Biotechs Update (11-7-13)

Biotech Stocks – Sell Off Accelerates As Investors Rush to Lock In 2013 Profits and “Risk Off” Includes Top Tier, Too.   The current collapse was triggered by:

a) Technical factors – A number of stocks failed to reach new highs despite bounces after the shock of early October. Momentum continues to be negative and the rotation out of the sector to other high beta technology stocks has also contributed. With charts mostly negative, there is little rush for the momentum players – helpful participants on the way up – to hurry back into bios.

b) Megacap sell-offs – The Big Six (AMGN, ALXN, BIIB, CELG, GILD, REGN) finally succumbed to the industry pullback despite superb earnings and pipeline progress. The “risk off” of October has made its way to the megacap, relatively safer names. That further puts pressure on the sector, when leadership stocks go the wrong way.

c) A lack of new buyers – Most recent biotech buyers seem to have been generalists in nature and have gravitated toward the large caps. Such investors are unaccustomed to biotech volatility and, therefore, have been the most hurt by the current pullback and also are often the first to sell.

d) Flood of new deals – Eventually this was bound to lead to regurgitation. The meaningful pullback in stars such as BLUE, SMTL and EPZM, among others, often symbolizes the financing window starting to close and the bottoming of stock prices. Companies attempting to get out and raise will accept less advantageous terms until the window finally shuts.

e) Investors’ locking in exceptional profits of 2013 – As mentioned in our last Issue, despite the pullback, this has been a wonderful year for biotechnology. Many investors grew complacent and might accept some pullback. However, when the drops exceed ~20%, in our view, fear takes over from greed. With valuations stretched, conservation is the buzz versus appreciation.

f) Sell Off not due to sector wide fundamentals, but cracks have emerged  – With many exceptional new product launches and a positive FDA, the group has benefitted tremendously. The culmination appears to be the unanimous FDA advisory panel of GILD’s sofosbuvir. While it appears to be dominant player, MRK unexpectedly strong data for a competitor did come out of left field. BIIB’s Tecfidera seems to have slowed of late and its hemophilia drug is now delayed.  REGN’s Eylea continues to astound and ALXN’s Soliris is steady and still ahead of the curve.  AMGN’s Krypolis sales were disappointingly flat. PCYC’s ibrutinib has yet to be approved. ARIA’s Iclusig removal no doubt hurt the perception of the FDA being easy on drug developers.None of these “cracks” by themselves are signs of a sea change – but as a whole they give already fragile and now risk averse investors more reasons to sell.

MTSL Sees A Year-End Rally – Focus On Core Names ALKS, INCY, ISIS, MDCO, NVAX, PCYC
While the pullback is both painful and scary, MTSL still believes a year-end rally is in the cards, as mostly long/short, hedge funds have the ability to jump back in a heartbeat. Long investors are positioning as well, we believe. Stock selection is of course essential, although the group tends to move in tandem. In our view, the core list of stocks above have had a transforming years, and 2014 will continue that trend. Stabilization in the large cap technical charts and the approval of GILD’s sofo and PCYC’s ibrutinib will be positive signs – and time, too, will help. The closer we get to December, in our view, the closer we get to bottom and then a turnaround.