BOSTON (TheStreet) -- This week's Biotech Stock Mailbag starts off gloomy because the sector's hoped-for back-to-school rebound is sputtering.
Walter R. writes, "I'm growing concerned about my portfolio of biotech stocks. I've listened to [Jim] Cramer and made money with his picks but nothing seems to be working now. I don't think Hillary [Clinton] can do anything about drug prices even if she is elected, so why are the biotech stocks falling like she can?"
My ability to predict the direction of biotech stocks is no better than Walter's, unfortunately. What looked like a decent bounce for the iShares Nasdaq Biotechnology ETF (IBB - Get Report) off the recent Aug. 24 to 25 low disappeared this week in a nasty stampede of selling.
Investors are spooked by biotech and drug stocks for two reasons -- fear that politicians might finally do something to rein in the rapidly escalating price of prescription drugs; and if drug-price controls are implemented here, the aggressive valuation of biotech and drugs will need to shrink significantly.
Myself and others have pointed out that Hillary Clinton's drug plan doesn't differ much from proposals made by other Democrats, past and present. A majority of Americans believe drug prices are too high, but the odds that Hillary can enact meaningful changes is low if only because of political gridlock in Washington, D.C. Assuming she even wins the presidency, which is uncertain, obviously.
But like it or not, investors are reacting to the negative sentiment about high drug prices and not necessarily the reality of the situation. Everyone is tired of reading about Turing Pharma CEO Martin Shkreli, but as I also said earlier this week, he's become the focal point of populist anger directed at the bio-pharma industry.
"Exploding drug prices have become a bipartisan issue and Martin has conveniently given them the ideal persona to vilify. Now we get to deal with hearing from every presidential candidate over the next year about how they're going to fix drug prices and, optically, that's not good for the sector," R.W. Baird biotech analyst Brian Skorney told me Thursday.
"Hillary's tweet was gasoline on a smoldering fire," a biotech hedge fund manager also said to me, referring to Clinton's Monday tweet in which she called Shkreli's 5,000% increase in the price of an infectious disease drug "outrageous." The fund manager continued, "Biotech was for sale since August and all you needed was another trigger to get itchy fingers to pull."
Biotech stocks perform best when investors are excited about strong clinical trial results, the approval of life-saving drugs and mega-mergers and acquisitions. Right now, we seem to be at a low point for all those things, which isn't helping.
Barring an unbelievable rebound between now and the end of September, the Nasdaq Biotechnology Index will suffer its first quarter of negative performance since September 2011, according to CNBC.
The recipe for a turnaround is pretty simple: good news!
There are enough expected events remaining this year to make a big bounce possible. Here's a dream scenario for biotech longs: big phase III study wins from Spark Therapeutics (ONCE - Get Report) and PTC Therapeutics (PTCT - Get Report) ; positive FDA advisory panel votes for the Duchenne muscular dystrophy drugs from Biomarin Pharmaceuticals (BMRN - Get Report) and Sarepta Therapeutics (SRPT - Get Report) ; and a very positive beta-thalassemia and sickle-cell disease clinical update from Bluebird Bio (BLUE - Get Report) at the American Society of Hematology annual meeting.
Needless to say, investors' mood will be far grimmer if the majority of these big biotech events turn out badly.
At Thursday's $111 close, Bluebird Bio's stock price is down 43% from its all-time high of $194 reached at the end of May. In that time period, Bluebird's $6 billion market value has shrunk to $4 billion.
This stock's slide is not related to any significant changes in Bluebird's two lead gene therapy programs targeting beta-thalassemia and sickle cell disease. The last Lentiglobin data presentation in June was quite positive. The next clinical update will come in December at the American Society of Hematology annual meeting. It's possible that I'm missing a red flag in the Lentiglobin data presented to date, but I don't know what that might be. (Please, let me know if you do.)
All of the turmoil in the overall biotech market (discussed above) is certainly having a detrimental impact on Bluebird. The company's top executives have been selling large quantities of stock, which isn't helping either.
Maybe the most overlooked explanation for Bluebird's weakness is competition from Global Blood Therapeutics (GBT) , which went public in the middle of August. Sickle cell disease is the lead indication for Global Blood's most advanced drug candidate GBT440. And like Bluebird and Lentiglobin, the American Society of Hematology meeting in December will be the venue for the next significant clinical update of GBT440 sickle cell data.
Bluebird and Global Blood are tackling sickle cell in different ways. Bluebird Lentiglobin is designed to fix a mutated gene in patients which causes oxygen-carrying red blood cells to deform into a sticky, sickle shape. It's a complex but one-time treatment with the scientifically audacious goal of curing the disease.
Global Blood's GBT440 works by modifying hemoglobin, the oxygen-carry protein inside red blood cells. GBT440 makes oxygen attach more tightly to hemoglobin. By keeping hemoglobin in a highly oxygenated state, the mutation which causes sickle cell disease is covered up, preventing red blood cells from becoming deformed and clumping together. Global Blood is formulating GBT440 into a pill which sickle cell patients would take once daily for the rest of their lives.
The excitement around Global Blood is based on data from six sickle cell patients treated with GBT440 for one month compared against two placebo patients. All six patients have responding to GBT440 treatment with significant reductions in the number of sickled red blood cells, supported by other improvements in measures of the disease. It's a data sample too small to make any big claims about, but then, investors have gotten very excited about Bluebird's gene therapy approach, also based on a study with just a handful of patients treated.
Global Blood has been expanding the ongoing GBT440 study so at the ASH meeting in December, researchers will present data on 24 patients, all treated for one month. The company is finishing up animal safety studies to allow for longer dosing in patients, Global Blood CEO Ted Love told me in an interview last week.
"We're really excited by the [anti-sickling] results that we've shown but we don't want to get out over our skis just yet. We need more data," said Love, a former Onyx Pharmaceuticals (ONXX) executive who came out of semi-retirement to first join Global Blood's board and then become its chief executive.
While no safety issues have cropped up in GBT440-treated patients yet, attempts by other companies to develop similar hemoglobin modifiers have not ended well. The big safety risk is that oxygen becomes so tightly bound to hemoglobin that it doesn't detach when instructed. This can lead to hypoxia, or tissues and organs deprived of adequate oxygen.
Global Blood intends to exploit GBT440's ability to improve the oxygen-carrying capacity of hemoglobin to possibly treat other acute and chronic lung diseases, including idiopathic pulmonary fibrosis. Data in animals showing GBT440's ability to increase oxygen uptake into the lungs and improve oxygenation of tissue are being presented at two medical meetings later this fall. A phase II study of GBT440 in patients with idiopathic pulmonary fibrosis is planned to start next year, Love said.
There's no way to predict accurately if Global Blood's GBT440 will become an effective treatment for sickle cell, but the early data are exciting and represent a different, potentially less complicated approach to the disease compared to Bluebird's gene therapy cure. Both approaches may end being successfully developed and approved. The mere fact that Global Blood is in the game as a potential Bluebird competitor has impacted the latter's market valuation.