No letting up in pharma as first-half gains outweigh losses

Up and up and up it goes, and where it stops, nobody knows. Little has stood in the way of mounting valuations in pharma and biotech – notwithstanding the occasional wobble or company-specific setback – with this sector being one to which every investor seems to want to have some exposure.

Three years of a biotech gold rush have tested investors’ nerves as well as economic philosophies, and yet the appetite for risk does not appear to be anywhere near satisfied. As a sign of this, witness Lilly’s late second-quarter surge on hopes in one of the most perilous development areas of all, Alzheimer’s disease.

It would be easy to point to the disparity between the biopharma indices and the broader indicators to discuss the sector’s performance. However, the slightly negative performances of the Dow Jones Industrial Average and FTSE 100 are the consequence of macroeconomic uncertainties – specifically, worries over a Greek exit from the Eurozone, an issue that seems to shake world markets periodically.

Stock index % change in H1
NASDAQ Biotechnology (US) 22%
S&P Pharmaceuticals (US)  5%
Dow Jones Pharma and Biotech (US)   9%
S&P 500 0%
DJIA -1%
Dow Jones STOXX Healthcare (EU)   15%
Thomson Reuters Europe Healthcare (EU) 4%
Euro STOXX 50 9%
FTSE-100 -1%
TOPIX Pharmaceutical Index (Japan)  23%

In this context the continued positive performance of the key pharma and biotech indicators shows that investors know where there are gains to be made.

Most of all, the Nasdaq biotechnology and Japan-focused Topix pharmaceutical indices grew 23% in the first six months; the run rate will not put the US index anywhere near the incredible 66% growth of 2013, but it has a decent chance of matching 2014’s 34%. But the EU was not a bad place to be, either, with the Dow Jones Stoxx Healthcare index posting double-digit growth, a sign that European investors have shaken off a conservative attitude towards the sector.

Finding growth in Alzheimer's

In the world of big pharma Lilly has capitalised most on the continued enthusiasm for all things biopharma. The Indiana-based company stormed forward in June with some risky betting that analyses of its Alzheimer’s disease project solanezumab to be revealed this month could turn up a golden nugget – a bet that, if wrong, should cause it to fall when this analysis is done next, in three months' time.

Sanofi’s elevation after a woeful 2014 ought to be no balm for its former chief executive Chris Viehbacher. Investors have forgotten about the missteps on Lantus pricing and are now thinking about one of the biggest launches of 2015 in the cholesterol drug Praluent, not to mention the potential for dupilumab to make a splash in autoimmune disorders.

Big pharma companies: top risers and fallers in 6 months
Share price (local currency) Market capitalisation ($bn) 
Top 3 risers YE 2014 Q2'15 Change Q2'15 6M change
Eli Lilly  $68.99 $83.49 21% 92.8 15.9
Sanofi  €75.66 €88.24 17% 125.0 (2.2)
Bristol-Myers Squibb $59.03 $66.54 13% 110.9 13.0
Top 3 worst performers 
AstraZeneca  $70.38 $63.71 (9%) 80.5 (8.4)
Johnson & Johnson  $104.57 $97.46 (7%) 270.3 (22.4)
GlaxoSmithKline  £13.76 £13.23 (4%) 96.3 (11.3)

Bristol-Myers Squibb prospered in spite of stumbling on its biggest stage, Asco (Asco Event Analyzer – 2015’s winners and losers, June 3, 2015). Unexpectedly fast FDA approval of its PD-1 agent in lung cancer has resulted in a 15% upgrade in consensus sales expectations since the beginning of the year as the sellside’s enthusiasm for immuno-oncology agents seems to have no limits.

The UK big pharmas AstraZeneca and GlaxoSmithKline take the ignominious places of first and third in the biggest losers of the first half of 2015. Astra came off a stellar year in 2014 when it fought off a takeover attempt by Pfizer, but as hopes for that takeout have faded so has the justification for the high valuation on which it ended the year.

Astra also has been unusually exposed to the troubles in the respiratory sector, a factor in Glaxo’s declines this year. Johnson & Johnson is the American filling in this British sandwich – significant downgrades for its biggest seller, Remicade, as US biosimilar competition has emerged, as well as the underperformance of the hepatitis C pill Olysio and a poor showing from medical devices have not helped its cause.

Buy buy

The large cap companies not regarded as big pharma had their share of astonishing risers, not least Valeant. As always with the acquisitive Canadian group, M&A drives the momentum in this stock, and the first half of 2015 was no exception: after missing out on the takeout of Allergan last year, a move on Salix, and speculation on numerous potential transactions in the always-active speciality pharma world have kept trading lively.

Novo Nordisk has benefited from the announcement that it will re-submit its US application for the long-acting insulins Tresiba and Ryzodeg this year. Fresenius, meanwhile, benefited from a positive growth outlook and the belief that it too could join the ranks of acquisitive companies.

Other large cap (>$25bn): top risers and fallers in 6 months
Share price (local currency) Market capitalistation ($bn) 
Top 3 risers YE 2014 Q2'15 Change Q2'15 6M change
Valeant  $143.11 $222.15 55% 76.1 28.0
Novo Nordisk  DKr 260.3 DKr 364.6 40% 108.9 15.3
Fresenius  €43.03 €57.82 34% 34.0 4.4
Top 3 worst performers 
Baxter  $73.29 $69.93 (5%) 38.0 (1.7)
Amgen  $159.29 $153.52 (4%) 116.7 (4.4)
Alexion  $185.03 $180.77 (2%) 40.5 (3.8)

On the negative side: Baxter has tumbled in advance of the spinout of its biopharma group Baxalta beginning yesterday; Amgen is suffering under the twin pressures of biosimilar completion and a pipeline that has yet to prove itself; and Alexion surprisingly made this list, as the dilutive nature of its Synageva takeout was felt by shareholders.

The debate about the biopharma bull market is as heated as ever, and the first half of 2015 has given those who refuse to believe that it is a bubble further evidence. All things pass, however, and with each passing day of market gains elevating outsized expectations, even a soft landing might be seen as disastrous.

To contact the writers of this story email Jonathan Gardner or Edwin Elmhirst in London at [email protected] or follow @ByJonGardner or @EPVantage on Twitter

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