One year ago, after being burned by disappointing sales of drugs like Dendreon Corp.’s Provenge and Human Genome Sciences Inc.’s Benlysta, investors swore off biotechs in the midst of a commercial launch. The savvy strategy was to make money selling biotech stocks at the inflection point of drug approval rather than betting on a drug’s longer-term commercial potential, and “short the launch” became the mantra of the day.

But over the last 12 months, biotech has been cranking out new drugs, and a few have gotten off to impressively strong starts. Investor sentiment may be turning in favor of some biotechs in launch mode, as management, sell-side analysts, and investors recalibrate expectations and redefine commercial success.

“Investors have become more cautious, but at the same time, they are rewarding companies that are meeting cautious expectations,” says SV Life Sciences investment manager David Pinniger. “They are willing to back these names and chase the momentum behind these names with the knowledge that there is good communication about how the launches are going.”

In the last 15 months or so, biotechs have launched half a dozen new drugs; of these, the vast majority are their sponsors’ first commercial launch. Key launches include Regeneron Pharmaceuticals Inc.’s Eylea (aflibercept) for wet-age related macular degeneration, Vertex Pharmaceuticals Inc.’s Incivek (telaprevir) for hepatitis C and Kalydeco (ivacaftor) for cystic fibrosis, Seattle Genetics Inc.’s Adcetris (brentuximab) for Hodgkin lymphoma, Incyte Corp.’s Jakafi (ruxolitinib) for myelofibrosis, Optimer Pharmaceuticals Inc.’s Dificid (fidaxomicin) for Clostridium difficile-associated diarrhea, Affymax Inc.’s Omontys (peginesatide) for anemia, and InterMune Inc.’s Esbriet (pirfenidone) for idiopathic pulmonary fibrosis in Europe.

FDA approved four more drugs in July, so those launches are either just underway or not yet started: Amarin Pharmaceuticals Inc.’s Vascepa (icosapent) for high triglycerides, Onyx Pharmaceuticals Inc.’s Kyprolis (carfilzomib) for multiple myeloma, Arena Pharmaceuticals Inc.’s Belviq (lorcaserin) for obesity and Vivus Inc.Qsymia (phentermine/topiramate) for obesity.

More new drugs – some with solid data and high expectations behind them – could soon be on the way. Two potential powerhouses are Medivation Inc.’s enzalutamide for prostate cancer, pending at FDA with a November 22 action date, and Ironwood Pharmaceuticals Inc./Forest Laboratories Inc.’s linaclotide for irritable bowel syndrome, with action expected in September.

It has been a productive year for biotech and as Kurt von Emster, a partner at the private equity firm venBio says, “the stocks have held up quite well in a lot of these cases. I think in general the theme of essentially shorting the launch is behind us now.”

Drugs that have launched in the last year are largely performing to expectations, even if those expectations are modest. The market hasn’t had to contend with any negative surprises like it experienced in August 2011, when Dendreon first announced it would not meet first full year sales forecasts for Provenge, leading to a massive sell-off that reverberated across the biotech industry. (See Also see "Disappointing Provenge Sales Stir Doubts About Demand" - Pink Sheet, 4 August, 2011..) One lesson biotech management has learned from the Dendreon debacle is to reign in enthusiasm for new drugs and manage investor expectations. Most companies are staying mum on sales expectations until at least a few months into a launch.

Still, just because drug makers are meeting expectations doesn’t mean those goal posts are set at the goal line. Most are niche drugs that address a small market, and while sales aren’t ringing up at a blockbuster level, the products can be marketed through a more profitable targeted sales force. To be clear, not every drug has been a success story or will be over the long term. InterMune, facing a difficult pricing environment in Europe, has had to fight to secure reimbursement for Esbriet there. The company reported Esbriet sales of just $5.5 million in the second quarter. Sales of certain other drugs have gotten off to a strong start and then plateaued as patients, aware of the medicines and waiting for their approval, were quickly treated.

By far the biggest surprise coming from the newest wave of drug launches has been positive – the wild success of Regeneron’s Eylea. Regeneron launched Eylea in November with a dosing advantage over Roche’s Lucentis (ranibizumab) and a lower price. (See Also see "Regeneron Plays It Safe With Eylea, Aims To Undercut Lucentis" - Pink Sheet, 21 November, 2011..) The drug has shot out of the gate; it generated $318 million in sales in the first half of 2012, leading Regeneron to raise revenue guidance for the drug for the year to $700 million to $750 million. It’s a strong launch for a drug entering a competitive category and is clearly tracking on a blockbuster trajectory.

Vertex’s Incivek generated more than double in sales than Eylea, $876.1 million, in its first two full quarters on the market. Nonetheless, sales of Incivek have plateaued as warehoused hepatitis C patients have been treated. In the first six months of 2012, Incivek generated sales of $685 million, less than in its first two full quarters on the market.

Eylea and Incivek have gotten investors excited about biotech launches, though the two cases are very different and the impact of each on their respective marketers has been quite different. Regeneron’s stock is up 167% to $137.58 August 16, from its opening price November 18 the day Eylea’s approval was announced, valuing Regeneron at a current market cap of around $12.91 billion.

The story has been different for Vertex, as Incivek sales have leveled off and the long-term enthusiasm for the drug is dampened by the competitive landscape in hepatitis C. Vertex’s stock declined after the launch of Incivek from $55.05 on the drug’s approval May 23, 2011, to around 30% lower a year later on May 4, 2012. The stock rallied May 7, however, on good pipeline news in cystic fibrosis regarding a combination that includes Kalydeco and was trading at $54.48 August 16, though the story for Vertex has mainly reverted to a pipeline one.

“Some of the biotechs really seem to know the underlying market well and are prepared in terms of pricing and marketing strategy a little better and are able to execute better than in the past,” says Michael Latwiss, an analyst with the market research firm Decision Resources. “The experience with Vertex and Regeneron is that they have been able to execute well.”

No other recent introductions are rolling like Eylea, but that has been exceptional. Seattle Genetics’ Adcetris and Incyte’s Jakafi target significantly smaller oncology markets. Optimer’s Dificid entered a price-sensitive environment for antibiotics and is considered to be off to a strong start given challenging market dynamics in the space. Affymax’s Omontys is launching into a lucrative market for erythropoiesis stimulating agents, but one where initial sales are constrained by the need to contract with dialysis providers and carefully transition patients to a new medicine.

Indeed, investors have been showing Affymax an uncommon level of patience while it negotiates with dialysis providers. The company’s stock is trading up around 18% since Omontys was approved by FDA March 27, although the drug has generated nominal sales thus far – just $50,000 in the second quarter. The fact that investors are holding out for Omontys to demonstrate traction suggests management has done well to outline the hurdles Omontys faces breaking into a well-established, cost-conscious market controlled by dialysis providers while still presenting a compelling case for the drug’s long-term success. And early contracts Affymax and its commercial partner Takeda Pharmaceutical Co. Ltd. have signed with several leading dialysis centers represent encouraging signs the company is making inroads into the lucrative market.

Other companies in the midst of launch are also trading up. Incyte’s stock was up 50% to around $18.50 August 16, even after a dip August 2 when the company announced second quarter sales for the drug. The reporting confused investors because Incyte reported sales of $29.7 million in the second quarter, recorded when a patient picks up a prescription from the pharmacy, though sales were higher, $35.1 million, when recorded as shipments to pharmacies. Incyte said it plans to change its reporting to the latter method, and analysts remained optimistic the launch is progressing well. (See Also see "Jakafi Launch Going Smoothly, But Incyte Confuses Investors" - Pink Sheet, 3 August, 2012..)

Seattle Genetics stock was up around 88%, at $25.87 August 16, from where it was a year ago when Adcetris was approved August 19, 2011. Optimer was up about 7%, at $15.15, as of August 16 from the approval of Dificid on May 27. The stock lost some ground after the initial launch, but has regained momentum. Investors appear pleased with the $15.2 million in second-quarter sales generated by Dificid in the US, and revenues and payments received from the drugs’ global marketing partners. US sales have surpassed the first year targets Optimer set with its US marketing partner Cubist Pharmaceuticals Inc., the firm reported.

Some investors are selling the launch when it comes to Onyx; the company’s stock has retracted in the days after the FDA approval of Kyprolis for multiple myeloma was announced July 20. The stock jumped 8% on the news to close the day at 76.38, but has since dropped back 10.2% to close August 16 at $68.55. But Onyx is unusual because it is believed to be up for sale, and some analyst say the stock has gone down amid speculation the company could be planning a capital raise. Deutsche Bank analyst Navdeep Singh issued a research note August 1 outlining why the “short the launch” strategy does not apply to Kyprolis, a drug he views as more in line with Eylea than with Benlysta or Provenge.

“Investors are growing more confident in launches where the market has already been developed, situations like Eylea. It just makes the process a lot easier and it gives a lot more clarity into the launch,” says Singh. Like the wet-AMD market for Eylea, the market for multiple myeloma already is well developed, and Krypolis offers a side effect advantage over one of the existing treatments, Velcade, he says. He projects peak sales of $3 billion for Kyprolis and has assigned Onyx a price target of $105, incorporating a 10% premium for M&A, resulting in a fair valuation of $96.

For investors who are willing to ride out a launch, the question is how and when to extract value. Medivation’s stock, at $98.10 August 16, is up more than 100% from the start of the year, following release of positive data that affirms the product’s relatively clean safety profile and points to differentiation from competitors in a large market. The company has a current market cap of $3.57 billion. But venBio’s von Emster is undeterred. “The product itself, at least in Wall Street’s mind, is doing over $1 billion valuing the company at where it is, but we are optimistic in that launch and we think it will be a wild success and the stock will go even higher than it is,” he says. “This stock tripled in the last year, but it will probably double again on a good launch.”

The stock of Ironwood, another biotech with a high-profile drug facing a key approval date this fall, on the other hand, remains flat, in part because of investor concerns about the product’s competitive position.

Indeed, in other cases, von Emster says, venBio jumps on retraction in the market after a drug approval to build the investment case. “Vivus’ pullback is an interesting look at how Qysmia is viewed negatively by the Street going into the launch, and we think the launch is going to be positive,” he says. Vivus’ stock has fallen about 25% since the FDA approval of Qysmia was announced July 17.

On the other hand, other investors are staying at arm’s length. One investor said his firm hasn’t invested in any biotechs in the midst of a launch recently because it is hard to extract value given inefficiencies post approval, especially as the stock price rises amid increasing awareness of the drug and the company. The investment firm focuses instead on development-stage companies that are “further off the radar.”

Ultimately, the success of a product launch comes down to the quality of the product, supported by data, and marketing prowess. Evaluating which drugs will be winners and which will fizzle is no easy task, but avoiding the launch altogether might mean missing out on some interesting opportunities. Anyone who bet against Eylea knows that.

Editor’s note: This article originally appeared in “The Pink Sheet,” August 20, 2012.

Hang Onto The Launch: Investor Outlook Is Brighter For Some Biotechs

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