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Following a spate of high profile clinical setbacks and regulatory delays that sent the sector into a tailspin during the final week of February 2009 (see prior column), investors shrugged off further disappointing clinical news as merger and acquisition activity helped biotechnology stocks stage a partial recovery last week. The NASDAQ Biotech Index (NBI) gained nearly 9 percent during the period, slightly lagging the broader market’s advance as evidenced by the 10.7 percent increase in the S&P 500 Index.

Last week, Genentech (DNA) and Biogen Idec (NASDAQ:BIIB) reported that a Phase 3 study of Rituxan® failed to meet the primary endpoint as a treatment for patients with a form of lupus. This was the second setback for patients with lupus in less than a month, as La Jolla Pharmaceutical (NASDAQ:LJPC) recently announced that the Independent Data Monitoring Board for its Riquent® Phase 3 study in lupus completed the first interim efficacy analysis and determined that continuing the study is futile.

Also during the week, Human Genome Sciences (HGSI) announced that Albuferon® met its primary endpoint of non-inferiority to peginterferon alfa-2a in a Phase 3 clinical trial for patients with chronic hepatitis C. Unfortunately, investors apparently had higher expectations for the study and sent the company’s stock to an all-time low on the news. Recent clinical setbacks in the area of lupus also likely weighed on Human Genome Sciences. The company is investigating LymphoStat-B®, a human monoclonal antibody that inhibits the biological activity of B-lymphocyte stimulator, in two Phase 3 superiority trials for patients with systemic lupus erythematosus (SLE). Human Genome Sciences expects to have the first Phase 3 data available for LymphoStat-B® by mid-2009, and all Phase 3 data to support regulatory filings available in fall 2009.

Putting disappointing clinical updates aside, last week’s big news came from Roche (OTCQX:RHHBY) and Genentech, which announced a merger agreement under which Roche will acquire the outstanding publicly held interest in Genentech for a total payment of approximately $47 billion in cash. This positive development fueled speculation as to where investors might redeploy their proceeds (see related article by Thomson Reuters).

Seeking biotechnology companies of comparable size and liquidity, investors will likely gravitate towards the larger companies among the 135 members of the NBI that we divided into the following three groups using data obtained through Gridstone Research:

Tier 1: market capitalization in excess of $10 billion (6 companies)
Tier 2: market capitalization greater than $2 billion but less than $10 billion (12 companies)
Tier 3: market capitalization of at least $1 billion but less than $2 billion (12 companies)

The 30 companies in these three groups had a collective market capitalization of approximately $240 billion at the end of last week. Assuming that investors reinvested the entire $47 billion in cash they receive for their Genentech shares into these groups, it would represent approximately 20 percent of the current value. Of course, it is unlikely that the entire $47 billion will return to the biotechnology sector, as index funds and other Genentech holders may reallocate their proceeds to other industries. Nonetheless, it is reasonable to assume that the majority of funds will be reinvested within the biotechnology sector.

Tier 1 consists of Amgen (NASDAQ:AMGN), Biogen Idec (BIIB), Celgene (NASDAQ:CELG), Genzyme General (GENZ), Gilead Sciences (NASDAQ:GILD), and Teva Pharma (NYSE:TEVA). Not surprisingly, this group performed exceptionally well during the past week. Year-to-date laggard Celgene (CELG) benefited the most and advanced 17 percent during the period.

click to enlarge images

Tier 1 Graph

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Tier 2 consists of Shire plc (SHPGY), Life Technologies (NASDAQ:LIFE), Vertex Pharmaceuticals (NASDAQ:VRTX), Cephalon (NASDAQ:CEPH), Illumina (NASDAQ:ILMN), Myriad Genetics (NASDAQ:MYGN), Qiagen N.V. (NASDAQ:QGEN), Alexion Pharmaceuticals (NASDAQ:ALXN), Warner Chilcott (NASDAQ:WCRX), Gen-Probe (NASDAQ:GPRO), OSI Pharmaceuticals (OSIP), and Perrigo (NYSE:PRGO). In addition to possibly benefiting from the reallocation of Genentech proceeds, Tier 2 includes some of the sector’s best performing stocks year-to-date, including Myriad Genetics, Life Technologies and Illumina.

Tier 2 Graph (partial list)

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Tier 3 consists of Endo Pharmaceuticals (NASDAQ:ENDP), Techne (NASDAQ:TECH), ONYX Pharmaceuticals (NASDAQ:ONXX), Sepracor (SEPR), United Therapeutics (NASDAQ:UTHR), Amylin Pharmaceuticals (AMLN), CV Therapeutics (CVTX), Isis Pharmaceuticals (NASDAQ:ISIS), Auxilium Pharmaceuticals (NASDAQ:AUXL), BioMarin Pharmaceutical (NASDAQ:BMRN), Regeneron Pharmaceuticals (NASDAQ:REGN), and Acorda Therapeutics (NASDAQ:ACOR). Tier 3 represents a number of companies that have been rumored as takeover targets themselves, including ONYX Pharmaceuticals, Amylin Pharmaceuticals, and Acorda Therapeutics. Just last week, Gilead Sciences and CV Therapeutics announced the signing of a definitive agreement pursuant to which Gilead will acquire CV Therapeutics for $20.00 per share, which topped an unsolicited proposal from Astellas Pharma Inc. to acquire CV Therapeutics.

Tier 3 Graph (partial list)


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The brisk pace of merger and acquisition activity along with licensing transactions is central to the bullish outlook for biotechnology proposed at the start of 2009. However, new product approvals and positive clinical trial results are an equally important theme. As such, investors will likely be closely monitoring near-term events, such as results from the first Phase 3 trial of Human Genome Sciences’ LymphoStat-B® for lupus in mid-2009, AMAG Pharmaceuticals (NASDAQ:AMAG) obtaining approval for Feraheme™ to treat anemia, final results from Dendreon’s (NASDAQ:DNDN) Phase 3 trial of Provenge® for prostate cancer expected in April, and results from Genentech’s Phase 3 study of Avastin® plus chemotherapy in adjuvant colon cancer expected in mid-2009.

Disclosure: I have no ownership or business relationship with any company named in the article.

Source: Where Might Genentech Investors Redeploy $47B?