It’s been a tough week for a number of biotech companies so far, with both large and small hit by a variety of factors. Here are two of the week’s biggest losers so far, and a look at what drove the decline – Anacor Pharmaceuticals Inc (NASDAQ:ANAC) and Illumina, Inc. (NASDAQ:ILMN).
First then, Anacor. This one is a combination of a number of factors, or so it would seem. Anacor kicked off the Tuesday session in the US at a little over $62 a share. By session close, the company went for $60.46 – a nearly 10% decline across the period. There was a premarket spike that contributed to the session wide loss, but a decline of this severity in a multi billion dollar company is of note nonetheless.
We heard at market open that Royce and Associates, an institutional Anacor investor, had cut its position in the company by more than fifty percent last quarter. The cut brings its holding to 58,500 shares, worth about $6.6 million, or 0.13% of outstanding stock, as thing stand. Now, this isn’t immediate cause for concern. A fund unravelling a position during pre-second quarter isn’t unusual. It’s the other elements that are in play that seem to have raised concern. Primarily, and specifically, Anacor’s earning potential. While revenues climbed year over year between 2014 and 2015, Anacor’s sales dipped during the final quarter of the year, and the company continues to chalk up a net loss quarter after quarter. It’s pipeline is pretty flush, and late stage development could turn this trend around, but with the company down considerably already on 2015 highs, it seems some speculative positions are no longer willing to wait and hold on a reversal.
For the more risk tolerant investor, the recent decline may represent an opportunity. Yes, the company is down, but fundamentally nothing has really changed from this time a week, or even a month, earlier, and in that sense, a 10% price drop is a gap that could close quickly when sentiment shifts.
Nest up Illumina. This one’s a little clearer. The company is set to report its first quarter 2016 revenues on May 3, and analysts had set forecasts of a consensus $596 million in revenues for the period. On Monday evening, however, Illumina issued a warning that stated it would miss this target, and would likely come in a lot closer to the $572 million mark. The discrepancy, according to management, comes on the back of weaker than expected sales in Europe of its HiSeq 2500, 3000 and 4000 products (for those not familiar, Illumina deals in genetic diagnostics and array tools).
The company is down nearly 25% on its Tuesday open. And ahead of the bell today, look set for further weakness. This said, however, the 6% revision in revenues versus its estimates still represents a 12% increase in revenues versus the same period a year earlier, and not only is Illumina generating a healthy quarterly bottom line (ranging from $102 million to $136 million across the last four quarters), but it also has a strong balance sheet. Just shy of $770 million cash on hand at beginning of January, 2016, and circa $2.1 billion total current assets at the same point. With a market cap of $20.1 billion, there’s a valid argument for the current 25% discount being an opportunity to get in cheap.
The crux will come on May 3. If, as management has stated, the discrepancy between analyst expectations and the actual data is just a 6% decline in revenues, and it primarily revolves around weak Europe, then there is every chance that the company will rebound on its Q1 release. In any case, it’s one to keep an eye on as we head into earnings season come May.
As a side note, these are not the only two companies down this week. The wider biotech sector has taken a hit on what seems to be a risk averse shift in sentiment – likely driven by the continuing fundamental weakness in Europe and China. The delaying of rate hikes in the US has provided a floor in equities over the last couple of months, but how ling this floor is set to hold, remains unclear. Diversification is key at this point, especially when it comes to development stage biotech.