What’s Next After Profit Taking Hits Biotech And Drug Stocks?

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 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.