http://www.wsj.com/articles/biotech-labs-birth-new-drugsand-new-fortunes-1466798095?cb=logged0.8019121173928669
Joseph Walker, Tom Mcginty, June 24, 2016
Drugs that help millions of people have lifted stocks of the firms that own them and made millionaires of many scientists and doctors behind them
Paul A. Friedman, like many travelers shuffling through airport security lines, sometimes daydreams about owning a private jet.
Dr. Friedman is one of the lucky ones who could afford it. Over the past few years, the former associate professor at Harvard Medical School sold $146.1 million worth of shares in Incyte Corp. He headed the firm as chief executive from lean times through the successful launch of a drug to treat a rare cancer.
Despite the windfall, he continues to drive his 2009 Audi. “We live in the same place, my wife and I,” said the 73-year-old physician, who retired as CEO in 2014 and remains a company director.
New drugs that extend or improve the lives of millions of people—and the potential of ones still in development—have lifted stocks of the biotechnology companies that own them and created a new class of millionaires from many of the scientists, doctors and investors behind them.
Biotech leaders have joined hedge-fund and tech executives in the U.S. corporate winner’s circle, riding the success of new high-price drugs and investor enthusiasm for the high-risk business. Some have bought fancy houses. Others, like Dr. Friedman, say not much has changed from lives spent in labs.
Organic chemist Norbert W. Bischofberger, the longtime research and development chief atGilead Sciences Inc.—and a co-inventor of Tamiflu—sold $320.3 million worth of company stock through 2015. Yet his wife had his old car towed and replaced with a new Toyota after he balked at getting a new one. “The conversation,” he recalled, “went something like, Wife: ‘We should get a new car for you.’ I: ‘There is nothing wrong with the one I got.’ ”
The average annual market value of biotech companies in the S&P Composite 1500 more than tripled from $180 billion in 2010, to $594.2 billion this year, according to data from S&P Dow Jones Indices.
Biotech was aided by low interest rates in the U.S. that drew investors to riskier, high-return ventures. The health-care law also helped by adding millions of people to insurance rolls, expanding the potential customer base with many people getting prescription drug coveragefor the first time.
Scrutiny of drug prices and fear of government price controls have contributed to a recent slump in biotech stocks, with the NasdaqBiotechnology index down 26% since January. “Every little company, every idea attracted capital,” said Geoffrey C. Porges, a senior biotechnology analyst at Leerink Partners LLC. “As a result, we probably overfunded the industry.”
Most of the new, patent-protected drugs have few rivals and scant limits on price, a sky’s-the-limit prospect that continues to draw investors to biotech firms with approved medicines—and to those only promising them.
Stock sales by executives and directors at money-losing biotech companies totaled $2.67 billion last year, or a third of all sales analyzed by the Journal, as investors seeking a stake in the next potential blockbuster sent the value of these firms soaring.
Merger fortunes
2015 was a record year for mergers and acquisitions. Some of the biggest windfalls went to shareholders of acquired biotech companies. Robert W. Duggan, former CEO of Pharmacyclics Inc. topped the list: $3.46 billion in cash and stock when the firm was acquired by AbbVie Inc. for $21 billion.
Mr. Duggan hadn’t worked in drug development before he bought into the money-losing Sunnyvale, Calif., biotech firm in 2004. Four years later, he used his 29% stake to take control of the company. At the time, in September 2008, Pharmacyclics had a market valuation of $53 million and, since 1991, had recorded losses of $340 million.
In 2013, Pharmacyclics received approval from the Food and Drug Administration for its first drug, Imbruvica, which has since become a popular treatment for the most common type of adult leukemia. Studies found it slowed progression of the disease with fewer side effects than older drugs.
With a yearly per-patient price tag around $100,000, Imbruvica’s global sales were $548 million in 2014, its first full year on the market, and rose to more than $1 billion last year.
“It shows if you get it right and make a modest investment, you can come out quite well,” said Mr. Duggan, who had put about $50 million into the firm. Other company executives and directors made $419 million in the deal.
At Receptos Inc., whose lead drug hasn’t moved beyond late-stage studies, 14 executives and directors received a total of $540.5 million for their stock when the company was acquired last year by CelgeneCorp., for $7.2 billion.
Sheila Gujrathi, the former chief medical officer at Receptos, received $75 million for her shares when the deal closed. Dr. Gujrathi, 45 years old, was one of the few women among biotech’s biggest earners last year.
“If you go into medicine, you don’t grow up thinking you could be a multimillionaire,” she said. “To find myself in a position where I have a substantial amount of wealth, yes, it’s surprising and life-changing.”
Among the companies still standing, executives and directors at Gilead Sciences Inc. sold stock valued at $413.5 million last year, the highest among all biotech companies. The company’s stock price has soared in recent years as it launched two fast-selling hepatitis C treatments, including Harvoni, the best-selling drug in America. Harvoni totaled $10.1 billion in U.S. sales last year.
Gilead also drew criticism from health-insurers and government officials for its prices—ranging from $84,000 to $94,500 per treatment course. Some insurers deny such drugs to all but their sickest patients. A Senate investigation last year alleged Gilead set its prices knowing they would result in limited insurance coverage.
“We stand behind the pricing of our therapies because of the benefit they bring to patients and the significant value they represent,” a Gilead spokeswoman said.
Years of losses
Biotech is distinguished from software and other strands of tech because it often takes hundreds of millions of dollars and a decade or more to learn if a new drug treatment succeeds. The cost of developing, say, a smartphone app is so low that anyone with the coding skills can make and sell one.
Even a promising drug can fail after years of investment during late-stage studies, and most biotech companies expect years of losses.
“The normal state of the industry is to be struggling to demonstrate that they’re making money, desperately trying to convince people it’s not just a bunch of risky science experiments,” said Dr. Porges, who completed medical school before entering the drug industry.
Regeneron Pharmaceuticals Inc., based in Tarrytown, N.Y., was founded in 1988 and had accumulated $1.27 billion in losses before getting FDA approval in November 2011 for Eylea, a treatment for age-related vision loss that annually costs $11,000 to $16,000. Eylea sales in the U.S. last year reached $2.68 billion.
Company shares grew 16-fold from 2011 through 2015—the best-performing stock in the S&P 500 over that period.
Regeneron’s chief scientific officer George D. Yancopoulos, the co-inventor of Eylea, sold $48.6 million in stock last year; company executives and directors reported a total of $226.6 million in stock sales.
Regeneron CEO Leonard Schleifer sold shares worth $136.5 million from 2012 to 2014, when he said he had spent some of his new fortune on golf: “I bought a new driver, but it was a demo. I got a good price on it.”
He later bought a $24.75 million, six-bedroom house on Martha’s Vineyard, Mass., the second-highest price ever paid for a single-family home on the island, the Vineyard Gazette reported last year.
Biotech executives and directors represented seven of the 20 biggest stock sellers last year among the Nasdaq-100, an index tracking the largest nonfinancial companies on the Nasdaq Stock Market: Gilead Sciences Executive Chairman John C. Martin ranked sixth overall, though his $190.6 million in sales were a fraction of the top three sellers— Microsoft Corp.’s Bill Gates; and Larry Page and Sergey Brin,co-founders of Google Inc., now a part of Alphabet Inc.—who each sold more than $1 billion in stock last year.
Mr. Martin, an organic chemist, stepped down in March as chief executive of the Foster City, Calif.-based company. During his tenure, Gilead transformed the care of three infectious diseases, a company spokeswoman said, referring to proprietary treatments for HIV as well as hepatitis B and C.
The company reported an $18.12 billion profit last year, fifth most in the blue-chip S&P 500 after Apple Inc., J.P. Morgan Chase & Co.,Berkshire Hathaway Inc. and Wells Fargo & Co., according to S&P Global Market Intelligence data.
Gilead recorded 55 cents in net profit for every $1 in revenue, the second-best margin in the S&P 500, according to S&P data.
Mr. Martin sold Gilead shares valued at $661.9 million from 2011 through 2015. He still owns roughly four million company shares with a market value of roughly $330 million.
Gilead has a reputation for thriftiness, said Bruce Montgomery, a former senior vice president who left the company in 2011. Company credit cards were limited, and executives “better have a damn good reason” to use the corporate jet, he said, rather than a commercial flight.
“If you met these guys at Home Depot,” he said, “you wouldn’t know they were rich.”
Rod Ferguson, a biotech investor with a Ph.D. in biochemistry, has seen firsthand the industry’s boom-and-bust cycle over the past three decades, he said, as investors lurched between unfettered optimism and utter pessimism.
In 2012, he said, biotech was out of favor and even companies with promising products in late-stage development had trouble raising money. On Halloween that year, Mr. Ferguson’s venture-capital firm bought a stake in privately held Auspex Pharmaceuticals Inc., valued then at what he called a “silly low” $26.2 million.
In February 2014, Auspex completed an initial public offering that valued the company at about $270 million. By December, the company announced that a late-stage study showed its new drug improved symptoms of Huntington’s disease, which attacks the brain’s nerve cells.
Overnight, the company’s market value doubled to $1.39 billion.
He thought 2015 would mark the peak of the biotech boom. “I said, ‘We’re selling anything not nailed to the floor,’” he recalled. “I’ve been in biotech too long—when the money’s good, you get out.”
Last year, Auspex was acquired by Teva Pharmaceutical IndustriesLtd. for $3.5 billion. Mr. Ferguson’s firm made $252.6 million, nearly 18 times its investment. “Anybody who denies luck is a fool or a liar,” he said. “We got lucky.”
Teva said in May the FDA had declined to approve the drug, asking for additional lab data. The company said it was working with the FDA to secure approval “as quickly as possible.”