Biotechs Unhinged-Roiled by Commentary and Tweet storms

Biotech stocks rallied briefly early in the week but sold off abruptly over the past two days with a quote from Trump in a Time Person of the Year article as saying, “I’m going to bring down drug prices”. This tough talk is reminiscent of comments by both Hillary Clinton and Trump during the election campaign. Despite an election rally that carried biotech stocks up with the general market the sector (IBB) has slumped since November 11. Analysts have tried to sooth biotech and drug stock investors saying that the drug industry would be safe from price controls under a Republican Congress  but sentiment has been damaged under the spell of populist rhetoric.

Over the past few weeks we have reviewed trends in the biotech sector and have advised caution because we are entering a new election cycle where healthcare policy is under scrutiny and cross currents make sub-sector calls hard to call. Today for example Express Scripts (ESRX) fell 6.74% under tweet fire as the large PBM was attacked by short seller Andrew Left of Citron Research citing the “opaqueness” of drug pricing and high margins.

  • Interest rates are on the rise which could diminish interest in yield plays such as large cap drug stocks. Also higher interest rates are not supportive of mid and small cap biotech stocks which require a lot of capital infusion.
  • As we wrote on Rayno Biobeat #4 November 22 when a broad market rally was picking up steam a sector shift pulled money out of bonds and into cyclicals-industrials,financials and energy. Biotechs stalled out and headed south. Healthcare remains one of the worse sectors (XLV) flat over 30 days with horrible sentiment.
  • Technicals remain grim, at best choppy, but at least the smaller cap more speculative XBI is holding recent lows and is still up 7.4% over one month, midway between November lows and October highs. However the IWM Russell 2000 ETF is up 16% for the same period showing the missed opportunity outside healthcare.
  • Tax selling could be exacerbating the downdraft in selective stocks.
  • We want to see selective stocks outperforming indices and ETFs so look for the Fidelity Select Biotechnology Portfolio (FBIOX) to beat the IBB both of which overweight larger cap stocks. Today was encouraging with many green stocks on the tape: ABBV, BLUE, BMRN, REGN, SGEN,VRTX etc.

Keep in mind we are still in a bear market for biotech that began with a selloff at the bull market peak in August of 2015. The craziness of the 2014-2015 bull market means that the consolidation and basing could continue for several more months. And with healthcare policies and drug pricing under scrutiny don’t expect easy trades, but maintain a core portfolio.

XBI SPDR S&P Biotech ETF daily Stock Chart

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