What Happened in Biotech in 2016?

By Markets Fool.com

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It's been a rollercoaster of a year for the biotech industry, with the decline that started in the middle of last year continuing into this year, a recovery from those lows after a few gyrations, a pre-election decline on fears of price controls, and a recovery when Donald Trump, rather than Hilary Clinton, was elected. Here's the performance of one index fund, the iShares NASDAQ Biotechnology Index ETF:

IBB data by YCharts.

Here's a look at the more memorable things that happened this year and some lessons learned.

IPOs slow

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There were 55 initial public offerings (IPOs) of drug companies on U.S. exchanges last year, but that shrank to just 29 so far this year. The slowdown isn't too surprising, considering the pent-up demand for capital led to a bolus of companies ready to ask for public money that has since been worked through. The struggling biotech stock indexes certainly didn't help the start-ups find willing buyers for their initial offerings.

Two biotechs worth keeping an eye on -- but not necessarily investing in right now -- are involved in gene editing: Editas Medicine and CRISPR Therapeutics. Both are using a new technique called "clustered regularly interspaced short palindromic repeats" (CRISPR) to edit patients' DNA. With a new technique, there's bound to be technical issues that need to be overcome, plus some unresolved issues over patents; those make these companies either buy-and-forget investments for the ultra-long term, or more appropriate for most investors' watch lists.

Deals continue

As is usually the case, there were plenty of acquisition and licensing deals this year. Two that stand out:

  • Pfizer's (NYSE: PFE) $14 billion takeout of Medivation. Investors benefited from a bidding war, which started with Sanofi showing interest, but others were also reportedly involved.
  • Celgene (NASDAQ: CELG)'s giving Juno Therapeutics (NASDAQ: JUNO) $1 billion, including some equity investment, in a 10-year agreement that grants Celgene rights to Juno's immune-cell therapy and autoimmune-disease treatments outside the U.S. That's a lot of guaranteed dough for relatively early-stage programs.

An FDA turning point?

The Food and Drug Administration's approval of Sarepta Therapeutics' (NASDAQ: SRPT) Duchenne muscular dystrophy drug, Exondys 51, could be a turning point in the standards the agency requires to get a drug approved. Exondys 51 was clearly safe, but the agency was split on whether efficacy data from just 12 patients was enough to justify an approval. Ultimately Janet Woodcock, the head of the FDA's Center for Drug Evaluation and Research, overruled her subordinates and approved Sarepta's drug.

Only time will tell whether this was a one-off approval, or if the FDA's standards for approval have relaxed a bit. Until that's known, the job of investors looking to invest in front of FDA decisions on drugs with less-than-stellar data will be harder.

Biosimilars continue to ramp up

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Europeans have had access to biosimilar drugs -- copycat versions of biologic drugs -- for years, but the FDA only approved the first biosimilar --Novartis' Zarxio, a copycat of Amgen's Neupogen -- last year. This year, the agency has approved three more:

  • Amgen's Amjevita, a biosimilar of AbbVie's Humira
  • Novartis' Erelzi, a biosimilar of Amgen's Enbrel
  • Celltrion's Inflectra, a biosimilar of Johnson & Johnson's Remicade

It's interesting that larger pharmaceutical and biotech companies have gotten into the game that for small-molecule generics, has typically been limited to drug companies that specialize in generics -- Novartis being an exception to the rule. Amgen, for instance, has an FDA-approved biosimilar, and is the recipient of competition from biosimilars of its branded drugs.

(Some) drugs become a commodity

While there was a lot of discussion of high drug prices during the election, the price of drugs that treat some diseases actually went down, after factoring in discounts negotiated by insurers and pharmacy benefit managers.

Gilead Sciences (NASDAQ: GILD), for instance, saw sales of its hepatitis C drugs fall 31% year over year in the third quarter, in part because of competition from new medications sold by Merck and AbbVie. Their drugs aren't necessarily any better than Gilead's drugs, and Gilead has retained a majority of the market share, but with alternatives that work as well, payers can negotiate lower prices by threatening to not cover them.

The same thing happened in the insulin space: Sanofi and Novo Nordisk had to discount their older insulin drugs to stay on payers' formularies.

Still down. Buy?

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With the biotech industry well off its highs and the index set to have its first down year in recent memory, now could be a good opportunity to invest. But as 2016 has shown us, rather than investing in an index fund that will track the broader market, investors are likely to be better off looking at individual drugmakers with innovative new drugs that can avoid competition and potentially catch the eyes of suitors.

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Brian Orelli has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool recommends Johnson and Johnson, Juno Therapeutics, and Novo Nordisk.

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