Biotech Gets a Lifeline

The biotech & biopharma sectors started to get off the schneid on Monday -- after a deep slump over the previous three weeks within an even larger and more-brutal eight-month bear market. The sector got off life support in part as a result of standout earnings from one of my previous Best Ideas, Eagle Pharmaceuticals (EGRX), which posted one of the more impressive quarterly reports this earnings season, beating the profit consensus by $0.38 a share, as sales of its cancer drug BENDEKA ramp up faster than expected. Teva Pharmaceuticals (TEVA) also posted numbers that beat expectations, showing it did not deserve to selloff on Friday, as did most of the sector when specialty drug maker Endo International (ENDP) significantly lowered guidance. Mylan (MYL) also had a good day, and never should have been caught up in Friday's Endo-related decline in the first place either. The generic drug giant beat earnings consensus and affirmed full-year guidance a few days before Endo's debacle. The stock is still cheap, at just over 8x this year's guidance. Also boosting sentiment on these areas of the market were two significant collaboration deals. One was between Ariad (ARIA) and Incyte (INCY). Ariad is selling its European operations to the INCY, as well as an exclusive license to develop and commercialize Ariad's drug Iclusig in Europe and 22 other countries. Ariad will retain commercialization rights in the U.S. and some other countries - and received a big, upfront payment of $140 million, significant regulatory and development milestone payouts and royalties of 32% to 50% of net sales of Iclusig. Opko Health (OPK) also entered into a smaller collaboration deal with Vifor Fresenius Medical Care Renal to commercialize its drug RAYALDEE in Europe, Canada and other selected countries outside the U.S. RAYALDEE should be approved by the FDA in October. This is not as big a deal as the one Ariad was able to garner, but good enough for better than a 5% gain in OPKO shares on Monday. What is really needed to turn sentiment around on the sector is a nice boost in M&A activity. We are starting to see some green shoots in that area, as an erstwhile bidding war seems to be in progress for mid-cap Medivation (MDVN). This company seems more and more likely to eventually be acquired for north of $10 billion, even as the stock has more than doubled over the past three months. I think the market can count on Allergan (AGN) being a more active hunter, once its $40 billion deal to sell its generics business to Teva is officially closed - hopefully by the end of June. I also believe Gilead Sciences (GILD) will finally move past the kick the tire phase, and start being an active participant in this market now that growth in its blockbuster hepatitis C franchise has hit a wall. With some $15 billion in free cash flow expected this year, it certainly has the firepower to pick up some high-quality assets. With biotech being one of the few areas within the S&P 500 producing double-digit growth this quarter, and with the large biotech names selling at their lowest collective valuation in some five years, one has to believe that someday soon the market will come to realization that there is substantial value in this beaten down sector. Maybe Monday was the start of that.

Biotech Gets a Lifeline

Solid earnings and the start of some M&A activity may be just what this sector needs to rise.

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