Biotech Investors Bow Out After Approvals on Sales Hurdles
When Human Genome Sciences Inc.’s lupus drug, Benlysta, won regulatory approval in March as the first treatment for the disease in more than 50 years, the company estimated the product may be worth $2.5 billion a year.
Since then, the Rockville, Maryland-based company’s stock has plunged 47 percent in Nasdaq Stock Market trading. The drop mirrors declines for other biotechnology companies with drug approvals the last two years and spotlights a trend that may slow the pace of acquisitions and decrease returns for potential buyers, analysts and industry officials said.
“The bull thesis a couple of years ago was that these stocks are going up before approval, and will go up after approval,” said Eric Schmidt, a New York-based analyst with Cowen & Co., in telephone interview. Now, “most stocks are down 20, 30, 40, and in some cases, 50 percent or more since their drugs were approved.”
The shares of Seattle-based Dendreon Corp. (DNDN); Savient Pharmaceuticals Inc. of East Brunswick, New Jersey; and Cambridge, Massachusetts-based Vertex Pharmaceuticals Inc. (VRTX) all fell this year after their products were approved for sale.
The decline is driven by the idea that new biotechnology products are so expensive and complex it can take years for sales to grow as insurers and the U.S. government seek to cut medical costs and regulators tighten safety checks, said Michael Yee of RBC Capital Markets.
‘Hurdles’ at the Start
Investors increasingly “fear the risks of commercial disappointment,” Yee, RBC’s director of biotechnology equity research in San Francisco, said in a telephone interview. “That’s a reflection of underappreciated commercial logistical issues with the launch, as well reimbursement hurdles at the start, and physician comfort in the first few months.”
The U.S. Food and Drug Administration increased scrutiny of potential safety hazards after criticism from consumer groups and Congress for taking years to identify heart risks tied to drugs such as Merck & Co.’s painkiller Vioxx and GlaxoSmithKline Plc (GSK)’s diabetes pill Avandia.
In many cases, that has led to an insistence on so-called risk management studies that continue for years after the product is approved, and watch for dangerous side effects that may arise as the drug is used by more and more people. When Human Genome’s Benlysta was approved, the FDA mandated further safety studies be done.
“Almost any drug that comes to market has its own particular challenges,” said Ron Cohen, chief executive officer of Hawthorne, New York-based Acorda Therapeutics Inc. (ACOR), in a telephone interview. Acorda’s stock has fallen 28 percent since Jan. 22, 2010, when its pill to improve walking in multiple sclerosis patients was cleared in the U.S. “Just getting approval, and even reimbursement, is not necessarily sufficient anymore to guarantee the drug will be a major success.”
After hitting the market in March, sales of Acorda’s Ampyra reached $133.1 million in 2010 and the company has estimated 2011 revenue could reach $205 million to $230 million. European regulators approved the drug on May 20.
Dendreon’s prostate-cancer drug Provenge was approved by U.S. regulators in April 2010, and the company estimated 2011 sales might reach as high as $400 million. When doctors didn’t prescribe the medicine as quickly as expected, Dendreon was forced to withdraw its revenue estimate in August, and this month said it would cut 25 percent of its workforce. Shares have declined 74 percent on the Nasdaq this year.
“There has been a half a dozen biotech launches that have disappointed,” said Christopher Raymond, an analyst at Robert W. Baird in Chicago, in a telephone interview. “People had unrealistic expectations. It’s not that the launch is going necessarily bad, but the companies have done worse than people had hoped.”
The high prices for biotechnology drugs also are slowing acceptance. Human Genome’s Benlysta for lupus patients with moderate to severe systemic disease will cost about $35,000 a year, David Southwell, the company’s chief financial officer, said at a Sept. 15 investor conference.
The treatment is bought by doctors ahead of time, then given intravenously to patients in medical offices or at centers and hospitals. The procedure means “there’s a bit of a gap between the actual agreement to reimburse the drug and the perception of the rheumatologists that they will get paid,” Southwell said.
As a result, a physician with 100 lupus patients may prescribe the drug to only a few initially to see how the reimbursement process works, then expand from there, he said.
For these reasons, “first-year guidance is very, very difficult to give, there’s huge variability around it,” Southwell said.
One result of the shift is that major pharmaceutical companies that traditionally scooped up biotechs before they gained approval for an experimental drug are now delaying bids until a product is approved and the shares have fallen, said NPS Pharmaceuticals Inc. (NPSP) Chief Executive Officer Francois Nader.
“It’s a buyer’s market,” said Nader, whose Bedminster, New Jersey-based company is developing a therapy for short bowel syndrome. “The trend we have seen recently is big pharma stepping in only after a drug is approved, rather than when it is in the regulatory review process” as in the past.
That, in turn, has pressured biotechnology companies to strengthen their balance sheets and seek new sources of revenue to market their new products, he said.
Other companies with new drugs have faced similar issues to Human Genome, said Schmidt of Cowen & Co.
Vertex saw its stock rise to $56.26 a day after the May 23 approval of its hepatitis C drug Incivek, which is being sold for $49,200 for a 12-week treatment course. Two months later, the company reported second-quarter revenue from Incivek of $75 million, more than double estimates by analysts, and three times that of a rival drug from Whitehouse Station, New Jersey-based Merck.
Still, the shares have declined 20 percent on the Nasdaq since the approval.
It’s a “$10 billion stock, they’re having a great launch, they’re blowing away expectations, yet still people can’t take up their peak sales estimates,” Schmidt said.
“I think we’ve beat the expectations at launch and we’ll try to continue that,” Matthew Emmens, Vertex’s CEO, said at an investor conference. “I think we’ve done a little better than you thought we would.”
The next companies to face declining shares once their experimental medicines are cleared for sale may be Incyte Corp. (INCY), of Wilmington, Delaware, InterMune Inc. (ITMN), of Brisbane, California, and Tarrytown, New York-based Regeneron Pharmaceuticals Inc. (REGN), Schmidt said.
Acorda fell 29 cents, or 1.4 percent, to $20.27 at 4 p.m. in Nasdaq Stock Market composite trading; Dendreon added 4 cents to $9.16; Human Genome fell 8 cents to $13.73; Regeneron declined $1.15, or 1.9 percent to $59.94; and Vertex dropped $1.18, or 2.6 percent, to $44.51.
Biotechnology company officials say the industry is beginning to adjust to the change.
During the U.S. recession, which began in December 2007 and ended in June 2009, biotechnology companies were running low on funds, said Nader, of NPS. By the third quarter of 2008, 46 percent had less than one year of cash available, according to data from the Biotechnology Industry Organization.
That forced many to look for partnerships, mergers and new sources of revenue to continue operations, Nader said. The biotechnology companies that survived the recession tend to have healthier balance sheets -- only 29 percent had less than one year of cash last year.
NPS is currently targeting institutional investors at least a year before its drug will likely hit the market after approval, in late 2012 or early 2013, he said.
“Conventional investors on Wall Street don’t seem to look out beyond what’s happening the next hour,” said Rajiv Kaul, who manages the $1.3 billion Fidelity Select Biotechnology Portfolio, in an interview. That provides an opening for long-term investors, when the market eventually turns around.
“All this creates massive opportunity where you can find situations where people are not looking out into the future,” Kaul said.
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