Biotech Bear Market Rally is Fading but Traders Are Favored

Long Term Concerns on Drug Pricing Remain

The biotech sector is still lagging other sectors in 2016 down 20.93% with the IBB compared to the S&P 500 (SPY) down only 2.19%. The IBB rallied over the past week in what looked like a major move up but Monday’s IBB high at 270 quickly got taken out resulting in a 4.1% loss over 5 days. The XBI also surged on Friday with unusual speculative activity in the small caps but the momentum peaked on Monday.

Some large cap biopharma stocks were hard hit today presumably on concerns about drug pricing and Medicare Drug Payments. A test program from the Obama administration was reported in a Wall Street Journal article might cut payments for expensive drugs that have lower-cost but are equally effective .Healthcare costs have become a major political issue and drug spending is expected to hit $535B in 2018  which is almost 17% of all personal healthcare spending. The pharmaceutical industry has pushed back on any government involvement in Medicare pricing because this action could manipulate the choice of treatment and deprive some patients of the best drugs in cancer, infectious diseases and autoimmune disorders. Blockbuster specialty drugs for oncology, rheumatoid arthritis and macular degeneration have been the growth engine for the biopharmaceutical industry.

A Press Release from announcing the test of Medicare Part D prescription drug models is found here. The proposed rule (under review with open comment until 5/9/16) is designed to do two things: drive the prescribing of the most effective drugs and test new payment approaches to reward positive patent outcomes.

Large cap biopharmaceuticals were weak Wednesday possibly reacting to the news and should be watched for potential pricing impact: AMGN down 2.58%, BIIB down 2.15%, CELG down 1.54% and REGN down 5.08%. Stocks in our new large cap portfolio were mixed: Abbvie (ABBV) up 1.92%, Bristol-Myers Squibb (BMY) down 1.09% and Gilead (GILD) down 0.94%. However many of these stocks have already been crushed since Hillary Clinton first raised the drug pricing issue in a September 2015 tweet when the bear market began.

Our lone speculative pick that we made recently, bluebird bio (BLUE) made a huge 20% move to $55 but has dropped back to $45 near our initial call at $43.

  • Unless you are frequent trader remain cautious on weighting of biotech holdings. Large caps are favored and valuation is important.
  • Small cap stocks are extremely volatile with many good opportunities for trades. Notably the huge pop on Friday and Monday quickly faded so a short covering component was implicated.
  • The next pivot point for analysis will be Q1 2016 earnings. See our financial summary of top large cap biopharmas.
  • Technicals and stock picking rules until fundamentals assert a growth trajectory.
  • We are stuck in a trading range for the sector but healthcare and biotech is underperforming since the February 11 market lows.

We are cautious near term and are presently rebalancing our biopharmaceutical portfolio.

Disclosure long: ABBV, FBIOX, GILD

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