A top Wall Street analyst just downgraded 6 pharma stocks and warned there could be 'significantly more downside' for biotech

  • SVB Leerink analyst Geoffrey Porges downgraded six drug companies, including GlaxoSmithKline.
  • The analyst said new leadership at the FDA, FTC and HHS are creating headwinds for the drug industry.
  • Increased regulatory scrutiny could limit M&A and make it more difficult to launch new drugs. 
  • See more stories on Insider’s business page.

One of Wall Street’s top analysts is warning that the booming biotech industry is facing regulatory constraints that could slice into company valuations. 

SVB Leerink’s Geoffrey Porges wrote in an analyst note Tuesday that “the industry and its investors will need to adjust to a different regulatory environment to the one they have enjoyed for the last 5 years.

He also downgraded six companies to market perform from outperform: GlaxoSmithKline, Alexion Pharmaceuticals, Morphosys, Translate Bio, Assembly Biosciences and Acceleron Pharma. Five of those companies saw their stock prices dip on Tuesday, while Translate Bio gained 4%.

The companies represent nearly all corners of the drug industry, from rare disease therapies to general consumer health products. 

Porges’ stock downgrades were, in part, driven by the influx of new regulators under President Joe Biden, and by constraints on drug companies’ ability to quickly launch new products and make multi-billion-dollar M&A deals, the analyst wrote. 

New FDA leadership is already creating roadblocks for new drug approvals, analysts say 

Three major federal agencies that oversee the drug industry have gotten new leadership under Biden. Two have already shown signs of what Porges called “regulatory activism”: The Food and Drug Administration and the Federal Trade Commission.

It has yet to be announced who will lead the FDA. Agency veteran Janet Woodcock was named acting commissioner in January. 

Even without a permanent new leader, the agency has issued a flurry of drug application rejections or decision delays over the last several months. In the last several weeks, the FDA has added new requirements to biotechs Fibrogen and Acadia’s drug applications and delayed its decision on whether to expand use of AbbVie’s drug Rinvoq.

This all indicates that the FDA will take a tougher stance on drug approvals under the Biden administration, Porges wrote. 

There are also signs that the lack of a permanent FDA commissioner is affecting one of the most highly watched drugs of the year: Biogen’s Alzheimer’s disease treatment aducanumab. 

The agency delayed its original decision date from March to June. Baird analyst Brian Skorney previously wrote that the delay was likely so that a permanent agency head could be in place for the controversial decision.

Whoever is in charge of the agency at that time would have a big impact on the outcome — Janet Woodcock taking the position permanently would be good news for Biogen and likely result in an aducanumab approval, while Joshua Sharfstein, a potential nominee, is more likely to rule against the drug, Skorney said. 

The multi-billion dollar biotech acquisitions that have boomed in recent years may be in trouble

Regulators and lawmakers are rethinking how they evaluate biopharma M&A, which could dampen the market and company valuations, according to the note.

The Federal Trade Commission announced last week that it plans to reconsider its approach to scrutinizing pharmaceutical mergers, with an eye toward taking a more aggressive stance against drug-company deals that may harm competition.

That’s part of why Porges downgraded Alexion’s stock price. The Boston-based rare disease drugmaker is currently in the process of being acquired by AstraZeneca for $39 billion.

Greater scrutiny of the tie-up makes the acquisition more risky, Porges wrote. 

“We see significant risk that the Alexion/AstraZeneca transaction is blocked by the FTC, or that the FTC places onerous conditions on AstraZeneca’s conduct after the acquisition that could alter the timeline, terms or value of the acquisition,” he wrote. 

A S&P index of biotech stocks has slumped 12% since reaching a high in early February. It has more than doubled over the past 12 months, though, thanks to the effects of the pandemic. But Porges said it could give up some of those gains.

“If sentiment changes there could be significantly more downside from today’s levels,” Porges added. 

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