Cashing In On Biotech
When progress is made in drug development, value is created. Investors recognize that progress by purchasing shares in companies when milestones—which act as catalysts—are met. The Maxim Group’s Senior Managing Director and Head of Healthcare Jason Kolbert lives by catalysts, and urges his investor clientele to understand there is no other reason to buy a stock except in anticipation of new information that creates value. In this interview with The Life Sciences Report, Kolbert discusses six names that have immense regenerative power for portfolios.
The Life Sciences Report: You follow some mid- and large-cap biotechs, in addition to small ones. Why did biotech shares pull back so severely starting in March?
Jason Kolbert: We had a tremendous rally in biotechnology in January and February, and then the bubble burst. Some of that is evidenced in the diatribe directed at Gilead Sciences Inc. (GILD:NASDAQ). Gilead is a large-cap leader in the world of biotechnology, and there was a lot of negative publicity directed at the company focused on the pricing of Sovaldi (sofosbuvir), its innovative therapy for hepatitis C. That seemed to be the straw that broke the biotech bubble. Gilead actually pulled back very sharply, to the low $70s per share.
Then the company reported Q1/14 earnings. Not only were the earnings good, but the Sovaldi numbers were the best we’ve ever seen for a new drug launch in the history of pharmaceuticals. The company reported total sales of $5 billion ($5B) for Q1/14, but total antiviral product sales increased to $4.51B, which is up from $2.06B in Q1/13. That dramatic increase was due mostly to sales of Sovaldi, which launched in December 2013.
Here we have a large-cap biotech company that is knocking the cover off the ball in terms of a product launch—in revenue, size and scope. In hindsight, what a great buying opportunity we had, because right now Gilead is trading at about $81/share.
But back to your question. Why did biotech pull back? What was the underlying reason? It wasn’t pricing on Sovaldi: That was just the trigger. I think it has to do with the rate of growth in the sector. Over the past couple of years, people have been very concerned about economic growth. One of the places an investor could reach for growth was in biotech. When we have economic recovery, the need to reach out for growth is less. The reality is that, in a recovering economic cycle, we have dollar rotation out of high-growth, high-risk sectors like biotechnology into lower-risk, lower-growth companies that tend to do better in an economic recovery.
TLSR: What does that mean going forward? What are institutional investors telling you now about their plans? Will they continue to invest in biotech?
JK: We know that toward the end of the biotech bubble we had generalists building their exposure to the biotech sector. Generalists are the last ones in, and they’re the first ones out, because biotech is relatively complicated, and investors need to understand the science to understand the probabilities of success. It’s not just about chasing momentum. Portfolio managers who are generalists are telling me they’re done with biotech for a while, but the biotech-specific funds see the hiccup as just that, a hiccup, and their bullish viewpoint overall hasn’t changed.
People are a little bit more cautious as to what they invest in. They want to make sure that the fundamentals are good and that catalysts will occur within the timeframe that they’re seeking for performance. I think that you will still see initial public offerings over the coming year, but they will be at lower valuations.
On balance, we remain very positive on the biotech sector. We think the worst part of the correction is over, and as we head into the summer, we look toward what might be the next major catalyst in the space, the results of the Vertex Pharmaceuticals Inc. (VRTX:NASDAQ) trials in cystic fibrosis (CF). If we were to get good data from those trials, that could spark something we rarely see, which is a summer biotech rally.
TLSR: With the generalists out, do you see the biotech market as being less volatile?