Medical breakthroughs, looser FDA made biotech stocks one of the decade’s best investments

GP: Biotech researcher lab laboratory scientist
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Biotechnology was one of the decade’s best investments as a dizzying pace of clinical innovation fueled the discovery of treatments once thought beyond the reach of modern medicine. A more aggressive FDA also aided the trend.

An investor who purchased shares of the iShares Nasdaq Biotechnology ETF in December 2009 is now up more than 350% in returns. In other words, a $1,000 stake in biotech in 2009 would now be worth over $4,500.

The broader stock market over the same period was up 187%, meaning that a stake in the S&P 500 in December 2009 would now be worth about $2,870.

Industry experts point to breakthroughs in the treatment of diseases like hepatitis C, multiple sclerosis and a variety of malignancies for biotech’s big decade and the eye-popping profits the industry’s therapies promise.

“If you look at the areas of oncology, virology and many rare diseases, we are at the point where we are looking at curative therapies in many cases,” said Jefferies analyst Jared Holz.

“You’ve really gone from no treatment with these unmet medical needs [a decade ago] to many therapies across hepatitis as well as solid and liquid,” he added. “Patients are living far longer than they were ever expected to.”

Banner decade

Gilead Sciences stunned Wall Street on Nov. 21, 2011 in announcing its intent to buy a small, Princeton, New Jersey-based biotech company with just over 80 employees and no commercial products.

Making Gilead’s gambit even riskier was what it was willing to pay for little-known Pharmasset: A hefty $11 billion price tag and 89% premium — more than one-third of Gilead’s market value.

Investors, unconvinced by Pharmasset’s promising Phase II hepatitis results or Gilead CEO John Martin’s assurances, punished the stock in the hours following the announcement. Gilead equity fell 9% to $18.13 during the session, its single-worst day on Wall Street in 19 months.

One year later, its stock price had more than doubled. The year after that it rose 90%.

Central to the Gilead thesis for Pharmasset — emblematic of the decade’s trend to come — was an openness to pursue and invest early in potentially breakthrough treatments. One positive trial in Phase II or Phase III or a glowing review by the FDA could transform a company overnight from a money-losing lab to a multibillion-dollar success.

But picking individual winners can be a tricky business in biotech. Since investors hoping for a big upswing often need to invest before a company’s therapy is approved, an unexpected FDA rejection or ineffective trial can result in sudden, steep declines.

Biogen, by no means unheard of by 2011, saw its own market value mushroom 33% over 12 trading sessions in April 2011 after new data showed the effectiveness of its new oral multiple sclerosis treatment. A more recent example, Vertex Pharmaceuticals is up more than 20% in the last three months after regulators approved its new cystic fibrosis treatment.

FDA fast track

But behind the decade’s flurry of new biotech treatments is also a more amenable FDA.

For years, the FDA subject new drugs to a deluge of tests before allowing pharmaceutical companies to market the treatments. Very few were “fast-tracked” to make them available sooner.

But that standard has reversed in recent years, with the FDA approving a record 43 new drugs last year through fast-track programs that reduce or skip major analysis that regulators would otherwise conduct. In other words, 73% of all new drugs approved by the FDA in 2018 received the FDA’s expedited process.

The administration says its attempts to accelerate approvals are important to satisfy the demands of drugmakers, practitioners and patients with the greatest medical needs, who often suffer from terminal or debilitating diseases without other recourse.

So far that trade-off between regulatory stringency and speed has worked to make investments in the space all the more attractive to investors looking to deploy cash, Jefferies’s Holz said.

“The science has been the fastest and the best that we have seen to date. And it continues to accelerate into 2020,” Holz said.

Rally on?

But biotech’s rise over the last decade was far from steady.

The “IBB” ETF topped out in July 2015 as a bipartisan coalition of presidential hopefuls lambasted rising health-care costs and threatened to regulate how much major biotech and pharmaceutical companies could charge for their medicines. Biotech stocks fell 40% by February 2016 and only very slowly recovered.

But signs of better growth emerged late in 2019.

Though the ETF has yet to return to its 2015 high, the industry’s equity has posted a whopping 27% rally over since early October and analysts say it shows no signs of stopping. Analysts at RBC in a recent note to clients explained that cheap capital and strong balance sheets have set the stage for the sector’s rebound into 2020.

“We expect maintained momentum for the biotech sector into early-2020, buoyed by continued M&A activity and improved sentiment following a recent string of favorable clinical, commercial, and regulatory catalysts,” analyst Brian Abrahams and others wrote.

The team said a series of surprise positive data from smaller companies like Axsome and Karuna as well as revitalized growth opportunities for previously-stagnant large-cap companies (Biogen with aducanumab and Amgen with Otezla) could be the beginning of a longer bounce.

“The group shows no signs of slowing down – we see more room to run, especially given that the sector remains underowned by many generalists likely to return to the space given the demonstrated alpha,” they wrote.

Still, investing in biotech isn’t without its potential pitfalls.

More than one Democrat running for president in 2020 has threatened to crack down health care’s biggest drugmakers. President Donald Trump, too, has often castigated high drug prices and pressed his rivals into more aggression action on expensive medicines.

It’s “Time for the Democrats to get serious about bipartisan solutions to lowering prescription drug prices for families,” Trump tweeted in November. “House Republicans are showing real LEADERSHIP and prepared to enact bipartisan solutions for drug prices.”

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