For the last seven years I have monitored the monthly performance of drug delivery and specialty pharma companies with the expectation that it will provide a sense of the health of these sectors. I post this information at my company website, www.pharmanumbers.com, with tables and a graph but little commentary. This blog adds a little more color to the posted numbers.

A short orientation follows at the end of this post that is worth reading to make sense of the discussion that follows.

So How Was January?

It was a very good month, all three indexes were up for the month led by the Emerging Specialty Pharma Index (ESPI) up 8.5%. This was very good news as it had taken a beating over the latter half of 2011. The Drug Delivery Index (DDI) was up a very positive 6.6%, a welcome change from the similar dismal performance of 2011. The Commercial Stage Index (CSPI) was up a more modest 2.5%, although 2011 was not that tough a year despite a significant drop in the second half of the year.

With respect to longer terms trends the CSPI, at 2,260 is well above the baseline value of 1,000 established at the end of 2004. The DDI and CSPI indexes though are still below their 2004/12 baseline values (1,000). Although both indexes did show an uptick in 2005 and 2006, there was a slide in value that started in 2007 and bottomed out in 2009. Since then the DDI and ESPI indexes have come back but respectively are still 12% and 30% below their baseline values.

So with the exception of the CSPI, companies as a group have lost enterprise value as estimated by their market capitalization. The loss in investor share price is even more dramatic for the DDI and ESPI companies as a group. In many cases these companies have issued considerable amounts of additional stock that disguise their stock price erosion.

In terms of individual companies, BioDelivery Sciences was the top gainer with a 150% increase in market cap in January as a result of their deal with Endo for their Phase III buprenorphine formulation. Adeona was up 84% and Orexigen 70%. The list of the top gainers and losers for the month in each index can be found at the Pharmanumbers index summary page.

Here’s hoping that 2012 can be an up year for all three of the indexes. With increased valuation will come increased investment that can support new investments in pipelines.

Background to the Indexes

The indexes are based on market capitalization, not share price. The indexes therefor reflect only the public company side of the industry and necessarily ignore the private company sector. Market capitalization makes it reasonably easy to calculate the value of the various sectors by adding up individual company market caps each month and comparing the total with previous months and years. Complications arise when companies are acquired or when they are delisted, but this is handled is a simple and consistent manner. Give me a call if you have questions about this.

So what defines the companies included in the different indexes, Drug Delivery Index (DDI), Commercial Stage Specialty Pharma Index (CSPI) and Emerging Stage Specialty Pharma Index (ESPI)? A drug delivery company is one that provides drug delivery type services to third parties in the form of technology, services or products. Their business model depends on securing a significant portion of their income from third parties agreements for drug delivery related activities. Specialty Pharma companies are those that develop branded pharmaceutical products for their own commercialization. These companies do not have a discovery function, they either work with previously approved actives or secure novel therapeutic actives at some post-discovery stage of development. The difference between the definition of emerging and commercial stage relates to whether the company hopes to have commercial activity, i.e., sale and marketing to physicians, or they are already active in commercializing products. Emerging companies of course hope to evolve into commercial stage companies.

The requirement that these specialty pharma companies not have discovery functions is important. If not for this requirement it would be impossible to separate these companies from any other number of emerging and commercial stage biopharma companies. The idea of Specialty Pharma companies being those companies that ‘specialize’ in one area is a misnomer. There are in fact very few companies that fit such a description, and almost none of them are active at the commercial stage. Once you are at the stage of commercializing products you are willing to promote almost anything, even products outside your specialty, as long as you feel it will turn a profit.