In 2008, the Dow Jones Industrial average recorded its worst annual performance since 1931 and the NASDAQ Composite had its worst year since inception in 1971. On the heels of such a miserable year, it may have seemed counter intuitive to provide a positive outlook for the speculative biotechnology industry in 2009, but that's exactly what we did. Our bullish thesis was reiterated for both 2010 and 2011.
The AMEX Biotechnology Index (BTK) ended 2008 at 647.17 and climbed to 1,091.42 by the end of 2011 for a gain of approximately 69% during this three-year period. Comparing this performance with the general market, the NASDAQ Composite increased 65% from 1,577.03 to 2,605.15 during the same period.
Our favorable outlook for the biotechnology industry remains intact for 2012 and is based on the following key drivers, which builds upon many of the catalysts we first proposed in 2009:
- Sector's defensive characteristics and impact on future economic growth
- Improving number of annual new product approvals since the low set in 2007
- 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
- Many micro, small and mid-capitalization companies remain undervalued
Defensive Sector and Economic Driver
During periods of economic uncertainty, the biotechnology sector is often portrayed as defensive given that disease is relentless in both good economic times and bad. Despite recent medical advances, there remains a need for quality, innovative products to diagnose and treat a broad variety of diseases such as cancer, central nervous system disorders, cardiovascular diseases, diabetes, respiratory, and infectious diseases.
Beyond its defensive characteristics, the sector plays a critical role in the United States [US] economy. Innovative new medicines developed by life science companies provide better patient outcomes, improved quality of care, increased life expectancy, and lead to economic gains and job creation.
While the strengths and weaknesses of the US healthcare system remain the subject of great debate, we believe new medicines should be viewed as investments in the future, not only in patient health - but also in economic recovery and growth. For example, as indicated in our article "Innovative New Medicines are Key to Economic Growth," a permanent one percent reduction in mortality from cancer alone has a present value to current and future generations of Americans of nearly $500 billion and a cure would be worth about $50 trillion.
New Drug Approvals
As we highlighted in recent years, legislation passed in 2008 gave the FDA more money and resources, but hiring and training hundreds of new employees takes time. With that process well underway, combined with increased familiarity of the risk evaluation and mitigation strategies [REMS] program, we expected the drug approval process to gradually improve.
Encouragingly, the total number of approvals for new molecular entities and biologic license applications by the U.S. Food and Drug Administration's [FDA] Center for Drug Evaluation and Research [CDER] in fiscal year 2011 was 35. This is an improvement from 21 approvals in 2010 and 25 approvals in 2009. In fact, according to a press announcement by the FDA, this is among the highest number of approvals in the past decade, surpassed only by 37 approvals in 2009. However, an article in Nature Reviews by Asher Mullard listing the annual number of drug approvals going back to 1996 shows that 36 approvals in 2004 [not 2009] was the record for the past decade. The same article also shows that new drug approvals peaked at a high of 56 in 1996.
Notable new drug approvals in 2011 include Johnson & Johnson's (JNJ) Zytiga® [abiraterone] for late-stage prostate cancer, Roche's (OTCQX:RHHBY) Zelboraf® [vemurafenib] and Bristol-Myers Squibb's (BMY) Yervoy™ [ipilimumab] both for melanoma, Human Genome Sciences' (HGSI) Benlysta® [belimumab] - the first new drug for lupus in 50 years, and Seattle Genetics' Adcetris™ [brentuximab vedotin] for a rare lymphoma known as systemic anaplastic large cell lymphoma [ALCL].
Record Pipeline and Investment
According to the latest report by the Pharmaceutical Research and Manufacturers of America [PhRMA], there are a record number of biotechnology product candidates currently in development. In the US alone, there are more than 900 biotechnology products in development, including 300 monoclonal antibodies, 298 vaccines, 78 recombinant proteins, 50 gene therapy products, 64 cell therapy products, and 23 antisense products. More than one-third of these product candidates are targeting cancer and related conditions and more than 20% are targeting infectious diseases.
Annual research and development expenditures by PhRMA member companies for 2009 was an estimated $45.8 billion, more than tripling the $15.2 billion level of investment in 1995. However, skeptics will point to the fact that despite growing R&D expenditures, the number of new drug approvals has declined since the mid-1990s [see chart below].
Access to Capital
During the second week of January, more than 8,000 registrants gathered in San Francisco, California for the 30th Annual J.P. Morgan Healthcare Conference [JPMHC] to hear 25-minute presentations from 395 life science companies. For industry executives and investors, the annual event typically serves as a good barometer for the rest of the year.
Between meetings, we roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored social media outlets throughout the event. In general, the plane flights and networking receptions were crowded as usual, industry observers "Tweeted" a sense of optimism, and attendees appeared more upbeat than in 2011.
The recent closing of three new funds may support increased optimism as it relates to access to capital. First, on January 3, 2012, Vivo Ventures announced the final closing of a $375 million fund targeting later development stage pharmaceutical and medical device companies in the US and in revenue stage healthcare companies in greater China. Second, during the JPMHC Canaan Partners announced the closing of a $600 million fund, with one-third of the fund designated to healthcare investments in biopharmaceutical, medical device and healthcare infrastructure companies. Also during the JPMHC, Flagship Ventures announced the closing of a $270 million life sciences fund, its largest fund to date. According to Flagship's press release, in addition to investing in early-stage companies, a portion of the new fund will be dedicated to "later-stage value investing opportunities resulting from the current capital-constrained environment." Finally, Luke Timmerman of Xconomy recently reported that Frazier Healthcare is also aiming for its first biotechnology fund since 2007.
Last year wasn't too bad either. In 2011, venture capitalists invested $28.4 billion in 3,673 deals, an increase of 22% in dollars and a 4% rise in deals over the prior year, according to the MoneyTree™ Report by PricewaterhouseCoopers LLP and the National Venture Capital Association [NVCA], based on data from Thomson Reuters. In fact, venture capital investing in 2011 ranks in the top three years for venture capital investing in the past decade. Biotechnology was the second largest investment sector, with $4.7 billion going into 446 deals. This represents a 22% increase in investment dollars, but a 9% drop in terms of the number of deals.
2012 is also off to a solid start with regard to follow-on financings. Synageva (GEVA), Arena Pharmaceuticals (ARNA), iBio (IBIO), Talon Therapeutics (OTC:TLON), ImmunoCelluar Therapeutics (IMUC), Vical (VICL), Synta Pharmaceuticals (SNTA), Chelsea Therapeutics (CHTP), Sequenom (SQNM), ZIOPHARM Oncology (ZIOP), Neurocrine Biosciences (NBIX), and NeuroMetrix (NURO) have each announced offerings since the start of the year.
Consolidation and Licensing
Adding to the optimism among industry executives and investors during the JPMHC, Bristol-Myers Squibb announced its $2.5 billion acquisition of Inhibitex, Inc. (INHX) on January 7, 2012. In view of the fact that US pharmaceutical companies stand to lose billions of revenue due to patent expirations from 2010 to 2012, we expect merger and acquisition [M&A] activity to remain brisk.
In other M&A news, ISTA Pharmaceuticals (ISTA) is still being pursued by Valeant Pharmaceuticals (VRX), which recently increased its previously proposed price to acquire ISTA from $6.50 to $7.50 per share in cash. Valeant also communicated to ISTA that it could achieve a price of up to $8.50 per share following confirmatory due diligence.
Licensing deal activity is also off to a strong start in 2012, as evidence by Xenon Pharmaceuticals' strategic alliance with Genentech, a member of the Roche Group, to discover and develop compounds and companion diagnostics for the potential treatment of pain. According to the deal, which was announced during JPMHC, Xenon is eligible to receive research, development and commercialization milestone payments, totaling up to $646 million for multiple products and indications. In addition, Xenon will receive royalties on sales of products resulting from the collaboration.
In other licensing news, BioDelivery Sciences (BDSI) recently signed a worldwide license and development agreement with Endo Pharmaceuticals (ENDP) for the exclusive rights to develop and commercialize BEMA Buprenorphine for the treatment of chronic pain.
Small Versus Large
Similar to recent years, we expect that small and mid-capitalization companies with late-stage programs and/or positive fundamental catalysts will continue to outperform their larger industry peers in 2012. For example, after being the third worst performer in the prior year, Medivation (MDVN) became the largest percentage gainer within the NASDAQ Biotech Index during 2011 based on encouraging results with MDV3100, the company's lead product candidate in Phase 3 development for the treatment of castration-resistant prostate cancer. In another dramatic reversal of fortune, after declining 22% in 2009 shares of Akorn, Inc. (AKRX), a niche generic pharmaceutical company, made an impressive comeback by becoming the largest percentage gainer within the NASDAQ Biotech Index during 2010 and again making the list of top ten gainers in 2011 [see Table 1].
However, the prior year's winners may not always stay hot. Both Human Genome Sciences and Dendreon Corporation (DNDN) were among the top ten gainers from the NASDAQ Biotech Index in 2009 with dizzying returns of 1,342% and 474%, respectively. In 2011, both names appear on the list of top ten decliners [see Table 2].
Table 1. Top ten gainers from NASDAQ Biotech Index (NBI) in 2011
|Ticker||Company||2010 Close||2011 Close||% Change|
|MDVN||Medivation, Inc.|| |
|QCOR||Questcor Pharmaceuticals, Inc.|| |
|ARIA||ARIAD Pharmaceuticals, Inc.|| |
|CRIS||Curis, Inc.|| |
|ONTY||Oncothyreon, Inc .|| |
|VICL||Vical Incorporated|| |
|SPPI||Spectrum Pharmaceuticals, Inc.|| |
|CBST||Cubist Pharmaceuticals, Inc.|| |
|ACHN||Achillion Pharmaceuticals, Inc.|| |
|AKRX||Akorn, Inc.|| |
Table 2. Top ten decliners from NASDAQ Biotech Index (NBI) in 2011
|Ticker||Company||2010 Close||2011 Close||% Change|
|PACB||Pacific Biosciences of Californ|| |
|SIGA||SIGA Technologies Inc.|| |
|SVNT||Savient Pharmaceuticals Inc|| |
|TRGT||Targacept, Inc.|| |
|DNDN||Dendreon Corporation|| |
|GERN||Geron Corporation|| |
|BPAX||BioSante Pharmaceuticals, Inc.|| |
|HGSI||Human Genome Sciences, Inc.|| |
|MNKD||MannKind Corporation|| |
|DRRX||Durect Corporation|| |
The drivers supporting our favorable outlook for the biotechnology industry remain intact for 2012, 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 particular, 2012 represents a period with particularly robust news flow for emerging immuno-oncology companies, as indicated in our article "2012 Preview: Cancer Immunotherapy Catalysts."
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