Earlier this month I articulated why I believed why despite the current bear market in biotech, the sector would have put in a firm bottom by the conclusion of October. It is looking more and more like a prescient call. In mid-June I had warned how I felt the sector was getting in bubble territory.
After getting below $300 briefly the iShares Nasdaq Biotechnology (IBB) ETF, the largest ETF focused on the biotech sector with almost $9 billion in assets; is up nicely since my "bottom" call hit on October 15th.
There were a couple of reasons I thought the bottom would be in this month. First, declines in the biotech sector tend to be sharp, scary and mercifully quick. They tend to last two to three months from peak to trough. Then the sector stabilizes/bottoms for a few weeks, after which the biotech indices start ascending again. This is exactly what happened during the last bear market in biotech which began early in March of 2014.
This sector from what I have observed over the years tends to bottom just before the large cap growth biotech concerns report quarterly earnings, which usually beat expectations. This week, two core Biotech Forum portfolio positions, Amgen (AMGN) & Gilead Sciences (GILD); have delivered results that have easily beat both the top and bottom line consensus. Both also raised revenue guidance. Major pharma concerns like Bristol Meyers Squibb (BMY), Merck (MRK) and Pfizer (PFE) all did the same on Tuesday.
We can now check that box off. Next, the "animal spirits" that are needed to positively shift the sentiment on the sector should stage a comeback in the near future. What better to those juices flowing again than the biggest possible tie-up in history? Reports are now crossing the wires that Pfizer and Allergan (AGN) are contemplating a mega $300 billion merger.
Whether or not this huge transaction takes place is largely irrelevant, as it will change the tone of conversation on this space. Two weeks ago investors were worried about who was going to be the next Valeant Pharmaceuticals (VRX) and fall to the ire of regulators, politicians and short sellers. Now watch the topic du jour change quickly to who could the next buyout target? This obviously will be positive for the biotech sector and I look for it to outperform the market through year end 2015. Just one man's opinion.
Thank You & Happy Hunting
Bret Jensen
Editor, Biotech Forum