At the start of the year I provided a positive outlook for the biotechnology industry in 2009, citing the sector’s defensive characteristics, favorable technical aspects, and improving fundamentals, such as the number of new product approvals, products in clinical trials and the brisk pace of industry consolidation and licensing transactions.
With January officially on the books, it appears an appropriate time to revisit this bullish biotechnology thesis. After all, there’s a saying on Wall Street: As January goes, so goes the rest of the year.
However, while a gain in the S&P 500 during the month of January has led to a positive overall year for stocks 85 percent of the time, the so-called January barometer may be no better than the proverbial toss of a coin when the month’s return is negative. The most recent example is 2003, with a positive return greater than 25 percent for the full year despite a negative 3.5 percent return during January. That may be good news in view of the fact that both the S&P 500 and Dow Jones Industrials lost nearly 9 percent for the month in 2009.
In contrast to one of the worst yearly starts for the broader market, the NASDAQ Biotech Index (NBI) was virtually unchanged during January 2009. In fact, the NBI has been outperforming the S&P 500 since mid-2008. This strong relative performance may signal that defensive industries like biotechnology remain in vogue with investors.
In addition to this defensive attribute, my previous column pointed out that new drug approvals by the FDA during 2008 were the highest in three years. With more money and greater resources, new drug approvals by the FDA could accelerate during 2009. This is important, as there are currently more than 400 biotech drug products and vaccines currently in clinical trials targeting more than 200 diseases according to Ernst & Young and BIO (Biotechnology Industry Organization).
2009 is off to a decent start with the mid-January FDA approval of Savella™, a selective serotonin and norepinephrine dual reuptake inhibitor for the management of fibromyalgia by Forest Laboratories, Inc. (FRX) and Cypress Bioscience, Inc. (CYPB). Additionally, Galderma Laboratories, L.P. received FDA approval for Vectical™, a unique vitamin D3 product for the treatment of mild-to-moderate plaque psoriasis in adults.
From a technical perspective, last month’s column introduced an indicator called the Bullish Percent, based on the percentage of stocks in an industry group or index that are currently trading above their 200-day moving average, and discussed how the indicator had turned positive for the NASDAQ Biotech Index going into the New Year.
But the field of technical analysis encompasses a variety of indicators to gauge the direction of the market and the Bullish Percent is just one arrow in the quiver. Technicians also keep a close eye on the number of stocks making new 52-week highs and lows.
In view of the poor performance logged by the broader indices in January, it’s not surprising that a paucity of stocks made new 52-week highs during this period. Interestingly, of the mere half-dozen NASDAQ stocks reaching new 52-week highs on a daily basis during the month of January, many were biotechnology companies.
For example, companies working in the field of stem cell research, such as Geron Corporation (GERN) and StemCells, Inc. (STEM), frequently appeared on the new 52-week high list during the month. Anadys Pharmaceuticals Inc. (ANDS), Repros Therapeutics Inc. (RPRX), and Maxygen, Inc. (MAXY) also frequently appeared on the new high list throughout January. Myriad Genetics Inc. (MYGN), which commercializes molecular diagnostic tests that can determine if a person is predisposed to certain cancers, exceeded prior 52-week high territory throughout the month of January and continues to do so after reporting strong second-quarter earnings this week.
Another biotechnology company that reached a 52-week high during January is CV Therapeutics, Inc. (CVTX), which received an unsolicited proposal from Astellas Pharma Inc. (OTCPK:ALPMF) to acquire the company. Indeed, merger and acquisition activity along with licensing transactions remain brisk and is central to the bullish outlook for biotechnology.
In addition to CVTX, M&A activity since my last column includes (acquirer/target): The Medicines Company (MDCO)/Targanta Therapeutics Corporation (TARG), Pfizer Inc. (PFE)/ Wyeth (WYE), and an option for Cephalon, Inc. (CEPH) to acquire Ception Therapeutics, Inc. Recent major licensing transactions include (licensor/licensee): BioMarin Pharmaceutical Inc. (BMRN)/La Jolla Pharmaceutical Company (OTCQB:LJPC), Myriad Genetics Inc./Panacos Pharmaceuticals, Inc. (OTCPK:PANC), and Bayer Schering Pharma AG/Micromet, Inc. (MITI).
I also previously noted that upcoming conferences offer an excellent opportunity for biotechnology leaders to generate momentum for the industry in the year ahead. Next week, a total of 150 companies will present at the BIO CEO & Investor Conference held February 9-10, 2009 in New York. Now in its eleventh year, the BIO CEO & Investor Conference is the largest independent investor conference for the life sciences industry focused on publicly-traded biotechnology companies.
To provide a fair balance of information, it is prudent to reiterate that the capital markets remain turbulent and there may be casualties along the way among undercapitalized biotechnology companies. According to industry statistics compiled by BIO in January 2009, 120 companies are trading with less than 6 months of cash on hand and 180 companies have less than 1 year of cash.
However, hope remains that the Net Operating Loss (NOL) refund provision that BIO has been advocating will be included in President Barack Obama’s economic stimulus options to promote innovation and job creation. Unlike bailouts, the NOL refund provision could allow biotechnology and other research-intensive industries to accelerate the utilization of their existing tax assets. As an example, a company with $100 million in accumulated NOL’s could potentially claim a refund of $20 million on their 2008 tax return.
The proposal is modeled after a New Jersey State law that went into effect in 1999 allowing emerging technology and biotechnology companies to sell net operating losses and unused research and development credits to get the cash they need to flourish. Profitable companies paying New Jersey corporate tax buy these credits and use them to reduce their state tax obligation. The main difference is that the government would provide the cash directly if the federal tax law change is approved as proposed under BIO’s NOL refund provision.
Using history as a guide for the potential benefits of the NOL refund provision, Celgene Corporation (CELG) was one of the first companies that benefited from New Jersey’s tax-credit transfer program and has since become the largest biotechnology company in New Jersey and one of the world’s largest as measured by market capitalization.
The bullish thesis for biotechnology in 2009 remains intact, as evidenced by the sector’s defensive characteristics and favorable technical and fundamental attributes. The favorable outlook is further bolstered by the sector’s relative outperformance during January 2009.
Disclosure: Long MITI.