• Biotechnology sector has corrected over 10%.
  • Poor earnings of larger biotechs knocked the wind out of the sector.
  • An imminent catalyst can push the sector higher, recovering recent losses and possibly make new 52-week highs.
  • Mid cap and small cap companies well-positioned for gains

    • Biotech Pulse

    The months of October and November have been unfavorable for biotechs as the sector has witnessed a sharp pullback. The Nasdaq Biotechnology Index (IBB), shown below, retreated 12% from its 52-week high posted in early October.

    Nasdaq Biotechnology Index (IBB) ~ November 2017

    During the same time, while biotechs have suffered, major market indexes have risen with the S&P 500 and Nasdaq Composite recording new highs.

    Trump Tweets Again About Lower Drug Prices

    Earlier this month, Trump took the opportunity to move forward his nomination of Alex Azar as new Secretary of HHS to make a push for lower drug prices.

    The biotech indexes experienced much higher volatility and declined sharply on November 13, the day of the tweet, and the following day.

    Trump’s comment followed his criticism in October of drug prices. To the extent Trump’s remark may have contributed to any decline in the biotech sector, it can simply be characterized as an overreaction. So far, Trump has pushed-out the effort for lower drug prices to the FDA with the mandate to make the drug-approval process more efficient. And nothing suggests that anything else is being contemplated.

    Concerns about Lackluster Earnings Growth and Tax Reform Uncertainty Affecting Biotechs

    The third quarter earnings performance knocked the wind out of the sails of larger biotechs and pharmaceuticals.

    The Nasdaq Biotechnology Index, which is oriented towards the larger cap biotechs, has suffered from weak results and guidance, relative to expectations, of some of the major biotech companies. The likes of Celgene (CELG), Gilead (GILD), Bristol-Myers (BMY), Biogen (BIIB), and Alexion Pharmaceuticals (ALXN), have all stumbled on the earnings bar. Even Amgen (AMGN) was somewhat light on revenues for a couple of key products. Competition and resulting pricing pressures have hurt these companies. Vertex Pharmaceuticals (VRTX) and Incyte (INCY) were a couple of notable standouts among large caps, delivering strong top-and-bottom-line performance.

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