2009: Biotech’s Stealth Small Cap Rally

On the heels of the Dow Jones Industrial Average (DJIA) logging its worst annual performance since 1931 and the NASDAQ Composite (COMP) having its worst year since inception in 1971, it may have seemed counter intuitive to provide a bullish outlook for the biotechnology industry in 2009.  Nonetheless, at the start of the year we provided a positive outlook for biotechnology, citing the sector’s defensive characteristics, favorable technical aspects, and improving fundamentals, such as the number of new product approvals, products in clinical trials and the brisk pace of industry consolidation and licensing transactions.

With 2009 officially on the books, it appears an appropriate time to review the sector’s performance along with some of the themes highlighted in our previous articles.

Big Versus Small

The twenty-member NYSE Arca Biotechnology Index (BTK) was up 46% in 2009, while the broader NASDAQ Biotech Index (NBI) was only up 16%, underperforming the Dow Jones Industrial Average (INDU), S&P 500 (SPX), and NASDAQ Composite (COMP), which were up 19%, 24%, and 44%, respectively.  Why the huge discrepancy in returns between these two major biotechnology indices?  Unlike the equal-weighted NYSE Arca Biotechnology Index, the NASDAQ Biotech Index is market value-weighted, taking into account the total market capitalization of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalizations, or the greatest values, will have the highest weighting in the index.

During 2009, large capitalization biotechnology companies [greater than $10 billion] dramatically underperformed their smaller peers.  For example, Celgene Corporation (CELG) was essentially flat, Amgen, Inc. (AMGN) was down 2%, Gilead Sciences, Inc. (GILD) declined by 15%, and Genzyme Corporation (GENZ) dropped 26% [earning Henri Termeer the coveted Nance Trophy for worst biotech CEO of 2009 by TheStreet.com’s Adam Feuerstein].  Some of the reasons for this poor performance include concerns over generic competition and pipeline progress – ironically some of the same issues that have plagued big pharma.

Accordingly, the relative underperformance of large capitalization biotechnology companies in 2009 masked the fact that many smaller, innovative companies performed well, with 20 of the 125 companies comprising the NASDAQ Biotech Index producing triple-digit returns during the period.  In fact, two biotechnology companies were among the largest percentage gainers in the NASDAQ Composite with their staggering quadruple-digit returns: Vanda Pharmaceuticals, Inc. (VNDA) +2,150% and Human Genome Sciences, Inc. (HGSI) +1,342%.  See Table 1 for a list of the top ten gainers from the NASDAQ Biotech Index in 2009.

Table 1. Top ten gainers from NASDAQ Biotech Index (NBI) in 2009

Company Name Symbol 12/31/08 Close 12/31/09 Close % Change
Vanda Pharmaceuticals Inc. VNDA $0.500 $11.250 2,150%
Human Genome Sciences, Inc. HGSI $2.120 $30.580 1,342%
Targacept, Inc. TRGT $3.560 $20.900 487%
Dendreon Corporation DNDN $4.580 $26.280 474%
Hi-Tech Pharmacal Co., Inc. HITK $5.540 $28.050 406%
BioCryst Pharmaceuticals, Inc. BCRX $1.370 $6.460 372%
Spectrum Pharmaceuticals, Inc. SPPI $1.490 $4.440 198%
Santarus, Inc. SNTS $1.570 $4.620 194%
Salix Pharmaceuticals, Ltd. SLXP $8.830 $25.390 188%
Impax Laboratories, Inc. IPXL $5.000 $13.610 172%


Oncology: Prostate Cancer Spotlight

Driven by positive Phase 3 results from Dendreon Corporation (DNDN) regarding its prostate cancer vaccine study, investors gravitated towards biotechnology companies working in the field of prostate cancer treatment as noted in our May 2009 article.  This enthusiasm only increased when Johnson & Johnson (JNJ) announced in May 2009 that it would acquire Cougar Biotechnology, Inc., a development stage company with an oral prostate cancer treatment being studied in two Phase 3 clinical trials, for approximately $1 billion.

While not a member of either major biotechnology index, shares of Oncogenex Pharmaceuticals, Inc. (OGXI) started the year around $3.00 and ended above $22 for a 643% return.  Oncogenex is developing OGX-011, which is designed to inhibit the production of clusterin, a protein that is associated with cancer treatment resistance, and has completed Phase 2 clinical trials in prostate, lung and breast cancer.  OGX-011 received Fast Track designation from the FDA for the treatment of progressive metastatic prostate cancer in combination with docetaxel.  Shares of Oncogenex had traded higher than $42 in August 2009, but the stock price declined following a license agreement with Teva Pharmaceutical Industries (TEVA) for OGX-011 that apparently did not meet investor’s expectations.

Not all biotechnology companies working in the area of prostate cancer were as fortunate as Dendreon, Cougar, and Oncogenex.  Shares of GTx, Inc. (GTXI) were the second largest industry decliner for 2009 due to a complete response letter from the Food and Drug Administration [FDA] that cited clinical deficiencies regarding the company’s New Drug Application [NDA] for toremifene 80 mg to reduce fractures in men with prostate cancer receiving androgen deprivation therapy.  See Table 2 for a list of the top ten decliners from the NASDAQ Biotech Index in 2009.

Shareholder Activist Wins

In view of past major coups with MedImmune and ImClone, in August 2009 we reviewed Carl Icahn’s biotechnology holdings as reported in SEC filings and identified three companies that significantly underperformed the NASDAQ Biotechnology Index over the past five years, but with recent successful shareholder activist outcomes that could positively impact future performance.  In particular, we noted that Alexander Denner, who has served as Managing Director of entities affiliated with Carl Icahn and as a director of ImClone, had recently been elected as a director at each company.

During 2009, those three companies, Biogen Idec, Inc. (BIIB), Amylin Pharmaceuticals, Inc. (AMLN), and Enzon Pharmaceuticals, Inc. (ENZN) produced positive returns of 12%, 31% and 81%, respectively.  While Biogen Idec underperformed the sector, it notched the highest return among large capitalization biotechnology companies.

In other shareholder activist news, holders of Vanda Pharmaceuticals (VNDA) are likely pleased that the company’s Board of Directors spurned a request by Tang Capital Partners, LP to liquidate the company in February 2009.  Shares of Vanda were up 2,150% for the year [see Table 1] following FDA approval in May 2009 to market the company’s Fanapt™ [iloperidone], a novel antipsychotic for the acute treatment of adult patients with schizophrenia, and a subsequent marketing agreement for the product with Novartis AG (NVS).

CNS: Developments for Parkinson’s Disease

Vanda Pharmaceuticals wasn’t the only company working in the area of central nervous system [CNS] disorders to make news.  Shares of Impax Laboratories, Inc. (IPXL), which were trading around $7.50 at the time we published our August 2009 article titled “Treating Parkinson’s Disease: Investment Opportunities and Challenges,” continued to reach new 52-week highs and ended up 172% for the year [see Table 1].  Impax recently initiated the second of two Phase 3 studies designed to support marketing approval of its IPX066 product candidate for the treatment of Parkinson’s disease.  IPX066 is an investigational extended release carbidopa-levodopa product intended to rapidly achieve and then sustain effective blood concentrations of levodopa, potentially improving clinical symptom management.

Gastrointestinal Disease: 3 Hits, 3 Misses

First, the good:

Both Salix Pharmaceuticals, Inc. (SLXP) and Santarus, Inc. (SNTS) appear in the list of top ten biotechnology gainers for 2009 with triple-digit returns due to favorable regulatory progress reported during the year [see Table 1].  In September, Salix announced the successful outcome of two Phase 3 trials to evaluate the efficacy and safety of Xifaxan® [rifaximin] for the treatment of non-constipation irritable bowel syndrome.  Salix is planning an NDA submission for the first half of 2010.  In December, Santarus announced that the FDA approved the company’s New Drug Application [NDA] for its prescription tablet product for all of the indications being sought, including for the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease.

While not a member of either major biotechnology index, shares of Soligenix, Inc. (SNGX.OB) increased 317% during 2009.  In January, the company reached agreement with the FDA on the design of a confirmatory, pivotal Phase 3 clinical trial evaluating its lead product orBec® for the treatment of acute gastrointestinal Graft-versus-Host Disease [GVHD].  The following month, Soligenix announced a potential $30 million North American partnership agreement with Sigma-Tau Pharmaceuticals for orBec and in October 2009 initiated patient enrollment in the confirmatory Phase 3 trial that is expected to complete with clinical data available in the first half of 2011.

Next, the bad:

As discussed in our December 2009 article “Graft Versus Host Disease: Failures and Future Opportunities,” Osiris Therapeutics, Inc. (OSIR) recently reported preliminary results from two Phase 3 trials evaluating its Prochymal product candidate for the treatment of acute GVHD.  Unfortunately, neither trial reached its primary endpoint, sending shares from $14 to a 52-week low of $5.35 by November 2009, earning the company a spot in the top ten decliners for the year [see Table 2].

The other two casualties working in the area of gastrointestinal disease and appearing in the top ten decliners for 2009 are:

  • Progenics Pharmaceuticals, Inc. (PGNX), which announced in October 2009 that the company regained worldwide rights to Relistor® [methylnaltrexone bromide] for the treatment of opioid-induced constipation from Wyeth Pharmaceuticals.  Global net sales of Relistor for the third quarter of 2009 were a mere $3.3 million, as compared to $3.2 million in sales for the previous quarter.
  • In the absence of any negative clinical or regulatory news, NPS Pharmaceuticals, Inc. (NPSP) stated it remains on track to reach full patient enrollment before the end of the first quarter of 2010 for a confirmatory Phase 3 trial with Gattex™ (teduglutide), the company’s proprietary analog of naturally occurring human glucagon-like peptide 2 [GLP-2], for the treatment of short bowel syndrome [SBS].  NPS believes that positive results from the trial, expected to complete in October 2010 according to ClinicalTrials.gov, will enable the company to seek U.S. marketing approval for Gattex.

Table 2. Top ten decliners from NASDAQ Biotech Index (NBI) in 2009

Company Name Symbol 12/31/08 Close 12/31/09 Close % Change
Sequenom, Inc. SQNM $19.840 $4.140 -79%
GTx, Inc. GTXI $16.840 $4.200 -75%
MiddleBrook Pharmaceuticals, Inc. MBRK $1.500 $0.510 -66%
Idenix Pharmaceuticals, Inc. IDIX $5.790 $2.150 -63%
Osiris Therapeutics, Inc. OSIR $19.160 $7.140 -63%
Progenics Pharmaceuticals Inc. PGNX $10.310 $4.440 -57%
Questcor Pharmaceuticals, Inc. QCOR $9.310 $4.750 -49%
NPS Pharmaceuticals, Inc. NPSP $6.210 $3.400 -45%
Discovery Laboratories, Inc. DSCO $1.120 $0.628 -44%
The Medicines Company MDCO $14.730 $8.340 -43%


2010 Outlook

The capital markets remain turbulent and there may be casualties along the way among undercapitalized companies, but many of the biotechnology industry’s fundamentals, such as the number of products in clinical trials, new product approvals, profitable biotech companies and industry mergers & acquisitions remain favorable for 2010. Similar to 2009, small capitalization companies with clinical or regulatory catalysts should continue to outperform their larger industry peers in the year ahead.

What is your outlook for the biotechnology industry in 2010?  Take a moment to complete our survey, which is only ten questions long and will take just minutes to complete.  The results of this important survey along with our industry outlook will be communicated in early 2010 through a future article.  Take the survey now by clicking here.

Three Recent Biotechnology Activist Wins by Carl Icahn

Although a controversial topic, activist hedge funds and private equity firms typically use a small equity stake in an underperforming company to put public pressure on its management and board of directors with the goal of increasing stakeholder value through cost cutting, changes in corporate strategy or management, capital restructuring, asset divestiture and other tactics.  Biotechnology investors with recent activist roles include Biotechnology Value Fund, Third Point LLC, Eastbourne Capital Management, and DellaCamera Capital Management among others.

Perhaps the most prominent shareholder activist in biotechnology is billionaire investor Carl Icahn, largely through his Icahn Management LP investment fund.  He has created value for some biotechnology stakeholders, including a very quick return with MedImmune, Inc. and a longer-term payoff with ImClone Systems, Inc.

MedImmune, Inc.

On February 14, 2007, Icahn Management LP disclosed that it purchased 2.8 million shares of MedImmune, Inc., or just over one percent of the company.  The stock had ranged from $25 to $37 over the prior 12-months and Icahn had threatened to nominate a slate of opposing directors to MedImmune’s board unless the company put itself up for sale, adding that the firm suffered from “very lackluster management.”  In less than two months, MedImmune announced that the company hired investment bank Goldman Sachs to help evaluate whether third parties would have an interest in acquiring the company at a price and on terms that would represent a better value for its stockholders than having the company continue to execute its business plan on a stand-alone basis.  Less than two weeks later, AstraZeneca plc (AZN) announced the $15.6 billion acquisition of MedImmune Inc. for $58 per share in cash, representing a premium of approximately 53% to MedImmune’s share price the day before it was disclosed that the company was for sale.  At the time, MedImmune had several marketed products and posted $1.3 billion in 2006 sales.

ImClone Systems, Inc.

Icahn Management LP’s success with ImClone Systems, Inc. took a little longer to materialize – in fact, nearly a decade.  Icahn first reported a 5.1% stake in ImClone in October 1999 through a Securities and Exchange Commission [SEC] filing, including the purchase of 594,100 shares from September 29, 1999 to October 10, 1999 at prices ranging from $22.09 to $32.05 a share.  At that time, Icahn Management LP reported owning a total of 1.29 million shares of ImClone.

The price of ImClone’s stock reached a high of $74 in early December 2001, but dropped to $14 by February 2002 after the U.S. Food and Drug Administration [FDA] raised serious doubts about test results for the company’s Erbitux® (cetuximab) product candidate for the treatment of colon, head and neck cancers.  Investigations, scandals [eg, Martha Stewart] and lawsuits ensued.

By March 2002, Icahn received clearance from the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Act to acquire up to $500 million of ImClone’s stock, or about 40% of the company.  In August 2006, Icahn reached an agreement with ImClone to avoid a possible proxy contest by accepting the company’s offer to have him and three of his recommended candidates on the management slate of director nominees for the 2006 annual stockholders meeting.  The three nominees were Alexander Denner, a current ImClone director, as well as Charles Woler and Richard Mulligan.  Icahn replaced David M. Kies as chairman of ImClone and ousted Joseph L. Fischer, ImClone’s interim chief executive officer [CEO].  At the time, Icahn also reported in the filing that he increased his stake in ImClone to 12.89%.

It wasn’t until October 2008 that Eli Lilly (LLY) agreed to pay $70 per share in cash for a total of $6.5 billion for ImClone Systems, a 51% premium to ImClone’s closing price on July 30, 2008, the day before an initial $60 per share offer by Bristol-Myers Squibb (BMY) was made public.  At the time, ImClone had one drug on the market, Erbitux, which posted $1.3 billion in 2007 sales worldwide, up 18% from 2006.

Three Recent Activist Wins

In view of major coups with MedImmune and ImClone, we reviewed Icahn’s current biotechnology holdings as reported in SEC filings (see Table 1) and identified three companies that have significantly underperformed the NASDAQ Biotechnology Index (NBI) over the past five years, but have very recent successful activist outcomes that could positively impact future performance.  In particular, Alexander Denner, who has served as Managing Director of entities affiliated with Carl Icahn and as a director of ImClone, has recently been elected as a director at each company.  Consider the following:

  • Biogen Idec Inc. (BIIB): On June 9, 2009, Biogen Idec Inc. reported that Icahn won two seats on the board, giving him leverage to push for change at the company.  Alexander Denner and Richard Mulligan, both formerly with Icahn at ImClone, were appointed to Biogen Idec’s board.  Icahn owns about 5.6% of Biogen Idec, his largest current biotechnology holding, and has urged the company to consider a break-up or sale to a large pharmaceutical company.  Biogen Idec, with more than $4 billion in annual revenue for 2008, sells three FDA approved drugs for cancer, multiple sclerosis [MS] and rheumatoid arthritis.  While Biogen Idec possesses a strong pipeline with several drugs in Phase 2 and Phase 3 development, the company’s flagship product Avonex® (interferon beta-1a) will soon face competition from Extavia®, a branded version of interferon beta-1b by Novartis AG (NVS) for the treatment of MS that will be introduced this fall.  Avonex represented more than half of Biogen Idec’s revenue in 2008.
  • Amylin Pharmaceuticals, Inc. (AMLN): On August 24, 2009, three months after a high profile proxy battle resulted in the ouster of its chairman, Joseph C. Cook, Jr., Amylin Pharmaceuticals announced the appointment of a new chairman.  Paulo F. Costa, who formerly headed the U.S. operations of Novartis AG as President and Chief Executive Officer of Novartis U.S. Corporation, took over as chairman after gaining a seat on Amylin’s board in May 2009.  At that time, two board members recommended by Icahn and Eastbourne Capital Management, Kathleen Behrens and Alexander Denner, were also elected.  Amylin’s top drug Byetta® (exenatide), which it sells with partner Eli Lilly & Co (LLY), is a GLP-1 agonist for patients with type 2 diabetes that is administered twice daily as a subcutaneous injection.  Amylin, with more than $840 million in annual revenue for 2008, has set a goal of becoming operating cash flow positive by the end of 2010.  An important near-term catalyst for the company, Amylin, Eli Lilly, and Alkermes, Inc. (ALKS) are working together to develop exenatide once weekly, which would represent the first weekly therapy to treat type 2 diabetes with glucose control and weight loss.  A New Drug Application [NDA] for exenatide once weekly was accepted for review by the FDA in July 2009.
  • Enzon Pharmaceuticals, Inc. (ENZN): In May 2009, Alexander Denner and Richard Mulligan, both formerly with Icahn at ImClone, were appointed to Enzon’s board.  More recently, on July 23, 2009, Enzon appointed Alexander Denner as non-executive Chairman of the Board, separating the role of CEO and Chairman.  Jeffrey H. Buchalter, who previously served as executive Chairman, continues to serve as a Director as well as President and CEO.  DellaCamera Capital, which beneficially holds approximately 8.3% of the shares of Enzon had been making a case for removal of Jeffrey Buchalter as CEO due to excessive compensation, poor stock performance, and questionable expense levels.  DellaCamera recently withdrew its consent solicitation to remove the CEO in order to better allow the Company`s new Chairman and new independent director to bring positive change to the Board.  Enzon, with more than $48 million in annual revenue for 2008, has a portfolio of four marketed products, Oncaspar®, DepoCyt®, Abelcet® and Adagen® along with a royalty revenue stream from licensing partnerships for other products developed using Enzon’s PEGylation technology.

Table 1: Icahn’s biotechnology holdings (as of 6/30/09)

Ticker Company Name # Shares Held % of Outstanding Recent Price $ Value of Shares Held
BIIB Biogen Idec, Inc. 16,075,256 5.56% $49.93 $802,637,532
AMLN Amylin Pharmaceuticals, Inc. 12,971,328 9.20% $12.91 $167,459,844
REGN Regeneron Pharmaceuticals, Inc. 2,508,001 3.22% $22.33 $56,003,662
ENZN Enzon Pharmaceuticals, Inc. 3,521,075 7.82% $7.19 $25,316,529
ENDP Endo Pharmaceuticals Holdings, Inc. 1,129,126 0.97% $22.74 $25,676,325
EXEL Exelixis, Inc. 2,357,110 2.20% $5.71 $13,459,098
MEDX Medarex, Inc. 313,040 0.24% $15.97 $4,999,249
ANX Adventrx Pharmaceuticals, Inc. 4,324,324 3.66% $0.17 $722,162
EMIS Emisphere Technologies, Inc. 86,430 0.24% $0.94 $81,244

A Word of Caution

Not all of Icahn’s biotechnology investments turn out like MedImmune and ImClone, so investors should conduct their own due diligence regarding Biogen Idec, Amylin, and Enzon before blindly following the billionaire investor.  For example, shares of Telik, Inc. (TELK) plunged more than 70% in a single trading session – falling from over $16 per share to below $5 per share – in late December 2006 after the company reported that its most advanced development compound, Telcyta® (canfosfamide HCI), failed to improve survival in patients with advanced lung cancer or in patients with ovarian cancer.  At one point, Icahn Management LP reported nearly a 10% holding in Telik but reported holding zero shares as of December 31, 2008.  Shares of Telik recently traded below a dollar.

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About MD Becker Partners LLC

MD Becker Partners is a boutique management and strategy consulting firm focusing on both public and private companies in emerging growth industries, such as pharmaceuticals, biotechnology, medical devices, and cleantech. The firm’s mission is to bring experience-based insights gleaned from the three independent disciplines of investor relations, strategic advisory and operational improvement together and apply them to carefully conceived and expertly enacted strategies that help companies increase visibility, unlock value and access resources to grow their business. For more information, visit the website: http://www.mdbpartners.com/

Disclaimer: This article contains the author’s own opinions, and none of the information contained therein constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. To the extent any of the information contained in the article may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.