What’s Fueling Biotech’s Growth? Baird Analysts Discuss Sector Trends

NEW YORK, Aug. 22, 2013

Baird, an employee-owned, international financial services firm, will host its annual Health Care Conference in New York City on Sept. 10-11. The conference will bring together institutional and private equity investor attendees to hear presentations from more than 70 public and privately held companies across a range of sectors including Biotechnology, Distribution & Services, Life Sciences & Diagnostics, Medical Technology, and Facilities & Services. For more information on the conference follow @BairdConference, #RWBHealthcare.

As a preview to the conference, Baird Senior Research Analysts Christopher J. Raymond and Brian P. Skorney, CFA,  discuss the phenomenal growth of biotech and some of the best performing stocks in the S&P 500 Index. According to Baird Biotech TrendWatch, biotech has outperformed the broader markets – up 52 percent vs. the S&P 500 up 24 percent – and the broader healthcare sector over the past year (+52 percent vs. +33 percent). M&A activity is strong and the sector is enjoying its best run with initial public offerings in a decade, with 16 completed and at least nine filed and pending year to date. Research and development success has driven returns to date and investors are continuing to take notice.

Q&A with Senior Research Analysts Chris Raymond and Brian Skorney

On the heels of Q2 earnings, how would you characterize the companies that are particularly well-positioned to take advantage of biotech’s stellar performance for the remainder of 2013?
We like companies that are either in the midst of, or well positioned for, near-term product launches that offer upside or development stage companies that offer a major advance, in terms of safety and efficacy, in an indication with significant need. There obviously is a continuum here, but particularly, we favor:
  • Regeneron Pharmaceuticals (REGN), which is more than a year into the launch of Eylea;
  • Alexion Pharmaceuticals, Inc. (ALXN), which is just beginning its launch of a new indication for Soliris (aHUS) in Europe;
  • Tesaro, Inc. (TSRO), which next year will be launching a new antiemetic agent in the oncology space;
  • Pharmacyclics, Inc. (PCYC), which is on the verge of launching a potentially paradigm shifting drug for the treatment of various hematologic malignancies;
  • Sarepta Therapeutics (SRPT), which has what appears to be a disease modifying treatment for one of the worst genetic diseases, Duchenne Muscular Dystrophy; and
  • Vertex Pharmaceuticals, Inc. (VRTX), which has already commercialized Kalydeco, drastically improving the lives of a small subset of cystic fibrosis patients and is rapidly expanding the percentage of patients they can offer a similar benefit to over the next two years.
How have advancements to R&D and new clinical approaches affected interest from institutional investors? Are we seeing new venture capital/private equity players enter the healthcare space that may have avoided it previously?
We are seeing a very real resurgence in interest in “story stocks”– that is, companies with very promising, but unproven technologies. Part of this has been due to recent breakthroughs of technologies that have been in development for over a decade but have only recently seen success after many failures. Successful programs in immunotherapy, RNAi/antisense and gene therapy, as well as other more novel approaches toward the treatment of disease that are being developed within both large pharma, biotech and academia, have made these names investable again from the standpoint of some investors. However, clinical development is still a very high risk game where there is a low rate of success, even among well validated technologies and historical disappointing efficacy or unforeseen safety events have derailed entire platforms.

In which areas of the biotech industry do you anticipate significant growth and why?
We believe a trend toward more genetically targeted therapies will continue to see substantial growth as both regulatory and reimbursement barriers drive efforts to better define patient subgroups that will benefit from treatment. The relative absence of early stage development in Big Pharma creates a clear role for biotech. Certainly we’ve seen a spate of new M&A that has been a boon to the space, and there’s no reason to believe that won’t continue to happen, given this dynamic. In our view, the most likely target is a commercial asset with a lot of growth still in front of it, or a late-stage asset or technology that has been substantially de-risked.

What factors help explain the increase in FDA approvals over the last two years? What happens if the pace of FDA approvals declines to previous levels?
We believe the accelerated pace of approvals over the last two years has been driven by a less restrictive FDA. We also believe the more restrictive regulatory environment, which peaked from 2008-2010, led to better efforts by the industry to run more definitive pivotal studies. FDA’s increased funding from the most recent Prescription Drug User Fee Act (PDUFA) has also provided the agency with more resources. At the same time, the agency has improved and increased its level of collaboration and information sharing with industry. If some structural shift were to take us back to a place where FDA is seen, once again, as a big impediment or drag on approvals, that would clearly not be good, and we could very well see a wholesale rebasing of valuations across the sector.

What are the barriers to sector growth?
Right now the biggest barrier to sector growth are the payers – be they managed care or government entities. These groups offer a formidable counter-balance in that, in addition to drug approval, payers demand that the drug be cost effective, as well as safe and efficacious. So in that respect, the market does have a level of control here. Funding and regulatory hurdles remain barriers to the sector as a whole, but are much less of an issue today than they were several years ago.

About Baird Research
Baird’s Research Department consists of 40 senior research analysts covering approximately 700 U.S. companies. Baird analysts have been recognized repeatedly in The Wall Street Journal’s annual “Best on the Street” survey and honored by StarMine as top analysts.

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Amy Nutter
Baird Public Relations