by Hilary Kramer | January 24, 2014 11:29 am
As a group, biotech companies were among the best performers in what was a stellar year for US stocks: The group was up 66%, outpacing the broader market by a staggering 3600 basis points. Behind that marquee performance, it was imperative to look at names that had the best therapies for the most onerous diseases.
Perhaps more than any other group, biotechs rise and fall on headlines, so for every whisper of FDA approval for new drugs, there’s the specter of rejection after years and billions of dollars are spent in development. For every rumored richly-valued takeout by a large cap pharmaceutical looking to beef up its product pipeline, there’s the chance that clinical trials can fail early and spectacularly before therapies even make it to regulatory hearings.
That’s why you see biotechs move double and even triple digit percentages in a day on good news, or plummet by as much as 50% or more on bad. This year undoubtedly will be a stock picker’s market, and especially so in biotech.
With that said, I want to give you some food for thought in the form of three companies that should be on your radar as buys, and one to sell.
With a $70 billion market capitalization, Celgene (CELG) hardly flies under the radar of most investors. The stock more than doubled in 2013. Thus far this year the shares are up another 3%. But even at a recent price of $168 a share, there could be a bit more gas in the engine, depending on the clinical trial results of drugs that lie beyond the company’s current focus on blood and oncology.
Celgene differs from many of its smaller biotech peers in that the company has the requisite double digit growth in its top line matched by an almost as rapid rise in its net earnings. Earlier this month the company said 2013 results would come in better than expectations, with revenues of $6.4 billion versus previous guidance of $6.2 billion. And though 2014 projections were under the Street’s consensus at the net income level – at $7 to $7.20 a share versus the Street at $7.26 a share, hit by continued launch of one of its drugs in Europe, investors should focus on the longer term horizon, where company management has forecasted that revenues can top $17 billion by 2017 and earnings are projected to come in at $15 a share. That’s a heady growth rate, more than doubling off of 2014’s levels.
Major contributors to revenues at present include Revlimid, at just over $4 billion of sales. Revlimid is used to treat multiple myeloma (MM), a blood cancer, and specifically “relapsed” multiple myeloma. The company’s Revlimid sales are about two thirds of the total market of drugs currently used to treat multiple myeloma. Interestingly, patents for this drug do not expire until 2027, which means that this revenue stream is relatively safe for the next several years.
Another drug, Thalomid, also is used to treat MM, while Pomalyst, which is used in the event that patients are unable to take the other two based on adverse effects (there is some inherent toxicity in those first two drugs), could top more than $1 billion in sales by 2017, according to some analysts. Pomalyst has received both US FDA approval and European regulatory approval.
Another drug, Abraxane, treats breast cancer, non-small cell lung cancer, and last year was approved in the US to treat patients with pancreatic cancer. Abraxane, which slows the growth of certain tumor types, also has gained a positive opinion from European reviewing agencies, likely paving the way for its approval to be marketed and used in Europe. Analysts expect the company’s sales of Abraxane to grow from roughly $650 million to more than $2 billion by 2017. These three drugs make up the backbone of the company’s portfolio, and Celgene also has Otezla, designed to combat psoriatic arthritis and psoriasis, in clinical trials. If approved by the FDA this year, an additional $1 billion of sales could accrue to Celgene, according to some industry analysts.
Of course, a lot of puzzle pieces must fall into place between now and 2017 for Celgene’s projections to come through. The flagship Revlimid is being positioned as a second line of defense and treatment for chronic lympgocytic lymphoma, and is under a phase 3 clinical trial. The company also wants to expand Revlimid’s revenues by gaining approval as a treatment for “newly” diagnosed cases of multiple myeloma. This year there will also likely be phase 3 trials for Abraxane to be used against a particular form of pancreatic cancer and also as a “first line treatment” for late-stage squamous cell non-small cell lung cancer.
As the company moves toward achieving its targets, and possibly even surpassing them, I suspect that shares will rebound – and by moving to a multiple in line with the average yearly growth rate, in the mid 20% range, we could see a $200 stock, or more, within a year or two.
I’ve long been a fan of Regeneron (REGN), and have recommended it in recent years to my own investment newsletter subscribers. The company’s shares have risen by roughly 70% in the past year, besting the market and pacing the 66% rise in 2013 for the biotech sector. At a recent $290 a share, REGN should outperform the market in the near term, rising double digits to the mid $300 level.
Key to the company’s near term success is the continued growth of its signature Eylea, a drug used to treat two eye diseases: “wet” age-related macular degeneration and a form of macular edema. At about two thirds of the company’s revenues, Eylea has been growing at more than 60% annually. Earlier this month, Regeneron said Eylea, which was co-developed with drug industry behemoth Bayer, logged fourth quarter sales of about $400 million, better than consensus estimates. Regeneron and Bayer also said in mid-January that they are working together on a new macular degeneration treatment that will be used in tandem with Eylea. Bayer will pay REGN $25 million upfront, with another $40 million coming upon certain milestones, and the companies will share development costs.
In addition to Eylea, the company has been actively developing human antibodies, which includes alirocumab, designed to combat “bad” cholesterol, and which has shown efficacy in Phase III trials. That efficacy shows the Regeneron drug is better than statins and alternatives (including the giant in the space, Lipitor) at blocking cholesterol formation. That’s a pretty impressive $6 billion market opportunity, and an FDA decision is likely early next year after clinical trial results will be hitting the headlines through 2014. Looking out beyond 2014 the company could earn as much as $10 a share in a few years and shares could touch into the mid $300 range.
Alexion Pharmaceuticals (ALXN) has been a recent recommendation of mine, and though the company only has a single drug on the market at present, it occupies a strong and defensible niche. That drug, Soliris, is used to treat PNH, a blood disorder, and aHUS, a genetic disease. Rare though they may be (affecting only a few dozens of thousands of people globally), these syndromes are life threatening, and Soliris is the only drug (with orphan status, which means it targets small patient populations) on the market. That means the company has been able to log annual sales of more than $1.5 billion.
The company has been rapidly moving beyond its current markets to find new indications for Soliris. In January, European regulatory authorizes approved the drug for use as a treatment for kidney transplant complications. And in late January, the FDA granted orphan status to the drug for treatment of complications in renal transplant patients.
The expanded indications are indeed encouraging, but it should be noted that ALXN is also looking for new drug candidates to flesh out its portfolio beyond its current drug. ALXN has secured options to buy nearly a dozen novel biotech discovery candidates. Company management has been sanguine about this drug development pipeline, and has projected that it can get as many as half a dozen new drug programs to the FDA over the next few years.
And in the meantime, the days of heady Soliris growth are far from over, as management re-confirmed October guidance 2013 for 36% revenue and 41% earnings growth. Looking ahead to the current year the company could see nearly 30% sales growth coupled with double digit earnings growth, and given the number of new indications that are on the table for Soliris, even those rates may prove conservative. Look for the stock to move up on new indications and even a buyout rumor, which tends to swirl around single drug companies as larger pharma players prefer to “buy rather than build” pipelines.
Though the biotech sector is rife with promise, and sky high stock prices, based on novel therapies and vaccines, there is also the specter of a tough reimbursement landscape for some drugs. And for some companies there is also controversy surrounding reimbursement as well.
Given the huge price tags of some of drugs and treatments currently on the market, it makes sense that public health and industry forces have been trying to push drug prices down to benefit patients. That means revenue and margin pressure, and headline pressures, for some biotechs, including Questcor Pharmaceuticals (QCOR).
Questcor’s drug is the hormone gel known as Acthar, which costs drug companies nearly $30,000 for a five injection vial. Acthar, which has been around for decades, was originally slated to treat pediatric seizures. But the drug is now much more prevalent as a treatment for multiple sclerosis and other immune disorders that have proven to be resistant to cortisone.
At the same time the company was able to expand the indications for its drug, so too was Questcor able to raise the price of Acthar – by several thousand percent, from roughly $40 per vial to the current $28,000.
In recent months the company has come under scrutiny as its billing practices have enabled Questcor to charge high levels for Acthar while at the same time “helping” patients afford the therapy. It works this way: QCOR pays rebates to state and federal governments for every injection that participants in Medicare, Medicaid and other programs receive.
Certainly the “expanded” treatment uses beyond the original pediatric patients gives QCOR growth, assisted in part by federal health care programs. It’s estimated that some 30% of QCOR’s sales (especially for treatment of multiple sclerosis) come from patients enrolled in Medicare.
But ongoing shifts in health care spending, especially under the Affordable Care Act, means that QCOR’s high prices and margins are likely temporary. Even with new legislation in place, thousands of dollars in deductibles need to be paid before patients start to see their drug benefits kick in – and even then they could be on the hook for 30-40% of the Acthar price tag, depending on the plan’s policies under ObamaCare.
QCOR has been a heavy contributor to medical charities that “fund the gap” between the money a patient lays out for a novel drug and what the insurance plan doles out. There’s been recent scrutiny over these charities, funded in part by the very companies they benefit, due to concerns over conflicts of interest.
In fact the Chronic Disease Fund, among the biggest of these charities, has been pulling back on writing grants that might be perceived as favoring a particular company’s drugs. That could be bad news for QCOR, which has in the past helped fund the Chronic Disease Fund, and which has benefitted from the charity as well. There are no other “competing drugs” that challenge Acthar in its expanded markets, so it’s possible that the Chronic Disease Fund could pull its beneficial relationship with Acthar precisely because there is nothing out there representing a choice.
But competing therapies are indeed on the horizon, which is a catch 22 of sorts for QCOR. Novartis is selling a competing drug in Europe, which retails for about $1,000 per treatment course. QCOR is familiar with the Novartis drug, having offered to pay $135 million last June. The transaction would be able to bring the Novartis drug to US shores, opening up competition in the market and presumably letting the Chronic Disease Fund point to an “alternative” therapy that would continue to allow spending on Acthar.
Either way, QCOR looks likely to face pricing pressure from the health care systems, or a dwindling “charity” lifeline that has helped keep 50% sales growth and 90% growth margins aloft. Or it’s possible that the FTC rejects its proposed push with the Novartis drug. That means shares could come down to the low $30 levels seen before the deal was announced.
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