Biotech Stock Playbook in a Momentum Market

Bull market in biotech intact with considerable volatility.

“Pure-play” vaccine stocks are hard to trade.

Make sure your portfolio has diagnostic stocks.

Since mid-July we have called for caution when adding new positions to your portfolio. Biotech stocks peaked in mid-July but we have assumed a fourth quarter rally driven by clinical news in oncology and important scientific breakthroughs in diagnostic testing for coronavirus and COVID vaccine data. M&A is expected to be a driver as well. Since the beginning of the pandemic in early March the underlying bull case for biotech stocks has been that they can provide solutions with diagnostic tests, vaccines and drugs. The coronavirus trade is not easy because while most of the key players and products are well known there is still a lot to be learned about clinical data and market trends.

Trading is favored in a momentum market because of political crosscurrents and need for government stimulus to fight the pandemic. Moreover COVID data changes weekly and is subjects to regional case outbreaks.

Here is a brief outline of how we view our life science portfolio:

1. Core large cap biopharma for dividends and growth. Our top picks are Abbvie (ABBV), Bristol-Myers (BMY), Merck (MRK), and Roche ADR (RHHBY). Add Astra Zeneca (AZN) and GlaxoSmithKline (GSK) fo more vaccine weighting. Add Johnson and Johnson (JNJ) for vaccine and general healthcare weighting.
2. We believe diagnostic stocks are a lower risk for a portfolio than vaccine stocks because they are more important for coronavirus control and getting the economy rolling again. Diagnostic platforms are well defined with performance parameters.Large cap leaders are Abbott (ABT) and Roche (RHHBY)  and with Q3 results several other mid-caps will show good results: DHR, TMO- both compares we have covered in the past. Quidel (QDEL) should do well but it is a momentum stock that has to be played accordingly..Our best pick Genmark Diagnostics (GNMK) returned 300% and we have taken some profits. We also like Hologic (HOLX) as a core infectious disease play.We mentioned Accelerate Diagnostics (AXDX)  as a good trade and it soared 50% over several months but has since come down to the $11 handle.Our new pick is Orasure (OSUR) which could deliver a breakthrough rapid test for COVID using saliva.

3. We can pick new trades in biopharma based on the momentum of the XBI. We traded out on recent weakness at the $115 level and expect to jump back in for post election gains.However at the present time we are neutral on the XBI.

4. Breakthrough technologies and innovation. The main driver of biotech stocks is innovation such as precision medicine in immuno-oncology whereby targeted antibodies create new medicines. Two leading companies in this area are Bristol-Myers and Merck with Opdivo and Keytruda. Gene therapy is another potential breakthrough treatment and we have provided updates on Editas Medicine (EDIT) and CRISPR Therapeutics (CRSP) but currently have no positions.Our latest trade in sequencing is Pacific Biosciences (PACB), a trade and a long term hold.

5. Vaccines are a difficult sector to trade which is why we favor going with large biopharma companies that have vaccine products in later stage clinical trials such as JNJ and AZN. We have traded the pure plays such as Moderna (MRNA) and Novavax (NVAX). But for example look at Inovio (INO) down in pre-market because the FDA delayed its Phase 1/2 trails because of lingering questions.

Summary: If you are adding new positions consider if it is a long term hold or a momentum trade.