Biotech Blahs: Unable To Hold Gains After ASCO Run-Up…Update-1

Monday June 20… Update 4:30p EDT…BRexit relief rally

Biotech stocks pretty much tracked the NASDAQ rally today slowly selling off as the day wore on. The more volatile XBI was still up 1.56% for the day beating the sluggish IBB up 0.91%. The healthcare sector overall held up about 1%. Energy and materials led up 1.31%.

Large caps biopharma was mixed despite early moves up. We would focus on Celgene (CELG) as  bellwether for the group because of its touted future growth prospects and broad portfolio. Celgene has collaborations with dozens of companies in what is called a “distributed research platform”. The stock is still down 17% YTD and flat over three months. Estimated two year top line revenue growth is in the 18% range from $8.7B today to $14.8B by 2020. Several analysts have a buy or overweight on the stock. Technicals for CELG are teetering at the support level of $99. Forward PE is a low 14.11 and the Price/Sales is 8.

Mid-caps drew more buyers with ALKS ALNY INCY and SGEN strong in the green.

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Biotech Blahs Bring Stocks Down to Support Level

As of midday trading today (1PM EDT) biotech stocks are trading down near the May lows erasing gains from the ASCO run-up. The IBB at $258 is unable to break through to recent highs hit in April and early June creating a double top.  The XBI has shown a similar technical pattern but with higher highs hit in early June near the end of ASCO and trading near the May 12 support level. We favor XBI (now at $53.85) for trading as the moves are more volatile on a week to week basis. Since the bubble burst in mid-July followed by the January downdraft biotech stocks have struggle to make gains from February lows. Technicals rule for now.

Nonetheless there is plenty of interest in the sector with tons of cash waiting in the wings to move individual stocks. This market favors traders and we saw that during the anticipation of clinical data from ASCO.

Pricing concerns remain an overhang in the market. Politicians have been focused on the issue of high drug costs since September 2015 . Investors expect growth from the large cap biopharma leaders and without new blockbuster drugs and top line revenue growth generalist investors may stay away.

The biotech sector is still in a bear market interrupted by strong countertrend rallies. Here are some underlying trends driving the sector:

  • M&A should pick up by year-end as larger biopharmas seek new product growth.
  • NASDAQ and the QQQ needs to be strong for the IBB to rally.
  • Macro issues such as Brexit, the FED and tepid global growth discourage generalist investors.
  • Large cap leaders need to show top line growth or minimally start looking like value stocks with dividends.
  • If the healthcare sector (XLV) outperforms biotech should do better.

We will review the biopharmaceutical sector at the end of the month to compare actively managed funds vs ETFS. Our last review showed that ETFs beat the funds and this is still the case YTD but the FBIOX performance is starting to improve over the past 3 months and beats the IBB by 3%. So can active management make a comeback?

If you are not a trader then an investment strategy can be to hold long-term core positions in large cap biopharma stocks that pay dividends. Our core portfolio includes stocks like: Abbvie (ABBV), Bristol- Myers Squibb (BMY) and Roche Holdings (RHHBY).

Update after today’s “quad witching” close.

Disclosure: long ABBV, BLUE, BMY, FBIOX, RHHBY. Short XBI as a hedge.

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