First-Half Performance: OIS Index Tracks US Stock Market but Lags Healthcare Benchmarks

We see ophthalmology as one of the more innovative specialties in healthcare, but does that excitement translate to the public markets?

In October, we launched the OIS Index to answer the question. This composite of ophthalmic growth stocks tracks the public investment performance of our sector. With this tool, we can highlight ophthalmology investment performance, in absolute terms and in comparison with broader biotech and medical device industries, as well as the overall US stock market.

The OIS Index was launched with an initial value of 1,000 on October 1; as of the market close on June 30, despite a late month surge, the OIS Index stood at 894.75.

After a 2.5% decline in May, the OIS Index returned to positive territory in June, posting a gain of 3.9%.

This performance was consistent with gains across the US medical device segment, and well ahead of the 0.8% gain for the overall US stock market, as measured by the Russell 3000 Index.

However, the NASDAQ Biotechnology Index posted an even stronger gain of 8.5% in June.

During the month, advancing stocks in the OIS Index outnumbered declining stocks by 18 to 14. The positive moves enabled the Index to hit 955, its highest point since November and only 4.5% below the initial value of 1,000 set on October 1.

The index reached a low of 796 on January 23, after several ophthalmic pipeline setbacks.

Over the three-month period ending on June 30, the OIS Index (+1.8%) underperformed all three relevant market benchmarks that we track: the Russell 3000 Index (+2.4%), the NASDAQ Biotechnology Index (+5.7%), and US medical device stocks (+10.0%).

Six Month Performance Review

During the first half of 2017, the OIS Index (+8.1%) performed in line with the Russell 3000 Index (+7.9%), but did not fully participate in the biotech and Medtech rallies that lifted the NASDAQ Biotechnology Index 17.1% and an index of US medical device stocks 25.1%.

Much of the underperformance of the OIS Index during the first half of this year has resulted from the methodology employed to manage the index. At the beginning of each quarter, the market cap-weighted index is rebalanced, and the valuations of the largest companies are capped to prevent a handful of large stocks from dictating performance of the overall index.

Since the beginning of 2017, the four largest components of the OIS Index have been Carl Zeiss Meditec, Spark Therapeutics, Aerie Pharmaceuticals, and Glaukos Corp. As of January 1, these four stocks accounted for 64% of total market valuation among the 32 companies in the OIS Index, but their total weight within the index was capped at 34%. As a group, these four companies returned a stellar 28% during the first half of 2017, but their overall impact on index performance was muted by their capping within the index. If these four stocks had been included in the index in full proportion to their market valuations, the OIS Index would have gained 19% during the first half of 2017 rather than the reported 8.1%, which would have been consistent with the biotech and medical device benchmarks.

As of July 1, the total market valuation of the 32 companies in the OIS Index stood at $14.1 billion. The proportion of index valuation represented by ophthalmic biopharma companies has remained steady at about 70%, with 30% represented by ophthalmic device companies.

Looking Ahead: Key Milestones for H2-2017

Any market sector stock index with a relatively small number of components, particularly one that consists of many early-stage biotechnology stocks, can be significantly affected by singular events. This has certainly been the case so far with the OIS Index, which was impacted by major pipeline announcements from Ophthotech Corp. and Inotek Pharmaceuticals in December and January, respectively.

With this in mind, the following key events slated for the second half of 2017 could contribute meaningfully to OIS Index performance:

Ocular Therapeutix has a PDUFA date of July 19 for its DEXTENZA dexamethasone intracanalicular insert for the treatment of ocular pain occurring after ophthalmic surgery.

Nicox, in partnership with Bausch + Lomb, has a PDUFA date of August 24 for Vyzulta (latanoprostenebunod) for intraocular pressure (IOP) lowering in patients with open-angle glaucoma or ocular hypertension. Nicox had previously had a September 8 PDUFA date for ZERVIATE (cetirizine for allergic conjunctivitis), but that product received an early FDA approval on May 30.

It is possible that Spark Therapeutics could receive an FDA approval decision during H2-2017 for voretigeneneparvovec for inherited retinal disease, but given the timing of the submission, it is also possible that a decision could come in 2018.

Drivers of OIS Index Performance in June

The largest contributor to OIS Index performance in June was Omeros Corp. (+1.9% contribution to index performance, stock up 31.7%), driven by news related to the company’s non-ophthalmic pipeline. On June 13, Omeros announced that the FDA had granted breakthrough therapy designation to OMS721 for the treatment of immunoglobulin A (IgA) nephropathy.

Clearside Biomedical (+1.1% contribution to index performance, stock up 32.4%) gained following presentation of preliminary results from an Extension Study of the completed Phase II trial of CLS-TA (triamcinolone acetonide for suprachoroidal administration), used together with intravitreal EYLEA (aflibercept) for the treatment of macular edema associated with retinal vein occlusion. The data suggest the potential for CLS-TA to lower the EYLEA retreatment rate in this indication.

Other key contributors to positive index performance in June were Spark Therapeutics (+1.3% contribution to index performance, stock up 17.3%) and STAAR Surgical (+1.0% contribution to index performance, stock up 18.0%).

The largest negative impact on the OIS Index in June came from GenSight Biologics (–0.8% contribution to index performance, stock down 27.4%). The stock declined following the June 22 announcement of a stock offering that raised €22.5 million. EyeGate Pharmaceuticals (–0.1% contribution to index performance, stock down 27.5%) experienced a similar decline after its June 9 announcement of a $10 million stock offering.

Ocular Therapeutix (–0.5% contribution to index performance, stock down 9.1%) declined following the June 22 announcement of an upcoming management transition at the CEO level that will take place during the third quarter of 2017.

pSivida Corp. (–0.4% contribution to index performance, stock down 24.7%) sold off following the seemingly positive announcement on June 13 that the second Phase III trial of Durasert three-year treatment for posterior segment uveitis achieved the trial’s primary endpoint of prevention of recurrence at six months with patients continuing to be followed for 36 months.