Strong small cap performance drives second-quarter gains

A strong showing by biotech stocks in the second quarter of the year points to a sector back in favour. And in the US at least, the smaller end of the market has benefitted from substantial investor attention.

EP Vantage’s quarterly analysis of share price movements reveals a very strong performance from small-cap US drug developers, which contrasts with a more mixed performance further up the scale. Huge advances from the likes of Vertex, Jazz and Puma put some of their larger peers to shame.

Vertex’s $32bn valuation is now close to its 2015 peak, while Jazz is also heading back to historic highs. Incyte, whose 26% surge does not make the top five risers, breached its biotech boom peak earlier in the year, although has come back since.

Many of the risers detailed below have long been considered potential M&A targets. But as stock prices climb higher once again it is becoming increasingly hard to see how exuberant public market valuations can be met by more cautious industry buyers.

Mid cap drug stocks ($25-5bn): top risers and fallers in 6 months
Top 5 risers June 30 share price  H1 chg June 30 market cap ($bn) H1 change ($bn) EP Vantage analysis
Vertex Pharmaceuticals $128.87 75% 32.1 13.8 Vertex investors toast birth of the son of Orkambi 
Ipsen €119.85 74% 10.7 4.4 Merrimack falls for $1bn oncology offer from Ipsen 
Zydus Cadila Rs526 48% 8.3 2.9
Jazz Pharmaceuticals $155.50 43% 9.3 2.8 Jazz keeps the narcolepsy market awake
Recordati €35.52 32% 8.0 1.8
Top 5 worst performers 
OPKO Health $6.58 (29%) 3.7 (1.5) Pharma regulatory and clinical trial news over Christmas 
Lupin  Rs1060 (29%) 7.4 (2.6)
Sumitomo Dainippon Pharma  ¥1533 (24%) 5.5 (2.2)
Hikma Pharmaceuticals £14.70 (22%) 4.5 (1.1) Snippet roundup: Sighs of relief for Astra and Glaxo
Dr. Reddy's Laboratories  Rs2683 (12%) 6.9  (0.7)  

A look at the mid cap space paints a more mixed picture for US biotech, with eight biotech climbers to five fallers. This reflects the picture among the big biotech stocks, where substantial double-digit gains by Regeneron, Amgen and Celgene were negated somewhat by backward slides at Alexion, Gilead and Biogen.

Vertex’s surge, on the back of strong cystic fibrosis data, has been matched in percentage terms by France’s Ipsen, which is still riding high on a deal with Merrimack. Italy’s Recordati still appears to be benefitting from speculation it was up for sale last year, while India’s Zydus Cadila has been on a tear since getting a clean bill of health for a crucial manufacturing plant.

Among the fallers Opko continues to be punished for a phase III failure at the close of 2016, while Lupin and Dr Reddy’s show that not all Indian drug makers are having a good year.

Small cap drug stocks ($5bn-250m): top risers and fallers in 6 months
Top 5 risers June 30 share price  H1 chg June 30 market cap ($m) H1 change ($m) EP Vantage analysis
Esperion Therapeutics $46.28 270% 1,045 763 Daily Market Movers: Global Majors & Industry (20 Mar 2017)
Puma Biotechnology $87.4 185% 3,231 2,857 Puma pulls within sight of FDA OK
Portola Pharmaceuticals $56.17 150% 3,203 1,945 Portola  breezes past the FDA (Snippet)
Loxo Oncology $80.19 150% 2,350 1,898 Asco – Loxo nudges ahead of Ignyta with tumour-agnostic therapy
Immunomedics $8.83 141% 974 271 Activist investor puts Immunomedics phase III in play
Top 5 worst performers 
4D Pharma £2.29 (68%) 188 (376)
Ardelyx $5.10 (64%) 242 (430) Ardelyx runs into problems with tenapanor
Trevena $2.30 (61%) 134 (1,357) Analgesic causes pain for Trevena (Snippet)
Sorrento Therapeutics $2.00 (59%) 153 (1,289)
Foamix $4.64 (58%) 174 (418) Daily Market Movers: Global Majors & Industry (27 Mar 2017)

Among the small caps the strong performance of US stocks really stands out – although they are also well represented among the fallers.

Improving fortunes for Esperion’s cardiovascular treatment, Puma’s breast cancer candidate and Portola’s blood thinner have all been reflected in substantial share price gains. And outside of these top five risers another six US companies have seen their market caps more than double this year.

Of course there are always clinical failures and set backs in biotech – Ardelyx and Trevena can attest to the pain of problems with a lead asset. But overall the public markets paint a picture of health for drug developers – with investors receptive to IPOs and follow-on fundraisings, and willing to reward clinical advances.

After a dismal 2016 many will welcome this buoyant mood. Those hoping to see a resurgence in takeovers, however, might question whether some of these valuations have departed too far from reality.

To contact the writer of this story email Amy Brown in London at AmyB@epvantage.com or follow @ByAmyBrown on Twitter.

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