Biotech Bull Market Takes A Breather
When the biotech bull market began in Q2 2009 it was value driven because of low technology values and Price/Sales for the widely covered stocks. Product sales were about to explode for many companies and in 2012 the sector took off. Biotech stocks are up more than 57% YTD but just as the media has caught on and trumpeted the winners there is reason to be cautious. The Q4 rally is in a “topping” trend particularly among the large cap leaders, many of which hit highs earlier in the quarter: ALXN, AMGN, BIIB, GILD, and REGN. Although the IBB ($216.20) pushed toward new highs on Monday, the November high of $225 appears to be a near term ceiling.The IBB 50 day moving average is $210 with firm technical support at $200. The recent top for the Fidelity Select Biotechnology Fund (FBIOX $171) was on December 2 at $180 with two 10% corrections to the $160 level in October and November.
Some Busted Momentum Stocks Were Driven By institutions
Laws of Physics Apply-Momentum Begets Momentum
The biotech bull market appears to be transitioning toward more “normalized” returns where clinical news, deals and earnings drive stocks rather than momentum investing tactics. Momentum investing causes a targeted stock to inexplicably rocket upward with high volume buying because of a theme, technology or clinical stage product that gets traction. Word of mouth among traders “pile on” as the stock gains relative strength. Technical indicators and favorable charts attract more buyers. Fundamental analysis and valuations weigh less in a momentum market because big money is behind the run which feeds on itself as stock prices rise with higher volumes. The target company CEOs may not even understand why their stock is going viral.When the short positions increase fuel as added to the move because they can be squeezed.Eventually momentum stocks will revert to more rational valuations as profits are taken or company fundamentals seep in.These high flying stocks are extremely sensitive to clinical news because expectations for revenues 3-5 years away may be unrealistic. At the current stage of the bull market the technicals on the stock become the arbiter.
There are many examples of mid-cap stocks way off their 2013 highs or have been reduced to “normality”. In many cases the company was dependent on one Phase 2 product and had little or no revenue.
Here are a few stocks illustrative of momentum investing. NB: we currently have no opinion on any of these stocks except Pharmacyclics (PCYC) which has been in our focus list since $38.
Aegerion Pharmaceuticals, Inc. ($63.45) Market Cap $1.86B
Aegerion is one of a new breed of biopharmaceutical companies focused in “rare diseases” or orphan drugs.Their flagship product Juxtapid is a lipid -lowering treatment in patients with homozygous familial hypercholesterolemia (HoFH). Revenues are estimated at $26M for Q4 , $16.33M actual in Q3 and $205M estimated for 2014. The stock peaked around $97 in early October, recovered in late October at $90 then headed south to current values. Two issues arose with the Company in November: the estimate for addressable market for Justapid and a “brush” with FDA for selling the product for “off label” use. Fidelity Biotechnology Fund (FBIOX) owns 2.4% of the shares, unusual for a small cap, and surely they have been a major driver of the stock. The market cap of AEGR near its peak was in the $2.9B range or 14X 2014 revenue forecast.
Celldex Therapeutics, (CLDX $22.50) Market Cap $1.82B
Celldex has a broad pipeline of clinical stage products for cancer and transplantation utilizing immunotherapy that target tumors or pathways. Its lead clinical product Rindopepimit, for front line glioblastoma is currently in Phase 3. A second clinical stage product is CDX-o11 for breast cancer. The Company was spun out of Medarex, now part of Bristol Myers, with commercial licenses to a monoclonal antibody platform for therapeutic development. Four other companies were acquired in the meantime and folded into Celldex, formerly called Avant Immunotherapeutics. The Company recently sold 7M shares of stock at $24.50.
Infinity Pharmaceuticals (INFI $13.25) Market Cap $718M
Infinity is focused in oncology and inflammation with three products in the clinical phase for hematologic malignancies and inflammation: IPI-145 for iNHL and CLL as well as asthma and inflammation. The Company is well known to nine analysts and hedge/mutual funds own about 70% of the Company. The stock plummeted when Phase 1 clinical results for their highly touted P13k inhibitor clinical results showed safety concerns. The stock actually started selling off long before the ASCO presentation and there was a double top in March as can be seen by this chart. Astutely the Company did a stock offering at $40 in mid-April. It is unusual do have such strong buzz on a Phase 1 drug driving the valuation to the $2B+but that is what happens with biotech stocks in an “uberbull” market.
Sarepta Therapeutics (SRPT $17.45) Market Cap $645M
Sarepta is focused in rare and infectious diseases utilizing an RNA based platform. Irrational exuberance launched SRPT stock up 50% to $55.61 when it showed positive Phase 2 clinical results for its Duchenne muscular dystrophy drug. But the FDA wanted to see Phase 3 data with a new trial and would not approve the drug as expected. The Phase 2 trial had only 10 patients. Many big institutional names were in the stock and in fact were increasing their holdings in Q3.
There are several other mid-cap biopharmaceutical stocks that can be characterized as momentum driven and are still close to their 2013 highs. Within my index of 50 mid to small cap companies here are several:
Alnylam (ALNY $59.90) 52 week high $66 Market Cap $3.8B up 228% YTD
Incyte (INCY $48.52) 52 week high $50 Market Cap $7.8B up 192% YTD
Ligand (LGND $53.51) 52 week high $58 Market Cap $1B up 158% YTD
Pharmacyclics (PCYC $110) 52 week high $143 Market Cap $8B up 91% YTD
Puma (PBYI $83.78) 52 week high $89 Market Cap $2.4B up 347% YTD
Summary-the point is to be cautious with stocks that may be subject to severe declines as momentum eases.
- We are seeing a trend away from momentum investing in a reversion to the mean. Valuations and business/clinical milestones should become much more important in 2014. Stocks need to grow into valuations.
- If you are a momentum investor you will need to follow technicals more closely and decide on your exits up-front.
- With returns in the biotechnology sector up 60% in 2013, profits will be taken in early 2014. Expect less froth and lower returns in 2014.
- The biotech bull market is intact and dramatic upside stock moves will still occur as most funds are flush with cash.
- If you are not a momentum investor or short term trader your biotechnology portfolio should be diversified with at least 5 stocks with one fund or ETF.