Top or bottom – tumultuous market awaits fresh catalysts

A correction or the beginning of the end? The biotech market’s performance in the past month ought to be described as more than a wobble, so the worry of every trader has been whether the fundamentals of life science companies are sound enough to prop up their valuations.

It is not the first time since Gilead Sciences triggered the bull run in November 2011 that share prices dipped worryingly, and yet the tumble in the last week of March felt different, perhaps because Gilead itself was centre stage in the drama (Gilead price challenge tests the coolest of heads, March 24, 2014). A welcome rebound has been seen this week, but the rest of 2014 might lack the catalysts to drive the growth rate that saw the Nasdaq biotechnology index double in 2012-13.

After setting a new record on February 25 at close to double its previous high-water mark in March 2000, the Nasdaq index was off 11% over the course of March, meeting the technical definition of a market correction.

There was at least one explanation that had little to do with the sustainability of the biotech bull market: fearing tighter monetary policy in the future, institutional investors moved out of high-growth stocks and into “value” companies, explaining why the broader indices outperformed biotech. 

But biotech has its own peculiarities, not least of which has to be the concern over how long payers, both public and private, will tolerate the $84,000 pricetag Gilead has placed on its hepatitis C drug Sovaldi, along with many other new drugs. With its $113bn market capitalisation, Gilead is a heavyweight of Nasdaq biotech, and when it moves drastically the whole index follows.

Biotech investors have seen similar before: October 2012 saw an 8% dip, coinciding with a US pharmacy benefit manager’s warnings about multiple sclerosis drug costs and prices as Biogen Idec’s MS pill Tecfidera neared a scheduled FDA decision date.

The whopping gains of 2012 and 2013 were amplified by the entry of generalist and institutional investors who saw profits to be made – and specialist biotech investors were more than happy to share in those gains. That situation might have reversed, for the time being.

Mark Schoenebaum, analyst with ISI Group, notes that both of the above macro and micro trends have caused generalists to move out of the higher-risk sector. “Every bear biotech and pharma market I’ve had the displeasure of observing has had the following theme as a common characteristic: generalists just think the high prices of drugs are not sustainable,” he says.

“I fear we are in a protracted period of generalist concern about pricing.” Nonetheless, Mr Schoenebaum says he believes the biotech market is within 5-10% of its bottom.

Feast or famine

When looking at the underlying trends of biotech’s stunning performance it should be clear that 2014 is a different year from the preceding two, which should be giving pause. Even as the much-feared patent cliff peaked in 2012, the FDA was approving drugs at a quickened pace and some much-heralded new drugs hit the market – a total of 43, well above the current 10-year average of 32 (Friendly FDA ups number of NMEs, January 10, 2013).

Then came 2013, in which at least eight drugs expected to be blockbusters were launched; leading the class were Tecfidera and Sovaldi, which with Kadcyla should become members of the $3bn-plus club in 2018 (for more information, see EP Vantage's 2013 review).

By contrast, 2014 could be very average year, with as few as three drugs forecast to be blockbusters by 2018 getting off the launchpad, and none breaching even $2bn in sales by then. A fourth potential blockbuster, Novartis’s serelaxin, is pretty much dead until long-term outcomes data are reported.

This is a sign that the R&D engine that kicked into high gear before the patent cliff arrived and created the extraordinary 2012-13 period has perhaps begun to slow.

“If we’re ever going to re-enter a bull market we just need new products,” Mr Schoenebaum says. “It doesn’t look like there’s a ton out there. My guess is we’re in a grind-it-out market where stock pickers are truly going to thrive and people who make sector bets are not.”

To contact the writer of this story email Jonathan Gardner in London at [email protected] or follow @JonEPVantage on Twitter

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