Biotech Shows Signs Of Life — Bret Jensen
Last week I penned a quick take on the carnage in the pharma and biotech sectors thanks to the attention that drug giant Valeant Pharmaceuticals (NYSE:VRX) was drawing from one prominent short seller as well as politicians trying to score election points with rhetoric around drug price “gouging” entitled “Insanity in Biotech Land”. I made a point that this sort of trading action was likely a sign of capitulation. I also highlighted the fact that Valeant may indeed be a “bad actor” but stocks like Mylan (NASDAQ:MYL) that saw significant selling thanks to the news on Valeant, were getting deeply oversold.
Those names have started to recover and even the shares of Valeant have stabilized although that equity will remain a battleground stock for the foreseeable future and I am avoiding it. In addition, I think the overall biotech sector is starting to stabilize and has behaved better recently. This is especially true for the large cap growth names in the market like Amgen (NASDAQ:AMGN).
There does seem to be a bifurcation in the biotech sector right now. The large cap names in the Biotech Forum portfolio turned positive starting late last week since that portfolio’s launch in April. They now show an average gain of roughly two percent over the last six months while the 15 small cap names in the portfolio sport an average loss of just over four percent.
This is one reason I always advise to keep 50% to 75% of one’s overall holdings in biotech in these types of large cap equities, depending on the individual’s risk preference. This is also a key reason that this portfolio has easily outperformed its benchmark of the iShares Nasdaq Biotechnology ETF (IBB) since its launch. Having this approach also takes a good portion of the volatility out of a sector that is prone to frequent sell-offs. The small cap portion of biotech has now gone through five official bear markets since 2009 and seems to get hit on cue every 12–18 months.
This recent sell-off looks and feels exactly like the last major pullback the sector had at the start of March of last year. In that decline, the large cap growth names largely fell 15% to 25% over 6–8 weeks. Small caps were hit much harder with a typical decline of 30% to 50%. Large caps were also the first to bottom and then the sector started to move up again after major names like Celgene (NASDAQ:CELG) delivered quarterly earnings reports that beat expectations. Sound familiar?
I think we are in the middle of a similar phase. We should know soon enough as Gilead Sciences (NASDAQ:GILD) reports today, Amgen provides quarterly results tomorrow and then Celgene reports next week. All three stocks have started to move up into earnings and I expect all of these names to beat the consensus. I took the opportunity to increase my stake in all three of these core holdings during the recent turmoil that gripped the sector.
Finally, I know I have a lot of Gilead fans among my followers. I want to make sure everyone saw this solid piece on the likely impact of the recent problems of Viekera Pak, its primary competitor in the hepatitis C space. I particularly want to pull out this enlightening snippet that should put some warmth in the heart of any Gilead shareholder.
“Still, revised labeling for Viekira Pak and Technivie will “likely materially negatively impact sales,” Citigroup analyst said in a research note. Analysts expect Gilead’s drugs to rake in $17 billion in sales next year compared to $2.5 billion for AbbVie’s meds. Other companies such as Johnson & Johnson (NYSE:JNJ) and Merck (NYSE:MRK) could also benefit from the development, as they forge ahead with their next-generation hep C therapies. Merck’s treatment, which is pending FDA approval, could rake in between $600 million and $700 million in sales next year, Anderson said, non-withstanding AbbVie’s latest regulatory misfortune.”
I believe this is an accurate outlook and would mean that Gilead would remain the major market share leader in the lucrative hepatitis C space with 80% to 85% of the overall market share for at least the medium term. At nine times this year’s earnings, it also means that the market is seriously underpricing Gilead’s continued dominance and worries about competition are overstated. Eventually, those concerns will dissipate which will be reflected via a significantly higher stock price.
Thank You & Happy Hunting
Editor, Biotech Forum
Disclosure: I am/we are long AMGN,CELG,GILD,MYL.
Originally published at seekingalpha.com.