Healthcare stocks put up impressive returns last year and are trumping the S&P 500 yet again this year.
The S&P health care select index ETF (XLV) is up more than 10% this year and the iShares Nasdaq biotechnology ETF (IBB) has gained more than 13% through the first six months.
Those returns handily outpaced the S&P 500, but they're just a fraction of the returns notched for those lucky enough to own shares in Intercept Pharmaceuticals (ICPT +0.00%), Intermune (ITMN +0.00%), Achillion Pharmaceuticals (ACHN +0.00%), Accelerate Diagnostics (AXDX +0.00%), and Horizon Pharma (HZNP +0.00%). All five of them are already up more than 100% this year, so let's take a closer look.
Source: Author's calculations
1. Tackling a growing health crisis
Intercept's shares surged in January following the early halt to its trial studying obeticholic acids, or OCAs, use in treating nonalcoholic steatohepatitis, or NASH, a fast growing cause of liver failure.
Investors cheered the news sending shares up more than 250% on enthusiasm that OCA could someday offer hope to potentially millions of people who are increasingly being diagnosed with NASH.
Estimates suggest that up to 12% of Americans may have NASH and that as many as 10% of NASH patients could wind up with liver failure. If those estimates prove correct, OCA may have similar sales potential to blockbuster treatments for hepatitis C.
Although Intercept's shares surged in January, they've done little since. In June, shares retreated following news that the NASH trial data wouldn't be available in July, when it was previously expected. That delay, however, is a temporary event and given that the trial was halted early, Intercept investors are likely to see the company outline an FDA filing plan that could slate the company for review within a year.
Source: Intermune
2. A second chance at a win
Intermune's impressive run this year follows positive phase 3 trial results for its drug Esbriet in patients with idiopathic pulmonary fibrosis, or IPF.
Those results show that Esbriet may slow disease progression and improve patient survival and that may clear the way to overcoming FDA objections to Esbriet when Intermune initially attempted to win over U.S. regulators in 2010.
The FDA may also be more welcoming to Esbriet this time around given that the drug won approval in Europe in 2011 and is currently being marketed in 15 primary markets.
Since there aren't any other approved competing therapies for IPF, some estimates peg Esbriet's peak sales potential within billion dollar blockbuster territory. Those projections may prove heady, however, given that Intermune is guiding for sales of $115 to $135 million this year in Europe.
Source: Achillion
3. Riding the coat-tails
Investors tripped over themselves to buy shares in Achillion last month following Merck's acquisition of Achillion competitor Idenix. Merck paid a jaw dropping 3.4 times Idenix's prior closing price to capture its promising hepatitis C pipeline.
That deal shifts attention to Achillion, which is one of the few remaining emerging hepatitis C pure plays.
Achillon has two intriguing hepatitis C drugs in mid-stage trials. ACH-3102, which has been awarded FDA fast-track designation, is being studied for use alongside Gilead's multibillion blockbuster drug Sovaldi to see if the two can shorten treatment regimens from 12 weeks to just six or eight weeks. And sovaprevir, a drug with fast-track status, is being combined with ACH-3102 and ribavirin as a potential Sovaldi alternative.
Source: Accelerate Diagnostics
4. Revolutionizing diagnostics
Accelerate has been in the fast lane as investors have raced to team up with famed health care investor Larry Feinberg, who owns 11% of Accelerate and controls another 19% via stock owned by Oracle Partners, the hedge fund he manages.
Accelerate also has another well-versed investor in Jack Schuler, the former president of Abbott Labs. Schuler serves on Accelerate's board of directors and owns more than 20% of the company.
What's likely attractive to both of these health care gurus is Accelerate's potential to reshape how infectious disease is diagnosed.
As superbugs evolve and develop resistance, it's getting far harder to quickly identify them and their weaknesses. Accelerate thinks it's built a better mousetrap. Instead of relying on time-hogging cultures, the company has built a diagnostic tool that can extract, concentrate, and immobilize live microbes from patients and then use image analyzing software to guide treatment. That means that Accelerate could offer an important next-generation solution to hospitals that cuts the time to determine which drugs to use from days to hours.
Source: Horizon Pharma
5. Resurrecting forgotten therapies
Horizon has been heading higher in part because of its $600 million acquisition of Ireland based Vidara. That deal gives Horizon a tax-friendly address that could lower its future tax bill as sales finally translate into profit.
The timing couldn't be better. Last fall, Horizon acquired the U.S. marketing rights to Pozen's Vimovo from AstraZeneca, giving the company its third approved product.
Each treats large patient populations with high unmet need, including arthritis, pain, and inflammatory disease.
Duexis is currently Horizon's top seller, accounting for 80% of its $74 million in fiscal 2013 sales. Horizon hopes sales will continue higher this year as it leverages its existing rheumatology sales force to market Vimovo,
So far that strategy is paying off. Horizon reported its first quarter sales beat its projections, totaling $52 million, $34 million which was for Vimovo. That's impressive given that AstraZeneca reported it sold just $20 million worth of the drug last year.
Horizon's first quarter performance and the Vidara buyout prompted the company to bump up its 2014 sales guidance to between $270 million and $280 million. Overall, analysts expect Horizon's earnings will climb from a loss last year to more than $1.50 per share by fiscal 2017.
Fool-worthy final thoughts
Intercept, Achillion, and Accelerate lack a commercial product and that means that they're highly speculative plays that are trading on their prospects rather than their proven sales and earnings record.
Intermune and Horizon differ in that they're already generating revenue from approved products. At Intermune, EU sales of Esbriet jumped from $10 million a year ago to $30 million in the first quarter and since the company filed its resubmission for Esbriet with the FDA in May, investors will likely see a decision and potential boost to sales within the year.
Horizon is also intriguing to me given that sales of Vimovo have already reached the $35 million price Horizon paid for rights to the drug. If those sales can continue higher, a tax-friendly structure should reward investors.
