The past week saw a powerful rollout of second quarter results
from big cap biotechs.
),Biogen Idec (
),Gilead Sciences (
) andRegeneron Pharmaceutical (
) all topped analyst consensus views, plus raised their Q3 and
full-year guidance. Amgen hit its highest point in almost seven
years Friday.Alexion Pharmaceuticals (ALXN) smashed views, raised
its outlook and surged 8% for the week.Vertex Pharmaceuticals
(VRTX) reports on Monday.
Investor response was mild compared to the volatile reactions
recently shown positive test results and government approvals for
Earlier this month,Vivus (VVUS) collapsed 27%, then reversed
to a 15-year high after the Food and Drug Administration gave the
nod to its obesity drug Qsymia. The stock is now 26% off its
Arena Pharmaceuticals (ARNA) rallied more than 81% on
expectations for approval of its fat-fighting pill, Belviq. The
stock spiked another 28% following the June 27 approval. It has
since dropped 29% off its high.
Onyx Pharmaceuticals (ONXX) is up 70% since the start of June,
after receiving advisory committee support, then accelerating FDA
approval of its blood-cancer treatment Krypolis.
The biggest approvals for the biotech industry's top-ranked
leaders are still to come. Before the year is out, Wall Street is
anticipating decisions on major new drugs from Gilead Sciences,
Biogen, andUnited Therapeutics (UTHR), among others. Still more
promising drugs are in late-stage trials.
"There is a lot of pipeline momentum recently in biotech, both
with recent launches and with recent (clinical trial) data,"
Morningstar analyst Karen Andersen told IBD.
That's kept biotechs among the top 10 in IBD's Industry Group
rankings all year. The group index is up 39% so far this year,
second only to the rocketing mortgage finance industry.
The bullish outlook for new drugs has also coaxed big pharmas
into shopping mode, which has helped amp up investor
On July 15,GlaxoSmithKline (GSK) aced a deal to buyHuman
Genome Sciences (HGSI) for $3 billion, ending a long, hostile
takeover attempt.Bristol-Myers Squibb (BMY) announced June 29 it
had pledged $5 billion forAmylin (AMLN).
A biotech is a company that uses cellular and molecular
processes to develop new medicines. The field is crowded, with
more than 200 stocks in IBD's biotech group. Most are cheap, thin
Biotechs must fund years of research and development before
they can earn a dime. They often go public in search of capital
before they have a product on the market.
The result: many stocks with no products. Many others have
only one, including some of the group's top-ranked players.
IBD 50 stock Alexion Pharmaceuticals' sole revenue generator
is Soliris, a drug treating rare blood diseases. The ailments it
treats are rare yet severe.
Alexion has few competitors, so it is able to charge a very
high price. Treatments can range well above $300,000 per year --
most of which is paid by insurers and the government.
Another handy plus: Soliris' biomedical mechanism can treat
more than one disease. The drug is currently approved for two
diseases in the U.S., with three other possible uses, or
indications, in trials. This is a common way for biotechs to
squeeze more revenue out of their products.
But even with multiple approvals, banking on just one drug is
a shaky existence. Patents eventually expire. And, if unforeseen
bad side effects turn up after approval, you're sunk.
As a result, biotechs work to keep their pipelines stocked
with projects. Even so, they tend to stick with what they know.
Gilead, for instance, is awaiting FDA approval for its new HIV
drug, the quad -- which is simply the latest addition to the
portfolio of HIV drugs that has led Gilead to dominate the
Getting outside the core competency often means an
acquisition. Gilead did that in January when it paid a cool $11
billion for Pharmasset, which was developing a very promising
hepatitis C drug. Similarly,Cubist (CBST) paid $190 million in
December for Adolor, in order to diversify beyond its
Larger, more diversified drug companies also regularly feed on
biotechs. The recent Glaxo-Human Genome and Bristol-Amylin deals
are classic examples of big pharmas buying biotechs to fill out
their pipelines as their blockbuster patents expire.
As is often the case, Human Genome and Glaxo already had a
partnership before the courtship started. Biotechs routinely make
deals with big pharmas, who offer capital and marketing expertise
in exchange for a cut of the drug profits. Such deals often turn
out to be the first stage of a merger.
In a broad sense, the market for biotechs is everyone who
needs medicine. Last year, the U.S. alone spent $320 billion on
medicines, according to the IMS Institute. But per-capita drug
use has been inching downwards since 2009, IMS found, perhaps
reflecting economic conditions.
Such general market indicators matter more to big pharmas than
to biotechs. Biotechs tend to be highly specialized, targeted to
specific diseases and markets where they can grow. The ideal
disease for a new drug is one that is incurable, chronic and
inadequately treated by current medicines.
HIV has proved to be such terrain for Gilead. Improvements in
that field generally focus on simplifying the regime and reducing
side effects. Another popular biotech target these days is
multiple sclerosis, a particular specialty of Biogen Idec.
Biogen's late-stage pipeline drug BG-12 is widely considered to
be the most promising of a new class of once-daily oral pills
that could replace the old regimen of injecting interferon.
Some other lucrative targets today are diseases that are
curable, but whose present treatment is long and unpleasant.
Gilead paid so dearly for Pharmasset because the standard
hepatitis C treatment, pegylated interferon, gives patients
flu-like symptoms and depression. The race for the
interferon-free hep C treatment now involves not only Gilead but
Vertex Pharmaceuticals, Bristol-Myers, and several other big
Another perpetual target is cancer, the bread-and-butter
malady for Amgen and Celgene.
Government policy looms large in biotech. Most U.S.-traded
biotechs are U.S.-based, so their fortunes depend on getting
their drugs through the FDA gantlet to commercialization. The
bigger ones also do business in Europe and sometimes other
countries, which impose different trial requirements.
But in the U.S., the FDA seems to be getting more lenient
about approvals, says Howard Liang, analyst with Leerink Swann.
Both recently approved obesity drugs were rejected by the FDA two
years ago. Fewer than half of the participants in Arena's Belviq
trial reached the clinical weight-loss goal.
"A few years ago, they would probably have been viewed as not
slam-dunks," said Liang.
The Affordable Care Act, recently upheld by the Supreme Court,
has had a mixed impact on biotechs. On the one hand, the more
people covered by health insurance, the more prescription drug
use. On the other hand, the Act includes cost-cutting provisions
that trimmed Medicare and Medicaid reimbursements for some
products and introduced new fees.
Andersen says companies with Medicaid-heavy clients like
Gilead felt the impact of the latter the most, while rare-drug
providers like Alexion were generally exempt. However, she adds
that most of that impact has already happened and is already
factored into stock prices.
New technology, the lifeblood of biotech, can lead to a burst
of pipeline activity. Basic biotech mechanisms often have
multiple uses that seem unrelated. The new class of hepatitis C
drugs, for instance, expands the use of biotech compounds known
as protease inhibitors, which were originally used for managing
Most biotechnology is applied to new drug development. But an
increasingly important technology for the field is the creation
of biosimilars. Most biological medicines can't be copied
generically, the way chemically manufactured drugs are, because
they're made of living cells. But in the last decade some
generic-drug makers have managed to produce similar, but not
identical knockoffs, known as biosimilars.
Biosimilars arrived first in Europe five years ago. An early
target market was Amgen's Neupogen. Earlier this year, the FDA
finally worked out a method of approval for biosimilars in the
U.S., raising the likelihood of wider competition and pricing
pressure in the biotech field.
With the number of promising drugs still in the pipeline,
analysts remain fairly bullish on the biotech industry.
And the U.S. population continues to get older, driving demand
for medicines overall. The main uncertainty is in clinical
trials, where bad news can come at any time.
"This space is quite cyclical, you have to say," said analyst
Liang. "But the fundamentals are good for the industry."
Andersen says the prospect for merger activity is still strong
in the industry, even though some leaders like Alexion have been
priced out of buying range. In a July 20 report, RBC Capital
Markets analyst Michael Yee citedBioMarin (BMRN),Pharmacyclics
(PCYC) andIncyte (INCY) as stocks that have rallied on buyout