Biotech stocks were causing excellent volatility in the NASDAQ on Friday, but there are material concerns that are real, and important. Gilead (NASDAQ:GILD) has immediate pricing concerns, and those absolutely could spread throughout the industry. Our analysis also tells us that unsustainable inflationary pressures exist in other asset classes too, but for Biotech those pressures seem to already be influencing profitability perceptions across Wall Street.
Of course, political pressures are the heavy hand in this sector, The House sent Gilead a letter to that effect on Thursday, and when the government pays the bills the benefit of capitalism, innovation, often gets hampered, but that cannot and must not distract investors from what makes them money. As far as I am concerned, price makes us money, not news, Government decisions, or anything else. In this case, the government is making a very obvious decision.
In summary, the letter sent to Gilead from the House of Representatives on Thursday suggests the $84,000 per treatment proposed cost of its Hepatitis C vaccine, Sovaldi, and the more probable $150,000 per treatment cost imposed by combination therapies offered by physicians, would not be affordable by most of the persons diagnosed with Hep-C because those are typically lower income demographics. In addition, and what was not as direct, the letter suggested that the Government, who would ultimately have to pay that bill, was not willing to pay what Gilead was asking. In no uncertain terms, the Government is doing everything in their power to reduce the cost per treatment, and if they are successful as they probably will be, the revenues from this seemingly successful vaccine will come down considerably from that $84,000 estimate. We do not yet know by how much.
However, what we do know is that if the Government is successful at fighting Gilead on price, they will not stop there, and other biotech companies will risk the same treatment (pun intended).
When news as important as this starts to surface, even upgrades are ignored, and that is exactly what happened with the price target increase for Amgen (NASDAQ:AMGN) today. Instead, Amgen, along with the entire sector, is getting hit hard, and investors in biotech stocks are wondering what they should do.
The first, and most important lesson that can ever be taught to people involved in investments that are encountering extreme levels of volatility is, don't panic. I know this is difficult, ask the people who were holding stock during the credit crisis, but it is important.
However, by saying do not panic I am not suggesting that you sit on your hands and hold. Instead, investors in the biotech sector, including investors or traders that hold the ETFs in this sector, including SPDR S&P Biotech ETF (NYSE:XBI), iShares Nasdaq Biotechnology (NASDAQ:IBB), or even ProShares Ultra Nasdaq Biotechnology (NASDAQ:BIB) should be carefully evaluating their holdings.
Although we cover this sector very closely, because Gilead caused this turmoil we will focus on that stock in this price review. According to our real time trading report for GILD, the stock broke longer term support yesterday, Thursday March 20, 2014, and unless it reverses back above that recently broken support level investors should avoid it.
Our analysis and report further suggest that GILD could fall aggressively. Fundamentally, the agreed-upon treatment price will influence how much, but for now there is no reason to guess. There are absolutely no compelling reasons to buy this stock right now, and sell signals became official yesterday when the stock began to break longer term support. GILD is an avoid.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies mentioned here for writing this article.