Next week, the medical investment world descends on San Francisco for the annual JP Morgan (Hambrecht and Quist to us old timers) Healthcare Conference and other satellite meetings. Unlike last year, when stocks were rising in early January, 2016 has been quite challenging. Fortunately, the price of oil or the Chinese economy has little impact on the healthcare sector; nonetheless, stocks got caught in the stock market downdraft. Additionally, there was a significant number of secondary offerings, which put added pressure on stocks.
The price correction, while likely dampening the mood ("there goes my bonus and it is only January" will probably be the rally cry), has created some incredibly attractive entry points, in my opinion. I think this is especially true in the undiscovered smaller cap universe; furthermore, as I have stated before, there will be important data presented this year as it relates to many of these companies. Already, there have been minor positive announcements for Celladon (CLDN) (initiation of Hepatitis Delta phase 2 study in Germany with lonafarnib), DURECT (positive phase 1 safety results with the injectable form of DUR-928) and Tobira (acceptance of an IND for cenicriviroc for the treatment of primary sclerosing cholangitis). Regarding the larger cap companies, while I continue to be favorable toward the "Fab Four" of Gilead (NASDAQ:GILD), Amgen (NASDAQ:AMGN), Regeneron (NASDAQ:REGN) and Juno (NASDAQ:JUNO), I believe that GILD may have a more difficult year than the consensus suggests due to a maturing domestic US Hepatitis C market, the intrayear price decline in Hepatitis C pharmacotherapy that occurred in 2015 and the entry of Merck with its combination regimen, Zepatier. I also am concerned, as previously expressed, that REGN's results could disappoint through the first half of 2016; however, I continue to expect sales of the PCSK9 class to be double consensus in 2020. As a final observation, pharmaceutical price increases will be in the 5-6% range annually over the next four years, versus the 9-11% range over the past two years. This return to historical average puts greater emphasis on unit growth and pipeline development. Therefore, I forecast ongoing consolidation in the sector. As stated before, I believe GILD in particular needs to make another transformative acquisition in order to experience earnings growth in the 2016-2018 timeframe (after which its pipeline will contribute very nicely).
Overall, I remain concerned that the updates provided next week may do little to assuage investor concern about the near term prospects for the pharmaceutical sector. For the past six months, I have discussed the fact that the sector has divided into the "haves" and "have nots", putting the onus on stock selection. In this regard, I believe the smaller cap stocks are advantaged due to underinvestment and the possibility of significant price appreciation on positive developments.
Disclosure: I am/we are long DRRX, CLDN, TBRA, KERX, MRK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.