In the first quarter of 2013, the NASDAQ Composite rose 8%. It was the only of the three major indexes that did not reach all-time highs. Although the NASDAQ is still far from reaching its all-time highs, an 8% return is still considered a positive. While many individual sectors and industries did outperform the broader market, the NASDAQ Biotechnology Index more than doubled the performance of the NASDAQ Composite with a return of 17%. These gains in the Biotechnology Index were not balanced, and in this article I am reviewing five stocks that significantly outperformed its industry.
$1 billion - $4.90 billion
$500 million - $999 million
$200 million - $499 million
< $200 million
It's really quite thought-provoking to see how the interest in the biotechnology industry has been allocated. In recent years, we would see strong performance from the $500-$999 million group and not as much for companies larger. This pattern left a number of bigger companies undervalued, and now the industry as a whole looks quite attractive, relevant to valuation. Now, using this chart, I am exploring five stocks that have been favorites in each category-- not necessarily the largest gains, but favorites.
The largest of companies were very balanced in performance, as most returned gains in the area of 15% during the quarter. There were a few laggards and leaders, with the biggest leader being Celgene Corporation (CELG). The company's large 47% gain, three times greater than average, was due to a number of events. For the quarter, Celgene issued bullish guidance, including its goal of $12 billion in revenue by 2017.
The company also proved that despite the fact that it is large, the market will still react warmly to speculation surrounding its pipeline, following a priority review of its Revlimid drug. Nevertheless, there were some negatives for the quarter, as the company's blockbuster-potential drug, Apremilast, had Phase III results showing just 33% of patients had a 75% reduction in psoriasis. This was much milder than its earlier study. Overall, it was a good quarter for the company, and investors continue to be excited with a number of catalysts ahead. Looking at the company's valuation, it does look pricey, but surprisingly has a PEG ratio of just 0.89. The stock has emerged as a leader in the industry, and should be watched in Q2.
$1 billion - $4.9 billion
As we get further down the list, the number of companies that greatly outperformed the industry will increase. The first example is with ISIS Pharmaceuticals (ISIS) and its 62% gain, 3.85 times better than the average. The volatile stock rose for many reasons: For one, it had traded with losses of almost 50% during a part of the Q4 quarter, and also because of it earning an FDA approval for its Kynamro drug to treat a rare genetic disorder, HoFH.
The company also had a number of other pipeline-related catalysts for the quarter. It initiated a Phase 1 study of its atherosclerosis drug, ISIS-APOARx. Also, the company announced that another drug, CRPRx, performed well in a Phase 1 trial. The company also formed an alliance with Roche, allowing Roche to utilize ISIS' technology and develop a treatment for Huntington's disease. All of this news came after the company's Kynamro drug approval.
The investment community has long since believed that ISIS has great technology and great upside, but there were always concerns if its antisense technology, and its approach of breaking down specific genes, would ever lead to an FDA approval. Following its first approval, there is now a strong belief that ISIS is a prime acquisition target, and that its technology will go on to earn various FDA approvals over the next five to ten years.
$500 million - $999 million
Celldex Therapeutics (CLDX) exploded in Q1 with gains of 70%, 7.6 times better than its group, as the speculation of an eventual approval was replaced with the probability of an eventual approval. The company had announced final data back in December for its breast cancer drug, CDX-011, and had already seen very large gains throughout 2012 to complement the success of both its late-stage products. But in 2013, gains have been driven by the bullish outlooks from analysts and the institutional interest combined with the possibility of a takeover. Celldex was just one of many that greatly outperformed this group in Q1, as this group might have been the most exciting of the quarter.
$200 million - $499 million
In the $200-$499 million group we saw the second best overall performance in the Biotechnology Index. Within this group, there were some great performances, and Hyperion Therapeutics (HPTX) was among the top of the list, outperforming its group more than eight fold.
Hyperion is an under-the-radar company, with low volume that is now valued at $486 million. The company had two specific days of large gains, although its trend has been consistently higher. The gains are in connection with its newly approved treatment, Ravicti, for urea cycle disorder, a rare and deadly genetic disorder. I might add that Ravicti's peak sales potential is only $100 million, according to recent analyst remarks. Yet the upside lies in the technology, and this company's growth is another example of money inflows to companies with new technologies and Orphan Statuses.
The under $200 million group is typically a very attractive area of investment interest for the market, but because of such good performance elsewhere, this group lagged in Q1. For the quarter we did see a number of leaders, but for the most part it was a slow quarter all-around. NeoStem (NBS) was intriguing, outperforming its group by ten fold, and doing so after a year of underperformance and speculation leading up to catalysts. For the quarter, NeoStem received approval to continue with its Phase 2 trial of its cell therapy heart treatment product, AMR-001. The product is being used to prevent further deterioration following a major heart attack, and has sales potential of over $1 billion if data continues to prove successful. The company also received a new patent that will expand the use for AMR-001 and also announced that it will begin testing its VSELs in clinical studies to determine if preclinical results can hold in larger trials.
The strong start for NeoStem is more than likely related to future events. The company is nearing the 12-month from data point and its Progenitor Cell Therapy (PCT) manufacturing business continues to grow. Last year, revenue from PCT doubled. This growth was from having clients that advanced into larger trials and also contracts with new companies in large studies. In January the company announced a partnership with Adaptimmune, and that PCT would be manufacturing its product during clinical studies. This news, combined with further advancing studies, should set the company up for another year of revenue growth. Although NeoStem did have an exciting Q1, these aforementioned factors are a foreshadowing of catalysts to come; expect more developments than what was seen in Q1. I believe 2013 could be very exciting for this small company.
When you see that the Biotechnology Index outperformed the NASDAQ by more than 100%, one may assume that it was a good quarter for the entire industry. Actually, it was a great quarter for the industry, but performance was very scattered depending on the size of a company. With two of the major indexes trading near all-time highs, it is difficult to determine upside from this point going forward. What we know is that there is a lot of money coming into biotechnology and it is very possible that these good fortunes will either continue or that we will tend to see individual stocks that breakout higher, regardless of market trend.