Stockwatch: Awkward Developments Pricking J.P. Morgan Bubble
Executive Summary
The warm fuzzy feeling in life sciences in the week before the J.P. Morgan Healthcare Conference was rudely threatened by clinical trial results from Halozyme and Heron, and negative financial preannouncements from Heron and Teva.
The biotech industry may have been hoping for a slow news week before the annual J.P. Morgan Healthcare Conference, to avoid investors being scared away from California. The rumors of blocks of vacant hotel rooms in downtown San Francisco being released in mid-December and what feels like a general downgrading of 2017 expectations from investment bank analysts were not enough to dampen the rise of the NASDAQ Biotech Index (NBI). The latter finished the first trading week of the year up just under 4.5% against the S&P 500's 0.6% rise. Cynics might point to the ability of determined and incentivized market participants to influence a stock market or index in the short-term, but drug pricing and clinical trial results are likely to counterbalance investors' thoughts as they review their biopharmaceutical holdings during and after the conference.
The value of the word "positive" in clinical trial announcements is falling rapidly as it becomes associated with contentious and mixed data sets, and p-values of eggshell-thin robustness. (Also see "Stockwatch: 2017, Year Of The Dog" - Scrip, 3 Jan, 2017.) Halozyme Therapeutics Inc.'s announcement of the results of its Phase II open-label study of the combination of its recombinant human hyaluronidase and Celgene Corp.'s Abraxane (nab-paclitaxel) in pancreatic cancer patients appeared to be the latest step down in value.
I was expecting the ensuing debate to be polarized between those social media commentators who focused on the reasonable amount of data that was not "positive" and the sell-side analysts who were keen to support an impending share issue by their banking colleagues. In the event, the analyst reports I read were more critical than I had expected, with those from J.P. Morgan pointing out the commercial relevance of the logical and better progression-free survival hazard ratio in stage 1 compared with stage 2 patients, noting that these earliest diagnoses are the smaller patient population.
The analysts from Citigroup took last week's gold star for insight when they said the results were "quite mixed, and ultimately leave [the already started] Phase III as a risky trial." They went further by reminding me (at least) that the study had been complicated by a clinical hold in stage 1 patients, the retrospective use of the diagnostic and a shorter duration of treatment in stage 1 compared to stage 2 patients, any one of which could potentially confound the study. The positive momentum of the week before the J.P. Morgan Healthcare Conference – that will undoubtedly be used to raise money for many companies during and after the meeting – was strong enough to outweigh the intense social media criticism of the study plus a downgrade by Citigroup. Halozyme's stock price ended the week up 34%.
Last year's J.P. Morgan Healthcare Conference was preceded by the analysts from two investment banks expressing their concern about the fragility of the sales growth of Vertex Pharmaceuticals Inc.'s cystic fibrosis franchise. (Also see "Stockwatch: Fanfare For A Down Year" - Scrip, 11 Jan, 2016.) That concern proved remarkably predictive of Vertex's repeated guidance cuts and misses of analysts' consensus estimates throughout 2016 and their negative pre-announcement on the cusp of this year's conference. Two new negative pre-announcements from Heron Therapeutics Inc. and Teva Pharmaceutical Industries Ltd. marked the premature start of fourth-quarter earnings season that would otherwise commence with Celgene's financial guidance on Jan. 9.
Heron Hit
Heron attempted to soften the blow of a cut in expectations for its recently launched anti-emetic drug Sustol (granisetron) by also announcing some "positive" top-line results from the Phase II study of its post-surgical pain combination HTX-011 (bupivacaine and meloxicam) in 152 abdominoplasty patients. Only the detailed results for 20 patients in the 400mg middle dose arm and 21 placebo patients were reported. The analysts from Cowen described the trial results as "encouraging" but couched them with the same "totality" of the data phrase that Amicus Therapeutics Inc. used to describe its Phase III study which recently left the FDA unconvinced. (Also see "Amicus Eyes Broad Future Label For Migalastat After Huge Filing Setback" - Pink Sheet, 29 Nov, 2016.) With the missed endpoint of pain up to 24 hours in the study and its 2017 Sustol sales guidance of $15m-$25m against a consensus of $50m after its recent launch in the face of established generic palonosetron, the Cowen analysts' description of Heron as a "magnet for controversy" seemed apt. Despite the 13% share price spike on the "positive" results announcement Heron's share price ended the first trading week of the year just over 1%.
Teva waited until the last day of the first trading week of the year to announce that the weakness in its generic drug business that was first reported in the third quarter of 2016 was here to stay. Both the biggest generic pharmaceutical companies – Teva and Mylan NV – appeared to laugh in the face of the generic drug price deflation pressure that had diminished the financial performances all of the smaller generic companies including Endo International PLC and Valeant Pharmaceuticals International Inc. right up until November 2016 when, to borrow the lyrics of Ellis Paul, it hit them like a southbound train. (Also see "Stockwatch: The Post-Truth Biopharma Rally" - Scrip, 21 Nov, 2016.) That train does not appear to be stopping in 2017 because after lowering its full-year 2016 guidance in November Teva last week took a hatchet to its sales and earnings expectations for 2017 and continued to exclude any impact of generic Copaxone (glatiramer acetate). A similarly rosy picture was painted by Johnson & Johnson in 2016 when, like Teva, it assumed the absence of generic competition to one of its biggest branded drugs – Remicade (infliximab) – in its full-year guidance, right up until the day after Pfizer Inc. announced the Inflectra (infliximab) launch. (Also see "Stockwatch: Earnings Season Inevitabilities" - Scrip, 24 Oct, 2016.) The deals and collaborations announced on the first day of the conference should result in that warm fuzzy feeling but continued financial pressures will provide a longer-term chill.
Andy Smith gives an investor's view on life science companies. He has been lead fund manager for four life science–specific funds, including 3i Bioscience, International Biotechnology and the AXA Framlington Biotech Fund, and was awarded the techMark Technology Fund Manager of the year for 2007.