Biotech Rally Loses Momentum But Still Up for the Week

IBB up 3.37 % , XBI up 5.04% , XLV up 0.77% this week.

Investors took profits today despite all of the media focus and renewed excitement for the long term potential of new blockbuster drugs. The rally began Wednesday with the news that the $160B inversion deal by Pfizer (PFE) and Allergan (AGN) was scrapped due to new Treasury rules intended to discourage large mergers with offshore acquirers. Some analysts felt that this deal was structured primarily for tax reasons and less for strategic fit. Did the Pfizer CEO Ian Read misread Washington?

After the merger breakup was announced bankers and investors immediately shifted to a new M&A scenario whereby Pfizer or Allergan would buy another large or mid-sized biotech company. Moreover with inversion deals nixed, smaller deals would pickup. Biogen (BIIB), Biomarin (BMRN), Bristol-Myers Squibb (BMY), Incyte (INCY), Medivation (MDVN) and Vertex (VRTX) were among the names thrown out. With M&A buzz back in the headlines the market rallied. 2015 was a record year for M&A but total volume targeting US companies for 2016 is down 38%. Valuations of biotech companies are more attractive so look for  deal pick-up in Q2.

A red screen today has dimmed hopes for this rally after the strong upside moves mid-week on big volume. The biotech sector tracks NASDAQ so without strength there do not expect another rally. NASDAQ was flat today at the 4845 level. Here is what to watch in the coming weeks:

  • Technicals Rule-we are well off the bottoms of February 11 and March 29 which should minimize downside risk.
  • Lively Tape-speculation is back for trading smaller caps an indicator of retail and specialist interest in the sector.
  • Healthcare Strength-with increasing volatility in the market due to macro news and concerns about growth investors will seek out healthcare stocks. the XLV is up 3% over one month.
  • Earnings and Growth– we will get our first look at results and guidance for 2106 with Q1 results. We will continue to track large cap biopharma metrics.

Trading has been good and we made money on ACAD, VRX and XBI all longs. risk remains on.

Our large caps picks for 2016 are: Abbvie (ABBV), Bristol-Myers Squibb (BMY), Gilead Sciences (GILD), Roche ADR (RHHBY), We have one smaller cap speculative pick bluebird bio (BLUE) a clinical stage gene therapy Company.

Disclosure:we have positions in all of these stocks.

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