Biotech Stocks Emerge Unscathed And Ready To Go

  • The blueprint to lower drug prices leaves Biotechs unscathed and can be a net positive for the biopharma industry.
  • A big cloud has cleared and this will assist biotech valuations going forward particularly as the market firms up.
  • An improving investment climate matched with overarching industry trends can favor biotechs to record a sharp rise over the next few months.
  • A portfolio exposure to small cap and midcap biotech stocks can be a prudent and rewarding strategy.

Biotech Pulse

Biotech stocks have a pulse now, and it's beginning to beat a little harder.

As President Trump on Friday, May 11, delivered a blueprint, American Patients First, to lower drug prices the early indications appear to be that the biotech and pharmaceutical industries have jumped through the proverbial ring of fire with just a few singed hair.

In fact, the blueprint, in its present form, lifts a cloud of uncertainty over the biopharma sector and paves the way for sunnier days ahead, at least for the near-term.

The biotech stocks have been demonstrating strong resilience in the face of intense volatility since February and, remarkably, keeping pace with the broader indexes, considering the highly speculative and volatile nature of the group.

As of April 1, the S&P Biotechnology Index (XBI) was up +3% for the year, while the larger cap Nasdaq Biotechnology Index (IBB) was down -3%. The Prudent Biotech Portfolio was up +18% over the same period.

The further clarity in administration's strategy is favorable for the biopharma sentiment and can provide the momentum to join the incipient market rally. Investors may consider an exposure to the sector at least for the second quarter, as the third quarter may amplify the negative rhetoric around drug pricing as election posturing becomes louder.

American Patients First

So far it appears the bark turned out to be worse than the bite.

The biggest fears heading into the blueprint announcement were:
(i) The Centers for Medicare & Medicaid Services (CMS) will acquire direct negotiating power to engage with pharmaceutical companies on pricing. Presently, negotiations with drugmakers are done by the insurance and pharmacy benefit management (PBM) companies, and as per the 2003 law, the CMS is prohibited from using its buying power to directly negotiate.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Moon Kil Woong 2 years ago Contributor's comment

What is holding Biotech's down is worry over debt and cash flow more than anything else. Buy the ones that don't have to raise money and you should be fine regardless.