The spectacular rise and even more spectacular collapse of Valeant Pharmaceuticals had multiple causes, but at the heart of the story was how much the biotech company relied on big drug price increases for growth.
Not only did those price hikes make Valeant (VRX) politically unpopular, but they also meant the business was ultimately unsustainable. Money managers prefer biotechs and pharmas that produce drugs with growing customer demand, as signaled by growth in sales volume.
"As you would think, the preferable avenue for revenue growth is through volume, as significant price increases (like we have seen over the past two years) can only be repeated for a few years," Leonard Yaffe, health care portfolio manager at Kessef Capital, told IBD in an email. "The more the revenue increase is due to volume, the more value is assigned to the drug."
If you're hunting for big growth stocks, and biotechs catch your eye, looking past the headline revenue numbers can help you see which companies might have more sustainable -- and even accelerating -- growth. If volume growth lags sales increases, the company is leaning on price, which might not last.
Most price increases are far more moderate than Valeant's 525% and 212% price hikes for heart drugs Nitropress and Isuprel, respectively. But many companies regularly lift their prices well past the inflation rate, which can prop up revenue but disguise actual demand.
IBD'S TAKE: Big caps can deliver still deliver big gains, often with less volatility than smaller-cap stocks. That's also true in biotech, which has some strong big-cap companies. Amgen and Biogen are among current residents of the IBD Big Cap 20.
Comparing volume and revenue is worthwhile for another reason: If volume growth was more than overall revenue growth, this signals that a company is having to rebate more of its list price than it did last year to move product, and/or is rolling out the drug in countries that extracted a lower price (as is often the case in Europe). Investors don't like this either, because it signals that insurers and other payors are putting the thumbscrews on the company.
"Payor mix obviously is very critical as well, as large, consolidated payors which cover many many lives have negotiating power and can pick/choose/rationalize products based on price, efficacy, alternatives etc.," Thomas Vandeventer, portfolio manager at Tocqueville Asset Management, told IBD in an email.
Second-quarter earnings reports and conference call comments revealed that while some biotech giants and hot stocks relied almost solely on price increases for growth, others expanded mostly on volume increases, and still others credited a mix of both.
Amgen Volume Growth Was Zip
Amgen (AMGN) was a classic example of leaning on price: Q2 revenue rose 6%, but volume growth was zero.
Much of this stems from the age of Amgen's leading drugs. Its top-seller, rheumatoid-arthritis drug Enbrel, is over a decade old, and its volume shrank 2% in the quarter. But it still contributed 10% growth thanks to pricing.
Two drugs that are even older, Epogen and Neupogen, shrank in both price and volume because they're facing new biosimilar competition. Newer drugs Prolia and Xgeva made up the difference by growing on both fronts. But this is one reason why, despite the fact that it beat Q2 estimates and raised guidance, Amgen stock initially dropped after the earnings report.
Celgene Drug Volume Expanded
In contrast to Amgen, Celgene's (CELG) revenue rose 22% in Q2, and 16 of those percentage points came from volume growth, according to the company. It didn't break the percentages down by individual drug like Amgen did, but the company said demand was good across the board.
Celgene also beat forecasts and raised guidance for future sales and profit, and its stock jumped 3% after the report.
Medivation Took Rebate Route For Xtandi
Medivation (MDVN) demonstrates the sneaky power of rebating. The list price of prostate-cancer drug Xtandi -- for now, Medivation's only marketed drug -- rose 6% during the second quarter. But while revenue overall rose 17% -- a bit less than analysts expected -- volume grew 18%.
"The growth in underlying demand for Xtandi was partially offset by a lower net price for Xtandi due to a year-over-year increase in the gross-to-net rate," said CFO Jennifer Jarrett on the Q2 earnings conference call, gross-to-net being industry-speak for the rebate level.
Xtandi has been in a tight competition with Johnson & Johnson's (JNJ) Zytiga in the prostate-cancer market, and J&J has been undercutting its price. CVS Health's (CVS) recently released 2017 drug formulary passed over Xtandi for Zytiga for this reason.
Biogen, Alexion, Incyte, Regeneron
Following their Q2 reports, here's a rundown of how the other big biotechs are faring on the price vs. volume question:
- Biogen (BIIB): On the conference call discussing Q2 results, CFO Paul Clancy described Biogen's price-volume situation in the U.S. and the rest of the world as "a tale of two cities."
"In the United States, the lion's share from a change (on a) year-over-year basis is price, and is pretty stable unit trends on Tecfidera, pretty stable unit trends on Tysabri and modest, gradual decline on the interferon franchise (which includes Avonex and Plegridy)," Clancy said. "Ex-United States, we are not seeing any pricing (increases) on a year-over-year basis, and all of the gains are attributable to volume and unit expansion."
Biogen's overall revenue rose 12% in the quarter, beating expectations.
- Alexion Pharmaceuticals (ALXN): Alexion's orphan drugs are priced so that a year's worth could buy you a house, but that showed signs of slipping in Q2. Volume rose 23%, while revenue climbed only 18%, though that was more than expected. The company noted that included a 3% foreign-exchange impact.
Lead drug Soliris provides the vast majority of revenue, and its volume rose 15% on a 10% hike in sales. The rest of the top line came from newly launched drugs that have no year-over-year comparison.
- Incyte (INCY): The company didn't break down the year-over-year impact of volume and price changes, but executive vice president Barry Flannelly said on the Q2 conference call that sales of Jakafi, which accounts for 85% of revenue, rose 14% over Q1. That included a 6% price increase, a 6% increase in the number of prescriptions, and a 2.9% improvement in the gross-to-net ratio, making for a modestly bullish trend.
Incyte's revenue jumped 51% year over year, beating expectations.
- Regeneron Pharmaceuticals (REGN): The company's 10-Q report said the 27% year-over-year growth in sales of Eylea (which accounts for nearly all net product sales) was "due to higher sales volume." Regeneron's overall revenue missed expectations with 21% growth, but that was due to lower collaboration revenue from its development partners, not sales.
RELATED:
Are Biotechs Making A Comeback: 5 Stocks To Watch
Biotechs Are Making A Case For Leadership, But Is It A Good One?
