Biotech stocks took a turn for the worse in 2009 as the major players dealt with regulatory, manufacturing and political issues as well as a deep recession, but their fortunes could turn in 2010 if they get added patent protection.
They were the exception in what was otherwise a bullish year for health care stocks, which benefited as investors sought defensive plays in a turbulent market.
Biotech stocks were the laggards of the Standard & Poor's 500 Health Care index, on track to post a more than 8 percent loss for the year, while the rest of the health care sector has logged gains of up to 64 percent, according to FactSet.
The decline in bellwethers such as Amgen and Genzyme was a key factor in weighing down the overall sector. On a broader scale, concerns included a backlog of drug approvals at the Food and Drug Administration, a decline in buyout activity, and fears over health care reform. That reform could come in early 2010 as Congress convenes to merge two approved bills.
While the S&P 500 index is on track to gain about 23 percent this year, its large biotech components are down about 8.3 percent. The Nasdaq Biotechnology Index, with a broader array of biotech companies, rose 15 percent, but that pales in comparison with the broader Nasdaq composite, which is set to gain about 44 percent.
Pharmaceutical companies, which saw a flurry of buyout and merger activity, are among the strongest performers with a 24 percent boost, a reversal from a lackluster 2008. But the lines between pharmaceutical and biotech companies are diminishing through a range of buyout and development deals. Traditional pharmaceuticals are made by synthesizing chemicals, while biotech-based drugs are made using living cells.
Meanwhile, hospital operators and insurers are on track to rally 61 percent, despite the recession, on hopes that health care reform in Washington could equate to more insured patients and revenue in the future.
"The biotech industry outperformed in 2008 partly because the large-cap players were considered safe and defensive," said S&P equity research analyst Steven Silver.
But, he said, this year the sector experienced a delayed reaction from the recession and its affect on patients' ability to pay for costly treatments. That got the sector off to a poor start in January and February, he added.
The slide was exacerbated on concerns that a proposed system for regulating biosimilars, or copies of biotech drugs, might sway in favor of generic drug developers. Congress is still debating the issue, though current legislation points to biotech drugs receiving closer to 12 years of market exclusivity.
Regulatory and manufacturing issues at specific companies also contributed to the decline in the sector.
"Large cap names were starting to show chinks in their armor, and investors took a step back and showed a little more caution," Silver said.
Amgen shares took a hit in October after the Thousand Oaks, Calif., company said the Food and Drug Administration wanted more information on the potential osteoporosis treatment Prolia. Shares have since recovered somewhat, to end the year barely changed.
Genzyme of Cambridge, Mass., shed a quarter of its value during 2009 as manufacturing problems stymied sales of its key drug Cerezyme for an enzyme disorder called Gaucher disease. Cephalon, based in Frazer, Pa., saw its shares fall 19 percent over concerns that sales of its blockbuster sleep disorder drug Provigil are lagging.
Biotech will likely bounce back in 2010, Silver said, as the pharmaceutical industry completes its consolidation and once again looks to shop around for biotechnology companies.
Looking ahead, Leerink Swann Research analyst Dr. Joshua Schimmer expects several potential surprises in 2010.
Concerns over biosimilars' potential impact on revenue could lessen in 2010, he said, in a note to investors. Uptake has been slow in Europe, partly owing to development costs, and the lesson from Europe may be that an eventual U.S. impact will be nominal.
"We would not be surprised to see biosimilar players start to lay down in 2010 with the recognition that the returns are not justifying the upfront costs," he said.