It’s been an interesting start to the week in biotech, with a number of household name pharmas experiencing volatility on both sides of the spread. Here are two of the week’s biggest movers, and a look at what’s driving their revaluation.
First up, Valeant Pharmaceuticals International, Inc. (NYSE:VRX). Those familiar with the biotech space, and likely many that aren’t, will have read or heard about the Valeant accounting issues that arose during the middle of last year. For those that aren’t, and by way of a quick summary, the company issued a statement in October outlining its intentions to have an independent committee review certain elements of its financials – elements relating to a mail order RX called Philidor. The issues in question focused on shipments recorded as revenues (about $58 million worth) by Valeant on delivery to Philidor, when in fact the shipments were only eligible for revenue recording at point of sale to patients.
This, in turn, derives (as we’ve now found out) from a $100 million option that Valeant picked up that gives it the right to acquire Philidor at zero cost for a decade post 2015. Essentially, with this option in place, Valeant’s shipping of the drugs in question to Philidor simply represented an internal (for accounting purposes, at least) distribution – not a sale, and in turn, not a viable revenue record.
Throughout the latter half of last year, markets tried to price in the potential impact of what might turn out to be a restatement, and Valeant stock collapsed from $262 during August 2015, to lows of $70 a share late November. It has since recovered slightly, and closed out last week for just shy of $85.
During Monday’s session, however, news that confirmed the company will be restating its financials wiped a further 11% of Valeant’s market capitalization, and a further 4% gain after hours will see the company open today’s session at just $73 a share.
Sometimes, this sort of accounting driven decline represents an opportunity to get in at a sentiment driven discount. After all, the revenues will get recognized eventually, and while there may be a relatively small admin expense, the company should recover. However, Valeant has also been dogged with the price hike stigma for the last twelve months, and with potential price reform just around the corner on the back of the US election, the company may have further to fall before it can mount any sort of meaningful recovery.
Our second big mover of the week is Editas Medicine Inc. (NASDAQ:EDIT). This one is slightly less straightforward than Valeant, as there doesn’t seem to be any glaring fundamental driver behind the company’s movement. Its shareholders won’t be complaining, however. The freshly public Editas gained close to 17% during Monday’s US session, having already picked up 10% gains on the last session of last week. Post-IPO, which took place on February 3, 2016, markets sold off on Editas amid expectations that the company was entering a weak capital market. Having carved out lows juts ahead of $12 a share a week later, however, sentient rebounded, and eight straight trading days of gains gives Editas a market capitalization at today’s market open that represents a 19% premium to its IPO valuation.
So what’s been the turnaround factors? Well, as we’ve said, nothing much. The announcing of a 5% hedge fund involvement on February 12, 2016, looks to have buoyed sentiment, but that aside, upside drivers have been practically nonexistent. The wider biotech sector has stages something of a modest recovery, and so the Editas gains may have come about against a backdrop of wider market strength. Alternatively, (or perhaps concurrently) the impact of what looks to be an investor relations campaign could have drawn speculative capital. A number of articles (we won’t link to them here, as we’re not in the business of highlighting investor relations campaigns, but they’re readily available with a Google search) have reiterated Editas’s potential in the gene editing space, and these may be responsible for at least some of the strength. Looking deep into the company’s filings, the only other update (which isn’t really of note) is a headquarters relocation slated for the third quarter of this year. This is not unexpected, however, as the windfall from the IPO was reported to fund exactly such expansion efforts. An odd one, but one to watch. If it is on the back of an investor relations campaign, this isn’t always a bad thing, but it’s a red flag that requires even tighter due diligence when considering an exposure.