3 Events That Could Sink the Biotech Sector This Year

By Markets Fool.com

The biotech sector has been hot over the last few years, which naturally leads to talk of a biotech bubble. We asked our healthcare experts for potential events that might pop that bubble -- or at least let a little air out.

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While we're certainly not cheering for these events to happen, we think investors should be aware of potential risks that could send the entire sector downward.

: One of the biggest drivers behind this biotech boom has been the breakthrough of novel treatments that had previously languished for decades. Immunotherapies, for example, are finally living up to their promise as important treatments for cancer. And bluebird biorecently reported stellar results for its gene therapy, LentiGlobin, which is indicated for a rare blood disorder therapy calledbeta-thalassemia.

In this context, all eyes could be on Celladon's cardiovascular gene therapy, Mydicar, next month. Specifically, the company is expected to report midstage results from the CUPID-2 study, which is testing Mydicar as a treatment for systolic heart failure. According to Celladon, this trial could serve as the basis for an accelerated regulatory filing in Europe, and if the results are clear-cut enough, in the U.S. as well.

If Mydicar proves ineffective at decreasing the rate at which patients reenter the hospital for heart-related problems, though, biotech investors might take this as a sign that the industry's good luck is finally running out. After all, CUPID-2 was essentially designed to give Mydicar an excellent shot at meeting its primary and secondary endpoints (i.e., the percentage of patients reentering the hospital after receiving Mydicar would have to more than triple for the study to fail, compared to the earlier, albeit much smaller, CUPID-1 trial).

: Drugmakers are enjoying an unprecedented string of price increases that has made drugs increasingly profitable; however, payers are beginning to cry foul.

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Previously, sky-high drug prices were limited to specialty drugs used to treat small patient populations, but prices for drugs used to treat big indications have soared, too.

Gilead Sciences' Sovaldi and Harvoni, two revolutionary hepatitis C drugs that cut treatment duration and boost cure rates, are great examples of surging prices for large patient populations.

Gilead Sciences priced these drugs north of $1,000 per pill. Since there are roughly 3 million HCV patients in the U.S., the market opportunity here is huge. Indeed, Sovaldi and Harvoni had combined sales of $12.4 billion last year.

That prompted pharmacy benefit managerExpress Scripts to jump at the chance to exchange exclusivity for a steep price cut whenAbbVielaunched its competing HCV drug Viekira Pak in December. That deal will save payers billions of dollars, and the company is setting its sights on other high-price drugs.

If payers like Express Scripts can leverage their size to knock down prices across the board, biotech revenues could drop significantly.

For example,IMS Healthpredicted that global spending on specialty cancer drugs will eclipse $71 billion in 2018. If payers can cut prices by 10%, sales in that indication alone would thus fall by $7.1 billion.

: My pick might be the least likely of the three to occur. Or maybe not. It's hard to tell.

While it's hard to quantify the likelihood that an approved drug might have an undisclosed side effect, it seems likely that the event would result in a large hit to not only the owner of the drug but also the overall biotech market.

Part of the run-up in the biotech sector has come from a disregard for the risk involved with developing and marketing drugs. Unfortunately for investors, those risks remain present even if companies are more efficient in developing new drugs.

It's hard to predict the next Vioxx or fen-phen before they occur. Most side effects are discovered during clinical trials, but rare events sometimes aren't revealed until the drug is prescribed to a larger population.

If a new side effect crops up, it's likely to be in a widely prescribed drug -- rare events in a small market aren't likely to be discovered -- which will exacerbate the situation. Investors will be reminded about the unknown risk associated with drug development and will likely take some or all of their money out of the sector.

The article 3 Events That Could Sink the Biotech Sector This Year originally appeared on Fool.com.

Brian Orelli has no position in any stocks mentioned. George Budwell owns shares of AbbVie Inc. and Gilead Sciences. Todd Campbell owns shares of Gilead Sciences. The Motley Fool recommends Bluebird Bio, Express Scripts, and Gilead Sciences. The Motley Fool owns shares of Express Scripts and Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.