Warning signs that the biotech sector's marathon five-year positive run had finally hit the fatigue wall were there for all to see at the end of the second quarter. Most thought that the industry was ripe for a major correction and that it had finally arrived when investors headed for the hills on news that China's economy appeared to be in rougher shape than originally forecast sending the markets south. Although biotech valuations were dragged down late August in the wake of market turbulence, investors did return as the markets rebounded. However, it wasn't a macroeconomic event that finally tanked biotech but a tweet on drug pricing that served to wipe $40 billion off biotech's collective valuation.

That tweet came from presidential candidate hopeful Hillary Clinton, who said she'd take on the issue of rising drug prices. It was in response to the fact that Turing Pharmaceuticals AG had hiked the price of Daraprim 5,000 percent after acquiring its U.S. rights from Impax Laboratories Inc. for approximately $55 million. The antiparasitic drug is indicated for the treatment of toxoplasmosis when used conjointly with a sulfonamide. It is also indicated for the treatment of acute malaria in certain patients, and for the treatment of chemoprophylaxis of malaria due to susceptible strains of plasmodia.

The widely reported increase generated mass criticism and Clinton termed it drug-price "gouging" and was the catalyst for her to release a proposal the following day to address the issue of "skyrocketing cost of prescription drugs." (See BioWorld Insight, Sept. 28, 2015.)

Although analysts pointed out that it would be at least two years or more before any legislative oversight would get around to dealing with this issue, if at all, the damage had been done. Investors, who had been beaten up over the past few months, were in no mood for any more negative news and quickly bailed on the sector with the result that the BioWorld Biotech Blue Chip Index, comprising 20 of the leading companies ranked by market cap, dropped almost 18 percent in value during the space of the next six trading days. By contrast the Dow Jones Industrial average only fell 2 percent and the Nasdaq Composite index 6 percent in the same period. (See BioWorld Biotech Blue Chip Index – September Woes, below.)

On the final day of the quarter the index did make a brief recovery, regaining 4 percent of its lost value providing some optimism that biotech may get back on track in the fourth quarter.

"Ultimately, cooler minds will prevail," John Chambers, vice chairman, head of Healthcare Investment Banking at Roth Capital Partners, told BioWorld Insight. "The sky certainly isn`t falling, but what the market now needs is for some stability to set in."

PERIOD TO FORGET

It is hard to remember a time when the industry's leading biotech companies collectively experienced such a terrible quarter performance returning a dramatic downturn of 20 percent. (See BioWorld Biotech Blue Chip Index, below.)

There is no doubt it is a period that biotech investors will want to forget as the reversal served to move the index into negative territory year-to-date at -1.3 percent.

Among the leading decliners in the third quarter was once high-flying gene therapy company Bluebird Bio Inc. (NASDAQ:BLUE) whose share value dropped almost 50 percent in the quarter demonstrating just how out of favor biotech companies have fallen.

No company in the group was immune to the downturn with leading biotech companies Amgen Inc. and Gilead Sciences Inc. seeing their share values in the third quarter fall by 10 percent and 16 percent respectively.

THIRD QUARTER FINANCINGS

Although public biotech companies were getting beaten up on the financial markets during the third quarter, they still had no difficulty in completing financing transactions.

Public offerings, including IPOs and follow-on financings, generated a staggering $29.8 billion in the period. Serving to boost this amount were giant-sized public offerings of debt completed by Gilead Sciences Inc., Celgene Corp. and Biogen Inc.

In September, Gilead priced six tranches of senior unsecured notes totaling $10 billion that it said will be deployed for general corporate purposes, such as the repayment of debt, working capital, payment of dividends and the repurchase of its outstanding common stock.

Celgene priced five series of senior unsecured notes that generated $8 billion, which the company said it will use to finance a portion of its $7.2 billion acquisition of Receptos Inc. (See BioWorld Today, July 16, 2015.)

Biogen priced a series of four senior unsecured notes for an aggregate principal amount of $6 billion, which will be used, together with cash on hand, to fund share repurchases of its common stock under the company's previously authorized $5 billion share repurchase program. The company has had a tough quarter seeing the value of its shares fall a dramatic 28 percent in the third quarter. This hasn't pleased investors and the law firm of Kessler Topaz Meltzer & Check LLP said that a shareholder class action lawsuit has been filed against the company on behalf of purchasers of its common stock between Jan. 29, 2015, and July 23, 2015.

The complaint alleges that Biogen and certain of its senior executive officers issued a series of misleading statements to investors regarding their expected fiscal 2015 financial results, and how sales of Tecfidera were expected to drive revenue growth. The fact that the company said in its second quarter financial results that it was lowering its revenue growth expectations due to less-than-stellar sales of multiple sclerosis (MS) drug Tecfidera (dimethyl fumarate) caused share values to decline 22 percent on the news.

Excluding these three massive financial transactions, public offerings in the third quarter were still 133 percent greater than the $2.5 billion raised in the same period last year. Year-to-date public offerings have generated $47.5 billion and contributed over 78 percent of the total financings of $61.1 billion.

STONG APPETITE FOR IPOS

Although, 2014 was always going to be a hard act to follow in terms of the record number of IPOs completed, companies that have gone public this year globally have, in fact, raised more dollars. The 55 companies that have completed their IPOs in 2015 have raised almost $5.4 billion, according to BioWorld Snapshots. In the same period last year 66 companies had joined the public arena generating $4.7 billion.

Despite the challenging capital markets, companies who are pulling the trigger on their IPOs this year are generating an average of $100 million.

During the third quarter seven of the 12 companies to complete IPOs each generated more than $100 million. Topping the list was immuno-oncology focused Nantkwest Inc. (NASDAQ:NK) with a $238 million offering. (See BioWorld Today, July 29, 2015.)

The Cardiff-by-the-Sea, Calif.-based company pulled off one of the largest IPOs ever for a biotech firm, with investors warming to its technology focused on developing several types of natural killer (NK) cells. Activated NKs (aNKs) make up a cell-based "off-the-shelf" treatment that's been tested in phase I trials. The company also is working on high-affinity NKs (haNKs), so named because they express high-affinity CD17, which could mean they can ramp up therapeutic efficacy of antibodies targeting cancer cells. Nantkwest expects to enter the clinic with haNKs next year.

Global Blood Therapeutics Inc., of South San Francisco, also received a warm welcome from Wall Street pricing its IPO of 6 million shares at $20 each, above the previously proposed range of $16 to $18. The company is developing small-molecule therapeutics for blood-based disorders, including GTB440, an oral, once-daily prophylactic therapy for sickle cell disease, currently in phase I/II testing.

Despite the negativity surrounding biotech equities, the company`s shares (NASDAQ:GBT) have more than doubled since their first day of trading, closing at the end of September at $42.16, up 110.8 percent.

Proving that the window for biotech IPOs hasn`t closed is Regenxbio Inc., of Washington, which in September, priced its IPO of 6.3 million shares at $22 each, above the originally proposed $17 to $19 range. It granted underwriters a 30-day option to purchase up to an additional 945,000 shares, potentially bringing in further proceeds of $20.8 million. Regenxbio is a gene therapy company developing its NAV technology platform for AAV gene delivery, which consists of rights to more than 100 AVV vectors, including AAV7, AAV8, AAV9 and AAVrh10. The company's shares (NASDAQ:RGNX) debuted to a solid reception, ending the first day of trading at $30.45, up $8.45, or 38.4 percent. However, it did get caught in the exodus of investors from biotech and closed the month at $22 back to where it started.

SETTING THE TABLE

There is no doubt that biotech will recover following the exodus of the generalist investors. It will get back to seeing more rational investors coming back to the biotech space and, like before, being more discriminating, noted Chambers.

If we also see an upswing in strategic activity this could also set the table for a healthy first half of next year.

"I don't see the market going through the level of volatility we have just experienced, that is simply not sustainable," Chambers said.