What Is Troubling The Biotech Industry? by Isaac Sprecher
The past several months have been especially difficult for the biotech industry. In mid-July Celgene purchased Receptos for ~8 billion dollars and the industry looked as if this bull market would go on forever. However on Friday, July 24, 2015 Biogen reported a lackluster quarter and sparked a downward spiral. Since then, the biotech industry has plunged (IBB ~33%, XBI ~43%). In January alone many small to mid cap bios were down almost 50% or more. Many additional factors have contributed to this crash; in August the Chinese stock market crashed, in September Martin Shkreli caused a drug pricing political uproar, and towards the end of last year and beginning of this year we had a slew of failed clinical trials, companies flat out lying to investors on interactions with the FDA. Some feel we are lucky that biotech is not down even more.
When Biogen missed the 2nd quarter estimates, the market panicked. It was very surprising to the market that one of the four horseman of biotech (BIIB, REGN, CELG, GILD) could have a bad quarter. Investors also questioned the Biogen pipeline. If one examines Biogen, it is easy to see that throughout the summer much of their value was based on anticipation that their new MS and Alzheimer’s drugs would prevail in clinical trials. I believe that investors were apprehensive regarding the likelihood of these moonshots failing.
The Martin Shkreli saga is long and drawn out; I will spare my readers the unnecessary details. What is important to know about this tale is that this year is an election year and politicians will say anything that they believe gives them a better shot of winning the election. The Shkreli saga led pricing of prescription drugs to become a top issue in the election. Hillary, Sanders, and Trump have jumped on this hot topic. What is reassuring for biotech investors from their comments is that they really have no idea how the pharmaceutical industry really works they seem to be more busy with the WU-TANG album then the real issues.
In late 2014 at a conference (ASH), Bluebird Bio showed stunning results in a drug for a blood disorder (albeit this was shown in a very small trial). Fast forward to this year; their tech is now being questioned on durability and their therapy has not shown to be viable for all patients with the disorder as with the rest of the gene therapy. What was once viewed as a cure is now being priced in at 90% chance of failure. My bet is that GT will fall in the middle; it will not be a cure but it will make the lives of patients with these horrible rare-diseases easier.
Beginning Labor Day we have seen very –VE data in small and mid-capbiotech’s late clinical trials to name a few TTPH, CMRX, ATRA, ALKS, ICPT, BLUE, CLVS, INCY, and ZFGN. These failures have reset market expectation that most clinical trials do not succeed. We have also seen a company’s steer investors astray between how they interrupted FDA discussion and what really was said on their meetings with FDA. A couple of examples include ESPR and FOLD who saw their stocks plunge resulting from their lack of transparency. Wall Street will accept failure but will never accept lack of transparency.
In 2015, the pharmaceutical industry eagerly awaited new therapies for lowering LDL Cholesterol called PCKSK9 inhibitors. With two competing drugs from AMGN and SNY/REGN it was a race to see who would be approved first for this blockbuster and who would have a head start in selling their drug. SNY/REGN was so determined to get to the market first that they purchased a priority review voucher for 245 million from RTRX just to beat AMGN to the market. In the lead up to the launch, Steve Miller (CEO OF ESRX) was quoted as saying that these new drugs would hit peak sales of 150 billion per year and would bankrupt the healthcare systems. I know it is still early to consider these drugs a failure. However, SNY/REGN PCKS9 sales in the 4th quarter were at embarrassing as they came in at ~7 million. Amgn just announced sales in the 4th quarter of their PCKS9 drug also underwhelmed. They did not even bother to break it out as a separate line item on their income statement. The slow launch can be connected to their ongoing CVOT, but I suspect it also has to be attributed to a pushback from Medicare and insurance companies on pricing. On the NVS 4th quarter conference call they announced very disappointing sales of their new heart failure drug Entresto because of push back by Medicare on pricing. (Entresto recently signed pay per performance deals last week)
In 2015, we saw a record year with around 687 billion in mergers in the healthcare industry. Expecting 2016 to be a repeat would be foolish. However in 2015, we saw some big deals AGN-PFE SHPG-BXLT. These big deals make future buyouts less likely, simply because there are less big fish in the ocean to bid up small biotech’s. In addition, we are in a period of intense volatility. Let’s do a case study of a potential M&A that got a lot of attention this summer. A company named VRTX that has a very exciting pipeline was rumored to be on GILD radar. VRTX develops a drug for CF and has hit some speed bumps in their lofty sales goals none the less it is quite an exciting company. In September, VRTX hit an all-time high of ~140 per share and currently VRTX is trading ~83. Let’s say Gild goes to BOD of INCY and offers 110. They will not get an accepted offer. There are many more examples of other biotech’s with the same issue. Management simply does not want to look like their selling low in their shareholders eyes.
So we heard all of our doom and gloom, can the industry recover to where it was 6 months ago with all these factors going against it? I would say probably not, but I do see some silver linings here. I am no fortune teller or scientist so I cannot tell you for certain which companies will hit it big on the next breakthrough. I do have some ideas that can help the industry.
To start, I believe pharmaceuticals need to start educating the American public on the high cost of just developing a drug. The industry should highlight the amount of failures each company goes through just to get one drug to market. My other PR idea is not going to make Wall Street analysts happy, but I believe in the long run this will be helpful for the industry. We all shop in stores similar to Macys where the list price on a suit can be 350 yet the real price is around 250. The same holds true when drugs are sold. I would estimate GILD lead HCV drug Harvoni/Solvadi which has a list price of 94k after rebates GILD probably nets GILD ~55k. However politicians feed the public the list price as opposed to the real price.
A very important tidbit politicians leave out is the economic benefit for patients that are cured from HCV, Cancer, and high blood pressure. How many people who would have died 10 years ago, are now able to live normal lives’ with most of these therapies coming in the past 15 years. How much has the healthcare system saved just by people with high blood pressure taking statins or HCV patients not needing liver transplants or getting liver cancer?
I think M&A will remain slow. With a lot of SMIDS (smaller-medium biotech companies) having a nice of amount of cash on their balance sheet they can hold out and possibly develop on their own. It would be nice to see new pioneers in the Biotech industry. Who knows? Maybe this downturn will produce another Celgene, Gilead, and Amgen. Time will tell, so hold on to your hats. For now, tread carefully as you are more likely to own the next failure then the next Amgen.