laboratories moved it emphatically up the value chain to establish it as a speciality pharma group, thanks to Forest’s digestive, respiratory and CNS franchises (Actavis enters the Forest and comes out a specialty pharma company, February 18, 2014). Alexion, meanwhile, continues to benefit from having the world’s most expensive drug in Soliris, on track to be a $4bn seller by 2018.

On the losing side of the equation, Merck KGaA was hurt by the sudden departure of its finance chief, and a lacklustre pipeline has not earned investor favour. Astellas Pharma and Takeda seem to be collateral damage in the ongoing volatility in the Japanese biotech market – Astellas in particular has come off a decent run benefiting from its partnership with Medivation on the prostate cancer drug Xtandi.

Other large cap: top risers and worst performers in Q1
Share price (local currency) Market capitalisation ($bn)
Rank Top 3 risers YE 2013 Q1 2014 Change YE 2013 Q1 2014
1 Teva Pharmaceutical Industries $40.08 $52.84 32% 37.95 50.15
2 Actavis $168.00 $205.85 23% 29.24 35.92
3 Alexion Pharmaceuticals $132.88 $152.13 14% 26.06 30.10
Rank Top 3 worst performers
1 Merck KGaA €129.92 €122.12  (6%) 38.54 36.15
2 Astellas Pharma ¥1,246 ¥1,224  (2%) 29.11 26.94
3 Takeda ¥4,825 ¥4,892 1% 38.96 37.22

In the mid-cap risers, M&A defined the beginning of 2014. Actavis’s decision to pay a 25% premium drove Forest to the top of the table; Salix built some momentum with the buyout of Santarus after some concern about the launch trajectory of Xifaxan; and no doubt investors hope that the always-active Mylan will make a move soon or become a target (Mid-cap consolidation spree looks set to yield bigger deals, February 20, 2014).

On the losing side of the mid-cap equation, it is probably no surprise that United Therapeutics has come back a bit – the surprise approval of Orenitram gave it a huge pre-Chrismas jump that propelled it into the 2013 winners circle (A Christmas miracle for United as oral Remodulin approved, December 23, 2013).

Mid-cap ($5-25bn) pharma companies: top risers and fallers in Q1 
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 risers YE 2013 Q1 2014 Change YE 2013 Q1 2014
1 Forest Laboratories $60.03 $92.27 54% 16.17 25.01
2 Salix Pharmaceuticals $89.94 $103.61 15% 5.66 6.56
3 Grifols €34.77 €39.78 14% 10.11 11.54
4 Chugai Pharmaceutical ¥2,325 ¥2,635 13% 13.31 14.21
5 Mylan $43.40 $48.83 13% 16.62 18.16
Rank Top 5 fallers
1 United Therapeutics $113.08 $94.03  (17%) 5.68 4.75
2 Shionogi ¥2,280 ¥1,913  (16%) 8.19 6.47
3 Daiichi Sankyo ¥1,923 ¥1,738  (10%) 13.94 11.87
4 Pharmacyclics $105.78 $100.22  (5%) 7.80 7.50
5 Vertex Pharmaceuticals $74.30 $70.72  (5%) 17.37 16.70

Shionogi and Daiichi Sankyo are not helped by the broader losses in the Japanese pharma market. Pharmacyclics and Vertex Pharmaceuticals have seen big selloffs following new approvals for big drugs.

After an incredible run-up in share prices March 2014 has served as a dramatic pause, although some observers are suggesting that the market is nearing the bottom of this decline (Top or bottom – tumultuous market awaits fresh catalysts, April 3, 2014). Indeed, today’s announcement that Mallinkrodt is buying Questcor for an incredible $5.6bn could trigger a return to form by sparking rising valuations of biotechs and a shift back into growth stocks.

To contact the writers of this story email Jonathan Gardner or Joanne Fagg in London at news@epvanage.com or follow @JonEPVantage or @JoEPVantage on Twitter

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