Biotech stages a "strong comeback" Part I

Jennifer Schonberger | Jul 24, 2008 10:26am EDT | Comment

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Unlike previous downturns, health care and biotech have underperformed this year relative to previous bust cycles. However, this near-term trend looks as though it may be reversing.

Institutional money has been flowing into the biotechnology sector. Both Nasdaq’s and Amex’s biotech indices are up 5.7% year-to-date, while the S&P 500 is down 11.4% year-to-date. According to Prophet.net the industry moved up to a ranking of 14 over the last 6 months, up 27 slots, or 18.05%, from a ranking of 41. Over the last month it’s now ranked eighth overall.

“Biotech has definitely been hurt by the general market, but recently we have seen a strong comeback,” said Dr. Fariba Ghodsian, chief investment officer of DAFNA Capital, which invests exclusively in biotechnology stocks. “Part of it is as the census moved against the market, but part of it is fundamentally.”

Ghodsian says biotechnology is one of the next hot sectors after we emerge from this downturn. “With different fields in biotech experiencing exciting new developments — from inflammation to cardiovascular to hepatitis C — it clearly offers a lot to improve treatment of diseases and I think it is being recognized in the marketplace,” she said. Ghodsian suspects we may see some of these strides in the companies and therefore the sector this year, but even more so in 2009.

Several recent trends that have characterized the biotechnology space have made Ghodsian very positive on the sector. For one thing, in recent months there have been an unprecedented number of acquisitions across the spectrum by both foreign and U.S. companies, partly because of the weak dollar.

Additionally, large pharmaceutical companies are suffering from very anemic pipelines and their major presence is expiring in the coming years, as patents run out. “Biotech is the natural place for them to look for opportunities to bolster their pipeline,” she said.

Big pharma has had been rusty when it has come to conjuring up new drugs and are becoming more reliant on small biotech companies and outside labs for new medicines.
Roche’s $44 billion bid for full ownership of biotech juggernaut Genentech (NYSE:DNA) is proof on a large scale that the trend is picking up steam.

Ghodsian says she expects these trends will continue either in terms of licensing or co-promotion activities with biotech or outright acquisitions of companies.

One point for pause is that the Food and Drug Administration (FDA) has become increasingly conservative. “We have seen them taking a more conservative stand when it comes to safety of the drugs,” she said.

The FDA is implementing more stringent regulatory end points in a number of places. They’re more interested now in seeing outcome studies for some drugs rather than relying on what they call ‘surrogate end points.’

In terms of competitive landscape, competition exists with large pharma, but there is also collaboration with them. “In many cases the smaller companies collaborate with large pharma for marketing drugs, but biotech companies are much more in control of those deals if they have a good drug,” Ghodsian said.

According to Ghodsian, usually many companies on the pharma side want to do a deal and biotech companies can dictate much better economics, either to co-promote and a get a 50-50 share of the drug sales or through demanding higher royalties. And the percentage of the royalties is going up as well she says.

So far biotech drugs have had a positive reimbursement environment overall. For unmet medical needs intended for diseases such as cancer, reimbursement has been healthy and biotech drugs have commanded high prices. “… there may be some scrutiny here and there, but I think overall when you look at biologic reimbursement it has been very healthy,” Ghodsian said. “Although on the generic front there are discussions about biological generics, Europe seems to be more advanced on that front and I don’t think that we see any of that materializing in the U.S. in the near term.”

Fields that are seeing the greatest development as of late in larger diseases include cancer, hepatitis C and diabetes; while areas seeing the greatest development in smaller diseases include lupus, immune thrombocytopenia purpura, pulmonary arterial hypertension, cyctic fibrosis and pulmonary fibrosis.

Another field Ghodsian perceives possesses major developments is rheumatoid arthritis. “There are major advances with oral drugs in development that would be a great benefit for the patients,” she said. Cardiovascular and gout disease are other areas expected to experience major developments.