Biotech Blahs-Investors Lose Interest in Biotech

Biotech shares have faded since the November 14 top after the brief post-election rally. Although individual stocks have made good moves nothing has really changed since our last biopharma post on December 19, Biotechs Fade Again. Some of the top picks in our portfolio are doing well YTD: Abbvie (ABBV), bluebird  bio (BLUE) and the IBB up 6% from our call at $250. Bristol Myers (BMY) a pick at $61, now  at $58.44 is starting to recover from recent lows. Our new Diagnostics and Tools pick Hologic (HOLX) is at $40 and we expect a return to growth in 2o17.

Sector Shift Away from Healthcare

We called the sector shift on November 22 when biotech stocks began their sell-off and the market leaders became the financials, industrials and energy. The high expectations of tax reform, regulatory relief, and aggressive infrastructure spending drove the market toward cyclical plays particularly the banks in a  rising interest rate scenario.

Biotech stocks had a rough start in 2016 with the IBB down from $327 to $290 an 11% drop in January 2016 so comparisons are favorable. The J.P.Morgan Healthcare Conference begins on January 9 and should bring  clarity to a sector which was one of the worst in 2016. The XLV a broad-based healthcare ETF was down 4.29% YTD. If you are looking for contrarian plays then healthcare is the sector for new picks.

ETFS Are Still Beating Many Funds in Biotech

We reviewed biotech ETFs and funds on 7/20 and again on 9/22 when it looked like the bear market rally could continue. The XBI broke out and the XLV turned green for 2016. Since that time the Brexit lows from early July has held but a “double top” resulted in the sector falling to the mid-range of trading over the past six months. We need to keep these ETFs and funds in mind for new positions in 2017. For example in 2016 the Fidelity Select Biotechnology Fund (FBIOX) with $9.59B in assets is down 26% with no Q4 recovery compared to the IBB which was down 21.56% for the same period. Clearly funds have had a more difficult time managing a portfolio in a bear market even though the Top Ten Holdings are ubiquitous with large caps.

• The IBB shows a choppy saw tooth pattern throughout December losing 3.17% with multiple attempts to clear $275 ending the year at $265.38  down 21.56% for 2016. No trend has emerged in Q4.
• The equal but small cap weighted XBI did worse in December down 5.5% ending the year at $59.19 down 15.68%. A six month low of 53.31 was hit on November 3.
• We have mentioned several well-known stocks that have made terrific moves in 2016 e.g. ARIA, ARRY, BLUE, GWPH, MDVN, TSRO etc. showing that specialized funds with expertise can pick winners. So despite the gloomy bear sentiment we are nowhere close to the “gloom and doom” of early 2009 when smaller companies could not get funded.
• We need a strong Nasdaq to keep biotech stocks on the buyers’ radar.