It's official - biopharma is back in favor. Shares in big and mid cap drug makers put on a terrific rally in the second quarter of the year, putting the retrenchment of 2016 firmly to bed.
A big runup to the end of June helped push the Nasdaq Biotechnology Index (NBI) to an 18-month high, and healthcare indices in general outperformed wider markets over the first half. Only a handful of companies have failed to move higher this year, marking Bristol-Myers Squibb (NYSE:BMY), Astellas (OTCPK:ALPMY) and Teva (NYSE:TEVA) out as the first half's disappointing exceptions (see tables below).
The resurgence of the NBI is particularly remarkable, given that the US companies here are presumably operating under the shadow of unresolved political machinations around tax and healthcare reform. Investors are clearly unperturbed by this lack of clarity, despite signs that corporates remain reluctant to make big strategic decisions (Second-quarter deals show a sector set on pause, July 03, 2017).
With the IPO markets also buoyant, it is hard not to conclude that the disparity between public market valuations and the prices that industry is willing to pay for acquisitions is growing ever wider.
Still, few companies will object to the rising paper values witnessed in the second quarter. Novartis and Lilly join the three top climbers in the big caps listed below with double digit gains over the six months.
Only Astrazeneca (NYSE:AZN) delivered a real trigger for this - results from the Pacific trial of Imfinzi in third-line lung cancer in May prompted a 9% jump in the stock on the day. Success in the impending Mystic study results will determine whether its rally continues.
Bristol-Myers, standing out as the lone big-cap decliner, has never recovered from last year's failure of Checkmate-026, the study that tried and failed to secure for Opdivo a position in first-line lung cancer. Further wins by Merck & Co (NYSE:MRK) with its rival checkpoint inhibitor Keytruda have consolidated its lead in the anti-PD-(NYSE:L)1 antibody space.
Outside big pharma but still in the large-cap space more fallers can be found, dominated by Japanese companies. Shares in Japan's drug makers have been hurt this year by moves by the government to put a lid on rising medical costs.
Concerns about Teva's strategic direction and squeezed generic drug prices continue to hurt the Israeli company, which is still looking for a new chief executive. Interestingly, outside the top three, several big biotech beasts have also registered declines in the first half - Biogen (NASDAQ:BIIB), Shire (NASDAQ:SHPG) and Gilead (NASDAQ:GILD) - albeit in the -2% to -6% range.
General investor enthusiasm for the sector is clearly not strong enough to erase concerns about the growth prospects for these majors. Regeneron (NASDAQ:REGN) stands out as a strong large-cap US performer, buoyed by the launch of the promising autoimmune drug Dupixent; consensus forecasts show royalties reaching $700m by 2022.
The climb in the NBI is indisputable, yet this analysis shows a mixed performance from the weighty large caps. Smaller biotech stocks certainly contributed to these gains - EP Vantage's analysis of this section of the industry, to be published next week, will reveal their identities.
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