M&A Bonanza For Drug & Biotech in 2011 (MRK, PFE, ALXN, DNDN, HGSI, CEPH, UTHR, CADX, AMAG, SNY, GENZ, AMGN, BEC, TEVA, SGMO, LLY, ALTH, CBST, VVUS, AUXL, VRTX)
The game of predicting mergers and acquisitions in the biotech and in pharma sectors is not a new one. The talk heats up, then it dies down. A deal comes, followed by another deal, and the activity goes quiet. This next week is likely to have at least more chatter in the biohealth sector for possible mergers and acquisitions after Barron’s gave a cover story called “The New Doctor in the House: Consolidation.”
Barron’s noted that “as big drug firms buy up smaller, specialty outfits and their most innovative products, better pipelines and sales-force efficiency will boost profits.” Here is the thing to consider: Barron’s did not really offer anything new or ground-breaking this weekend. It will have rekindled some hope that M&A is coming in the space. At issue: pipeline fatigue. A note we’d throw in as well, dead-dead stocks. We are going to at least address some of the Barron’s roster, but we want to show you many others which are just as or even more likely acquisition targets. Some of ours have even been in-play before.
Barron’s threw in Merck & Co. (NYSE: MRK) and Pfizer, Inc. (NYSE: PFE) as the largest of the Big Pharma players and it threw out biohealth names with stock-market values below $10 billion:
- Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) with a $7.5 billion value after a hueg run-up;
- Dendreon Corporation (NASDAQ: DNDN) for Provenge for prostate cancer (and future cancers) with a $5 billion market value today;
- Human Genome Sciences, Inc. (NASDAQ: HGSI) for its Benlysta in patients with severe active lupus nephritis and CNS lupus and a $4.5 billion market cap;
- Cephalon, Inc. (NASDAQ: CEPH) is one we have rarely looked as since things quieted down there;
- United Therapeutics Corporation (NASDAQ: UTHR) for its treat pulmonary arterial hypertension and an almost-$4 billion value;
- Cadence Pharmaceuticals Inc. (NASDAQ: CADX) was noted for its pain medication without the addiction aspects of morphine and its value is only $369 million;
- AMAG Pharmaceuticals, Inc. (NASDAQ: AMAG) was called a value stock despite its recent weak sales and despite its cash burn with a $368 million market cap.
Much of the biotech M&A game hinges on Sanofi-Aventis (NYSE: SNY) in its chase to acquire Genzyme Corporation (NASDAQ: GENZ). The latest talk is that a work-out could come to $80 all-in if certain milestones were achieved but the deal is still south of there officially. As noted above, we have our own opinions on which biotech companies and drug companies could find their way into the hands of a larger acquirer.
Amgen Inc. (NASDAQ: AMGN) is likely to continue being an acquirer. The company recently announced a deal worth potentially $1 billion to acquire privately-held BioVex. Last year the company said it was aggressively looking for new targets and its $52 billion market cap is the largest of all the independent biotechs in America. The company has more tricks up its sleeve.
Beckman Coulter Inc. (NYSE: BEC) went into play in early December with private equity firms being the likely acquirers of the portfolio of biomedical testing equipment and supplies. We argued at the time of the premium that it seemed shares fully reflected that value, and shares are actually lower now.
And don’t forget Sangamo Biosciences Inc. (NASDAQ: SGMO), where shares rallied in November on rumors of a potential bid interest from Eli Lilly & Co. (NYSE: LLY). It had good news on ZFP Therapeutic program to develop SB-509, a zinc finger protein transcriptional activator (ZFP-TF) of the vascular endothelial growth factor (VEGF)-A gene as a treatment for ALS and the news flow has continued to propel shares higher. It went above $4.50 on the rumors but now shares trade at $7.39. The market cap is still low here at $334 million.
Allos Therapeutics, Inc. (NASDAQ: ALTH) has been another name floated out there for M&A possibilities, but things are looking less and less bright for the company. Shares hit a 52-week low just on Friday.
Cubist Pharmaceuticals Inc. (NASDAQ: CBST) has not really gone anywhere as it is deemed a mature company, but it is one we thought for sure that would find its way into being part of a larger company. Its Cubicin is on the market and it fights severe hospital-induced infections and the market cap is $1.3 billion here.
VIVUS Inc. (NASDAQ: VVUS) remains a wild card due to the FDA. Diet and weight-loss pills have not been given any real love by the FDA. The exception here is that Qnexa does have serious benefits. There are side effects, particularly in cases of pregnancy. We would ask this though: How many pregnant and soon-to-be-pregnant women really diet? Most doctors don’t even want pregnant women taking supplements, let alone drugs. IF the FDA approves Qnexa, that $680 million market cap may be worth far more.
Teva Pharmaceutical Industries Limited (NASDAQ: TEVA)… We have also noted Teva’s mega-cap ambitions, and making more acquisitions would generally get there.
Last year, Morningstar put out a list of three favorites that it sees as acquisition targets in the biohealth space: Auxilium Pharmaceuticals Inc. (NASDAQ: AUXL), Human Genome Sciences Inc. (NASDAQ: HGSI), and Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX). FULL ARTICLE
This should at least give you a better and more concise list of possible deals and deal-makers for 2011. Just remember this, regardless of what Barron’s or other media outlets try to tell you: not all biotechs have to be acquired, not at all.
JON C. OGG
Bioheath Investor is creating some ongoing outlook pieces as 2010 ends so we have an outline of what to expect for 2011. We have already given the “Best of Big Biotech in 2010″ and now we want to focus on “The Big Biotechs With The Most Upside for 2011.” Using “Big Biotech” implies market caps of those with a market cap of $1 billion or higher. It was surprising that many of those big biotechs are actually trading much higher than their projected price targets.
Our screen generated 7 of the pack with implied upside of more than 15% for 2011. Those making the screen were Amgen Inc. (NASDAQ: AMGN), Gilead Sciences, Inc. (NASDAQ: GILD), Celgene Corporation (NASDAQ: CELG), Human Genome Sciences, Inc. (NASDAQ: HGSI), Dendreon Corporation (NASDAQ: DNDN), Incyte Corporation (NASDAQ: INCY), and Acorda Therapeutics, Inc. (NASDAQ: ACOR) made the grade for those with the most implied upside to the average analyst price targets with a one-year horizon.
We did create a brief table showing the tickers, the current price, the implied analyst consensus price target from Thomson Reuters, the implied upside to that target, and the 52-week trading range. More importantly, we gave an added breakdown on each with supporting data and color for building such an outlook.
|Stock||Current||Target||Implied Gain||52-Week Range|
|AMGN||$56.13||$65.39||16.5%||50.26 – 61.26|
|GILD||$36.54||$44.67||22.2%||31.73 – 49.50|
|CELG||$60.28||$70.48||16.9%||48.02 – 65.79|
|HGSI||$24.63||$35.17||42.8%||20.56 – 34.49|
|DNDN||$35.81||$52.73||47.2%||25.78 – 57.67|
|INCY||$16.81||$21.08||25.4%||8.50 – 17.48|
|ACOR||$27.60||$33.58||21.6%||24.99 – 40.48|
Amgen Inc. (NASDAQ: AMGN) has been range-bound for so long that we have called it a Big Pharma company masquerading as a biotech. It is THE largest of all U.S.-based biotechs out there. The 16.5% implied upside to a consensus target of $65.39 would mean a multi-year high as this one has been greatly range-bound in a $50 to $60 range. We’ll be looking forward to more data on its prostate cancer indication possibilities. The market cap here is well over $50 billion and it has so far survived its political risks and reimbursement risks from Washington D.C. What else is there really to add?
Gilead Sciences, Inc. (NASDAQ: GILD) has a high implied upside of more than 22% and it ranks among the biggest biotechs in the world with its $29.6 billion market cap. The implied target of $44.67 has already been breached before as the 52-week high is $49.50. Gilead even peaked at $55 back in 2008 before the meltdown. Its recent loss may have become InterMune’s gain.
Celgene Corporation (NASDAQ: CELG) has become harder and harder to evaluate on its valuation versus growth, but grown it has… even if shares have been range-bound. Its market cap is north of $28 billion based on REVLIMID, THALOMID, and others. If it makes that near-17% upside to $70.48, that will be a new 52-week high and will be within striking distance of the 2007 and 2008 highs.
Human Genome Sciences, Inc. (NASDAQ: HGSI) is the #2 stock of the implied upside stocks worth more than $1 billion. The implied event is the FDA review of Benlysta for lupus in March 2011 and if approved it would be the first lupus treatment in the last 50 years. While the implied upside is almost 43% to $35.17, Human Genome shares have already traded as high as $34.49 over the last year. Two recent analyst calls could not have been more opposite.
Dendreon Corporation (NASDAQ: DNDN) won the pole position as #1 with the most implied upside. Dendreon is a 2011 story as it telegraphed that its Provenge is likely to see a later in the ramp up and back-ended growth cycle as more capacity comes on line. The company is also seeking expanded Provenge manufacturing approval. While the implied upside is 47% to the $52.73 target, shares have traded north of $57.00 this year. We recently saw a very bullish outlook from a research report here.
Incyte Corporation (NASDAQ: INCY) is expected to have some 25% upside to its $21.08 consensus target, and it should be noted that it has a 52-week high of only $17.48. Thomson Reuters expects a decline in 2011 revenues and the story is still one that can go either very well or could backfire as its losses mount. Incyte’s market cap is still north of $2 billion and its cash is in excess of $400 million as of its September 30, 2010 balance sheet. Keep in mind that at the time of that balance sheet, debt and deferred liabilities already offset that cash balance. Incyte is one that could be a huge wild card ahead.
Acorda Therapeutics, Inc. (NASDAQ: ACOR) is one that is close enough to the 52-week lows that the implied upside may not be believed by many investors. The implied upside to the $33.58 target is still over 21%, but shares have come off the yearly highs by more than 30% so far in 2010. Its market cap is barely over the $1 billion line at $1.08 billion and we’d rate this another wild card for biotech investors.
As far as how these big biotech targets compare with a fresh initiation from Credit Suisse, that can be seen here. Keep your eyes out for both Human Genome Sciences and Dendreon in 2011. Those are both exponential winners and were up for review in late 2010 as they were among the field of ten-baggers with implied gains of 1,000% or more.
JON C. OGG
Beckman Coulter, Inc. (NYSE: BEC) is on fire after announcing that it is for sale. The company provides biomedical testing instrument systems, tests, and supplies for clinical laboratories worldwide. We wanted to see what it can fetch in a sale to see if investors should hang around for more or whether they should take the money and run.
Private equity firms are expected to be the buyers, although other industrial companies might have an interest. Reports are out the Beckman Coulter has hired Goldman Sachs to help it explore its options.
The shares closed at $57.09 Thursday and its market capitalization was just under $4 billion. Shares are now magically at $72.75.
2010 has been a very rough year as its summer guidance punished shares with more than a 20% loss. Its CEO also left after a five-year tenure and no real explanation was offered.
The stock is up over 27% this morning at $72.75 and shares put in a new high for 2010 today. The new 52-week range is $43.95 to $74.85.
We took a look at the stock options trading but investors will need to go out to FEB-2011 to get enough time value. The $75 CALLS are trading above $3.00, implying that shares need to be acquired for more than $78.00 for the options trade to work out.
As you saw elsewhere, this company had a monumental rise from 1990 to the early 2000s. The problem is that by 2005 shares peaked above $70.00 and the prices in the mid-$70′s acted as key resistance on the chart again in 2007, 2008, and again in 2009. Today’s move puts the stock above $70.00 for what appears to be the first time in 2010.
You never know what a buyer will pay if there is major interest or if a bidding war develops. This news today just created what some investors would call a phantom $1 billion in added share value by market capitalization alone.
If you average out the 2010 and 2011 estimates from Thomson Reuters, you get close to a $4.00 EPS target. There is also only an expected 4% revenue growth for 2011 to $3.82 billion in sales. The current share price comes to more than 18-times a blended 2010 to 2011 earnings estimate.
The most recent balance sheet as of 9/30/2010 showed more than $300 million in cash and long-term investments combined but it also comes with long-term debt of $1.33 billion and other liabilities of $533 million. The WSJ noted that this could fetch more than $5 billion in a buyout. We would caution that leaked rumors and leaked news is often a value of the enterprise with all equity AND debt rater than just equity as it is being treated today.
Analysts are cautious here on this one. Before the effects of this news, the consensus analyst target was just above $55.00 per share. The highest target was said to be $66.00 and the lowest target was $47.00.
For a company that has had problems and that has been volatile, this may be a gift at the current share price. Many investors will likely determine that today’s gains represent enough of a buyout premium to take the money and run. That may be even more so while we know 100% that the capital gains taxes are only 15% through December 31, 2010. A tax cut compromise was reached, but it is not signed and many key figures are fighting it.
Beckman Coulter could fetch a higher price depending upon who is the acquirer. Logic and common sense seems to lead to the conclusion that this big gain seen on Friday is a high enough premium already.
JON C. OGG
Sangamo Biosciences Inc. (NASDAQ: SGMO) may not be the biggest name in the biotech world, but it is among the latest with buyout rumors driving its share price.
Rumors of a potential bid interest from Eli Lilly & Co. (NYSE: LLY) drove shares higher all day on Monday. The rumor is that the drug developer is being looked at by Lilly.
The rumors may be tied to data from the last couple of weeks after it presented Phase II clinical data from its ZFP Therapeutic program to develop SB-509, a zinc finger protein transcriptional activator (ZFP-TF) of the vascular endothelial growth factor (VEGF)-A gene as a treatment for ALS.
Its presentation data from study SB-509-801 demonstrated that the drug was well-tolerated in subjects with ALS and that 40% of SB-509 treated subjects had delayed deterioration of toe and ankle muscle strength as measured by manual muscle testing. That 40% figure compared to 23% of baseline-matched historic controls. Positive improvements in electrophysiological measures of motor nerves were observed in a subset of treated subjects were also observed.
Shares closed up 9.6% on Monday at $4.54 versus a 52-week range of $2.81 to $6.82. The volume was also more than 1 million shares, making this about 5-times normal trading volume.
Sangamo’s market cap is $205 million and the development stage company has cash and short-term securities as of September 30 of $62.7 million.
JON C. OGG
Genzyme Corporation (NASDAQ: GENZ) could be interpreted as cutting its own nose off just to spite its face if you have followed the merger and share price drama over the last few months. While the company is trying to maximize shareholder value and perhaps hoping for rival bids above the $69 offer from Sanofi-Aventis (NYSE: SNY), the company is making noise again that may act to actually drive shares lower rather than higher as it hopes.
Chief Executive Officer Henri Termeer has been quoted saying in an article in the French daily Le Figaro that Genzyme has a list of defenses to fend off the $69.00 cash buyout of Sanofi-Aventis. Among these defenses named is the use of the “poison pill.” The company has not made any formal decision there on that front, which is effectively a delaying tactic from the company by saying and can take an action but not actually taking an action.
The official stance from Termeer in his interview is that the company is looking to maximize shareholder value, but the company is not for sale. Termeer is still taking a risk. If no rival buyers emerge and if Sanofi-Aventis forced away, the value is south of today’s share price.
Ultimately that intrinsic share price value can go higher on its own, but the company cannot afford any more missteps. Its Campath in multiple sclerosis is a promising candidate from studies and those results are due next year.
The full translation of the Le Figaro article is here.
JON C. OGG
Genzyme Corporation (NASDAQ: GENZ) may have some signs of life. On what felt much like a directionless Friday, the biotechnology company under a turnaround and under an M&A tree may actually have some interest.
The company rose Friday on news that it expects to meet the November 28, 2010 deadline to move the finishing and filling operations out of its Allston, Massachusetts plant for U.S. products.
Genzyme has suffered as a result of a virus and contamination at its Allston plant, which is one of the key factors that bruised the stock over the last year before Sanofi-Aventis (NYSE: SNY) stepped in with a buyout offer.
Reports were out this week that GlaxoSmithKline plc (NYSE: GSK) wasnit interested in making a competing bid for Genzyme.
While a $1.00+ gain might not be out of the ordinary, this stands out like a sore thumb for M&A investors. Genzyme wants more than $69 from Sanofi-Aventis and the news flow on other potential bidders has been fairly mum.
The $1.04 gain to $71.31 is the highest closing price since November 5 when it closed at $71.69. The trading volume of 4.583 million was also the highest since November 5.
The $72.50 NOV10 CALLS expired worthless on Friday and we saw more than 10,000 of those contracts trade. Here was the action in the DEC10 CALLS:
Strike Volume OpInt
70.00 3,613 20,711
72.50 6,999 22,428
75.00 4,020 8,934
Even the JAN11 $75 CALLS traded 3,202 contracts versus an open interest of over 81,000 contracts.
This might not seem like much to major screening efforts, but for M&A and special situation and turnaround investors, it feels like something may be coming down the pipe soon. Stay tuned.
JON C. OGG
Human Genome Sciences Inc. (NASDAQ: HGSI) has some vindication for its BENLYSTA as a treatment for lupus. The company announced that it and partner GlaxoSmithkline plc (NYSE: GSK) received FDA panel backing from the Arthritis Advisory Committee.
The company noted that a vote tally of 13 approval recommendations was above the 2 that recommended against approval. The FDA does not always follow its panel recommendations, but generally it does and a wide vote like this makes the winds favor an approval over a blockage. If approved as a treatment for autoantibody-positive patients with active systemic lupus erythematosus, this would mark the first treatment in about two generations.
The FDA’s committee is convened to provide the FDA with independent expert advice on a broad range of issues related to rheumatology drug products, and these are non-binding recommendations. The decision on final FDA approval of BENLYSTA a Prescription Drug User Fee Act was given a target date of December 9, 2010.
Human Genome Sciences and GlaxoSmithKline are developing BENLYSTA under a definitive co-development and co-commercialization agreement which was entered into back in 2006. The two companies will share equally in Phase 3/4 development costs, sales and marketing expenses, and profits of any product commercialized under the current agreement.
Cautious FDA comments over the safety and efficacy had recently caused a stir and had put pressure on the shares. Over the weekend we issued a note that despite the concerns voiced, FDA approval seemed very likely here for BENLYSTA because the incidence of side-effects seemed low and it also is hard to know if those suicides had anything to do with the drug. Human Genome Sciences had been at $25.88, and in the post-halt trading the stock is up 9% at $28.28.
The ultimate proof in the pudding will come from the FDA formal decision. The FDA itself does not always follow the panel recommendations. Still, our bet is that Human Genome Sciences wins FDA approval.
The big question now is rather simple… Will takeover chatter return when it comes to Human Genome Sciences? The issue in saying that M&A is likely is that the market cap is almost $5 billion even before the effect of the after-hours pop. To top that off, this one has traded north of $34.00 and the company would likely need a high premium to secure shareholder backing. Anything is possible in the world of M&A, but a split here on the costs and the expenses for a split of the profits may have been a cheaper way to acquire the company than a buyout.
Human Genome Sciences was briefly a $1.00 stock. Then it began its monumental climb. For a company to justify acquiring the company at a major premium now, management of the acquirer might have to do some deep explaining to shareholders who wonder why a chance was not taken before the market cap got too high here.
FDA approval seems close to a certainty. A buyout does not seem so certain here.
JON C. OGG
Two key biotechs had a rough day on Friday and these issues will be key to focus on in the coming days. Genzyme Corporation (NASDAQ: GENZ) is showing some very concerning trends, and the first Lupus drug in two generations from Human Genome Sciences Inc. (NYSE: HGSI) may now have some safety concerns. We wanted to take a look at the action in each and offer some outlook and color for further review.
We have previous noted how and why Genzyme Corporation (NASDAQ: GENZ) may be the entire pivot point for the biotech sector in 2011. We conducted an options analysis on Friday evening and have found not just that there was unusual options trading in the company. The options trading reveals that traders are betting on a breakdown in the Sanofi-Aventis (NYSE: SNY) merger and/or that no new bidders will emerge by Christmas.
Genzyme’s stock closed down 0.46% at $69.84 on Friday. This might not seem much on the surface, but this close is now under $70 and that means a dimmer hope of a deal premium above the $69.00 already on the table. Shares had traded under $70 on an intra-day basis since Wednesday, but the low was Friday at $69.51. The $69.84 close is actually the lowest close since going all the way back to the end of August.
Human Genome Sciences Inc. (NYSE: HGSI) is seeing a further breakdown on its Benlysta lupus drug hopes. The stock had a very rough day Friday after the FDA has raised questions about its Lupus drug over safety issues. Shares closed down 10.88% on Friday at $23.60 on 17 million shares.
HGSI’s safety concerns are on mortality rates, questions about three suicides, and on an issue of how the drug may not perform in African Americans well. There was very heavy options trading taking place in HGSI on Friday. At $23.60, its 52-week range is $20.56 to $34.49.
Genzyme is a special situation and it may literally be holding up the entire biotech sector. As far as Human Genome Sciences, our interpretation has been that Benlysta will get FDA approval as there have been no new true lupus treatments in close to a half-century. Our belief has been that a significant improvement in their disease would trump these safety issues.
JON C. OGG
We have previously outlined how the bull market is leaving biotech in the dust. With a lack of exponential growers in 2010 compared to 2009, there is a sad state of affairs that may be the most crucial element of all for biotech in 2011. Genzyme Corporation (NASDAQ: GENZ) could be the one critical element for the whole biotech sector. We would pay particular attention to Biogen Idec Inc. (NASDAQ: BIIB), Life Technologies Corporation (NASDAQ: LIFE), Illumina Inc. (NASDAQ: ILMN), Dendreon Corp. (NASDAQ: DNDN), and Human Genome Sciences Inc. (NASDAQ: HGSI), depending upon the outcome of the Genzyme situation.
Genzyme shares have slid after the Sanofi-Aventis (NYSE: SNY) offering peak and the larger company has asked Genzyme to come to the bargaining table. So far, Genzyme is looking for and hoping for a higher bid. So far, Henri Termeer’s stance has been that the offer undervalues the company and that the offer is opportunistic. So far, the stock has remained above the $69.00 offer. If Genzyme shares fall under that $69.00 offer, more shareholders may just decide to tender their shares to Sanofi-Aventis and call it a day.
So, why is Genzyme key to the whole sector?
Again, biotech has lagged the market and the sector has headwinds from patent issues, to cost controls out of D.C., to a more harsh FDA when it comes to drug approvals. Goldman Sachs issued very cautious research on the sector as a whole, with one exception. The biggest issue is that this tender or a rival deal could unleash more than $17 billion that would have to find a new home. For institutions and for many investors alike, it is not an unheard of event that money in one sector has to now find a new home inside the stock of another company in the same sector. At $70.23, Genzyme has a market cap of roughly $17.9 billion.
Unlocking $17 billion or more could create significant interest in the biotech and biohealth players that are smaller than Genzyme. Our data shows that there are more than 20 biotechs smaller than Genzyme which are valued at $1 billion or more by market capitalization. The next closest smaller companies tied to biotech are Biogen Idec Inc. (NASDAQ: BIIB), Life Technologies Corporation (NASDAQ: LIFE), Illumina Inc. (NASDAQ: ILMN), Dendreon Corp. (NASDAQ: DNDN), and Human Genome Sciences Inc. (HGSI).
This is giant for US biotech, and it is number four by market cap in US-listed biotechs as the table shows:
|Amgen Inc. (AMGN)||54.0B|
|Gilead Sciences Inc. (GILD)||30.7B|
|Celgene Corporation (CELG)||26.9B|
|Genzyme Corp. (GENZ)||18.2B|
|Biogen Idec Inc. (BIIB)||13.6B|
|Life Technologies Corporation (LIFE)||8.9B|
|Illumina Inc. (ILMN)||6.2B|
|Dendreon Corp. (DNDN)||6.1B|
|Human Genome Sciences Inc. (HGSI)||5.4B|
|Qiagen NV (QGEN)||4.2B|
|Abraxis BioScience, Inc. (ABII)||3.1B|
|Amylin Pharmaceuticals, Inc. (AMLN)||3.1B|
|Talecris Biotherapeutics Holdi (TLCR)||2.8B|
|BioMarin Pharmaceutical Inc. (BMRN)||2.3B|
|Techne Corp. (TECH)||2.3B|
|Regeneron Pharmaceuticals, Inc (REGN)||2.2B|
|Charles River Laboratories Int (CRL)||2.1B|
|Incyte Corporation (INCY)||1.8B|
|Medicis Pharmaceutical Corp. (MRX)||1.8B|
|Onyx Pharmaceuticals Inc. (ONXX)||1.7B|
|Savient Pharmaceuticals, Inc. (SVNT)||1.5B|
|Theravance Inc. (THRX)||1.4B|
|Acorda Therapeutics, Inc. (ACOR)||1.3B|
|Seattle Genetics Inc. (SGEN)||1.2B|
|ViroPharma Inc. (VPHM)||1.2B|
|XOMA Ltd. (XOMA)||1.0B|
JON C. OGG
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