Stockwatch: Market Turmoil Exposes Weak Fundamentals
This article was originally published in Scrip
The one good aspect of being away on holiday during last week's stock market turmoil was that I had the perspective of an observer of the frantic selling and buying action. However, the selling action actually started the week before last and there were more warning signs from life science companies, even during the mid-week recovery, which suggested that there may be more weakness to come.
The two down-days for publically-quoted life science companies that preceded my holiday were followed by analyses from market commentators bemoaning the lack of liquidity in the market. Liquidity in this case is the virtual absence of buyers, and therefore mismatch in buyers and sellers. Indeed, in answer to a question 'Why are the stock markets going down?' in 2001, my first managing director replied, "More sellers than buyers." In the build-up to the last week's share price falls that were supposedly in sympathy with those in China, the absence of buyers can be seen in retrospect as analogous to the drastically receding seas just before a tsunami.
And sure enough, the stock market tsunami hit last Monday with the gene therapy, CAR-T and other newly IPO'd companies suffering the most as the flight away from risk turned into the mass boarding of fleets of Airbus A380s. However, in many ways the bad news coming out from biotech and pharma companies was overlooked in the midst of either market turmoil, or well-orchestrated distraction.
As the analysts from Citigroup put it last Monday, "In addition to the general market sell-off," Novo Nordisk A/S announced the disappointing Phase III (ADJUNCT ONE) trial failure of its GLP-1 receptor agonist Victoza (liraglutide) in Type I diabetic (T1D) patients, and that it will not now file for an expansion to Victoza's label in T1D patients. Whilst a smaller market than Type II diabetes, clinically significant activity in T1D patients would have meant a lot financially to the company. This is because T1D patients are usually diagnosed early in life and would therefore have many years of dosing ahead of them. Furthermore, positive results would have almost certainly catalyzed off-label use in T1D patients as Victoza is already on the market and diabetologists are comfortable with its prescribing. Nevertheless, the analysts from JP Morgan wrote that there was "no effect" on their forecasts because despite being in Phase III, they had not included any sales for Victoza in T1D patients in their valuation.
This stance appears strange since there are hundreds of biotech companies who are many years away from entering Phase III and yet their valuations by analysts are almost totally dependent on products in much earlier stages of development. Then when Novo announced recently that it was moving the oral version of its glucagon-like peptide-1 (GLP-1) analog semaglutide into Phase III in conjunction with a bullish announcement on a $2bn manufacturing capacity investment, the analysts from JP Morgan decided to include oral semaglutide sales of $2.5bn by 2025 (risk-adjusted by 50%) in their valuation of Novo. However, more pensively, the analysts from Leerink Partners suggested that at a price to earnings multiple of 27, "Novo just doesn't stand out," and that there was "No need to be a hero," and invest at that sort of multiple.
Against this inclusion or exclusion of future sales to support Novo's valuation, we are still in the long tail of second-quarter earnings season where the reporting of last quarter's sales also seem not to justify the valuations of the companies involved. Thrombogenics NV is rapidly becoming the poster child for biotech companies whose approved and launched products have translated into a perpetual loss-making proposition. Half-year sales of Jetrea (ocriplasmin) for vitreomacular adhesion – which was launched in the US in 2013 – were a pitiful €4.25m; not just well below JP Morgan's forecast, but now in retreat from the €5.0m reported at the end of the previous six months. Also making losses after having the world's first gene therapy medicine, Glybera (alipogene tiparvovec) approved outside China since 2012, was uniQure NV who is yet to report any sales by, or royalties from, commercial partner Chiesi Farmaceutici SpA. As the analysts from Piper Jaffray pointed out, "No additional color was provided on the European launch of Glybera." uniQure was dealt a further blow last week when it reported the FDA's request for two new well-controlled Phase III studies of Glybera to support its US approval. Rather than including the contentious study that supported the European approval which, after six years of follow-up, has still not engendered in any sales, the FDA declined to include the study as one of the pivotals in the BLA. While the analysts from Piper Jaffray reported both negative events and those from Leerink Partners "removed the US opportunity for Glybera and lowered EU numbers on the product," the analysts from Jefferies still stubbornly included just under €10m of European Glybera sales in their forecasts for 2015 and relegated the FDA's new requirements to a table that listed only one 12-patient trial starting in mid-2016 as the basis for Glybera's US approval.
No one expects the recent stock market volatility to decline and with so many companies coming to the market in the last few years and with many from previous windows having products recently approved, the expectations for success are high. In reality, failure rates are also high and blockbuster products are rare. Worryingly, there is plenty of room for more life science-specific weakness and valuations look likely to come down further as a result.
Andy Smith is chief investment officer of Mann Bioinvest. Mann Bioinvest is the investment adviser for the Magna BioPharma Income fund which has no position in the stocks mentioned, unless stated above. Dr Smith gives an investment fund manager's view on public life science companies. He has been lead fund manager for four life science–specific funds, including International Biotechnology Trust and the AXA Framlington Biotech Fund, and was awarded the Technology Fund Manager of the year for 2007.