Biopharmaceutics: a premonition of a bubble
Pharmaceutical Madness
Tatiana Lomskaya, Financial One
For several years now, pharmaceutical startups in the United States have attracted abnormal investments in terms of volumes. Players are obsessed with the idea of developing a cure for cancer or Alzheimer's disease, which will bring creators and investors billions of dollars. Or completely ruin them if the tests fail.
On Wednesday, September 9, the shares of the American pharmaceutical company Tetraphase Pharmaceuticals collapsed by more than 79% (from $44.78 to $9.49 per paper) after its flagship development – the antibiotic eravacyclin – failed to pass the final stage of clinical trials. The market reaction is natural: eravacycline is the only drug of the company that was ready to enter the market. Investors believed in the bright future of Tetraphase – its capitalization on the eve of the collapse was $ 1.63 billion. Now – only a couple of tens of millions.
Today, a pharmaceutical company in the US market is not at all obliged to produce effective drugs in order to conduct a public offering and be valued at billions of dollars. Here are some more examples: Juno Therapeutics, a cancer drug developer, went public in December 2014, and is currently valued at $4.18 billion. Another creator of the cancer drug, which was placed last year, Kite Pharma, has a capitalization of $ 2.78 billion; Spark Therapeutics, which went public in January 2015, is now worth more than $ 1.13 billion. At the same time, none of the listed companies has offered any viable medicines to the market at the moment.
First of all, the placement, and the license – thenIt is known that in order to obtain a license in the United States, a medical drug must undergo several phases of clinical trials: in Phase 1, the safety of the drug is tested, in Phase 2, its effectiveness, Phase 3 involves comparing the drug with existing analogues.
Moreover, if the first stage takes on average several months, then the subsequent ones can stretch for years. But the problem is not even in time. According to a KMR Group study, 97% of medicines do not even pass the preliminary stage of testing: 95% of the drugs that fall into it fail Phase 1; 88% of medical products fail Phase 2. Only 56% of drugs that have passed all previous stages receive approval in Phase 3.
As you can see, the probability of a "breakthrough" is extremely small. Nevertheless, pharmaceuticals is now the leader of the American market in terms of the number of public offerings. In 2014, 71 pharmaceutical companies entered the IPO in the United States – this is a quarter of all American placements last year (Renaissance Capital data). At the same time, most of them, according to J.P.Morgan, were either at the preliminary stage of clinical trials, or in Phases 1 and 2.
In search of ideasOf course, this pharmaceutical madness did not come out of thin air.
Firstly, large manufacturers are expiring patents for the most popular medicines, while research and development require more and more costs: according to 2012 data, each approved drug corresponds to an average of $4 billion in R&D costs. It is not surprising that major players are actively looking for promising projects on the side.
Admittedly, there are really impressive examples here. In 2011, Gilead Sciences Corporation acquired an unremarkable hepatitis C drug developer, Pharmasset Inc. The drug she created With Sovaldi was licensed at the end of 2013 and became a real hit. Due to this transaction alone, Gilead Sciences has increased its capitalization by more than $100 billion over three years.
The main reason for such a high interest of investors in the shares of biotech startups is the high level of return. Just look at the dynamics of the Nasdaq Biotechnology index, which grew by 26% in the first half of 2015, while the S&P 500 rose by only 1.7%. In addition, last year, the US Food and Drug Administration significantly simplified the procedure for obtaining patents, which further increases the attractiveness of this industry.
Premonition of a bubbleAs the company progresses through the testing stages, its stock prices rise.
For example, the already mentioned Juno Therapeutics has doubled in price in six months of its presence on the market. However, in case of problems, investors have a hard time. For example, in June 2015, the investors of Avalanche Biotechnologies doubted the reliability of the results of Phase 2 – as a result, its shares fell by 56% in a day.
And, nevertheless, last year, the shares of companies at the stage of preliminary trials or in Phase 1 on the first day of trading grew by an average of 29% – twice as fast as other pharmaceutical debuts. The situation is somewhat reminiscent of the famous dot-com bubble, when stocks soared by 50-70% on the first day of trading (Renaissance Capital data). At that time, many investors did not conduct in-depth research and simply entered into the capital of each transaction, believing that a breakthrough was just around the corner.
It is not surprising that in July 2014, Fed Chair Janet Yellen in her speech separately mentioned small-cap pharmaceutical companies, calling them "significantly overvalued." The US regulator urges investors to be careful, but it has not yet managed to stop the hype.
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14.09.2015