Post-QE2 Economy Skipping Biotech (BBH, XBI, CELG, GILD, AMGN, BIIB, ALXN, MNKD, HGSI, VVUS, DNDN)
Things have changed in the last week. The mid-term elections took away the majority of the House of Representatives, and the Senate now no longer has the super-majority which could get laws passed no matter what they included. Now it seems that the tax cuts may be extended for another year or maybe two years, which could imply a permanent change ahead if the 2010 election trends remain close to the same in 2012. Quantitative easing from the FOMC is meant to drive investors into riskier assets and create a higher pricing environment to avoid deflationary pressure. Generally speaking, those riskier assets are commodities, and broader stocks tied to industrial, exports, financials, and more. But what about biotech and emerging pharma? So far, QE2, tax extension, and the reversal of ‘the new normal’ has not highlighted biotech in the slightest.
Biotech HOLDRs (NYSE: BBH) and SPDR S&P Biotech (NYSE: XBI) are classic examples of underperforming ETFs in the last week as you can see in the chart below. The Biotech HOLDRs actually fell during the rest of the market gains, while the SPDR S&P Biotech ETF significantly underperformed the PowerShares QQQ (NASDAQ: QQQQ).
A research call this last Thursday came from Goldman Sachs and it was cautious in Celgene Corporation (NASDAQ: CELG) and Gilead Sciences Inc. (NASDAQ: GILD); and the call was very cautious in Amgen Inc. (NASDAQ: AMGN) and Biogen Idec Inc. (NASDAQ: BIIB). Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) was the one that Goldman Sachs liked, and despite its large gains so far in 2010 the stock performed well after rising from about $68 early Tuesday to close the week out at $72.72.
MannKind Corp. (NASDAQ: MNKD) is one of those companies that will have nearly zero impact from Quantitative Easing nor from who is in control of the House, Senate, or White House. Alfred Mann’s inhalable insulin candidate took a hit because of fraud allegations from a terminated employee who brought up study misconduct concerns. Shares went from $6.20 on Thursday early morning to close the week out at $5.54 for roughly a 10% drop. The 52-week range is $4.76 to $11.12, and the general theme is that AFREZZA is farther and farther away from approval.
Human Genome Sciences Inc. (NASDAQ: HGSI) has lost some of its high-flyer status compared to 2009 and early 2010, and this week brought about a negative cloud on teh company even though the company itself was not at fault. The SEC charged a French research doctor with insider trading that allowed a hedge fund to dump 6 million shares after a tip that the drug Albuferon for Hepatitis C had negative test results. The problem is that the incident goes back to 2007. Human Genome shares were nearly at $27.00 at the start of the week and they closed at $25.31 versus a 52-week range of $20.56 to $34.49.
VIVUS Inc. (NASDAQ: VVUS) was started as Buy at Roth Capital this last week with a $12 price target, yet it did not hold much of the large gains from the week before. VIVUS shares rose a week earlier from $6.13 ti $7.75 after the FDA denied its Qnexa weight loss drug but after most issues seemed to be within working conditions without the need for a new round of drug trials. Shares did not close on the lows Friday, but the loss was close to 10% at $7.12 on the week. If this is approved, we have seen some research that indicates many patients will probably pay out of pocket on their own for this if insurance reimbursement rates do not cover it.
Dendreon Corporation (NASDAQ: DNDN) was another dud this week. The company’s loss was more than $79 million due to ongoing product expansion and promotion costs for PROVENGE. The drug is selling less than expected so far. The company sold $20.2 million and sales grew each month, but analysts were looking for nearly $24 million in sales. Dendreon gave sales projections of $46 to $47 million in 2010 revenue. It said it expects $350 to $400 million in revenue in 2011, but 2011 is expected to be very back-end loaded as capacity comes on line. That implies that any delay will push revenues further and further out, perhaps as more prostate cancer competition can come on the market. Analyst expectations were more like $62.6 million in 2010 and over $400 million in 2011. Shares peaked at $39.00 during the week but closed down at $35.07; its 52-week range is $25.05 to $57.67.
Most investors consider biotech and emerging pharma to be risk-based assets. These are a different sort of risk. Some of the pressure from Washington D.C. may abate, but Republicans have vowed to address some of the cost side of the equation when it comes to healthcare. If Washington can figure a way for hospitals to not charge $25 for administering an aspirin tablet or an ibuprofen pill, it seems logical that $20,000 to $90,000 treatment regimens could remain under scrutiny.
So far, biotech and emerging pharma is being discounted entirely despite the winds of change feeling a tad less abrasive.
JON C. OGG