Photographer: Dhiraj Singh/Bloomberg

Stocks of Drug Upstarts Churn Amid Wider Market’s Steady Climb

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  • Biotechnology indexes are beating broader stock-market gains
  • Earnings may boost volatility missing elsewhere in the market

Biotechnology stocks are famously volatile, and in an otherwise placid market, the swings look even more pronounced.

The sector has outpaced the wider market amid a long rally that’s pushed major indexes to record after record. The Nasdaq Biotechnology Index is up 25 percent in 2017, while the S&P 500 is up 15 percent. Some standouts have more than doubled in value; Loxo Oncology Inc. has almost tripled this year after encouraging data on its experimental cancer drug.

As enticing as biotech’s big wins are, there’s also the potential for peril: Take Celgene Corp., maker of blockbuster cancer treatment Revlimid. Its shares have dropped about 10 percent from $135.96 on Thursday to $121.91 at 9:44 a.m. Monday in New York, after the company halted a final-stage trial of a Crohn’s disease drug expected to fetch $1 billion in sales in coming years -- and patch a big hole left by the looming end of Revlimid’s exclusivity.

“It’s either going to be zero or 100,” said John Schroer, a health portfolio manager at Allianz Global Investors who has been investing in biotech stocks for more than two decades.

Amid relative tranquility in the stock market, biotechs have been a more raucous corner. The Chicago Board Options Exchange Volatility Index, a gauge of stocks’ swings, is near a historic low; the Nasdaq Biotech Index has a volatility rating about 10 points higher than the S&P 500.

Before the end of this year, companies such as AbbVie Inc., with its lung cancer drug Rova-T, and Sage Therapeutics Inc. with its postpartum depression results, will rise or fall on the outcome of key trials. Earnings season for the industry is also heating up, with heavyweights Amgen Inc., Gilead Sciences Inc. and Shire Plc reporting this week.

The odds are stacked against success for biotech companies. One in 10 drugs makes it from hypothesis, through three clinical trials, and on to FDA approval, according to an industry study. And the market is crowded, with hundreds of publicly traded companies for investors to sift through.

Christopher Marai, a biotech analyst at Instinet, said the business is rockier than other churn-prone sectors such as internet stocks because new data on drugs that are often a company’s only product can be infrequent. “The risk is as high as it gets,” he said, “and we’re guessing.”

“Biotech, in some sense, is all about science and disease and the human body, which even after all these years we don’t understand as well as we think,” said Teresa McRoberts, portfolio manager of Alger Health Sciences Fund. “Even the best investors in this space get things wrong because the human body is just a very complicated thing.”

But it’s not just the science that can go wrong. Investors said that they’ve had plenty of mornings where they’ve woken up to other news that has made or lost millions.

McRoberts said she once left work for lunch and came back to a screen covered in red alerts after Eli Lilly & Co. lost a patent trial.

The travails of Intercept Pharmaceuticals Inc. and Axovant Sciences Ltd., once biotech darlings, show what can happen when a company’s lead drug falters.

Intercept shares sank in September when 19 people died after being prescribed the company’s lone drug, Ocaliva, which treats rare liver disease. Just three years ago, the company’s market valuation topped $6 billion. Now, it’s less than $2 billion. 

Axovant was on the verge of what investors and patients alike were hoping would be a treatment for Alzheimer’s disease symptoms. Its shares soared until its treatment failed in a clinical trial last month. Since then, Axovant has plunged 77 percent.

Such stories are in contrast to companies like Loxo Oncology and Amicus Therapeutics Inc., which has a promising treatment for Pompe disease, a debilitating enzyme disorder. Amicus shares have nearly tripled this year.

“You can make a lot of money in this space,” said McRoberts of Alger Health Sciences Fund. “But you can also lose a lot of money.”

Make or Break

Eddie Yoon, portfolio manager of the Fidelity health-care fund, said investing in the sector requires financial acumen as well as detailed knowledge of how clinical trials are set up and an understanding of the disease a drug aims to treat.

“The real expertise is trying to find those companies that have a greater probability of success than failure,” he said. “It really focuses on do we believe in the science, do we believe in the clinical trials, and do we believe the end market’s commercial opportunity is big enough?”

McRoberts of the Alger Health Sciences Fund said there are multiple events in a drug’s life that can highly reward or highly disappoint investors.

“Luck is a big deal, if you happen to be in the right place in the right time with the right FDA,” she said. “There’s luck in life and luck in everything and luck in drug development.”

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