- Sector layoffs still coming as companies move to extend cash runways
- Markets still highly reactive to bad trial results
Investors often flee from risk in a bear market. In their attempts to reduce losses, they become hyper-vigilant about anything that might be perceived as bad news for a stock in their portfolios. Disappointing clinical trial results or drug safety concerns can dent a pharmaceutical company’s share price at the best of times – but in a bear market, the impact is sometimes downright punishing.
Data from Evaluate Vantage shows that the average biopharma share price drop in reaction to negative trial data currently sits at about 40 per cent – the worst figure for several years.
Smaller-cap biotechs with only a handful of drugs in the pipeline are likely to feel the impact of bad news most acutely, as opposed to blue-chip pharma companies with highly diversified revenue streams. Last week, GSK (GSK) decided to abandon late-stage trials of a rheumatoid arthritis drug that it once predicted had billion-dollar sales potential after it proved to be less effective than hoped. Experts at the US Food and Drug Administration (FDA) also partially withdrew support for another of the company’s pipeline prospects, the anaemia treatment daprodustat, following a panel meeting last week.
Bear market despair
Two pieces of bad news like this would dent a smaller company’s share price, but when markets closed on the week in which the updates landed, GSK was up 3.78 per cent week on week. Investors are perhaps feeling bullish after the company’s vaccine against the respiratory syncytial virus (RSV) proved highly efficacious in a recent trial. However, companies with thinner pipelines aren’t likely to retain the same level of confidence in times of economic turbulence.
Kodiak Sciences (US:KOD), a developer of treatments for retinal diseases, stands out among the sector’s most troubled firms in the first half of 2022. Its shares fell 80 per cent in a day in February after one of its drug candidates failed to improve vision as effectively as an existing therapy from a rival firm.
Kodiak’s shares are down 92 per cent in the year to date. Another specialist drug developer that received a substantial knock to its share price in the first quarter was Synairgen (SNG), which is working to develop an inhaled treatment for severe viral lung infections. On 21 February, it was revealed that the company’s lead product, SNG001, had failed in a late-stage trial of patients hospitalised with Covid-19. Its shares fell 85 per cent in a day and have not recovered substantially.
Sector experts have noted that biotech was particularly out of favour in the first half of the year. “The sector hit a low in June but has since traded above that level, whereas the broader market has fallen to new lows,” said Ailsa Craig, lead investment manager at International Biotechnology Trust (IBT). “During this period, biotech company share prices were being hit regardless of company fundamentals. Positive data felt unappreciated, with muted share moves and negative data sending stocks down hard.”
Beginnings of a bounceback?
The Nasdaq Biotechnology Index is still down 18 per cent year on year, and the straitened conditions have brought on waves of layoffs across the sector. In October alone, no fewer than nine US-based biotechs announced they would be cutting staff numbers, mostly in an effort to extend their cash runways as they refocus on their most profitable business lines. Even big pharma companies, including AbbVie (US:ABBV), Bristol-Myers Squibb (US:BMS) and Novartis (CH:NOVN), have let employees go this year as part of restructuring plans.
According to Craig, this is not a sign of ongoing weakness in the biopharma space, but a consequence of the wider market contraction and the end of pharma’s pandemic bull run. “We now have a risk-off period and valuations have dropped dramatically,” she explained. “At these times, we tend to see consolidation in the sector – mergers, acquisitions and failures – which more often than not lead to layoffs. The pandemic period of 2019-2022 accelerated the whole biotech pendulum, a period that would normally not have that kind of aggressive swing.”
An analyst with Jefferies recently told the Financial Times that investors’ appetite for biotechs was returning, although only if the companies in question have positive trial data. Recent winners include Amylyx Pharmaceuticals (US:AMLX), a developer of drugs for neurodegenerative disease that recently received FDA approval for a drug that treats motor neurone disease. Among the larger pharma companies, Bristol-Myers Squibb recently earned approval for a psoriasis treatment and announced positive results from a trial of a drug that treats red blood cell disorders.
If macro conditions stay choppy, it could be a while before early-stage companies with speculative drug prospects attract financing again. Until then, markets will be on the lookout for positive data readouts.
