Surging US drives strong drug stock performances at nine month stage

As the third-quarter of 2013 closes one fact remains patently a clear – a stratospheric performance will be required to gain a place as one of the best performing stocks this year. That a company the size of Celgene – worth a respectable $33bn at the end of 2012 - can be deemed to have almost doubled in value over nine months illustrates the fervour that is driving valuations in the US.

EP Vantage’s quarterly look at share price performances reveals that among the industry’s biggest drug developers, it is indeed US companies that dominate the top risers. The exception is Roche, which features with a 33% share price gain, another notable achievement for a company of this size. On the flip side, negative territory is rare among the big caps, although mishap-prone Indian manufacturers feature heavily in the mid-cap fallers, the analysis shows (see tables).

Stock Index % change in 9M 2013
NASDAQ Biotechnology (US) 53%
Dow Jones Pharma and Biotech (US)   30%
TOPIX Pharmaceutical Index (Japan)  25%
S&P Pharmaceuticals (US)  20%
Thomson Reuters Europe Healthcare (EU) 18%
S&P 500 18%
DJIA 15%
Dow Jones STOXX Healthcare (EU)   14%
FTSE-100 10%
Euro STOXX 50 10%

A look at the performance of various indices illustrates just how popular drug stocks have proven this year, with industry benchmarks outperforming broader indices by some way. The US stands head and shoulders above the rest, with the Nasdaq Biotechnology Index standing out above all – the index is now 37% higher than the peak reached at the turn of the century, before the genomics bubble burst.

Driving the index higher are the stocks that feature in the analyses below. But outside the top five risers are numerous other US companies that are benefiting from the investor confidence.

If the share price gains are remarkable, then the actual valuations that some of these companies have now achieved are also staggering. Gilead, with a market value of $96bn, is now worth substantially more than AstraZeneca or Eli Lilly, with market caps of $65bn and $57bn respectively. In certain cases big pharma is now being easily bested by big biotech – Celgene and Biogen Idec are also worth more than Eli Lilly.

Huge expectations are being placed on the pipelines of these new big beasts of the industry. For example the products that Gilead already sells, mainly its HIV medicines, have a net present value of $31.4bn, according to EvaluatePharma data. Its R&D pipeline meanwhile is valued at $38m, comprised mainly of hepatitis C candidate sofosbuvir. Which leaves $26bn of market value unaccounted for.

With a market cap just $19bn shy of GlaxoSmithKline’s, investors cannot be betting on a Gilead takeout. Many may baulk at the term bubble, but with huge valuations being placed on very risky assets across the board, it is hard to see how else to describe the situation.

Large cap ($30bn+) pharma companies: top risers and worst performers in 9M
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 risers YE 2012 9M 2013 Change YE 2012 9M 2013
1 Celgene $78.47 $154.137 96% 33.19 63.39
2 Gilead Sciences $36.72 $62.87 71% 55.65 96.23
3 Biogen Idec $146.37 $240.76 64% 34.63 57.22
4 Bristol-Myers Squibb $32.59 $46.28 42% 53.80 76.19
5 Roche SFr184.00 SFr243.90 33% 170.72 222.36
Rank Top 5 worst performers
1 Baxter International $66.66 $65.69 (1%) 36.62 35.66
2 Teva Pharmaceutical Industries $37.34 $37.78 1% 35.23 35.68
3 Eli Lilly $49.32 $50.33 2% 55.57 56.70
4 Novo Nordisk DKr916.50 DKr936.00 2% 72.14 72.64
5 Sanofi €71.39 €74.97 5% 122.65 130.11

Aside from wider market exuberance, various pipeline successes have also driven these large cap gains.

Approval of pomylast in multiple myeloma earlier this year was followed by clinical success for apremilast, Revlimid and Abraxane for Celgene; expectations for sofosbuvir continue to drive Gilead; and new MS pill Tecfidera has streaked from the blocks since Biogen Idec won approval in March.

Successes are more myriad for Bristol-Myers Squibb and Roche, although both have had several pipeline wins and both have a PD-1 or PD-L1 antibody in their pipelines – currently the industry’s most hotly anticipated class of drug.

Meanwhile the only declining big cap is Baxter, which has taken a tumble recently on concern that new long acting haemophilia treatments from the likes of Biogen Idec will damage the company’s sales.

While essentially a flat performance over the year is not disastrous, in the light of performances elsewhere the company’s investors have to be disappointed. The same goes for Teva, Eli Lilly and Novo Nordisk, which have also failed to make much progress this year.

Mid cap ($2.5-30bn+) pharma companies: top risers and fallers in 9M
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 risers YE 2012 9M 2013 Change YE 2012 9M 2013 EP Vantage comment and analysis
1 Pharmacyclics $57.78 $138.26 139% 4.02 10.11 Event – Ibrutinib surprises again with quick FDA filing
2 Warner Chilcott $12.04 $22.93 90% 3.02 5.76 Generics the key to growth from merged Actavis and Warner Chilcott
3 Seattle Genetics $23.17 $43.83 89% 2.76 5.34
4 Regeneron Pharmaceuticals $171.07 $312.87 83% 16.16 30.26 Lucentis growth under threat again as Eylea scores another win
5 Alkermes $18.52 $33.62 82% 2.44 4.56 BIO 2013 – Alkermes hopes to step out of partners’ shadows
Rank Top 5 fallers
1 Wockhardt Rs1572.10 Rs522.40 (67%) 3.14 0.96 Daily Market Movers (24 Jul 2013)
2 Ranbaxy Laboratories Rs502.75 Rs330.70 (34%) 3.88 2.34 Daily Market Movers (16 Sep 2013)
3 Zydus Cadila Rs900.70 Rs680.00 (25%) 3.36 2.33
4 Orion €22.05 €18.66 (15%) 4.06 3.44
5 Celltrion KRW52,200 KRW46,750 (10%) 4.92 4.17 Daily Market Movers (1 Aug 2013)

Outside the $30bn plus companies, hopes for new products have also driven gains, aside from Warner Chilcott, which features thanks to its takeover bid from Actavis, which is close to closing.

Pharmacyclics certainly occupies the stratospheric category, and provides a perfect example of how these huge valuations are being forged in the spreadsheets of mad-cap sell side analysts (The new frontier in valuing US biotechs, September 30, 2013). If there bubble is there to be burst, the failure of a highly prized asset such of this might do it.

Elsewhere, Seattle Genetics has seen its valuation rise steadily alongside hopes for its antibody drug conjugate technology; another big collaboration was signed earlier this year with Bayer, triggering further gains. Regeneron’s stake in its Sanofi-partnered PCSK9 antibody has given it a boost, alongside a continuing strong launch of Eylea. And over at Alkermes a number of pipeline successes, in particular phase II data for its major depressive disorder treatment, ALKS 5461, have driven gains.

But the Indian sector appears to have come down with a bump. Ranbaxy’s troubles are well documented and appear to have infected another US plant, while Wockhardt has also failed to recover from an FDA import ban, put in place in May. Zydus Cadila’s problems are more financial; profits have missed expectations throughout the year, with the company blaming big tax bills.

In Finland, Orion has been struggling to convince investors it can overcome a number of generic threats. And in Korea, despite winning approval for the first biosimilar monoclonal antibody in Europe, Celltrion stock has been suffering from concerns about the intention of its chairman to sell a big stake, as well competition from bigger biosimilar players; weak quarterly reports have not helped.

But even in this broader group of companies, share price fallers are relatively rare, and are mostly to be found outside the US. The only American companies to register declines so far this year are Allergan and Ariad. With US valuations showing no sign of a temperence, 2013 is looking like a record year for American drug stocks.

To contact the writer of this story email Amy Brown at AmyB@epvantage.com or Joanne Fagg joannef@epvantage.com or follow @AmyEPVantage or @JoEPVantage on Twitter.

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