Market corrections are always scary when they happen but, fortunately, they don't come around too often. The previous meltdown for biopharmaceutical equities was back in February 2016. This time around, the BioWorld Biopharmaceutical index experienced a dramatic drop of 10 percent in October, with the BioWorld Drug Developers index suffering an almost 19 percent swoon. A late market rally did help stop the bleeding but by then the damage had been done, leaving investors to lick their wounds and the sector to face an uphill battle to recover its losses before the close of the year.

There didn't seem to be a single trigger that caused the volatile markets during the month. According to the Cowen and Co. biotechnology analyst team writing in their monthly biotech thermometer report to clients, they postulated that "a variety of explanations have been given, including risk aversion, tariffs, midterm elections, Medicare Part B changes, rising interest rates, declining economic growth and unexciting sector earnings."

The meltdown certainly caught most biotech investors by surprise because they were feeling quite good about the sector heading into October, particularly as the BioWorld Biopharmaceutical index had gained more than 10 percent in September.

The gains, however, were quickly handed back as the index underperformed the broader markets, with the Dow Jones Industrial index dropping just 5 percent and the Nasdaq Composite falling 9.2 percent in the period. (See BioWorld Biopharmaceutical index, below.)

No traction from earnings

Biotech's blue chip companies failed to impress investors despite posting strong third-quarter financials. Leading the decliners in the group was Summit, N.J.-based Celgene Corp., whose shares (NASDAQ:CELG) dropped 20 percent in October and now sit down 31 percent year to date; over a 12-month period, they have declined more than 50 percent. Investors were relatively unmoved about the company's net product sales of $3.89 billion, an 18 percent increase over the same period last year. Although Revlimid (lenalidomide) sales enjoyed an 18 percent third-quarter increase to $2.44 billion, with growth attributed to increases in market share and extended treatment duration, investors continue to remain cautious about the company's prospects because of impending generic competition for its multiple myeloma flagship product.

Leerink analyst Geoffrey Porges noted in a research report on Celgene that "although the company re-affirmed the 2020 revenue and EPS guidance and expressed its confidence in the five key late-stage candidates to make up for most of the revenue erosion of Revlimid from upcoming generic competition, investors are likely looking for more growth opportunities to reassure them about the post-2020 outlook."

Celgene was not alone in experiencing share price erosion among biotech's elite companies. Gilead Sciences Inc.'s shares (NASDAQ:GILD) closed almost 12 percent down. Despite posting a 14 percent drop in revenues, the company reported an improvement in its HIV product sales to $3.7 billion, compared to $3.3 billion for the same period last year. Chronic hepatitis C virus product sales, however, experienced a significant decline to $902 million compared to $2.2 billion for the same period in 2017.

It was the same story for Boston-based Vertex Pharmaceuticals Inc., whose shares (NASDAQ:VRTX) tumbled 12 percent even though it posted a significant 42 percent third-quarter jump in its total cystic fibrosis (CF) product revenues to $783 million, beating consensus by 2 percent. The company attributed the increase to a rapid uptake of its newest CF drug, Symdeko (tezacaftor/ivacaftor and ivacaftor), in the U.S., which recorded revenues of $255 million, up 37 percent over the previous quarter.

The FDA cleared the drug for marketing in February to treat CF in people age 12 and older with two copies of the F508del mutation in the CF transmembrane conductance regulator gene or who have at least one mutation that is responsive to tezacaftor/ivacaftor. (See BioWorld, Oct. 26, 2018.)

Drug developers dive

With market volatility dialed up, investors have shied away from risk and, as a result, small and midsized biotech companies focused on drug development were hard hit, as evidenced by the 18.5 percent drop in value of the BioWorld Drug Developers index in October, leaving it underwater by 20 percent year to date. (See BioWorld Drug Developers index, below.)

Across the board 20 percent declines in the share values of group members during October were typical even though companies did not report news. Any negative news exacerbated share price declines. Clovis Oncology Inc., of Boulder, Colo., for example, reported a wider-than-expected net loss for the quarter of $89.9 million, or $1.71 per share, including disappointing ovarian cancer treatment Rubraca (rucaparib) revenues of $22.8 million in the quarter, missing consensus estimates. It has been a tough month for the company, with its shares taking an additional hit as investors wrestled with the competitive implications of data submitted in rucaparib's NDA and presented at the European Society for Medical Oncology congress in Copenhagen. At the time, concerns around a lack of response in a small number of platinum-refractory patients, safety and tough-to-make comparisons with other PARP inhibitors, such as Astrazeneca plc's already-approved Lynparza (olaparib), comprised several factors that weighed on the company's stock value. At the end of October, shares of Clovis (NASDAQ:CLVS) closed down 60 percent, making the company the leading decliner in the group.

Climate

While the first few trading days of November did see some uptick in the values of biotech equities, it is hard to imagine that there will be a swift recovery from the October declines. Cowen and Co. noted that "biotech investors leave October shell-shocked, hiding under their desks, and questioning their choice of careers."

It is clear that it will take some major catalysts to kickstart the sector once again and bring investors back off the sidelines. 

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