US outperformance dominates small-cap drug stock gains

Surging valuations in the US are not only evident among the world’s biggest drug makers. A look at the progress of the industry’s smaller players on stock markets so far this year reveals the leaderboards are once again dominated by American companies.

Also evident is Japan’s own biotech bubble, with the government’s promise of support for advanced technologies like stem cells propelling many stocks to substantial gains this year. Meanwhile in negative territory, several smaller players have been carried off by commercial or clinical failure. Even the biotech bubble has not been able to insulate certain US companies from these common tripping points – step forward Affymax, Aveo and Resverlogix.

The spectacular surge in valuation of several US small-cap companies – classified by EvaluatePharma as those with a market value of $250-$2.5bn at the start of the year – will see them elevated to the ranks of the mid caps next year, assuming nothing catastrophic happens between now and Christmas.

Pipeline wins for Alnylam and Isis this year, as well as a string of deals from the latter, have built hopes that the companies have finally unlocked the therapeutic potential of their RNAi-based platforms. Both now boast $4bn-plus valuations, but late-stage clinical and regulatory wins need to follow.

The other small-cap contender for the mid-caps is Celldex, which has surged on hopes for its antibody-drug conjugate CDX-011, with investors also likely betting on a deal of some sort. Its valuation is certainly up there with the most frothy, where it is joined by Clovis which had also been riding high on takeout hopes after positive data for its lung cancer candidate CO-1686.

The top riser, Acadia, has made real progress with its Parkinson’s disease psychosis treatment pimavanserin – the FDA agreed to a quicker than expected submission process – but still has to get it to market and establish demand, and investors are no doubt hoping that a partner emerges.

However, Clovis's reported failure to find a buyer – an unjustifiable valuation must surely have played a part – should raise warning signs to investors hoping that similarly highly valued assets will persuade interested parties to part with cash at these levels.

On the flip side, the small-cap decliners include familiar tales of catastrophe: the withdrawal of Omontys for Affymax; the FDA's refusal to approve Pharmaxis’s cystic fibrosis treatment Bronchitol or Aveo’s kidney cancer treatment tivozanib; the failure of Celsion’s liver cancer treatment ThermoDox in a phase III trial; and, over in India, disappointing financial results from Jubilant and concern about its high debt levels.

Outside of the small caps and into the territory of the tiny – those with market caps below $250m at the beginning of the year – signs of the Japanese bubble are evident, with companies continuing to benefit from the government’s pledge to support the industry’s efforts to back cutting-edge medical research.

The US generics firm Lannett is a notable entrant; a substantial leap in earnings has attracted investors possibly hoping to benefit from ongoing consolidation in the generics industry.

Among the nano caps, BioCryst has staged a remarkable turnaround on hopes of an oral hereditary angioedema treatment, while Opexa received a lifeline from Merck KGaA in the shape of an option over its multiple sclerosis immunotherapy Tcelna.

And Catalyst Pharmaceutical has staged a recovery after the failure of its cocaine addiction therapy last year, winning breakthrough therapy designation from the FDA for Firdapse, its treatment for the autoimmune disorder Lambert-Eaton myasthenic syndrome.

In negative territory are companies struggling to survive substantial setbacks. In particular, Resverlogix suffered a second failure of its good cholesterol-boosting therapy. For others like Pernix Therapeutics in the US and TiGenix in Europe, financial woes are responsible, as the companies struggle to keep their heads above water under the weight of weak demand for various product offerings.

To contact the writer of this story email Amy Brown at [email protected] or Joanne Fagg [email protected] or follow @AmyEPVantage or @JoEPVantage on Twitter