US Biotechnology: Back to School 2019What We Learned This Summer & Thoughts on Biotech into YENorth America Equity ResearchSeptember 2019Cory W. Kasimov AC212-622-5266cory.w.kasimov@jpmorgan.comJ.P. Morgan Securities LLCNeena M. Bitritto-Garg, CFA212-622-8967neena.m.bitritto-garg@jpmchase.comJ.P. Morgan Securities LLCMatthew T. Holt, Ph.D.212-622-9602matthew.t.holt@jpmorgan.comJ.P. Morgan Securities LLCSee the end pages of this presentation for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Gavin Scott212-622-0579gavin.scott@jpmorgan.comJ.P. Morgan Securities LLC1What We Learned This Summer: Executive SummaryAs biotech investors make their (rather depressing) pilgrimage from the beaches back to the Street, we wanted to recap what we learned this summer… Summer performance for the sector disappointed overall (NBI -0.5% vs. S&P 500 +3.5%), though this was mostly driven by a combination of apathy + macroeconomic factors and persistent Healthcare reform concerns Large-cap biotech remains out of favor and has been a drag on sector sentiment. In our view, it is still hard to identify key sector-moving catalysts that could turn this around On an encouraging note, 2Q19 earnings were generally positive and clinical / regulatory catalysts that occurred over the summer were mostly favorable In our view, AMGN was the biggest winner this summer with encouraging AMG 510 updates, a win on Enbrel IP (though this is the outcome we modeled and we still have concerns longer term), and the strategic (albeit expensive) acquisition of Otezla… and, perhaps more importantly, to share our thoughts as we head into the end of the year In the back half of 2019, we continue to see selectivity as important for stock picking with additional M&A as a key tailwind and healthcare reform / headline risk topping the list as a key headwind Two names that we would own into the end of the year are BMRN & SAGE. We see BMRN as fundamentally undervalued and think the company could garner more interest ahead of the upcoming vosoritide readout in 4Q19. SAGE is set up for another bigclinical readout with SAGE-217 in MDD expected by 4Q19/1Q20 (potentially at JPM in Jan?) Beyond these two events, some other key catalysts we’ll be watching include (1) AMGN’s update for AMG 510 at World Lung on 9/8 (followed by competitive KRAS updates later this fall); (2) ACAD’s interim DRP readout expected in 2H19; and (3) pivotal data for BLUE / CELG’s BCMA CAR T, bb2121Bottom line: Although we continue to have a constructive dialogue with investors, the lack of large-cap leadership, dearth of sector moving catalysts, and intensifying election cycle leave us still in favor of selectivity2Source: Bloomberg as of 08/29/2019, J.P. Morgan ResearchWhat We Learned This Summer: PerformanceAfter a strong start to the year, biotech (the NBI) is materially underperforming the broader market with no relief seen over the summerDespite initially outpacing the S&P 500 earlier this year, biotech continues to lag the broader index (2019 YTD performance: NBI+7.0% vs. S&P 500 +16.7%)… And the gap between the S&P 500 and biotech widened over the summer (2019 Summer Performance: NBI -0.5% vs. S&P 500 +3.5%), although neither index did particularly well 3Source: Bloomberg as of 08/29/2019, J.P. Morgan ResearchWhat We Learned This Summer: PerformanceFor our coverage universe, summer performance was particularly difficult for smids (especially commercial smids like CLVS and ACOR)73.2%20.8%15.5%9.6%5.7%4.2%2.0%0.8%(2.6)%(3.0)%(4.0)%(4.5)%(4.7)%(7.0)%(9.6)%(11.8)%(12.4)%(15.8)%(16.2)%(22.1)%(22.4)%(27.4)%(29.9)%(30.5)%(65.6)%(66.3)%3.5%(0.5)%(2.0)%-80.0%-60.0%-40.0%-20.0%0.0%20.0%40.0%60.0%80.0%100.0%NVCRAMGNEDITACADSGENVRTXCELGINCYSAGEBIIBALLORAREGILDREGNONCEALXNALKSBLUEBMRNGBTGWPHJNCEPBYIMRNACLVSACORSPXNBIBTK173.8%154.8%78.4%75.9%51.5%46.3%29.6%29.0%25.6%15.2%13.8%11.6%10.2%8.0%6.3%4.3%1.9%0.9%(0.6)%(12.4)%(22.2)%(26.8)%(28.9)%(46.8)%(67.9)%(78.0)%16.7%7.0%4.6%-100.0%-50.0%0.0%50.0%100.0%150.0%200.0%NVCRONCESAGEACADCELGGWPHINCYSGENRAREALXNGBTJNCEEDITVRTXAMGNBLUEGILDALLOMRNABMRNREGNBIIBALKSPBYICLVSACORSPXNBIBTKSummer Performance(Memorial Day – August 29*)*Note: August 30 performance not included, but would see material downside added to ALXNYTD Performance(through August 29*)4Source: Bloomberg as of 08/23/2019, J.P. Morgan ResearchWhat We Learned This Summer: 2019 Fund FlowsBiotech funds hemorrhaged capital over the summer…Though fund flows have historically been volatile, capital continues to move out of the biotech sector (even after a promising, M&A fueled 1Q19) with ~$0.6B of fund outflows YTD Week EndingIBB ($ M)Week End...
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