It's no secret that the biotech sector has been on fire. In the last twelve months, shares of the NASDAQ Biotech Index have soundly crushed the S&P 500, climbing a whopping 74% --- and it looks like the biotech bull train has yet to let up.
While I am not necessarily changing my long-term investing strategy here, it would not surprise me at all to see a bit of a consolidation after the excitement from the JP Morgan Healthcare conference. This year has already produced some spectacular gains from a variety of stories: Intercept Pharmaceuticals up 382% on the unexpected clinical halt due to overwhelming efficacy in its trial for patients suffering from nonalcoholic steatohepatitis (NASH). Alnylam is up 44% year to date after securing an equity investment from Sanofi. Chelsea Therapeuitics is up 13% year to date after a positive advisory committee vote for their drug Northera. And Gilead is up 9% after early indications that the initial Sovaldi launch for Hepatitis C is going much better than expected. And we are just 3 weeks into the year. There has been so much news flow in the biotech space that it has been hard to keep up, and I would not at all be bothered by a lull in news for a little while.
My record in calling macro sector plays has been pretty terrible so I will refrain from calling a sector pullback, although it would not surprise me in the least. Just take a look at the 3 month chart of the IBB.
IBB 3 Month Total Returns data by YCharts
That is a 24% move, just lagging the broader market's gains from all of last year.
So, with that in mind, where do we go from here? I'm taking a deeper look and focusing somewhat on major upcoming catalysts in the coming months, with 2 in particular.
First is Vertex (VRTX 0.10%). Vertex has an extremely important year ahead with major catalysts in cystic fibrosis. Most eyes are on the phase 3 Traffic and Transport studies due out mid-year, but we may also get data from an early clinical study looking at VX-661 in combination with Kalydeco before this. VX-661 showed great data early on and I believe it will play a large part in the 3 drug combo that Vertex has in mind. Here is a link Vertex's latest presentation and their PR from last week detailing their plans for 2014 and beyond. Vertex hit a recent low of $58.06 on November 12 and now sits at $84.12, a gain of nearly 45% in just 2 months and just off its all time high of $89.96. Vertex will have a strong cash position, with $1.47 billion at year end 2013. With its Hep C franchise in limbo, and probably dead, the sole focus is on Cystic Fibrosis. Outside of the upcoming trials, Vertex needs to continue to expand its Kalydeco franchise, which it guided to $470-500 million in sales this year. If the FDA approves it for other certain gating mutations, 2015 should see some nice growth. They ultimately estimated that nearly 7,000 patients could be eligible for Kalydeco monotherapy.
The second large catalyst I am focused on is Bristol-Myers Squibb's (BMY 0.96%) data of Nivolumab. This is certainly the crown jewel of its pipeline, and we should expect a flurry of data in the next several months. I think people were disappointed to not see any data released at JP Morgan last week, especially since the PD-1/Yervoy third-line squamous NSCLC data are already in-house. I was surprised to see, however, that Bristol has so far held up quite well in the face of the news that Merck will begin filing its PD-1 inhibitor in Melanoma on a rolling basis, expected to be completed mid-year.
I would be surprised if we hear anything on Bristol's earnings call, but timing is always difficult and it could come then. They report earnings on Friday Jan 24th. I also expect a much fuller data set at ASCO this year on other studies involving melanoma and kidney cancer as well. I continue to be long March $50 and 55 calls, and January (2015) $42 and $50 calls, in addition to common stock, although I am slightly worried about the March calls should Bristol decide to sit on the data. Either way, I look forward to the company's updates and continue to think that it will outperform other large cap pharma this year should these data impress.
