Biotech consolidates its dominance in the first quarter

Analysis

It was never in doubt that biotech had come of age, but the first quarter of 2013 has underlined the importance that the sector now plays for investors in healthcare companies.

The quarter not only saw the Nasdaq biotechnology index hit an all-time high – beating even the genomics-driven mid-2000 biobubble – but three of the five best-performing large-cap stocks in the period were big biotech rather than big pharma. Although there are some signs that investors are switching away from smaller companies, no one is daring to speculate about when the tide might turn.

While it is true that a relatively small number of relatively large stocks tend to drive the Nasdaq biotech index, there is no single better measure of sector sentiment.

Stock index % change in Q1 2013
Dow Jones Pharma and Biotech (US)   17%
S&P Pharmaceuticals (US)  15%
Nasdaq Biotechnology (US) 17%
Dow Jones STOXX Healthcare (EU)   12%
Thomson Reuters Europe Healthcare (EU) 10%
Topix Pharmaceutical Index (Japan)  30%
FTSE-100 9%
Euro STOXX 50 0%
S&P 500 10%
DJIA 11%

A cut of the top five first-quarter share price performers features three – Celgene, Biogen Idec and Gilead Sciences – that have a lot to do with the Nasdaq index’s surge. Just as tellingly, not a single pharma/biotech stock with a market cap over $30bn suffered an overall decline during the quarter.

It is barely believable that a company as large as Celgene can boast a year-to-date share price gain of almost 50%, but this is precisely what has happened as sentiment built around several factors, including the February approval of the cytostatic Pomalyst, positive phase III apremilast data and a stock buyback.

The Pomalyst approval helped relieve jitters over Celgene’s all-important blockbuster, Revlimid; the stock had lost ground late last year after Revlimid sales disappointed, and the recent surge shows just what a buying opportunity that was.

Meanwhile, analysts have rewritten the hepatitis C rulebook as Gilead continues to ride a seemingly unstoppable wave of optimism in its march towards the first all-oral interferon-free regimen and Biogen basks in the recent US approval of Tecfidera – expected to be the biggest drug launch of 2013.

Large cap ($30bn+) pharma companies: top risers in Q1
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 risers YE 2012 Q1 2013 Change YE 2012 Q1 2013
1 Celgene $78.47 $115.91 48% 33.19 48.54
2 Takeda ¥3,855 ¥5,140 33% 38.52 44.58
3 Gilead Sciences $36.72 $48.94 33% 55.65 74.58
4 Biogen Idec $146.37 $192.62 32% 34.63 45.52
5 Bristol-Myers Squibb $32.59 $41.19 26% 53.80 67.67

Outside the top five, Abbott Laboratories’ spun-out drugs business, AbbVie, has had a promising start to its standalone life, boasting a respectable 17% share price increase.

Japan fizzes

It is interesting that a Japanese company, Takeda, has claimed second place in the big-cap movers, and indeed Japan features strongly in the mid-cap table too.

The local biotech sector has enjoyed a ride that has exceeded even that of the US, as illustrated by the performance of the Topix pharma index, whose 30% first-quarter rise easily beats Nasdaq biotech (When will Japanese biotech come off the boil?, March 12, 2013).

Mid cap ($2.5-30bn) pharma companies: top risers and fallers in Q1
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 risers YE 2012 Q1 2013 Change YE 2012 Q1 2013
1 Dainippon Sumitomo Pharma ¥1,035 ¥1,755 70% 5.21 7.84
2 Seattle Genetics $23.17 $35.51 53% 2.76 4.28
3 Alfresa Holdings ¥3,370 ¥5,090 51% 2.51 3.36
4 Suzuken Group ¥2,429 ¥3,500 44% 2.89 3.69
5 Medipal Holdings ¥955 ¥1,331 39% 2.96 3.65
Rank Top 5 fallers
1 Ranbaxy Laboratories Rs502.75 Rs439.90 (13%) 4.00 3.43
2 AREVA €12.82 €11.52 (10%) 6.37 5.87
3 Medivation $51.16 $46.76 (9%) 3.80 3.50
4 Cipla Rs414.10 Rs379.75 (8%) 6.27 5.62
5 Orion €22.05 €20.31 (8%) 4.06 3.84

Four of the five best-performing mid-cap stocks are Japanese, although these come with a caveat: the share price changes are expressed in local currency terms, and thus exclude the effect of the recent collapse of the Japanese yen against the US dollar. Thus, while Dainippon, Alfresa, Suzuken and Medipal sit on first-quarter rises of 70%, 51%, 44% and 39% respectively, for those who might have invested US dollars in the companies the increases are a far more restrained 50%, 34%, 28% and 24%.

Anyone daring to call the top of the Japanese market can also speculate on the fate of biotech on the Nasdaq. A mid-cap player that illustrates the optimism is Seattle Genetics, which to be fair, can at least boast a marketed cancer drug, Adcetris, partnered with Takeda.

But it seems that neither a safety alert nor Adcetris’s flatlining sales and the need to shell out more R&D dollars in an effort to broaden the drug’s use in rare lymphomas can dampen investor enthusiasm. For a cautionary tale look no further than Medivation: the company’s stock finished last year up over 100%, but stalled in the first quarter despite its prostate cancer drug Xtandi making a strong start on the market.

Among the fallers, Ranbaxy recalled certain lots of generic atorvastatin, only resuming supply recently, while the fellow Indian generics company Cipla was hit by margin pressure. This type of volatility in the generics space is something that recent biotech enthusiasts have yet to contend with.

That the Nasdaq biotech index is now higher than in a period widely viewed as representing the worst excesses of blind investing in all things “biotech” should give sector bulls and bears alike ample food for thought.

To contact the writers of this story email Jacob Plieth or Joanne Fagg in London at news@epvantage.com or follow @JacobEPVantage and @JoEPVantage on Twitter

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