The Week Ahead In Healthcare

By Stephen D. Simpson, CFA | August 05, 2012 AAA

As is generally the case for many areas of the stock market, summer marks a pronounced slowdown in newsflow and stock action for the healthcare sector. Although these periods can be frustrating for investors and traders who crave action, the sluggish pace of trading can afford others an opportunity to get caught up on due diligence and begin establishing positions.

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Two Significant Cancer Companies Heading in Opposite Directions
With little of note on the horizon on this weekend, a quick look back at last week seems in order as it was a notable week for at least two oncology-focused biotechnology companies.

Dendreon (Nasdaq:DNDN) reported yet another disappointing quarter; a quarter that saw not only a significant restructuring announcement, but also a sequential decline in sales of the controversial cancer vacine Provenge. Although lauded as a first-of-its-kind therapy, Provenge has simply not caught on with the oncology community - likely due to a combination of its unconventional nature and the lack of response seen in traditional indicators (Provenge doesn't appreciably shrink tumors or lower PSA levels). While management believes that its latest round of cuts will allow the company to break even at $100 million in quarterly sales, very competitive new drugs from Johnson & Johnson (NYSE:JNJ) and Medivation (Nasdaq:MDVN) may make even that level of revenue production difficult.

SEE: How To Choose A Healthcare Plan

Speaking of Medivation, the company announced last weak that the FDA has set a PDUFA date for its heralded prostate cancer drug enzalutamide. On or about November 22, investors will know whether the FDA has approved the drug for sale in the United States or whether Medivation (and partner Astellas) will have to submit additional data.

The K-V Story Ends with a Whimper
This past weekend also saw the likely end of former controversial specialty drug company K-V Pharmaceutical, as the company declared Chapter 11 bankruptcy.

SEE: An Overview Of Corporate Bankruptcy

K-V had largely bet the company's future on Makena - a drug designed to prevent premature births. The controversy came from the fact that K-V had conducted trials and sought approval for Makena as an orphan drug, but compounding pharmacies had been producing the treatment (legally) for patients for years. Whereas pharmacies were charging $300 or less for a course of treatment, K-V initially tried to price Makena at around $25,000 without offering any appreciable improvement in safety or efficacy (rather, just the consistency of a single manufactured product versus the potential variability from compounding pharmacies).

K-V tried to enlist the FDA to eliminate the cheaper competition and force compounding pharmacies to cease selling their cheaper generic alternative as part of the orphan drug designation, but widespread public outrage (including the involvement of Congress) and an unclear legal precedent ultimately led the FDA to back down. K-V tried to reprice the drug (cutting the price by more than half), but could not gain any headway.

SEE: 5 Things To Know About Managing Your Healthcare Deductible

The Bottom Line
The performance of healthcare stocks (as measured by ETFs) has begun to falter a bit. The Health Care Select Sector SPDR (ARCA:XLV) is up around 9.3% year-to-date, slipping below the the 9.7% return of the S&P 500. The iShares Dow Jones US Pharmaceuticals ETF (ARCA:IHE) is up 12.6%, while the iShares Dow Jones US Medical Devices ETF (ARCA:IHI) is up 8.1%. The SPDR S&P Biotech ETF (ARCA:XBI) has risen more than 30% year-to-date.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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