If you hold any biotech stocks in your portfolio, then it's
time for a gut check.
Share prices in this high-risk/high-reward group posted their
biggest one-week loss in recent memory, leading investors to
figure out if it's time to get out now... or to commit more
How bad was the carnage? The
SPDR S&P Biotech ETF (NYSE:
slid nearly 10% on the week, and for many individual stocks, the
erosion was far more severe.
#-ad_banner-#Cancer-focused biotech Exelixis saw its shares
plunge on poor clinical testing data, but all of these other
stocks fell out for seemingly no explicable reason. Actually,
there was a negative catalyst impacting this whole group:
Congress recently questioned a move
Gilead Sciences (Nasdaq:
to price a new hepatitis C drug at more than $1,000 per pill.
Many investors quickly concluded that new drugs in development
from other biotech firms may not fetch the high reimbursement
rates that analysts had been suggesting.
To be sure, few drugs in development will be priced quite that
boldly. (Indeed, Gilead subsequently relented and suggested that
many insurers will get 20% to 30% discounts from that list
price.) Yet the issue reminds investors that biotech stocks face
not only face approval risk for any new drugs, but will no longer
be able to command any price they want while shielded from
generic competition. The FDA used to approve new drugs that were
merely "good enough." Now, the FDA wants to see that they are
clearly better than rival drugs already on the market, or are
priced at lower rates than existing drugs.
The biotech sector's woes may also be attributable to a sudden
decision by many investors to lock in profits after a remarkable
multi-year surge. Indeed, the SPDR S&P Biotech
exchange-traded fund (
) showed all the signs of a bubble. The fact that this ETF is
still 100% higher that it was at the start of 2012 is hardly good
news for bottom-fishing value investors. Still, the fact that
this sudden sell-off has been indiscriminate means that investors
can start to look for oversold opportunities.
One of those opportunities can be found in the post-IPO arena.
Newly public companies often lack a stable shareholder base, and
have found few buyers in recent sessions. Here's a look the
biotech firms that came public in the first quarter of 2014 and
have already fallen more than 25% from their trading peaks.
The rapid pullback in these stocks doesn't make them bargains
per se. But it does make them worth a fresh deep look now that
they can be bought for so much less.
And since these firms are newly public, they are all several
years away -- if ever -- from having a key drug come to market.
That's why it pays to focus on companies that have raised enough
money to sustain them for at least a few years, as the capital
markets for biotech secondary offerings may be fast-closing. Most
of these firms will be providing a quarterly update in the next
four to six weeks, and the conference calls will be a good chance
to hear directly from management about the various drug
development strategies in place.
What Analysts Are Saying
Wall Street analysts, many of whom have biotechnology
backgrounds, are also a good source of ideas. I am fan of
investment firm Leerink Sawn, as they focus exclusively on health
care and have deep domain expertise. Leerink's Michael Schmidt
recommends shares of recent IPO
Dicerna Pharma (Nasdaq:
, which opened for trading in late February near the $45 mark and
is already below $30. Schmidt believes that Dicerna has developed
a solid platform of RNA drugs, and sees shares more than doubling
to $60, noting that the company has enough cash on hand to last
I also track the research work of Cantor Fitzgerald's Irina
Rivkind, who has developed a solid track record as a stock picker
over the past few years. Rivkind currently sees more than 100%
Synergy Pharma (Nasdaq:
, which had soared past the $6.50 mark in early March, only to be
pushed below $5 again in the recent biotech rout.
Biotech investors should also take a fresh look at
Threshold Pharmaceuticals (Nasdaq:
, which has more than $80 million in cash on hand, a key drug
that has shown solid clinical progress by starving tumors of
oxygen, and a key partnership with Germany's Merck.
Lastly, investors may want to revisit the opportunity
Intercept Pharmaceuticals (Nasdaq:
which I profiled at the start of 2014
. Shares of Intercept surged from $300 in late January to more
than $450 by mid-March -- but are back down near $300. Some
analysts still see this stock nearly tripling from current
Risks to Consider:
Investors should assume the worst in terms of balance sheet
replenishment. As we saw in 2008 and 2009, when the
capital-raising environment is unreceptive to biotech firms,
their cash balances can become perilously low.
Action to Take -->
One of the reasons that biotech had been surging in recent years
is the rapid clinical progress being made in many areas such as
cancer and hepatitis. Indeed, there now dozens of drugs in Phase
II and III trials that have shown impressive efficacy and safety
profiles. How all of these drugs will be paid for in the tight
health care spending environment is another question. Still, many
drugs face potential blockbuster opportunities, and the sector
pullback has given investors a fresh chance to capitalize on that
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