Biotech shares have surged during the week of June 19, with Exelis Inc. (EXEL) leading the charge and up by 26%, Incyte Corp. (INCY) up nearly 16%, Kite Pharma Inc. up almost 14.5%, and Regeneron Pharmaceuticals Inc. (REGN) up just over 12%. These are huge moves for these stocks over just a five day period. The sector as a whole has come alive, and there is a perfect reason for this. (For more, see also: Why These Biotech Stocks Are Gaining.)
From a fundamental standpoint, investors have finally started to feel comfortable that perhaps drug pricing issues are likely not to be nearly as damaging as first feared. With so much focus during the presidential election period on the recent surge in the price for drugs, investors’ biggest concerns were that price controls would be put into place. Once President Trump was elected investors should have begun to realize the method he would use to control prices was through competition. However, the fear that price controls could be put in place made investors feel uncomfortable enough that they did not want to take that risk—which for the most part kept a lid on the group. Increased competition will likely come through deregulation allowing for generics to reach the market faster. In the end, it was the uncertainty that caused the greatest fear, and with this uncertainty beginning to lift, the sector is coming back to life. (For more, see also: Top 5 Biotech Stocks as of June 2017.)
The second piece of the move higher is purely technical based, with the fundamentals igniting the technical break-out. When we explore the NASDAQ Biotechnology ETF (IBB) we see the ETF broke well above previous resistance around $300 and quickly ran to around $320.
The SPDR S&P Biotech ETF (XBI) also saw a similar breakout occur this week.
The combination of more clarity around drug pricing and the technical powder keg waiting to explode created a big move higher in the group. This move might have further room to run as well with resistance levels on the IBB around the $340 level and around $82 on the XBI.
It wasn’t just the smaller company having the big weeks, it was the mega-cap biotechs as well. Amgen Inc. (AMGN) was up nearly 6%, Celgene Corp. (CELG) up nearly 10%, Gilead Science (GILD) up 10%, and Biogen Inc. (BIIB) up over percent 11%. These are strong moves in companies that all have market caps in the $50 billion and higher range.
The sector before the big move was having a decent year, but remember where this sector was in summer of 2015. The IBB was trading around $400 and traded as low as $240 in the spring of 2016. Even at $320, the sector is still down nearly 25% from its all-times highs.
The recent surge in Biotech is not only good for the sector but for the market as a whole, as Biotech represents risk and demonstrates that the risk appetite in the market is large. Market participants are looking for companies that can deliver big top line growth numbers.
If you have been waiting for the breakout in Biotechs to happen, enjoy it. It has been a long time coming.
Michael Kramer and the clients of Mott Capital Management LLC own shares of CELG
Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management LLC, a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.