The often bandied about conventional wisdom continues to be proven incorrect in the aftermath of the recent US election. Numerous politicians took aim at the pharmaceutical industry for what has been deemed excessive profits, leading to a mass exodus of investors scared of additional regulation. The politician most notable behind this movement is Hillary Clinton, yet with her recent defeat, it stood to reason the sector would rally. The article below discusses the recent disappointing price action and offers some justification for the lackluster results thus far.
Biotech set for Blast-off
Regeneron Pharmaceuticals (NASDAQ:REGN) one of the top five components of the I-shares Biotech ETF (NASDAQ:IBB), right on cue took off post the election results. The IBB spiked as well yet not as aggressively, as it is weighed down by some notable laggards such as Amgen (NASDAQ:AMGN) which I recently wrote about and Gilead Sciences (NASDAQ:GILD). The charts displayed are through November 10th, to give a striking visual representation of the move.
The early momentum evaporated rapidly as the election results were digested, with most of the gains vanishing. Below are some charts of some notable pharma/biotech entities that closed the upward gap post the election results or in some cases breached it to the downside. The list is lengthy and distinguished as the risk characteristics of the companies dramatically differ.
Alexion Pharmaceuticals (NASDAQ:ALXN) has the dubious distinction of an internal accounting investigation hitting post the election bounce sending the shares to a new low. Biomarin Pharmaceuticals (NASDAQ:BMRN) another mid-sized biotech has closed the upward gap in disappointing fashion as well.
Joining them are large Cap Biotech behemoths AMGN who is trading at the bottom of the upward gap.
GILD continues to frustrate all by giving up all of the moves higher off the Trump victory.
Moving on to the traditional pharma sector, the same observable trend is clearly in place.
I am using Pfizer (NYSE:PFE) as a proxy for large-cap pharma; PFE gapped up roughly 10% post the Trump victory a stunning move for a company of PFE size. PFE is a low beta security with a high dividend, tailor made for a retiree looking for income. PFE has a diversified revenue base of over $55 billion dollars; such a move is highly unusual. The equity has managed to give back some of the gains, a disappointing outcome. PFE was engaged in an ill-fated merger with Allergan (NYSE:AGN) a former hedge fund darling. The carnage in pharma continues with AGN threatening to post a fresh 52 week low. I have included a one year chart to illustrate AGN fall from grace. The unwinding of the long AGN/short PFE arbitrage was taken out in November with the recent move a retest of the lows.
Eli Lilly (NYSE:LLY) is poised to give back all of the Trump bump as shown below. LLY is widely seen as having a clear path for mid-single digit revenue growth over the next few years as they have successfully negotiated the dreaded patent cliff.
The same phenomenon can be observed in the chart for Abbvie (NYSE:ABBV). I recently wrote a piece on why I sold ABBV which was not well received by the ABBV bulls. ABBV has given up all of the post-election bounce and seems poised to test its recent post-earnings low.
A Trump victory was widely seen to benefit financial companies along with the healthcare industry. The concept of a quick burst of enthusiasm that will quickly evaporate is not the cause of the recent weakness as the financials remain as jubilant as ever. The chart above is the Financial Select Spiders (NYSEARCA:XLF) a proxy for the financial sector. The move is more pronounced in the smaller regional banks as illustrated by the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) below.
The industry continues to undergo tax loss selling as investors and institutions reduce holdings in the field. Institutional money continues to flow out, with the most likely resting place the red-hot financial sector. Momentum has clearly left the sector, making for the ideal setting for the contrarian investor to build a stake in some high-quality names at what should be proven to be bargains as the decade progresses. Sectors fall in and out of fashion on Wall Street all the time, in 2016 it is pharma/biotech turn to have a seat while others take the lead.
For those who are interested in the industry, a couple of key points to consider. The lush profits generated by the companies are only valid as long as the patent remains in force. Therefore, it would be wise to avoid projecting ample revenue out past the patent life on valuation models. The patent cliff needs to be navigated expertly with new products to take the place of those who lose patent exclusivity. The concept seems simplistic enough yet in practice it becomes problematic when an entity generates a significant amount of revenue from one product. For example, ABBV and ALXN produce well over 50% of their sales from products that are in the final stages of patent exclusivity. What may look like a bargain from traditional metrics such as price-earnings ratios may indeed be proven incorrect as the equity becomes "cheaper." GILD is a prime example of this as the security sports a mid-single digit p/e ratio.
The focus should shift to the product pipeline, along with the durability of the patent estate. A premium should be placed on mid-sized entities that are poised to sharply accelerate revenue growth over the next five years. The pharma/biotech sector is broad enough to appeal to all classes of investors. I suspect as the calendar flips to 2017, the industry will gain favor once again. I am looking to put additional funds to work here as multiple bargains are popping up. I would like to thank you for reading, and I look forward to your comments.
Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.
Disclosure: I am/we are long REGN, PFE, GILD.
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.