Biotech has been a great performer since I suggested it as a contrarian play on Oct. 11.
In that time, the SPDR S&P Biotech exchange-traded fund XBI, +0.23% is up 24%, and the iShares Nasdaq Biotechnology Index IBB, +0.40% has advanced 20%, compared with 5.2% for the S&P 500 SPX, +0.48%. The seven stocks I singled out in that column have done well. They are up 23.5%.
But what to do now? My take: Stay in biotech for more upside, and consider buying if you have no exposure.
Though the “easy” money has been made (investing is never “easy,” but you know what I mean), biotech can go higher from here for three reasons.
1. Washington, D.C. is on hold.
“Washington is very focused on impeachment and trade talks,” says Jefferies biotech analyst Michael Yee. “It doesn’t seem like drug pricing or Medicare for All are going to be in the near-term picture. If that’s the case, people feel better about biotech, and the stocks move up.”
Part of the bullish dynamic on the political front is that candidate Joe Biden is clearly the front-runner again in the Democratic primaries. This makes it less likely, at least for the moment, that Elizabeth Warren’s Medicare for All proposal will become law.
“The worst-case scenarios are essentially being looked past,” says Yee.
2. Continuing optimism ahead of Woodstock for Biotech.
The 38th Annual J.P. Morgan Healthcare Conference on Jan. 13-16 in San Francisco is one of the key events in the sector. It can generate a lot of investor interest because companies pitch their stories, present new data, and throw out tidbits during offstage huddles and private one-on-ones. (Yes, there’s still a division of wealth in terms of information flow in the markets.)
3. More M&A.
The turn of the year can be a good time for mergers and acquisitions. Already we have seen quite a few, suggesting there’s a trend in place. “We continue to think there is much more consolidation on the horizon given the pipeline needs across large cap bio-pharma,” says Jared Holz, a sector strategist at Jefferies.
I cover biotech closely in my stock letter Brush Up on Stocks, and so far this fall four of my names have been bought out for nice gains. Medicines Company MDCO, -0.08% and Dova Pharmaceuticals are being purchased by Novartis NVS, -0.50% NOVN, -0.05% and Orphan Biovitrum SOBI, +0.13% BIOVF, +1.73%. Exact Sciences EXAS, +0.01% closed its purchase of Genomic Health, and Audentes Therapeutics BOLD, -0.13% is being bought by Astellas ALPMY, -0.29%.
Beyond these, ArQule ARQL, -1.14% and Synthorx THOR, +0.01% rocketed in December on news they were being bought by Merck MRK, +0.33%, and Sanofi SNY, +0.43% SAN, +0.64%, respectively. Those stocks doubled or more.
Gains like those attract attention to the sector and have everyone wondering which companies are next. Money managers and analysts are reluctant to speculate publicly on takeovers for good reason — it’s not easy to get it right. But I’ll take a swing.
Two more names from my letter that might get bought because they offer a narrow list of products that would fit nicely into a big pharmaceutical company with a large sales force are Amarin AMRN, +0.79% and Acadia Pharmaceuticals ACAD, -1.31%. The sweet spot for takeover candidates is companies like these which have a few approved therapies so they aren’t huge money pits, but more on the way.
Now here’s a follow-up on names in my October column on biotech, plus one more.
Shares of this company BIIB, -0.06% shot up in October on renewed hopes that its aducanumab may be the long sought-after therapy for Alzheimer’s. Biogen released more study results last week which it says even further strengthen the case.
But the studies were far from a slam dunk, leaving a lot of questions about where the stock goes from here. Biogen released conflicting results, but highlighted a subgroup that benefited.
“This whole study is just noise,” concluded Baird biotech analyst Brian Skorney. “We don’t buy it.” He says Biogen hasn’t really demonstrated that reducing beta-amyloid plaques benefits Alzheimer’s patients.
But there was enough in the data to leave an opening for bulls, and possible approval. “At end of the day we know the data are mixed,” says Yee. “The data do not support Food and Drug Administration approval under normal circumstance. But this does not meet normal circumstance criteria,” he says.
What he means is political pressure to approve an Alzheimer’s therapy may tip the scales for aducanumab. Yee sees upside to $475 in the stock, and a downside to $190 — a risk-reward bet that some investors might be OK with.
Another strong performer since early October, Vertex VRTX, -0.07% is an easier name to hold than Biogen because it’s a much “cleaner” story, says Yee. Vertex has a strong cystic fibrosis therapy franchise that is likely to help the company beat on earnings and revenue when it reports fourth-quarter results.
It also has a solid pipeline. For example, by spring or early summer we could see results from a Phase II study of a drug candidate called VX-814 for deficiency of a protein known as alpha-1 antitrypsin, a condition that can lead to lung or liver ailments. Positive results could push the stock up 25% to $275, believes Yee. If the study disappoints, the stock falls 10%, he predicts.
Vertex is also developing gene-editing therapies in collaboration with Crispr Therapeutics CRSP, +0.34% and possible treatments for kidney diseases and sickle cell disease.
The knock on Vertex is that all the good news is known, so it’s a crowded, consensus trade. That may be. But because it’s such a “clean story” it is the easy stock to for sell-side analysts to pitch to generalist investors who develop more interest in biotech. “It’s the easiest story for money flow to come into,” says Yee.
Like Vertex, Amgen AMGN, +0.32% is an “easy” pitch for sell-side analysts to make to generalists warming up to biotech as the sector rebounds. This suggests Amgen shares could move higher from here even though the company has few near-term catalysts. Amgen is the No. 2 beneficiary of generalist money flow into the group, behind Vertex.
Amgen is a “clean” story in part because it will likely meet earnings estimates when it reports for the fourth quarter, says Yee. And it, too, has a solid pipeline. This includes a promising KRAS inhibitor, a potential cancer therapy that may work by fixing cell signaling to combat tumor cell growth and metastasis. Amgen is developing this therapy in collaboration with Revolution Medicines.
Another drug in the pipeline that Yee singles out it is tezepelumab, a human monoclonal antibody that may treat severe asthma and a form of dermatitis. Amgen is collaborating with AstraZeneca AZN, -0.90% AZN, -0.42% to develop tezepelumab.
The Rodney Dangerfield of large-cap biotech (the stock trades where it did a year ago, so it gets no respect), Gilead GILD, +0.57% continues to look like dead money to many investors because it has no near-term catalysts and has a light pipeline.
But Gilead has a history of moving up in January because it teases some new potential positive at the J.P. Morgan biotech meeting, like a possible purchase of another biotech company to strengthen the pipeline. “Expectations are so low, if they actually say anything it’s positive,” says Yee. Meanwhile there may be little downside risk because the stock is already pricing in a boring future.
Two pieces of ‘sage’ advice
1. Here’s a biotech name to consider, for investors who like to buy selloffs. Sage Therapeutics SAGE, +3.72% just got whacked after it announced its depression drug, SAGE-217, failed in a Phase 3 trial.
Yee thinks another Phase 3 trial with results due out in 2021 will show better results. “If you have one-year time horizon, we think that study will be positive.”
CEO Jeffery Jonas likes the odds. He just bought over $2 million worth of stock at around $64 a share. The stock advanced on the news, so it might make sense to wait for a little weakness to join him.
2. By the middle of January, it will be time to reassess your positions in biotech. The Democratic primaries start on Feb. 3, so debates about drug price regulation will heat up again. The key as the election year heats up is to keep an eye on the polls. If it looks like Biden will be the Democratic candidate, biotech goes higher, says Yee. If it looks like President Donald Trump will win, biotech will go higher. “So long as it is anybody but Warren, biotech goes higher.”
At the time of publication, Michael Brush owned AMRN and ACAD. Brush has suggested AMRN, ACAD, MDCO, Dova Pharmaceuticals, Genomic Health, BOLD, BIIB, AMGN, and GILD, in his stock newsletter Brush Up on Stocks. Brush is a Manhattan-based financial writer.