The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), which tracks the Nasdaq Biotechnology Index (NASDAQ:NBI), has been in free fall since the beginning of the year and is now consolidating at around the $260 per share level. Despite that the fundamentals of the entire biotech sector still look strong, remarks from U.S. Presidential candidates during their stump speeches and debates continue to rattle individual biotechnology and pharmaceutical companies. From the technical viewpoint, the index could be in the bottoming stage and investors may want to pay close attention for good entry points.
Technical Overview - About 42.75% of the holdings in the IBB index are the five big cap biotech companies, Celgene (NASDAQ:CELG), Amgen (NASDAQ:AMGN), Biogen (NASDAQ:BIIB), Gilead Sciences (NASDAQ:GILD) and Regeneron Pharmaceuticals (NASDAQ:REGN), with a combined market cap of over $438 billion. Celgene, Amgen and Biogen have already reported their fourth-quarter 2015 earnings with Gilead Sciences and Regeneron Pharmaceuticals earnings on tap.
The share price of IBB was trading in an uptrend channel from July 2011 until July 2015, when the index reached the all-time high of $400.75 per share and began to make a trend reversal. During that time period, on July 13, Democratic presidential hopeful Hillary Clinton gave a speech at the New School in New York City on "Growth and Fairness Economy", in which she laid out her economic vision and also touched on the subject of making prescription drugs more affordable, according to The Wall Street Journal. That could be one of the explanations for the pullback in the share price of IBB.
IBB has already made a 35.36% price correction since the shares tumbled from its all-time high to a 52-week low of $259.06 per share on January 28, compared to a 37.11% correction for IBB during the 2008 financial crisis. If the bearish sentiment continues and IBB continues to pull back further, the next support is at $247.80 per share, or the October 15, 2014 low, meaning a 38.17% price correction for IBB.
Biogen - As of February 1, Biogen has a weight of 9.53% in IBB. Despite the company reporting its fourth-quarter 2015 earnings on January 27 that exceeded the consensus estimates, there is some concern that Tecfidera sales are slowing down after several quarters of explosive growth. The stock could get a boost, as there is a potential to launch three new products this year, including Benepali, Zinbryta and an infliximab (Remicade) biosimilar. Benepali is a biosimilar candidate to the reference product Enbrel. Zinbryta is a multiple sclerosis drug jointly developed with AbbVie (NYSE:ABBV).
Technically, BIIB has been trading in an ascending broadening wedge chart pattern since early 2013. The stock hit an all-time high of $480.18 per share on March 20 last year, after the company announced impressive data from its early stage study of Alzheimer's drug BIIB037. BIIB is now trading near the bottom of the broadening wedge at around the $250 per share level, where the stock could bounce off. Investors may want to be careful though, as a potential bearish head and shoulders chart pattern has emerged, with the neckline at $254.50 per share. The stock could pull back further to the $233.77 per share level, if the trendline support of the broadening wedge doesn't hold.
Amgen - Amgen, the second largest holding in IBB, has a weight of 9.49%. Although Amgen reported their fourth-quarter 2015 earnings result that beat top-line and bottom-line expectations, investors are still concerned about the launch of PCSK9 cholesterol lowering drug Repatha (evolocumab), due to a lack of details from management.
In March 2015, Sandoz, a Novartis (NYSE:NVS) subsidiary, received approval from the Food and Drug Administration [FDA] for its cancer treatment drug Zarxio, a biosimilar of Amgen's Neupogen. Although Zarxio's selling price is 15% less than Neupogen, thus far, Amgen hasn't seen a significant drop in worldwide sales of Neupogen, according to their latest fourth-quarter 2015 earnings report. Amgen could lose some market share of its Enbrel drug to Biogen's Benepali, a biosimilar candidate to the reference product Enbrel, when Benepali is launched.
It was a turnaround for Amgen when the company submitted a biologics license application [BLA] for ABP 501, a biosimilar of Humira (adalimumab), to the FDA on January 25 for review. Humira, AbbVie's top-selling drug for treatment of a variety of autoimmune diseases, generated sales of about $14 billion last year.
Technically, shares of Amgen have been trading in a symmetrical triangle chart pattern as investors can't decide in what direction the stock will move next. In our viewpoint, the stock is bouncing around the $145.25 level and looks like it is ready to move higher, as investors are expecting more information and encouraging news on Repatha.
Celgene - As of February 1, Celgene has a weight of 9.18% in IBB. Investors were not quite impressed with Celgene's fourth-quarter 2015 earnings report, which came in below expectations, citing higher expenses than anticipated and the usual currency FX problem. Investors still like the company, as Celgene is expecting strong growth in 2016 but is still facing a currency headwind of approximately $120 million.
Technically similar to BIIB, CELG has been trading in an ascending broadening wedge chart pattern with a base at around $87.42 per share. The stock hit an all-time high of $140.72 per share in the summer of 2015, and has since pulled back to below the $100 per share level, falling along with shares of IBB. In fact, CELG shows a strong positive correlation (+0.95) with IBB over a 5-year period. The stock is bouncing on the trendline support of the broadening wedge and can bounce off from there.
Similar again to BIIB, investors may want to be careful as a potential bearish head and shoulders chart pattern has also emerged with the neckline at $96.33 per share. The stock could pull back further to the $87.42 per share level, if the trendline support of the broadening wedge doesn't hold.
Conclusions - The iShares Nasdaq Biotechnology ETF is in deeply oversold territory. Shares of Celgene, Amgen and Biogen are about to bounce off technical supports while IBB investors are awaiting earnings reports from Gilead Sciences and Regeneron Pharmaceuticals. Since there will be more stump speeches and debates from the presidential candidates from both parties from now until the general election in November, we are expecting more volatility in the sector, with a bias to the upside. Although political and others risks have increased, in our view, the risk reward is still in favor of the investors in the biotech sector.
Disclosure: I am/we are long BIIB, CELG, REGN, ABBV.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.