The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), which tracks the Nasdaq Biotechnology Index (NASDAQ:NBI), has pulled back sharply since the beginning of March, while the broader market continues to rally off the February low, despite that the fundamentals of the biotech sector still look strong. According to FactSet, the Biotechnology sector is projected to report double-digit revenue growth for the first quarter 2016, one of the highest sales growth forecasts among the S&P 500 sectors.
High prescription drug costs have been a hot-button issue in both Democratic and Republican presidential primary campaigns since September 21, when Hillary Clinton sent out a tweet about "outrageous" price gouging by a pharmaceutical CEO. Based upon investors' reactions, remarks from presidential candidates during their stump speeches and debates continue to be a dark cloud over the sector.
Recent sell-offs in the biotechnology sector have been tied to the collapse of Valeant Pharmaceuticals' (NYSE:VRX) share prices, after the company cut its earnings guidance on March 15 and warned about a potential default on its debt due to a delayed filing. Valeant was scrutinized earlier in February by members of Congress for many things, including raising prices on existing drugs.
Panic selling in the biotech sector may have created buying opportunities for investors looking for some risk diversity, as IBB now trades at about 18 times forward 12-month earnings, down from a peak of 55.76 in early 2015, according to FactSet. The premium has been coming down to a comparable level to other ETFs, including the Technology Select Sector SPDR ETF (NYSEARCA:XLK) at 16.4, and the Energy Select Sector SPDR ETF (NYSEARCA:XLE) at 26.4.
From a historical perspective, IBB has a 5-year return of 170.70%, compared to 91.78% and -7.01% for the XLK and XLE, respectively. Unlike other sectors in the S&P 500, the key driver for IBB to reach its all-time high in 2015 was M&A activities.
From a technical viewpoint, IBB has tried several times, but failed, to bounce off its support levels during the recent downturn. It is going to be a hit-and-miss activity, as one doesn't know if the bottom is in until after the fact. Nonetheless, investors may want to pay close attention for good entry points, as campaign rhetoric and other investor concerns will start to be priced in and the bottoming process begins.
Sector Rotations Might Help IBB
The Materials Select Sector SPDR ETF (NYSEARCA:XLB) and XLE have been on a sharp rebound since oil plunged to the February 11th low of $26.05 per barrel, or the "Janet Yellen low," when Federal Reserve Chair Janet Yellen told the U.S. Congress on the second day of her two-day semiannual monetary policy report that overseas weakness and market distress could threaten the Fed's plans to raise the rate, but didn't explicitly mention any delays to interest rate hikes.
Since then, both ETFs have run up on hopes for more central bank stimulus and on a jump in crude oil prices. Jeffrey Currie, Goldman Sachs' head of commodities research, issued a report in early March saying that the recent rally in commodities is just a "mirage" and recommended shorting copper and aluminum. Beyond suggesting that the commodities rebound is a head fake, Currie said the rally is "premature" and "not sustainable," according to MarketWatch.
Technically, XLB and XLE are already crowded trades and may be poised for corrections. One possibility for a sector rotation strategy is to sell the overbought XLB and XLE ETFs and buy the under-owned Health Care Select Sector SPDR ETF (NYSEARCA:XLV) and IBB. Of course, money could go to the sidelines, or to the bond market, if the broader market heads south.
About 44.63% of the holdings in the IBB index are the five big cap biotech companies, Amgen (NASDAQ:AMGN), Celgene (NASDAQ:CELG), Biogen (NASDAQ:BIIB), Gilead Sciences (NASDAQ:GILD) and Regeneron Pharmaceuticals (NASDAQ:REGN), with a combined market cap of over $400 billion, as of March 18. Despite that, the fourth-quarter earnings of the top five big cap companies in IBB have been mixed, as Celgene and Regeneron recently reported disappointing results, all of them are expecting strong growth in 2016.
Technically, IBB has been trading in a symmetrical triangle chart pattern, meaning investors can't decide in what direction the ETF will move next. IBB bounced off the trendline support at around the $241 level and appears to form a double bottom chart pattern, but the downtrend may continue until the ETF can close above the head resistance at $252.72 per share. The double bottom could be confirmed if IBB can close and stay above the neckline resistance at around $268.14 per share.
Amgen and Gilead Sciences May Have Bottomed
As of March 18, Amgen has a weight of 9.68% in IBB. Amgen's fourth-quarter 2015 earnings report came in above expectations, driven by strong sales of its flagship rheumatoid arthritis drug Enbrel. Sales of Neulasta (pegfilgrastim), its second blockbuster drug, decreased due to lower unit demand and unfavorable changes in foreign exchange rates. Both Enbrel and Neulasta will soon be facing the threat of biosimilar competition from Novatis (Sandoz) and Samsung Bioepis, as well as from Baxalta and Coherus Biosciences.
Although the company raised its full-year guidance for both revenue and EPS, investors are still concerned about the launch of their PCSK9 cholesterol lowering drug Repatha (evolocumab), due to a lack of details from management.
This week, Regeneron Pharmaceuticals and Sanofi (NYSE:SNY) were found to have infringed on Amgen's Repatha patents. According to Barron's, there is a permanent injunction hearing scheduled for March 23-24. The most likely outcome is for Sanofi/Regeneron to settle and pay royalties to Amgen for U.S. sales of Regeneron/Sanofi drug Praluent (alirocumab).
Technically, shares of Amgen are trading in a symmetrical triangle chart pattern, as investors are undecided about the direction of the stock. AMGN seems to have bottomed, in September 2015 at $128.54 per share, as it successfully retested the long-term trendline support at $139.02 a share. Since the end of 2015, the stock has been moving in a bullish descending wedge chart pattern and is about to break out, considering that investors are expecting more information and encouraging news about Repatha.
Gilead Sciences has a weight of 9.15% in IBB, as of March 18. Gilead's fourth-quarter 2015 earnings report came in well above expectations, as the company continues to gain global market share with their hepatitis C drugs, Harvoni and Sovaldi. The decline in U.S. sales of Gilead's flagship hepatitis C drugs was offset by sales in Europe and abroad. The company also announced a $12 billion share buyback and a 10% increase in its quarterly dividend. Some investors were disappointed in that Gilead did not announce any new acquisition plans.
GILD has made a 26.23% price correction since the stock pulled back from its 52-week high, at $121.77 per share at the end of June 2015. Investors should be aware that the stock is trading in a potential head and shoulders chart pattern, with necklines between $90.20 and $92.64 per share. Shares of Gilead bounced off a 5-year trendline support, on February 2 at $81.50 per share, and have been moving in a bullish descending wedge chart pattern above the 50-day moving average at $88.96 per share. The February 2 bottom may be confirmed, if the stock can break out and stay above the neckline resistance.
The iShares Nasdaq Biotechnology ETF, IBB, has pulled back sharply since the beginning of March while the broader market continues to rally off the February low, despite that the fundamentals of the biotech sector still look strong. Recent sell-offs in the biotechnology sector have been tied to the collapse of Valeant Pharmaceuticals, but panic selling in the sector may have created buying opportunities for investors looking for some risk diversity considering the valuation has come down to the level comparable to other sectors in the S&P 500.
IBB has tried several times, but failed, to bounce off its support levels during the recent downturn although IBB components, Amgen and Gilead Sciences, may have bottomed. Celgene, Biogen and Regeneron chart patterns look similar to IBB, meaning the stocks may have yet to find a bottom.
Disclosure: I am/we are long CELG, REGN, BIIB.
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.