Sell-Off in Biotech-Land
Last week, biotechs were blindsided Tuesday when it was announced that FDA Commissioner Scott Gottlieb will be resigning imminently. A broad index of biotech stocks (BTK) - not an ETF (which is managed) - dropped from an intra-day high of 5,123 to close the week near its low at 4,861. That's a drop of 5.1%. A large-cap biotech ETF (NASDAQ:IBB) and small-cap-oriented biotech ETF (NYSEARCA:XBI) dropped more like 7%. Those compare to a 2% drawdown for the S&P 500 (SPY) and slightly more than 2% for the NASDAQ 100 (QQQ).
Here's what STAT had to say about the reaction of traders to the news of Dr. Gottlieb's impending departure:
[The] news is likely to leave biotech and pharma executives, who largely adored Gottlieb, nervous at best and frightened at worst.
The article continues:
... the libertarian figures whose names were floated for the job before he got it seemed to want to dismantle the FDA drug oversight and review process, taking deregulation so far that even the drug companies worried...
"I think Scott was pretty much a best-case scenario for the sector that one could see under a Trump administration, so any replacement is probably going to be worse. Hopefully not much, much worse," said Baird biotech analyst Brian Skorney...
It's not hyperbolic in the least to say that biopharma loved Gottlieb.
At conferences, Gottlieb extolled the industry for developing new gene and cell therapies to treat rare diseases and cancer. He would almost brag about how the FDA was leading the way in helping these new therapies reach the market.
For similar reasons, health care investors saw Gottlieb as a guy who wanted to approve drugs.
You see the message in the article.
My question is, "where's the beef" that Gottlieb's departure will matter for the future profitability of the biotech industry?
Alas, the article has none, not even a small burger as in the old Wendy's commercial. The article goes on to point out that modernization of the FDA began in the Obama era.
Looking Beyond Gottlieb: Biotech is Getting Stronger
Re a potential "libertarian" commissioner of the FDA: I will predict that nothing major is changing. A House controlled by Democrats and a Senate controlled by Republicans is not going to agree on a legislation to alter the "safe and effective" framework of drug or device approval. Further, the FDA commissioner must be approved by the Senate. Senators like their job. They don't like risking re-election by changing the rules to allow lightly-tested drugs on the market.
Not quoted above, but STAT brought up the libertarian argument that FDA should just evaluate safety, not efficacy. That's just not going to happen, and guess what? A drug's safety cannot be evaluated without large-scale clinical trials, which means measuring efficacy at the same time. And no doctor is going to prescribe a drug that may have a decent safety profile but no evidence of efficacy. And no insurance company is going to pay big bucks for a potential placebo: safe but ineffective. I think the worriers that STAT cited are worrying over nothing.
So, why did biotech funds and BTK drop 2% promptly on the news and then continue down?
Maybe because of how biotechs have traded the past five years:
BTK more than doubled between its Feb. 2016 low and its September 2018 high. I think it just "needed" a rest.
Evidence that this move was just technical and not based on fundamentals comes from that and the lack of substance behind the STAT reporting.
Exacerbating a technical move is the ongoing Fed removal of about $50 B worth of liquidity per month from the banking system as it reverses QE.
I proffer another reason to think of A) not selling into this downward move and B) buying the dip. Namely: there have been lots of good news lately. Here's a sample from a few stocks I own and track, with Friday's closing price.
ABBV received a positive opinion from CHMP in the EU for one of its two key replacements for Humira, Skyrizi (risankizumab). This is reassuring. FDA approval could arrive in Q2. Also, Venclexta received its fifth Breakthrough Therapy Designation for the commercially important fixed-dose, time-limited first-line treatment of CLL (with Gazyva). Consensus EPS estimates for 2019 have dropped a few cents over the past 60 days and have dropped $0.13 for 2020. So that's a mild negative, but then, ABBV is down from a high above $120.
Skyrizi is poised join an elite group of psoriasis drugs that are coming close to the near-cure level for a good number of moderate-severe cases. Not long ago, this concept seemed out of reach. We are not there yet, but improvement has been substantial.
ABBV's even more key follow-on drug to replace Humira, "upa," expects FDA approval in Q3 for rheumatoid arthritis. So by Q4, ABBV could be promoting two potentially best-in-class drugs for two of Humira's most important indications, each with clinical and dosing superiority over Humira.
I peg ABBV as trading around 10X GAAP 2019 EPS. With SPY around 18X consensus GAAP 2019 EPS, ABBV could see EPS shrink nearly 50% and still only be at a market multiple, despite having numerous growth drivers apart from Skyrizi and upa (upadacitinib), and a focused pipeline which includes improvements in treating autoimmune diseases.
Both psoriasis and RA are relatively common diseases, and ABBV is looking to make a difference in the lives of many people with Skyrizi and upa.
These are just some examples of how biotech is beginning to make a larger and larger difference in more and more people. The following sections present other examples.
REGN received some mild bad news in the legal battle between its and Sanofi's (SNY) Praluent versus Amgen's (AMGN) Repatha, but it announced strong data on its/SNY's Dupixent for a very important third indication:
Positive Results Presented from Two Phase 3 Trials of Dupixent® (in Severe Chronic Rhinosinusitis with Nasal Polyps (CRSwNP)
... Dupixent reduced the need for systemic corticosteroid use and the need for nasal/sinus surgery...
"Dupixent is the first biologic therapy to demonstrate the potential to produce disease-modifying effects in severe CRSwNP, significantly improving all disease measures in the study, including sense of smell, one of the most troublesome and challenging-to-treat symptoms for patients," said Claus Bachert, M.D...
First-in-class, best-in-class. This is very nice to see. Few insurers, not even NICE in the UK, can argue against these two particular bits of data:
- 60% and 51% improvement in health-related quality of life vs. 18% and 18% with placebo at 24 weeks in SINUS-24 and SINUS-52, respectively
- 73% reduction in rescue treatment with systemic corticosteroids or nasal polyp surgery compared with placebo at 24 weeks in SINUS-24 and 76% reduction in rescue treatment compared with placebo at 52 weeks in SINUS-52.
Please see the press release for a lengthy list of other endpoints.
These are impressive data, not marginal.
What adds to the good news, medically and commercially, is that Dupixent is also an asthma treatment, and biologics for asthma are getting to be a crowded area. Thus the following detail from the press release matters: about 60% of patients in the studies also had asthma, most of it bad enough to be on treatment, and both studies showed statistically significant improvement in lung function.
The FDA is giving Dupixent for CRSwNP a Priority Review, with a target action date of June 26.
Dupixent is looking differentiated from competitive drugs.
In addition, slightly over one month ago, REGN presented detailed information about the benefits of Eylea in diabetic retinopathy (PANORAMA study). The benefit was clinically major. I would not feel comfortable with off-label Avastin being substituted for this pending indication. The target action date for the sBLA for this indication is May 13.
Starting with nothing other than some capital at the turn of the century, REGN is making a difference in the health of many people. Yet I am modeling $24 GAAP EPS for REGN this year, which would put REGN at a slight P/E discount to SPY.
ALXN announced last week a recent publication of its three-year data showing strong results for Soliris on generalized myasthenia gravis (gMG), a serious disease. Soliris represents the first drug approved by the FDA for gMG in more than 60 years. Note the approval is for a subset of gMG patients.
Soliris as a significant help for a meaningful subset of gMG patients is a great scientific achievement. I peg ALXN as trading around a market P/E, but I think the odds favor much faster and less cyclical growth for it than for the stocks in SPY.
Last week, VRTX announced a second 3-drug combo showed terrific results in cystic fibrosis:
Two Phase 3 Studies of the Triple Combination of VX-445, Tezacaftor and Ivacaftor Met Primary Endpoint of Improvement in Lung Function (ppFEV1) in People with Cystic Fibrosis
- Mean absolute improvement in ppFEV1 of 13.8 percentage points from baseline at week 4 in people with one F508del mutation and one minimal function mutation (F/MF) compared to placebo (p<0.0001)-
- Mean absolute improvement in ppFEV1 of 10.0 percentage points from baseline at week 4 when VX-445 was added in people with two F508del mutations (F/F) already receiving tezacaftor and ivacaftor compared to control group of placebo added to tezacaftor and ivacaftor (p<0.0001).
This was the second 3-drug combo to succeed. VRTX says it will choose one of the two combos and submit for regulatory approval in Q3 in the US and in Q4 in the EU. I anticipate rapid approvals.
VRTX has taken discoveries funded by the Cystic Fibrosis Foundation and run with it to create what are now major improvements in the standard of care of this disease, which previously could be treated only symptomatically and with great effort.
VRTX was placidly sitting around $190 Tuesday, then collapsed 7% seemingly only on the Gottlieb news. VRTX could have secular growth in CF into the 2030s, and has other growth drivers in its pipeline.
GILD's stock did not react very badly to the news of the departure of its head of oncology. It then reacted badly despite positive news on Descovy as a safer preventative against HIV infection, good data on switching well-controlled patients to Biktarvy, safety and efficacy of treating HIV-positive children with an adult dose of Biktarvy, as well as encouraging early-stage data on a novel HIV drug that can be injected subcutaneously and potentially no more often than every three months. The stock plumbed its December 2018 multi-year lows after this barrage of news that, in a different week, could have allowed the stock to rise. Typically a new CEO of the quality of GILD's new CEO, Daniel O'Day, sees a stock get a honeymoon. Let's see what happens. I doubt that Mr. O'Day would have taken this job if it looked like a ticket to Hades.
Risks: Not Trivial
To be very clear, biotech stocks are a subset of tech stocks. They may be riskier, in that putting chemicals into people is full of surprises. In addition, the insurance aspect of payment is sometimes stranger than fiction. As with any "sexy" sector, stocks can go from extremes of euphoria to the depths of despair. Please be careful with biotech, whether via individual stocks or funds.
Now it's time to sum up.
Biotech: Getting Better All the Time
Biotech is delivering for society on common maladies: e.g.: preventing migraines, clearing up severe skin disease, decreasing the risk of major adverse cardiovascular events, slowing the progression of RA, and putting cancer in remission or on a back burner.
And it's changing the world of rare diseases in so many ways. Just look at SMA with Spinraza, with everything from gene therapy to oral therapy in development. In addition to the ALXN and VRTX breakthroughs, other rare diseases are being treated with increasing effectiveness.
Moving counter to the tide of medical science, last week it was time for profits to be taken following a doubling in biotech stock prices, for short sellers to seize a seeming opportunity, and for some shareholders to begin to worry.
But FDA commissioners always come and then go, typically to make more money. And getting a new drug to market now and then a few months earlier is not what drives alpha for investors. What matters to the stocks are the fundamentals: whether R&D money is spent productively, whether sales and marketing is effective, how global pricing works out, and so on. Guess what? The FDA is not involved in those major aspects of the pharmaceutical business, so long as it communicates clearly and consistently with the companies as they move along their journey of drug discovery and development.
Many biotechs are now trading near or below the P/E of SPY, which is comprised mostly of mature companies that by definition can only grow at the rate of the mature US economy mixed with the uncertain global economy. Yet I see the above examples as suggesting that a number of companies have more attractive price:earnings:growth characteristics than most stocks. The timelines in biotech can wear many investors out, and there are no guarantees about pricing, ROIC, and so on.
Just one man's opinion:
The best is yet to come.
Long biotechs for the long haul.
Thanks for reading and sharing any thoughts on the sector you wish to contribute.
Submitted Sunday night, S&P futures 2,746.
Disclosure: I am/we are long ABBV, ALXN, GILD, REGN, VRTX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.