The Biotech Bear Market: Is it over?

On July 13th, 2015, the iShares Nasdaq Biotechnology ETF (ticker: IBB) peaked at just under $400 per share. A little less than a year later, the popular biotech exchange traded fund traded at $249 per share—down 37 percent from its all-time high. The combination of an over-extended sector and the political rumblings in D.C. threatening to clamp down on ever escalating drug prices, brought biotechs down from the stratosphere into a more reasonable valuation. Since the June 2016 bottom, the IBB ETF has rallied 27 percent from $249 to $316 per share. Technical analysts hail the recent breakout of the IBB above the $302 area as a key area of penetration, and further gains should transpire. See graph below (courtesy of Bigcharts/Marketwatch)

 

 

Some of the more bearish analysts see this as a bear market rally and a great opportunity to harvest recent gains or go short. At In Sickness and Wealth, we feel the biotech rally has further to go and hold a position in IBB. We’d only change our mind if IBB resumed its decline and took out the June 2017 lows of $282 per share, or if a major bear market hit the stock market which would likely take all stocks down with it.

Our reasons:

We believe the 37 percent decline is typical of a nasty bear market correction. Over history, most declines of 20 to 40 percent are usually followed by significant rallies.

The sector is one of the most innovative in all of medicine, with new treatments and drugs that give life-saving treatment and in some cases, actual cures, as is the case with Gilead’s Hepatitis drugs.

A look at the top five companies in the NASDAQ biotech index, (Celgene, Amgen, Biogen, Gilead and Regeneron) illustrates some intriguing action. Celgene and Amgen are poised to break out to all-time highs. Celgene is a stone’s throw from its all-time high of just under $140. Amgen is about to break above its all-time high of around $185. Regeneron has had a meteoric rise from the low $300s to over $500 per share and looks ready to mount further upside progress toward its all-time high of $600 per share. Biogen too is acting much healthier and its short term trend is decidedly up.

Gilead is the sole underperformer in the top five and sits nowhere near its all-time high and closer to 52-week lows. Those five companies make up a third of the Nasdaq Biotech index. Moreover, we recently took some profits in Regeneron and those profits will likely be reinvested in either another biotech stock or in additional shares of the IBB ETF. The ISAW personal portfolio has been underweight in Biotech for some time now… perhaps it’s time to get some additional exposure to a sector with so much promise. The usual caveat: Biotech stocks display much greater volatility than the market as a whole – hence, for many investors who don’t have cast iron stomachs, a broad-based ETF or mutual fund might be the way to go to obtain more diverse exposure.

Stay Tuned…

David Lerman and Jodie Warner

Leave a Reply