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Biotech’s Coming Reversal



February 12, 2016 – Comments (1) | RELATED TICKERS: IBB , SGYP , DVAX

It’s a tough time to be a biotech long. The iShares Nasdaq Biotechnology (IBB) is down close to 40% on 2015 highs. The SPDR S&P Biotech ETF (XBI) is down 50% across the same period. Big pharma and development stage companies alike are all feeling the heat from a wider market shift in sentiment, and a political focus on drug price reform is stoking the flames. Are we nearing a bottom, and if so, which companies stand out as top value picks? And what’s going to change that will shift general sentiment and stem the current outflow of capital from the biotech sector?

In order to answer the first question, we need to ascertain whether the 2016 selloff is a longer term reversal, or just a correction on the gains we’ve seen over the last half decade. Across the period, biotech has been a very easy space to make money in. Just buying the ETFs and holding would have brought in triple digit returns. For the big pharma picker, household names like Gilead Sciences Inc. (GILD) gained 450% across the same period. For the more risk tolerant, scores of development stage companies with little to no revenues mirrored capitalization gains of their incumbent counterparts.

Now, things are different.

There are still some value picks out there, but selectivity is key. Clinical stage biotechs are an especially risky allocation, but the right exposure could be a smart move for two reasons.

First, there is a lot of capital looking for a home at the moment, and a junior biotech that brings good data to the table in a large-market indication could quickly attract that free capital.

Second, we’re heading towards what looks to be a prime M&A environment. It’s earnings season, and a host of big pharma operations have billions of dollars on their balance sheets. Couple this with the spectrum of junior biotech with late stage trials that are currently trading at 40-50% discounts to their price this time last year, and that we will see a flurry of acquisitions looks probable.

There are some great fits out there, available at equally great discounts.

Synergy Pharmaceuticals, Inc. (SGYP), a $400M company just filed an NDA for its GI tract candidate, plecanatide. The drug would fit neatly into AstraZeneca PLC’s (AZN) GI tract portfolio, which includes Movantik. Movantik is the drug that the company just spent millions beaming into US households during the Super Bowl and that analysts expect to generate $2 billion annually by next year. Even if it paid a steep 40% premium to current market price, AstraZeneca could pick up Synergy at half its June 2015 price.

Another one is Dynavax Technologies Corporation (DVAX). Dynavax just released pivotal data for its lead hepatitis B candidate, which demonstrated a statistically significant improvement in efficacy over a current standard of care, GlaxoSmithKline (GSK) Engerix B. The company is set to submit a BLA before the end of March, and with a six-month review, could pick up an FDA green light before the final quarter of the year. GlaxoSmithKline could acquire Dynavax for a little over 41% cheaper than last September, and the company could simultaneously bolster its own hep B portfolio, which generates in excess of $1 billion annually, while eliminating the competition that Dynavax would pose to its lead drug Engerix-B. 

So while biotech is down, there remain plenty of late stage trials and pending FDA reviews that have the potential to fuel a turnaround. As pivotal data rolls in and the agency reports on its 2016 reviews, small cap biotech will garner attention and could draw currently freed up capital. Big pharma will want to pick up these assets at the lowest possible price, and once global markets calm down over oil Armageddon, the pressure could come off biotech fairly quickly.



1 Comments – Post Your Own

#1) On February 14, 2016 at 12:37 AM, BlueCollarTrade (47.46) wrote:

One of the headwinds for Pharma is the 2016 presidential election. Until this is settled, I think that the explosive upside for the IBB is capped.   The smug Pharma Boy Martin Shreki is unfortunately the face of Drug Pricing, bring the market a seedy image.   

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