In January 2016, the Biotech Index dropped by 21% and spent the rest of the year muddling through attractive valuations, a fair mix of good and bad clinical data, and legislative risk concerns. The holy grail week of the JP Morgan conference was an absolute disappointment, following 3 years of excellent stock performance. My line from the conference was my impression of young (they all are!) buy-side analysts walking around saying "It's only January and I've already lost my bonus."
This year, expectations are minimal for the pharmaceutical sector, which makes me feel encouraged about my forecast for a 15% gain in the IBB. This quarter, we shall get top line data from Amgen's (NASDAQ:AMGN) event-driven FOURIER study for Repatha, its PCSK9 inhibitor. Favorable results, which I am anticipating, could change perception towards the entire sector. Mid-year, we should get data on Merck's (NYSE:MRK) BACE1 inhibitor, verubecestat. I have been extremely negative on the prospects for prior Alzheimer's drugs, but I believe that verubecestat has a reasonable chance of success. If results are positive, this drug could prove transformational in treating early stage disease.
Summing up, we enter 2017 with pharmaceutical stock valuations being extremely conservative (16x vs. 26x one year ago), yet the pipelines seem promising and there is the potential for some major blockbusters. Furthermore, unlike early 2016, there have not been a great number of capital raises to date. The expectations going into next week's JP Morgan Healthcare Conference are modest, and drug pricing remains a major concern. Although this latter issue will not be resolved soon, I maintain that drug companies will moderate price increases given the intense focus due to their actions over the past three years. Also, with the exception of direct Medicare price negotiation, which I do not foresee, there is very little from a legislative standpoint that could have a significant adverse effect. As it relates to the pharmaceutical stocks, I am a buyer across the board, notably MRK, CELG, AMGN, NVS, BMY, ONCE, KITE, DRRX, ARDX, KERX, CNAT, EIGR and CTMX.
Disclosure: I am/we are long MRK, CELG, AMGN, NVS, BMY, ONCE, DRRX, KITE, ARDX, KERX, CNAT, EIGR, CTMX.
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.