Adam on Biotech Stocks

The guy banging his head on the desk is Abbvie CEO Richard Gonzalez. Last December, Abbvie was looking super smart for cutting a deal with Express Scripts to become the exclusive provider of hepatitis C drugs for the PBM's national formulary. Just as importantly, Gilead Sciences, Abbvie's biggest hepatitis C competitor, was excluded. 

Today, Gonzalez's strategy appears to have backfired because Gilead is winning way more PBM contracts. The most recent deal was announced today, granting Gilead exclusive rights to WellCare.

Here's how the PBM market share in hepatitis C breaks down to date, compiled by Deutsche Bank. Gilead looks to be the big winner. That Abbvie-Express Scripts deal, just a blip.

Gilead Sciences sneezes and the entire biotech sector catches a cold. 

I know, it's such a cliche but I desperately wanted to use the cute Dumbo gif in this Tumblr post.

Investor concerns about the sustainability of premium drug pricing roared back Wednesday following Gilead's admission last night that it was offering insurance companies, private and public, deep discounts of up to 46% for its hepatitis C drugs Sovaldi and Harvoni.

If Gilead is giving away big Hep C price cuts, so too is its major competitor Abbvie. And the competition will only intensify when Merck and Bristol-Myers Squibb secure approvals for their respective Hep C therapies. 

Meantime, the pool of hepatitis C patients available to treat is shrinking fast, which makes it tougher for laggards like Achillion Pharma and Regulus Therapeutics to grab a meaningful piece of the revenue pie. 

All the Hep C stocks are down sharply Wednesday, which in turn is causing weakness in the Nasdaq Biotechnology Index and related ETFs. Pharmacy benefit managers like Express Scripts have said they're looking at other disease areas -- multiple sclerosis, rheumatoid arthritis and cancer, among them, to win new and larger drug price discounts.

Biotech stocks are over-valued! Drug prices are not sustainable! Investors won't digest more IPOs! The biotech bubble is about to POP! Nationwide Insurance killed a cute kid during the Super Bowl!!!

You've heard these concerns and more but one month into 2015, investors continue to climb the wall of worry, pushing the major biotech stock indices higher and higher.

Here's where we stand with January trading under our belts.

Biotech stocks are outperforming the broader market by a healthy margin, just like they did in 2014. [If you're wondering, the XBI and NBI were up 15% and 8% in January 2014, respectively.]

Here's a snapshot of what's buzzing in biotech:

1. Gene therapy is super-hot. Spark Therapeutics priced its IPO on Friday at $23 per share, opened at $45 and closed at $50. Spark is developing one-time treatments for genetic diseases. The company's lead program is in a late-stage study for a rare form of blindness. 

Bluebird Bio remains the most talked about and best-performing gene therapy stock (even if the $2.7 billion valuation is cited as evidence of an over-heated biotech sector) but there isn't a laggard in the bunch over the past three months, with the possible exception of Avalanche Biotechnologies. 

Pay close attention to the gene therapy stocks, including newly IPO's Spark, for the rest of 2015. 

2. Hepatitis C drug marketing battle rages on. Abbvie shares were weak Friday on lower-than-expected sales guidance for Viekira Pak. The company said it expects sales of the hepatitis C therapy to achieve an "exit rate" of $3 billion by the end of 2015. Enanta Pharmaceuticals shares fell Friday in sympathy. Enanta receives a royalty from Abbvie based on Viekira Pak sales. 

Gilead Sciences reports fourth quarter and 2014 earnings on Tuesday after the close. 

Here's how the three big Hep C stocks have performed since Abbvie secured Viekira Pak approval on Dec. 19:

3. Big-cap biotech performance: Biogen Idec staged a fourth-quarter earnings relief rally Friday to gain the top spot. Investors had been worried that Biogen's multiple sclerosis pill Tecfidera might under-perform in the fourth quarter, but the company pulled out better-than-expected sales. Celgene, Alexion Pharma and Amgen all reported fourth-quarter earnings and 2015 guidance basically in-line with expectations.

In the past two days, biotech companies have raised more than $2.5 billion in follow-on equity and debt financings.

The two largest deals: Wednesday night, Biomarin Pharmaceuticals sold 8.5 million shares at $93.25, grossing $793 million. Tuesday, Alnylam Pharmaceuticals sold 4.7 million shares at $95, raising $450 million. 

Remember when the arrival of a competing hepatitis C therapy and price war was going to put the big hurt on Gilead Sciences' stock price?

I guess not. 

Sure, it's a bit early to draw any real conclusions, but I bet few expected Gilead to be significantly outperforming Hep C rivals Abbvie and Enanta Pharma at this stage.

Abbvie may have drawn first blood with its Express Scripts exclusivity deal, but Gilead struck back with CVS Health and Anthem.

Let's play. 

I published my 2015 biotech stock predictions today, including a couple of M&A gems: Gilead Sciences will buy Bristol-Myers Squibb. Pfizer will acquire Biogen Idec -- and move its corporate headquarters to the center of the biotech universe in Cambridge, Mass! 

If I'm right, you can all buy me a beer. I prefer double IPAs.*

It's really difficult to predict M&A activity but that doesn't stop anyone from trying. As a biotech investor, there's nothing more thrilling than waking up one morning to find a stock in your portfolio has just been acquired for a 50% premium. 

In 2014, the total value of M&A deals in healthcare (public and private companies) reached a record $86 billion. Eighty-nine deals were completed in 2014, the second highest total in the past 15 years, according to figures compiled by BioCentury. 

Will M&A deal flow continue higher in 2015? "Inversion" type acquisitions motivated by the desire to leverage lower tax rates overseas seem to be off the table, but that might lead Big Pharma to look again at buying smaller companies based on science and strong drug pipelines. {Hence, my Pfizer-Biogen prediction.]

Shire has $1.6 billion in cash from Abbvie following the aborted merger last year, leading to much speculation that the company will go on a shopping spree in 2015. NPS Pharma, a potential Shire target, hired Goldman Sachs to help sell the company, the Wall Street Journal reported Monday.

Large-cap biotech companies are sitting on mountains of cash in their balance sheets, which needs to be deployed somehow. Share buybacks are popular in biotech as a means to boost shareholder returns (dividends are not) but I also expect to see a lot of that cash used for M&A deal making. 

On Tuesday, Gilead acquired a liver disease program from a privately held German company. While this deal was relatively small, it does bolster the consensus buyside investor view that Gilead will be an active acquirer of assets in 2015. 

J.P. Morgan offered some thoughts on "hot" therapeutic areas for 2015 M&A activity in its biotech sector outlook reported published yesterday:

It’s raining money in biotech tonight! 

Cempra: $100 million offering.

Five Prime Therapeutics: $75 million offering.

Cerus: Selling undisclosed amount of stock. 

Avalanche Biotechnologies: A stock offering likely to raise about $100 million.

Synageva Biopharma: A stock offering likely to raise about $250 million.

Karyopharm Therapeutics: A stock offering likely to raise about $106 million.

 Challenges and opportunities in drug and biomarker development for nonalcoholic steatohepatitis: Findings and recommendations from an American Association for the Study of Liver Diseases (AASLD) - Food and Drug Administration (FDA) joint workshop

Intercept Pharmaceuticals is up 10% Monday because FDA appears copacetic with the company's proposal to use a surrogate efficacy endpoint in the planned pivotal phase III study of its NASH drug OCA.

Baird analyst Brian Skorney comments:

We think this reflects a very favorable assertion from an article co-authored by an FDA clinical reviewer. We believe the FLINT study demonstrated that OCA can effectively hit this endpoint in a large Phase 3 study...

We think we could see Intercept's announcement of a Phase 3 program in the near future and believe an FDA sign-off to move forward with a study that could support accelerated approval based on biopsy will be a major derisking event for the stock here.

Biotech investors are an optimistic lot, so in a raging bull market like the one the sector's been living through for the past two-plus years, talk of valuation bloat recedes into the distance.

I don't have a crystal ball clear enough to forecast the direction of biotech stocks in 2015, but this year isn't ending on a high note, thanks to Express Scripts and its war against ever-escalating drug prices. (Or, maybe the villains are biotech companies who believed they could slap sky-high prices on their drugs without consequence.)

Whoever is to blame, the reality of reined-in (lower) drug pricing represents the greatest threat to the continued biotech bull market. 

On that note, I compiled a list of the most expensive, development-stage biotech and drug companies, ranked by market cap. Development stage means no drugs approved, no meaningful revenue, and of course, no income. 

The valuation of these stocks bake in A LOT of future success. They might also be at the most risk if investors turn sour on the biotech sector in 2015.

1. Alnylam Pharmaceuticals: $7.9 billion

2. Isis Pharmaceuticals: $7.4 billion [Isis has a drug approved but has never reported sales.]

3. Agios Pharmaceuticals $4.4 billion

4. Opko Health $4.3 billion

5. Receptos $4.2 billion

6. Intercept Pharma $3.3 billion

7. Acadia Pharma $3.2 billion

8. Synageva BioPharma $3.2 billion

9. Bluebird Bio $2.8 billion

10. Intrexon $2.7 billion

Juno Therapeutics, the hottest biotech IPO of the year, priced this morning at $24 per share and is now up more than 60% in early trading. 

Pharmacy benefits manager CVS Health issued a report Thursday on the commercial launch of Gilead Sciences' new hepatitis C therapy Harvoni. 

Blast off! 

The introduction of highly effective, well-tolerated and convenient all-oral therapies like Sovaldi has significantly increased the number of hepatitis C patients seeking treatment (and cures.) This is great for public health, fantastic for Gilead's bottom line, but not so welcome by PBMs like CVS and Express Scripts in the business of "managing" healthcare spending (otherwise known as doing all they can do keep spending in check. 

The CVS report outlines four ways in which it will try to "manage the costs" of new hepatitis C therapies: 

1. CVS/Caremark will use prior authorization.

2. Evaluate severity of illness to determine when to begin treatment.

3. Thoughtful formulary placement. (Translation: Pit competing Hep C drug companies against each other and hopefully starting a price war.) From the report:

There will likely be a new product available in the marketplace shortly, manufactured by AbbVie. The new product has been shown to have similar efficacy to the therapies currently available. Additional products will likely reach the market in the next 24 to 26 months. Consistent with its past practices, CVS/caremark will pursue an aggressive strategy to negotiate with manufacturers and use both formulary step edits and/or formulary product exclusions to control costs for patients and payers.

4. Provide adherence support to help patients complete therapy.

An important near-term event for Orexigen Therapeutics occurs on Dec. 19 when the European Medicine Agency announces the approval recommendations from the monthly meeting of the Committee for Medicinal Products for Human Use (CHMP).  

Orexigen's Mysimba (the European brand name for the weight-loss pill Contrave) is on the December CHMP agenda. If CHMP recommends Mysimba's approval, Orexigen will have a significant advantage over weight-loss pill competitors Arena Pharmaceuticals and Vivus, both of which have been rejected by European regulators.

Tuesday, I polled biotech investors on Twitter to gauge sentiment for the upcoming Mysimba European approval decision. The results are posted in the chart above:

72% of respondents believe Orexigen will secure European approval for its weight-loss pill. 28% believe Mysimba will be rejected in Europe. (I voted in the approval camp.)

The hepatitis C marketing battle between Gilead Sciences and Abbvie will be a huge investment story line for the healthcare sector in 2015.

By the end of the week (perhaps Monday), the FDA is widely expected to approve Abbvie's hepatitis C treatment regimen -- Viekirax and Exviera. Once launched, this combination therapy will compete against Gilead Sciences' already-approved Harvoni. 

Viekirax/Exviera vs. Harvoni. Hep C drugs, not Pokemon. Got it?

Here's the tale of the tape:

Gliead's Harvoni: Two drugs combined into a single pill swallowed once per day. Very convenient. Highly effective with hepatitis C cure rates exceeding 95% for almost all patients. Price: $63,000 to $94,500 for an 8-week and 12-week course of therapy, respectively. That works out to price $1,125 per pill per day.

Abbvie's Viekirax/Exviera: Three drugs (plus a blood level booster) combined into six pills. Patients take 4 pills in the morning and 2 pills at night, so not as convenient. Highly effective with hepatitis C cure rates exceeding 95% for almost all patients. Price: ??? A burning question.

Current investor expectations have Abbvie setting the list price of Viekirax/Exviera essentially on par with, or just slightly below, Harvoni. Behind the scenes, however, Abbvie is also expected to offer larger discounts/rebates to insurance companies in order to win market share. How much is hard to pinpoint, but some analysts believe the net price of Viekirax/Exviera could be 10-20% below Harvoni. 

Insurance companies and pharmacy benefit managers like Express Scripts have made a big stink about their inability to pay for the crush of hepatitis C patients seeking cures. Next year, investors will be paying close attention to see if payers restrict use of Viekirax/Exviera and Harvoni and/or demand bigger discounts to keep the drugs on formulary.

This week, Wall Street goes ga-ga for cancer immunotherapy.

Bellicum Pharmaceuticals and Juno Therapeutics are expected to raise more than $300 million combined through their respective initial public offering. Both companies are developing so-called CAR-T therapies, which use re-engineered immune cells to seek out and kill blood cancer cells. Early clinical trials involving this new form of cancer immunotherapy have delivered amazing results and generated huge investor interest.

Bellicum is up first on Thursday, expected to offer 6.3 million shares priced between $15-17 with another nearly 1 million shares set aside for over allotments. Nasdaq ticker BLCM. 

Juno's market debut follows on Friday and is probably the most highly anticipated biotech IPO of the year. The company is expected offer 9.3 million shares priced between $15-18. Underwriters have an option to sell another 1.4 million shares. Ticker: JUNO.

CAR-T therapies are personalized for each patient. The process starts by harvesting T cells from the patient's blood. In a lab, scientists add a chimeric antigen receptor (CAR) to the surface of the T cells. This receptor allows the T cells to recognize a protein known as CD19 found on the most leukemic cells. The T cells are also programmed to multiply once attached to the CD19 protein. Once this engineering work is done, the T cells are infused back into the patient where they seek out and destroy leukemic cells. 

CAR-T is not without risks. All the patients who respond suffer from severe flu-like symptoms resulting from the engineered T cells attacking leukemic cells. In some cases, the side effects are life threatening unless managed carefully.

A CAR-T therapy being developed by the University of Pennsylvania and Novartis has put 90% of children with an aggressive form of leukemia into remission, according to interim results from a clinical trial presented last week.

Other CAR-T companies include Kite Therapeutics  and a joint venture between Celgene and Bluebird Bio.

Investor demand for shares in the Bellicum and Juno IPOs is expected to be heavy, setting the stage for big first-day gains.

A Twitter poll conducted last week by healthcare investor Brad Loncar (@bradloncar) asked where will Juno shares open on their first day of trading.

Here comes Orexigen Therapeutics, winning big-time market share from obesity pill rivals Vivus and Arena Pharmaceuticals.

The chart and graph above were tweeted out this morning by professional money manager @zbiotech, who tracks new prescriptions of obesity pills using data generated by Symphony Health. 

For the week ended Dec. 5 (the last week of data available), Orexigen's Contrave captured 28% of new prescriptions. Contrave's been commercially available for eight weeks and already had market share for new prescriptions equal to Vivus' Qsymia.

In that same time span, NRx market share for Arena Pharma's Belviq has dropped from 60% to 44%. 

Why is Orexigen's Contrave launch outperforming its obesity pill rivals? Give substantial credit to Orexigen's marketing partner, the Japanese drug maker Takeda:

Selling weight-loss pills to fat Americans is clearly more difficult than Vivus and Arena envisioned. Orexigen will face the same challenges, but of the three companies, it has the best marketing partner in Takeda because of its metabolic drug expertise. Takeda's diabetes drug Actos is a blockbuster, so expect the company to apply that know-how to selling Contrave. If approved, Takeda is going to launch Contrave with 900 sales reps, which is way more than Vivus and Eisai (Arena's marketing partner) deploy.   Orexigen also has the advantage of having the only obesity drug with clinical trial data ruling out an increased risk of heart-related side effects. Interim, top-line results from the Contrave "LIGHT" cardiovascular safety study were announced last fall. Data from the heart-safety study are unlikely to be included in the Contrave FDA label just yet in order to allow the study to continue to the end. Still, Takeda sales reps might just find a way to make sure doctors know that the interim analysis of the LIGHT study was positive.

Investors are taking notice. 

An interesting side note from Monday's $840 million acquisition of Prosensa by BioMarin Pharmaceuticals: GlaxoSmithKline gave up rights to Prosensa's lead rare disease drug drisapersen in January 2014 because of negative results from a phase III study. 

A lot of people (I'll throw myself in this group) believed Glaxo's exit meant drisapersen was dead, and you could have bought Prosensa shares for around $5 at the time. Today, BioMarin is buying those same shares for $17.75 with another $4 per share in potential payouts possible.

In November 2013, Glaxo also gave up on a partnership with Amicus Therapeutics to co-develop the rare disease drug migalastat. Glaxo's exit caused Amicus shares to sink to around $2 per share. 

A year later, migalastat is very much alive and well, heading towards a likely approval in Europe. Amicus shares are trading around $7.50.

Bad decisions by Glaxo have provided wonderful buying opportunities for savvy, risk-taking biotech investors. 

Here's one more example: Celldex Therapeutics has been flying high on the positive outlook for its brain tumor drug rindopepimut. Pfizer had rights to the drug but returned it to Celldex in 2010.