At the start of the year, we provided a favorable outlook for the biotechnology industry in 2010 that was based on the same six drivers we proposed for 2009, which included the following:
- Sector’s defensive characteristics and impact on future economic growth.
- Highest number of annual new product approvals since 2004.
- Record number of products in clinical trials and annual industry research and development investment.
- Improving access to capital.
- Brisk pace of industry consolidation and licensing transactions.
- Many small- and mid-capitalization companies remain undervalued.
With 2010 officially on the books, it appears an appropriate time to review the sector’s performance along with some of the themes highlighted in our previous articles.
Big Versus Small
The twenty-member NYSE Arca Biotechnology Index (BTK) was up 38% in 2010, while the broader Nasdaq Biotechnology Index (NBI) advanced 15%. Performance of the NBI was in line with the Dow Jones Industrial Average (DIA), S&P 500 (SPY), and Nasdaq Composite, which were up 11%, 13%, and 17%, respectively.
Why the huge discrepancy in returns between the two major biotechnology indices? Unlike the equal-weighted BTK, the NBI is calculated under a modified capitalization-weighted methodology, taking into account the total market value of the companies it tracks and not just their share prices. Accordingly, companies with the largest market capitalizations, or the greatest values, will have the highest weighting in the index.
During 2010, most of the large capitalization biotechnology companies (greater than $10 billion) underperformed the median return of 11% for the 130 companies in the NBI. For example, Celgene Corporation (CELG) was up 6%, Cephalon, Inc. (CEPH) was down 1%, Amgen, Inc. (AMGN) was down 3%, Teva Pharmaceutical Industries (TEVA) was down 7%, and Gilead Sciences, Inc. (GILD) declined by 16%. Bucking the trend of underperformance among large capitalization biotechnology names were Shire plc (SHPGY), along with Genzyme Corporation (GENZ) and Biogen Idec, Inc. (BIIB), both of which were targeted by shareholder activist Carl Icahn.
Accordingly, the relative underperformance of large capitalization biotechnology companies in 2010 masked the fact that many smaller, innovative companies performed well, as evidenced by the fact that 30 of the 130 companies comprising the NBI produced greater than 50% returns during the period. This performance is consistent with our thesis that small- and mid-capitalization companies with positive clinical or regulatory catalysts would continue to outperform their larger industry peers in 2010. See Table 1 for a list of the top 10 gainers from the NBI in 2010.
Noticeably absent from the list of 2010 winners, however, were the staggering quadruple-digit returns witnessed in 2009 (Vanda Pharmaceuticals, Inc. (VNDA) +2,150% and Human Genome Sciences, Inc. (HGSI) +1,342%).
Table 1. Top 10 gainers from NBI in 2010
|Company Name||Symbol||12/31/09 Close||12/31/10 Close||% Change|
|Questcor Pharmaceuticals, Inc.||QCOR||$4.75||$14.73||210%|
|Neurocrine Biosciences, Inc.||NBIX||$2.72||$7.64||181%|
|Jazz Pharmaceuticals, Inc.||JAZZ||$7.88||$19.68||150%|
|Caliper Life Sciences, Inc||CALP||$2.54||$6.34||150%|
|SIGA Technologies, Inc.||SIGA||$5.80||$14.00||141%|
|Idenix Pharmaceuticals, Inc.||IDIX||$2.15||$5.04||134%|
|NPS Pharmaceuticals, Inc.||NPSP||$3.40||$7.90||132%|
|ARIAD Pharmaceuticals, Inc.||ARIA||$2.28||$5.10||124%|
Last Year’s Laggards Become 2010 Winners
After declining 22% in 2009, shares of Akorn, Inc., a niche generic pharmaceutical company, staged an impressive comeback by becoming the largest percentage gainer within the NBI during 2010. In November 2010, the company announced that core business revenue is projected in the range of $79.0-80.0 million in 2010, a 76-79% increase over 2009, and up from the company’s prior guidance range of $71.0-75.0 million.
In another dramatic reversal of fortune, three of the top 10 gainers from the NBI in 2010 made the list of top 10 decliners in the prior year. Questcor Pharmaceuticals, Inc., Idenix Pharmaceuticals, Inc., and NPS Pharmaceuticals, Inc. rebounded sharply in 2010, each posting triple-digit returns due in part to the following:
- Questcor’s performance was largely due to strong revenue growth from its H.P. Acthar® Gel (repository corticotropin injection), which is indicated for the treatment of acute exacerbations of multiple sclerosis in adults, as monotherapy for the treatment of infantile spasms in infants and children under two years of age, and for the treatment of several other diseases and disorders.
- Despite news in September 2010 that the U.S. Food and Drug Administration (FDA) placed two of the company’s HCV drug candidates on clinical hold, Idenix Pharmaceuticals benefited from its drug candidate for the treatment of HIV/AIDS advancing into a Phase 2b trial by its corporate partner, ViiV Healthcare.
- Interest in NPS Pharmaceuticals can be attributed to the fact that in early 2011 the company expects to report top-line results from a Phase 3 study of teduglutide, a proprietary analog of GLP-2, in patients with short bowel syndrome who are chronically dependent on parenteral nutrition.
Losers Brought to You by the Letter “A”
Affymax, Inc., which hopes that its investigational anemia drug peginesatide could ultimately compete with Amgen Inc.’s Aranesp® (darbepoetin alfa), posted the largest percentage decline within the NBI for 2010. Top-line results from the Phase 3 clinical program released in June 2010 showed that the frequency of death, stroke, myocardial infarction, congestive heart failure, unstable angina, and arrhythmia was higher in non-dialysis patients taking peginesatide than those taking Aranesp, which sent shares of Affymax plummeting. In November 2010, Affymax and partner Takeda (OTCPK:TKPHF) confirmed their goal of submitting a new drug application (NDA) for peginesatide for the treatment of anemia in chronic renal failure patients on dialysis in the second quarter of 2011.
AMAG Pharmaceuticals, Inc. launched Feraheme® (ferumoxytol) to treat iron deficiency anemia in July 2009, but anemic sales earned the company a spot in the top 10 decliners of 2010. Net product revenues from Feraheme were $15.1 million in the third quarter of 2010, well below the $500 million to $1 billion in annual sales originally projected by Wall Street analysts.
Table 2. Top 10 decliners from NBI in 2010
|Company Name||Symbol||12/31/09 Close||12/31/10 Close||% Change|
|China Sky One Medical, Inc.||OTCPK:CSKI||$22.75||$6.97||-69%|
|AMAG Pharmaceuticals, Inc.||AMAG||$38.03||$18.10||-52%|
|Arena Pharmaceuticals, Inc.||ARNA||$3.55||$1.72||-52%|
|Alexza Pharmaceuticals, Inc.||ALXA||$2.40||$1.25||-48%|
|Alnylam Pharmaceuticals, Inc.||ALNY||$17.62||$9.86||-44%|
Most of the drivers supporting our favorable outlook for the biotechnology industry remain intact for 2011, such as the record number of products in clinical trials and annual industry R&D investment, improving access to capital, brisk pace of industry consolidation and licensing transactions, and attractive valuations among many small- and mid-capitalization companies, which should continue to outperform their larger industry peers in 2011.
The key exception relates to the number of FDA drug approvals, which declined in 2010 and is more than 50% below the high of 56 new approvals in 1996 despite the fact that legislation passed in 2008 gave the FDA more money and resources. There is no discounting the negative impact of clinical and regulatory setbacks on the psyche of biotechnology investors, as evidenced by the greater than 10% decline in the NBI in late February 2009 following a spate of high profile disappointments.
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