A broad biopharma selloff and even broader macroeconomic turmoil have been the characteristics of the 2016 investment year, and traders have found themselves looking for safe harbours. How else to explain the first half performance of a conglomerate like Johnson & Johnson, which saw its shares gain the most of any big cap company in the first six months?
The victims of this flight to safety have been smaller players, which in the absence of clinical success or M&A speculation have struggled to attract investors. With the UK’s vote to leave the EU having created even more market uproar to close out the first half, the best investment strategy for at least a few months could be a conservative one focused on reliable, if not explosive, growth.
Carnage almost everywhere
A look at the first-half performances of the sector-specific indices confirms this view. Only the S&P pharmaceuticals index, which features AbbVie, Eli Lilly, and Pfizer, showed a gain, while Nasdaq biotechnology, a measure of the health of smaller biopharma shares, tumbled 21%. Regional indices such as Europe and Japan showed that there were few refuges outside the big pharma sphere.
|Stock index||% change in H1|
|NASDAQ Biotechnology (US)||-21%|
|S&P Pharmaceuticals (US)||3%|
|Dow Jones Pharma and Biotech (US)||-6%|
|Dow Jones STOXX Healthcare (EU)||-6%|
|Thomson Reuters Europe Healthcare (EU)||-5%|
|Euro STOXX 50||-13%|
|TOPIX Pharmaceutical Index (Japan)||-10%|
This is how the biggest pharma company by market capitalisation ended up growing by more than any of its peers in the first half of 2016. On the ground J&J has had success with the cancer drugs Imbruvica and the newly introduced Darzalex, but as a group with a wide range of consumer products, prescription drugs and medical technology offerings it is comparatively resilient to downturns.
GlaxoSmithKline, by comparison, was not on much of a year when it abruptly became a beneficiary of the UK’s EU referendum result. As a company that reports earnings in sterling but sees less than a quarter of its sales in Europe, the group has benefited from the rapid devaluation of the pound since the “Brexit” vote.
|Big pharma companies: top risers and fallers in 6 months|
|Market capitalisation ($bn)|
|Top 3 risers||SP change||YE 2015||H1 2016||6M change|
|Johnson & Johnson ($)||18%||283.01||333.65||50.64|
|Top 3 fallers|
|Eli Lilly ($)||(7%)||93.13||86.93||(6.20)|
Pfizer, meanwhile, saw its fortunes turn once it called off the acquisition of Allergan after new US tax regulations were imposed.
Glaxo’s fellow UK company AstraZeneca did not see the same benefit from Brexit. Its US-traded, dollar-denominated shares were off 11% on the first half, although they did recover from a low of minus-18% following the EU referendum results – London-traded shares fared better, finishing the first six months off 6%.
Roche and Lilly, meanwhile, never seemed to recover from the January sell-off in quite the same way as the rest of this grouping has.
Outside the sphere of traditional big pharma there was little positive news to be found. Amgen was the best performer, its shares sliding 6% in the first six months, while Astellas Pharma and Shire came up with 8% and 10% losses respectively.
|Other big drug makers ($25bn+): top risers and fallers in 6 months|
|Market capitalisation ($bn)|
|Best peformers||SP change||YE 2015||H1 2016||6M change|
|Astellas Pharma (¥)||(8%)||29.30||27.66||(1.09)|
|Valeant Pharmaceuticals International ($)||(80%)||34.68||6.91||(27.77)|
|Alexion Pharmaceuticals ($)||(39%)||42.98||26.16||(16.82)|
|Regeneron Pharmaceuticals ($)||(36%)||55.45||36.03||(19.43)|
|Vertex Pharmaceuticals ($)||(32%)||30.92||21.28||(9.64)|
On the losing side of the equation was Valeant, whose shares are now worth less than a tenth of what they were a year ago. Although nearly all of the bad news regarding its business practices had emerged by the end of 2015, it was not immune to January’s selloff or to the March mini-shock over concerns that it might breach of debt covenants.
Even the reliable Alexion, maker of the world’s most expensive drug, took a tumble in the first six months when Soliris failed a trial in myasthenia gravis. Regeneron, meanwhile, has been troubled this year by a negative ruling in a patent dispute with Amgen over Praluent, and has seen downgrades in that heart drug’s forecasts.
A perfect storm of valuation worries, pricing sustainability, sector sentiment and macro pressures have struck biopharma in the first six months of 2016. There were winners, to be sure, but picking them required selectivity and luck, not to mention a bit of nerve.