Profit Taking Hits Biotech Stocks

Disruption Coming to Healthcare?

Another Round of Sector Rotation?

The biotech sector hit a wall after breaking through to new highs last week. The major news that sparked profit taking on Tuesday was that Amazon, Berkshire Hathaway and J.P.Morgan formed a consortium to address rising healthcare costs by trying to disrupt the current system with a new model. By forming an independent healthcare Company for their own employees the “new company” might eliminate bureaucratic costs and middlemen such as PBMs(Pharmacy Benefit Managers) as well as negotiate lower drug prices. But of course this new model could be years away from implementation. Reaction to the news was swift with many biotech high fliers and ETFs selling off. We posted early Tuesday at the market open that investors should be more cautious and “take a little off” as the disruptive news could cause analysts to downgrade the sector especially considering the meteoric run YTD.

  • The volatile XBI took almost a 5 point hit from highs near 98 on Monday to the current level in the $93 range but still up over 10% YTD and over 44% in 12 months.
  • The large cap weighted  IBB is off 6 points to the $114 level today and up 6.74% YTD.
  • The broad based healthcare XLV is still up over 6% YTD but took a 4 point hit off Monday highs.The XLV is still up over 23% in 12 months about the same as the S&P 500.

The momentum in biotech has been broken with crosscurrents in the various subsectors caused by the recurring commentary of high drug prices now complicated by the issue of the healthcare payor and distribution model. Until we see how this news plays out we remain cautious about picking winners in what is still a bull market.So it is best to raise a little cash and hold off on new buys.

One trend to watch is sector rotation as we see today out of healthcare into “plain vanilla funds” or into energy and financials. Moreover the overall market may be correcting so it may be best to wait at least until we get through more of the 2017 earnings cycle. We will summarize the valuation of large cap biotech after all earnings are in. Can revenue growth rates support current valuations and will M&A perk things up?  See Amgen today.

Today the large cap performance is mixed with Regeneron Pharmaceuticals (REGN) down over 5.69% and Roche((RHHBY) of 2.71%. Abbvie (ABBV) recovered from the two day 10 point sell-of, up 3.6% to the $116 level. Mid caps fared better particularly Seattle Genetics (SGEN) up 7.36% to $56.15.

(Paragraph Below has been edited on Friday am)

Amgen (AMGN) earnings missed on Q4 earnings because of a $6.1B charge on U.S. Tax Reform and Q4 revenues missed from $5.97B to $5.80B. Guidance for 2018 Revenues is in the range of $21.8B to $22.8B. AMGN Shares declined about 1.73% after hours to the $182 level, but is now back up to the $188 level on Friday. AMGN is still outperforming the IBB up 8.66% YTD compared to only 5.7% for the IBB so if you own it hold it with a dividend of 2.8%.

We will review our biotech portfolio in the coming weeks and rebalance after a great 12 month performance.

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