Biotech’s Golden Moment

It has taken a pandemic for biotechs to take flight towards their all-time high.

One of the first industry groups to recover from the virus-related selloff and be neutral for the year, biotech indexes have gained strength as they move towards or make new 52-week highs. The Nasdaq Biotechnology Index, which is heavily weighted towards larger cap biotechs like Gilead (GILD), Vertex (VRTX), and Amgen (AMGN), may finally be positioned to achieve an all-time high, eclipsing the previous one recorded in July 2015, nearly 5 years ago.

After falling sharply in the wake of the pandemic-related systemic shock, the healthcare sector has rebounded strongly and is down ~4% for the year. The healthcare has been led primarily by biotechs, pharmaceuticals, medical devices and services, and managed care companies. 

In a highly uncertain environment, healthcare is proving to be a sector that is relatively more insular to the disruptions of the pandemic and benefits from managing, treating, and eventually curing the viral disease. No longer is healthcare, in general, and biopharma, in particular, are being viewed through the lens of the high drug pricing issue. Instead, healthcare is being viewed as a front-line defense in the quest for a solution to the pandemic. This important shift significantly diminishes the regulatory pressure on healthcare costs and drug prices, at least for this year. 

But some groups within healthcare are much better positioned than others. And biotech is one of the better-positioned ones. Recently, this was discussed in greater detail in the article Biotech Melt-Up. 

As weeks have passed since the market collapse in March, biotechnology has assumed a pivotal position during this pandemic outbreak. A number of reasons are favoring the group which is positioning itself to finally surpass the all-time high set in 2015 - and this time, it may well do that. 

The business disruption risk as a result of the pandemic has proven to be manageable thus far, with trial delays and suspensions anticipated to be about 2 quarters and that can last till the final quarter of 2020. While that is highly disruptive, quite costly, and can require protocol changes upon resumption or even do-overs; at this time, it doesn't pose a crippling risk that many other sectors of the economy are facing. That in itself puts biotechs in a relatively better position. Furthermore, biotech and pharma companies are uniquely positioned to understand the best way to continue their research and operations safely even though clinical trials can get delayed.

The FDA risk of slipping-up on the approval timeline appears to be contained with the agency approving even well-ahead of PDUFA dates, as suggested by the Incyte (INCY) and Seattle Genetics (SGEN) recent drug approvals. Advisory Committee (AdComm) meetings though are being generally postponed or canceled. There are 9 PDUFA decisions expected during May.

The road to a pandemic treatment or cure runs through the biotech and pharmaceutical groups. With over 140 vaccines and drug treatments being developed worldwide, as per Pharma Intelligence, and a world anxiously awaiting a positive outcome, biotechs and pharmaceuticals have garnered significant positive attention. In addition, there are over 115 clinical trials for already approved drugs and vaccines that are being repurposed to treat COVID-19. Gilead's Remdesivir is one such repurposed drug that recently received FDA approval.

An environment of low rates and uniquely favorable industry dynamics will further stoke investor interest. We have written in the past on the best period for biotechs being during a prolonged period of low-interest rates. That is the kind of environment presently. But a low-interest rate situation solely by itself wouldn't have carried as much weight in this hostile environment. However, when combined with the unique strengths of biotechs during the existing pandemic environment, it creates a highly favorable situation for the biotech group when compared to nearly all other industry groups.

The largest US oncology conference, ASCO, will be held virtually this year from May 29 to 31. The annual conference has a number of key data readouts and critical trial updates.

The abstracts will be released on May 13, 2020. Biotechs typically react favorably to the updates during the conference. At times, the high profile event is also used to announce partnerships and acquisitions.

The race for a pandemic cure is the golden moment for the biotech and pharmaceutical industries to deliver a solution for a crisis that has devastated lives and livelihoods. The market is closely tracking the progress of a treatment and cure and recent positive updates on Gilead's Remdesivir and Moderna's (NASDAQ:MRNA) vaccine triggered market rallies. The vaccine is the most durable solution and there are multiple promising trials underway. But vaccine development is a field noted for its low success rate. A few key vaccine projects are shown in the exhibit below.

Source: The New York Times

On anti-viral treatments, there are many repurposed drugs, like Remdesivir, that are undergoing Phase 3 trials and should have data readouts over the May-July period. Repurposed drugs are helpful in offering earlier solutions since they can begin Phase 3 trials without undergoing earlier studies. There are also some promising new monoclonal antibody drugs and RNAi therapeutics in the early stages from the likes of Regeneron (REGN), Vir Biotechnology (VIR), and Alnylam Pharmaceuticals (ALNY), amongst others, that will have some key readouts in early Fall 2020. A more comprehensive discussion was provided in the article Biotech Melt-Up.

While biotechs and a growing part of healthcare experience a set of favorable factors, a big portion of a gradually opening economy will still remain under a long shadow of the pandemic and have a more uncertain outlook. In the absence of national testing and tracing infrastructure, it is inevitable for new community seedings to occur and viral hot spots to emerge as engagement and interaction rise combined with any laxity in maintaining physical distancing and reducing large gatherings. Such zonal and regional outbreaks have the potential to make the recovery more jagged and halting after a rapid initial rise.

There are many things being done at the business and local levels to mitigate viral spread. Companies are adjusting to a different environment and will continue to practice remote working where possible. In addition, the norms at offices and factory floors will be revised to minimize viral transmission, thus greatly assisting in building economic momentum.

The ability of the states to rapidly manage smaller local outbreaks before they turn into wider ones will influence the pace of recovery. A poor response will further hurt consumer confidence and roll back economic momentum. The daily death toll 7-day moving average remains near 2000 deaths and predicted to climb higher, which will continue to restrain consumer spending and economic activity.

The broader economy faces heightened uncertainty.

There are many shifting dynamics that will affect the recovery pace for most sectors of the economy. Rapid recovery, characterized as V-shaped, is preferred but is not the most certain outcome in our belief. However, the market appears to be reflecting optimism at this time for the economic recovery to be strong and durable, and even reflect the pace of the stock market recovery. That creates a good environment for stocks at least for the next month if not longer, particularly with the Federal Reserve being highly supportive, until economic evidence may emerge to the contrary.

Even if the recovery is uneven, biotechs and few other healthcare groups are better positioned to overcome economic setbacks that may be witnessed during the recovery phase, for e.g. a rollback due to a relapse. Thus, it is prudent to consider higher healthcare and biotech allocation in the portfolio during this uncertain economic recovery phase.

Biotechs and healthcare will continue to benefit broadly as the tide of positive investor sentiment keeps rising. But one still has to be selective and adequately diversify, not forgetting that biotechs remain a higher-risk and more speculative segment of the market which will still get affected if an economic rebound suffers thus possibly provoking a sharp market downturn.

We are presently 100% invested in Prudent Healthcare and Prudent Biotech model portfolios and 50% in the Prudent Smallcap portfolio. There are many healthcare and biotech stocks that remain promising. A few of them include Vertex Pharmaceuticals (VRTX), Gilead Sciences (GILD), Moderna (MRNA), Regeneron Pharmaceuticals (REGN), Vir Biotechnology (VIR), Alnylam Pharmaceuticals (ALNY), Momenta Pharmaceuticals (MNTA), Acceleron Pharma (XLRN), Emergent BioSolutions (EBS), Collegium (COLL), Exelis (EXEL), Halozyme Therapeutics (HALO), Iovance Biotherapeutics (IOVA), Immunomedics (IMMU), TG Therapeutics (TGTX), ChemoCentryx (CCXI), Incyte (INCY), Inovio Pharma (INO), Fate Therapeutics (FATE), DexCom (DXCM), Quidel (QDEL), Luminex (LMNX), Masimo (MASI), Karuna Therapeutics (KRTX), Zai Lab (ZLAB), Kodiak Sciences (KOD), BioNTech (BNTX), Syndax Pharmaceuticals (SNDX), Novavax (NVAX), Livongo Health (LVGO), Axonics Modulation (AXNX), NeoGenomics (NEO), Vapotherm (VAPO), Arcus Biosciences (RCUS), Seattle Genetics (SGEN), and Eli Lilly (LLY).

The article was submitted on May 11 to Seeking Alpha.