Biotech: Breathing space before next growth curve
Biotech shares have tumbled since the summer of 2015. Has the euphoria of recent years vanished into thin air? What shall we expect ahead of the US elections as persistent discussion of medicine prices could depress share prices in the health sector for some time to come?
We believe that the current phase is actually a breathing space before the next growth curve. The market has now passed on the effects of possible shifts in sales and profit development, reflected for example in the issue of reimbursement in the health systems, and these are evident in the price of shares.
In the short term the drug pricing discussion will continue however to keep share prices volatile. At the latest in January 2017, when the newly elected U.S. President announces the future direction in each area of policy, we expect the subject to cause irritation again. We believe that companies will react by boosting sales and profit and bringing new products to market.
In cancer immunotherapies, in particular, the innovation cycle is moving ahead and is set to generate a large number of new products in the coming years, which can lead to prices increase.
This is also the case with hepatitis C treatments developed by company such as Gilead Sciences. But Gilead is an extreme example of a company with a novel product in an indication that for many patients has been hitherto incurable. The price it is charging is raising prices across the market. Ultimately it is the value of a medicine that will determine its price.
Criticism from the political arena is often levied at the list price and frequently ignores the fact that high growth rates are generated by volumes. The new therapeutic agents make it possible to treat many times more patients than before, and the final level of sales is correspondingly high.
Ultimately any discussion about the price of a drug should revolve around its medical value or benefit. Average prices for hepatitis C drugs are lower now than they were five or ten years ago, when the complications associated with this infectious disease sometimes led to long periods of stationary hospital treatment. Thanks to the effective new drugs, the pool of treatable patients has increased by several times and the related sales revenues are commensurately high.
Cancer immunotherapy is likely to be another disease at the centre of public debate in the coming years, as it’s a sector in which we are witnessing the second and third waves of combination therapies. Here, too, the issue of cost will be scrutinized together with the medical benefit and the corresponding improvement in patient quality of life. In gene therapy we will see curative therapies, i.e. treatment approaches that completely cure a disease by altering the genetic makeup of an individual’s cells.
Curative approaches could produce huge cost-savings for health care systems over the long run, but the cost of cell-based treatment options or gene therapy will be even higher than today’s biopharmaceuticals derived from antibodies and small-molecule agents. The ongoing discussion of pricing and cost models, be it for minor indications with relatively few patients or diseases such as Alzheimer’s that afflict millions of people and have growing patient populations, must be intensified. The question here is whether the cost of health care will be increasingly covered by private insurance plans or by the government.
The profit drivers marketed by industry heavyweights such as Gilead, Amgen and Celgene have enabled these companies to attain the market value of major pharmaceutical companies. That makes it more difficult to maintain profit growth at a level above that of Big Pharma. In order to continue achieving above-average double-digit growth in future, these companies will draw on the innovative strength of their in-house development pipelines and at the same time take an aggressive approach to acquisitions.
Biotechs will try to extend the mechanism of action of their products to new therapeutic areas. Take, for example, Revlimid, the myeloma therapy that generates over 60 percent of Celgene’s sales. The class of immunomodulators such as Revlimid can also be used to treat other forms of cancer. This has enabled Celgene to move from myeloma lymphoma. Gilead is doing the same thing with infectious diseases. The company has used its leading position in HIV therapies to expand into hepatitis C. And from there it has gained access to universities and academic institutes with acknowledged scientific expertise in other liver diseases such as hepatitis B and non-alcoholic steatohepatitis (NASH).
Correction phases in the past have shown that the prices of large caps start moving before the appetite for risk grows. This is why we have stuck with our approach of going with the trading opportunities offered by large caps and buying selectively from smaller firms.
The number of profitable biotech companies is growing all the time. We are however sticking with our current approach of building a portfolio of a small number of core holdings plus small caps with the potential to grow faster than the market. Our primary focus continues to be on companies in their growth phase that are poised to become large caps. In terms of our investment strategy, the growing number of profitable companies could mean that we will reduce the percentage share of our portfolio accounted for by large caps in the future.
Daniel Koller, lead manager of BB-Biotech