Biotechs In Motion As New Drug Pipeline Brims


The past week saw a powerful rollout of second quarter results from big cap biotechs.

Amgen ( AMGN ),Celgene ( CELG ),Biogen Idec ( BIIB ),Gilead Sciences ( GILD ) andRegeneron Pharmaceutical ( REGN ) 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 new drugs.

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 high.

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 interest.

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).

1. Business

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 and unprofitable.

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 space.

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 anti-infective Cubicin.

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.

2. Market

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 pharmas.

Another perpetual target is cancer, the bread-and-butter malady for Amgen and Celgene.

3. Climate

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.

4. Technology

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 HIV infection.

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.

5. Outlook

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 speculation.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: AMGN , BIIB , CELG , GILD , REGN

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