Bioinvest Letter 840
http://www.bioinvest.com/wp-content/uploads/2016/11/MTSL-Issue-839.pdf
UPDATES: ACAD, ALKS, BMRN, INCY, XON, IONS, MDCO, OGXI, SGMO, ZIOP
SENTIMENT — Blacktober – A Perfect Political Storm as Drug Pricing Pressure Grows — A confluence of negative events in the drug industry withQ3 misses from both BioPharma (AMGN, NVS) and commercial payers continue to all point the finger at one culprit – high and growing drug prices. High drug prices have presented politicians with a “Perfect Storm” of negativity usually reserved for industries that are truly loathed by the public, like tobacco. The political pressure has been huge as the drug industry remains front and center for every politician with the rhetoric reaching all-time highs. One thing missing from the drug pricing rhetoric is the innovation that creates life-saving cancer drugs and cures for chronic diseases like hepatitis C. The Election noise is louder than ever, but the industry itself is due for some of the blame with egregious, constant price increases that are not invisible anymore. The sentiment hit a low on Thursday, with technical meltdowns, more fund outflows, disappointing early new launches, and an over feeling of disgust. The lack of any takeover news hasn’t helped, despite the fact that most Big Pharma/Bios have burgeoning balance sheets, are raising dividends and have publicly stated their intentions to make acquisitions. Add in tax loss selling everywhere and we touched lows for the year.
Is This Capitulation? Whatever we can say about the health of the bio/pharma industry will do nothing to take away the pain experienced by most biotech investors since the end of September, let alone throughout 2016. On top of the horrific pullback of late, the NBI still had the worst day in a long time. In addition to political rhetoric, there has been a plethora of negative news this recent period via clinical results (e.g., ALNY, NVAX, etc.) and FDA news (e.g., REGN/SNY, CEMP, etc.). The Election is Tuesday and we could have taken a break from publishing until then, but our job is to keep our subscribers well informed and looking forward. Most third quarter results of our Universe have reported, with CELG, INCYand ALKS standing out as positive. Even companies like BIIB that delivered a solid Q3 report and whose stock reacted favorably on the quarter – only to be clobbered with the rest of the group’s pullback. The few MTSL Companies with upcoming clinical trial releases we have mentioned time and again (ANTH, MDCO, INCY, ZIOP). People will still be taking drugs and we, as consumers, understand that drug pricing has gotten out of control. The noise is so deafening that no matter what any company does or says today – so the sector is undergoing a re-pricing like it hasn’t seen in years. Technically, there is just nothing good to say other than we are at oversold levels. Thursday’s action most certainly felt like capitulation. The 50-day Moving Average has been violated on the downside since earlyOctober. The more important 50-week MA was tested a week ago but was blown away by this week’s rout. Having said that, we are ending today just above both bottoms of the year, seen in February and then again in June. Maybe three times is a charm, but we really do not know what catalyst can turn us around. Maybe the Election, maybe the AHA and/or ASH. Maybe a takeover. Either way, the turnaround catalysts are often hard to see and difficult to predict.
Can Trump Salvage a Split In Congress? The biopharma industry came under additional pressure when Trump’s recent weakness appeared that it would lead to a Democratic sweep, that would allow for aggressive moves on controlling drug prices. In our view, a split is best for the biotechs at this point in time and would take some of the pressure off the stocks. The release of the Clinton emails appears to have given Trump a significant bump which is highly unusual this late in the election. Thus, the odds have swung back towards a split which would be best for biotech stocks. While we still have to get through one more weekend until the election, who knows what dirt may be thrown at the last minute, we may be setting up for a nice post-election rally in the biotechs.
Not Just Politicians It’s not just politician’s pressure on drug pricing anymore, as many bio/pharma CEOs recently told investors that the days of regular price increases that have been steady as a clock are over. GSK and AMGN both highlighted these concerns as pushback from payers will only increase – leading to sell off in anything where there is a biosimilar situation. AMGN in particular is very concerned about Enbrel growth as the anti-TNF class which includes Humira and had avoided price pressure until now appears to be one of the more vulnerable drug classes. The bottom line is regardless of who wins the Election drug pricing will remain a hot issue. In our view, that makes it very important that drug developers focus on truly innovative drugs that can save both lives and the healthcare system money. We are also likely seeing some early tax loss selling as most biotech fund managers have portfolios full of losers this year, and the fiscal year for mutual funds ends inOctober. (That’s why the November 1 one-day rally was hopeful, but mostly due to short-covering.) With so many biotech stocks being down for the year, fund managers have plenty of tax loss selling candidates to choose from. Some tax loss selling has already started which has contributed to the recent weakness. Fund flows also remain negative leaving very few buyers for the excess supply caused by tax loss selling and in some cases margin calls resulting in an unbalanced market.
