If you think the federal government is leaky these days, it's
got nothing on the biotech industry.
Ever sinceAmgen (
) bid $10 billion for up-and-comingOnyx Pharmaceuticals (
) back in June, the drama has dribbled out to Wall Street largely
through news reports citing unnamed sources.
Over the last couple of weeks, the news has shaken investor
confidence in the deal, and in biotech stocks in general.
Onyx announced June 30 it had rejected Amgen's offer as too
low. True, Onyx is losing money -- at the moment -- but analysts
polled by Thomson Reuters expect skyrocketing profits next year
as its blood-cancer drug Kyprolis ramps up following last year's
That is just the kind of hot drug the solid but slower-growing
Amgen is looking for to fill out its pipeline, particularly in
its oncology franchise.
Large drugmakers are increasingly on the hunt for biotechs.
Investors often value biotech stocks for their buyout potential
more than for profits, say analysts.
Onyx was no exception. In spite of the rejection, its stock
vaulted more than 50% after the news of Amgen's bid. Speculation
about other suitors also flew around Wall Street. Big
) andPfizer (
) were on the list. Both were already developing drugs in
partnership with Onyx. Other large-cap biotechs, such asGilead
) andCelgene (CELG), also were mentioned.
By early August, the grapevine buzzed that Amgen had raised
its bid by about 8%. Reports also said Amgen was the only buyer
still interested. On Aug. 15, another anonymous report claimed
Amgen had demanded specific data from one of Onyx's ongoing drug
trials before it would finalize a deal.
This rattled Wall Street's confidence, according to analyst
Mark Schoenebaum of ISI Group.
"What's going on with Onyx now indicates that the pharma
industry may think that a lot of these stocks are expensive,"
Schoenebaum told IBD. "So we've seen underperformance in biotech
in the last week."
By Thursday, Onyx reportedly had capitulated, handing over the
requested data to Amgen.
If true, Schoenebaum wrote in an email, this should lead to a
rapid resolution of the issue "and a deal should be near."
His expectation: "We wake up this coming Monday morning to a
deal announcement at about $130 (per share)."
Divining Cost Of Blockbusters
Biotech stocks have been on a bull run for a couple of years
now. The 261-stock biotech group seems permanently lodged in the
top 10 among the 197 industries tracked by IBD. Rallying since
October 2008, the group this month climbed to less than 10% from
its frothy March 2000 peak before easing up.
Are the valuations justified? Schoenebaum admits that, for
those using a discount cash-flow analysis, many of the stocks
seem overpriced. At the same time, he avers that "fundamentals
are stronger than they've ever been."
To prove the point he charts out the number of new drugs
approved in the drug industry per every inflation-adjusted
billion dollars spent on research and development. Conclusion:
industry productivity is at its highest level since 2000.
Of course, not every new drug that makes it to the market is a
hit. But a number of recent launches from the larger-cap biotechs
have been very strong.
Last month, for instance,Biogen Idec (BIIB) smashed analysts'
estimates when it reported the first quarter of sales for
Tecfidera, its new multiple-sclerosis pill. Some other drugs in
late-stage development also have sky-high expectations. Consensus
estimates for Gilead's hepatitis C drug sofosbuvir, which is
currently awaiting FDA approval, have crept upward steadily over
the last year. Many analysts are discussing peak annual sales of
$8 billion. Also hotly anticipated: Biogen's long-acting blood
product for hemophiliacs andVertex Pharmaceuticals ' (VRTX)
Morningstar analyst Karen Andersen says her valuation analyses
for large-cap biotechs are "all over the map," but agrees that
fundamentals are excellent. What worries her more is that the
excitement is extending to smaller-cap biotechs that may be less
"If I had to predict a source of disappointment, it's in
seeing the trial data coming out of the companies that are
IPO-ing," Andersen said.
Buyout Hopes Float IPOs
Indeed, biotechs have been storming the initial public
offering calendar lately. Exhibit A isIntrexon (XON), a player in
synthetic biology -- programming DNA for use in medicine and food
The stock nearly doubled its $16 IPO price in its first two
days of trading earlier this month. Shares pulled back, but
remained 43% above their initial offering price on Friday.
Cancer-drug developersOnconova Therapeutics (ONTX) andAgios
Pharmaceuticals (AGIO) are up 70% and 35% respectively from their
July debuts. Muscular-dystrophy specialistProsensa (RNA), which
came out in June, is up more than 100%.
Besides all being recent IPOs, these companies have something
else in common: none of them actually has a product on the market
yet. While it's not unusual for biotechs to go public early as a
way to raise R&D capital, it is unusual that investors are so
excited about them.
John Pennett, who heads the life-sciences division of
accounting and advisory firm EisnerAmper, says that buyout
speculation may be a factor in driving these stocks' prices well
above what the underwriters think the market will bear. But he
also attributes some of the interest to improving prospects for
new drugs getting through the FDA approval process.
Pennett told IBD that among the companies garnering the most
investor interest are makers of orphan drugs, a designation
created by the FDA to speed approval of treatments for rare
diseases that lack existing therapies.
Alexion Pharmaceuticals (ALXN) rode its orphan drug Soliris to
a $20 billion market cap. It has also been the subject of buyout
rumors this summer as giant pharma firmRoche (RHHBY) was
reportedly exploring a deal.
Making The FDA A BFF
More recently the FDA created a "breakthrough therapy"
designation, which expedites review for drugs that "may have
substantial improvement on at least one clinically significant
endpoint over available therapy" for serious medical
Last month,Pharmacyclics ' (PCYC) stock shot up after it said
it had filed for approval of its leukemia drug ibrutinib using
this designation, which allowed it to file after only two phases
of clinical trials instead of the usual three.
"The tone and tenor that the FDA sets drives an awful lot of
the process," Pennett told IBD.
"I do think that companies are talking to the FDA earlier,
trying to be upfront about getting buy-off and sign-off early in
the process as opposed to waiting and seeing what happens down
the road," he said.
As a result of this friendly environment and pipeline
strength, none of IBD's sources expect a dramatic crash anytime
Schoenebaum reckons that the market is in "the third or fourth
inning of a bubble." Andersen sees too many near-term catalysts
among the leading biotechs to be seriously worried.
"There's still room for an extended period of positive news,"
she said. "We're not anticipating that the bottom is about to