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Europe Just Gave a Boost to Biotech's Brightest Lights

6 December 2013 in Trading Ideas

In one sense, the rally in biotech stocks has been a microcosm of the broader market – any dips or pullbacks have largely proven to be opportunities to buy equities at lower prices before another leg up.

And here again, we seem to have encountered a similar pattern that could indicate the next leg up.

Of course, biotechs have followed that pattern on a somewhat grander – and more profitable — scale. While the S&P 500 has gained nearly 25% in 2013, many biotech stocks have more than doubled that. The Biotech Breakthroughs motif, for example, has surged 62.7% in 2013.

The motif is also up 7.0% in the past month, while the S&P 500 has gained 1.0%. The latest lift has been in large part to the performance of three of its top stocks. Biogen Idec, Gilead Sciences, and Celgene shares comprise about 30% of the Biotech Breakthroughs motif, and all three stocks recently were hitting all-time highs on the strength of promising news from Europe.1

For Biogen, that news came in the form of the company’s Tecfidera multiple scelerosis drug moving one step closer to launching in the European Union after the EU’s Committee for Medicinal Products for Human Use (CHMP) ruled the drug was a “new active substance.” The big deal? It means Tecfidera can be protected from competition for 10 years. As Investor’s Business Daily noted, that’s better protection than the company’s own patents, which are subject to legal challenges after a few years.

Biotech BreakthroughsAnalysts say uncertainty surrounding the ruling had put a damper on Biogen’s stock. Now, however, the skies are definitely brighter. The news inspired Deutsche Bank analyst Robyn Karnauskus to raise her peak market-share estimate for the drug to 30% from 25% and lift her projections of worldwide Tecfidera sales to $6 billion from $5 billion.

Another sign of how big this could be: Biogen’s sales growth had been ramping up over the past quarters – from 6% to 32% — largely from Tecfidera’s entry into the US market alone.

For Gilead, a thumbs-up ruling by the EU’s CHMP also led to new all-time highs. The company’s Sovaldi hepatitis C drug won a vote about a month earlier than Wall Street expected, following an accelerated review procedure after the drug performed very well in clinical trials.

The European Commission, which ultimately approves drugs in the continent, has generally followed the advice of CHMP, IBD noted.

Gilead said the ruling could mean the company launches the drug in Europe during next year’s first quarter. (It’s expected to gain US approval this month).

RBC Capital Markets analyst Michael Yee expects Gilead will do $2 billion in US sales alone in 2014, and envisions a scenario where the company adds a few hundred million while the drug just begins a ramp-up next year in Europe. However, the current consensus estimates that Sovaldi sales will hit $8 billion by 2018.

The CHMP also shined on Celgene last month. The body endorsed the company’s Abraxane treatment for pancreatic cancer in combination with Eli Lilly’s Gemzar drug. As IBD reported, Abraxane has been on the market for breast cancer since 2005, but since Celgene bought the drug’s developer in 2010, it’s been investigating new indications. In the US, it was approved for lung cancer a year ago and for pancreatic cancer in September, but so far in Europe it’s still authorized only for breast cancer.

Naturally, the fate of all of these companies’ drugs is subject to the continued success in treatments as well as current and future competition.

However, in this market, a little promise can go a long way for shareholders.

1Investors’ Business Daily, “Biogen, Celgene, Gilead Hit Highs on EU Drug News,” Nov. 22, 2013, http://finance.yahoo.com/news/biogen-celgene-gilead-hit-highs-212400346.html, (accessed Dec. 4, 2013).