A handful of huge gains stand out among mid and small-cap biotechs

Drug makers from across the globe feature in 2019’s list of best performing small biotech stocks, from Galapagos to Daiichi Sankyo to Arrowhead.

Quarterly shareprice performance

A spectacular end to the year for biotech stocks helped generate several clear winners among the world’s small drug makers across 2019. The broad geographical spread of the best-performing companies really stands out, with most major regions represented in the top five gainers.

The same goes for the sector laggards, where failures and disappointments brought down companies from Japan’s Sumitomo Dainippon, to Nektar in the US and Irlab in Sweden. But the third-quarter global stock market rally, which helped many indices exit the year on a high, is the prevailing story heading into 2020.

This helped four drug makers in Vantage’s mid-cap space – those with a market cap of $5-25bn at the start of 2019 – more than double in value last year. For Daiichi Sankyo this also represented a huge $25bn appreciation in value, while Seattle Genetics, Galapagos and Sino Bio are also now capitalised at way over $10bn.

True, several of these gains were accompanied by clinical or regulatory advances – breast cancer progress boosted both Seattle and Daiichi, for example – while Galapagos benefited from a huge collaboration with Gilead. But frothy market conditions could certainly be detected towards the end of last year, and investors must now consider whether such a rally can continue.

The opening week of 2020 has seen some pullback – understandable given certain global events – and the approaching JP Morgan healthcare conference, which starts next week, will be crucial to help set the tone.

Mid cap ($5-25bn): top risers and fallers in 12 months
  Share price Market capitalisation ($bn)
  12mth change 31 Dec 2019 12mth change
Top 5 risers
Galapagos 125% 13.33 8.30
Sino Biopharmaceutical 111% 17.50 9.20
Daiichi Sankyo 106% 47.39 25.31
Seattle Genetics 102% 19.58 10.51
Vifor Pharma 65% 11.56 4.57
Top 5 fallers
Sumitomo Dainippon (39%) 7.84 (4.49)
Aurobindo Pharma (37%) 3.77 (2.05)
Teva Pharmaceutical (36%) 10.70 (6.10)
Piramal Enterprises (36%) 4.27 (1.67)
Nektar Therapeutics (34%) 3.80 (1.89)

It is notable that even the worst performers among the mid-caps avoided all-out calamity – previous years have seen much more severe declines in this category. Sumitomo leads the laggards; the Japanese group was laid low early in the year by a failure in stroke, and a broad deal with Roivant has yet to reignite much investor excitement.

Problems with manufacturing sites continue to dog several Indian generics makers – Aurobindo in particular – while the Israeli giant Teva continues to struggle with its financial woes and the broad compression of prices in the generics market that is making life hard for many players in this segment.

Nektar, which has been hurt by flagging confidence in its lead cytokine asset, stands out as the rare US faller. As is typical, US biotechs have notably benefited from the market rally, and companies based in America dominate the list of small-cap risers.

Small cap ($250m-5bn): top risers and fallers in 12 months
  Share price Market capitalisation ($m)
  12mth change 31 Dec 2019 12mth change
Top 5 risers
Kodiak Sciences 913% 2,666 2,405
Arrowhead 411% 6,064 4,919
Eidos Therapeutics 317% 2,152    1,646
Epizyme 299% 2,240  1,752
Reata 264% 5,063  3,717
Top 5 fallers
Novavax (89%) 106 (598)
Irlab Therapeutics (88%) 152 (128)
Wave Life Sciences (81%) 275 (964)
Solid Biosciences (83%) 205 (745)
Aptinyx (79%) 115 (439)

It is here that the more frothy aspects of the market can really be seen: Kodiak and Arrowhead, for example, have a long way to go to prove the worth of their respective projects, though the latter has been boosted by dealmaking in the RNAi space.

The Medicines Company’s takeout by Novartis is an example here – the deal has not gone through but the stock is sitting on a 344% gain this year. The target group has been removed from this ranking, as have Arqule and Synthorx, whose takeouts by Merck & Co and Sanofi respectively have yet to close; these stocks were up 621% and 302% over 2019.

The fallers are as usual populated by companies blighted by clinical failure, though several are managing to struggle on. Novavax, for example, is pushing on with a flu candidate after the failure of its RSV project caused the stock to crater earlier in 2019; while Aptinyx, which was trading at cash for most of 2019 after the failure of a pain asset, has four follow-on projects in mid-stage trials.

Sweden’s Irlab astonishingly pulled off a rights issue in December to fund further development of a Parkinson’s disease therapy, IRL790, the failure of which caused the company’s shares to plunge earlier in the year.

In a sign of the competitive nature of the Duchenne muscular dystrophy space, both Solid and Wave are in the doldrums after setbacks with their respective contenders for the muscle wasting condition. Investors deserted Solid over the year as its gene therapy was hit by clinical holds and fell behind competitors, while Wave crashed in December after abandoning its exon-skipping approach on the back of very disappointing data.

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