Biotech Sector Analysis: March Madness

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"Sound sector and company fundamentals are intact, and improving in some cases. The industry gatekeeper—the U.S. Food and Drug Administration (FDA)—continues to be cooperative. The bullish stock market also bodes well—as cash flows into healthcare funds remain abundant—driving many stocks to what appear to be extended levels."

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In a sign of continued optimism, biotechnology stocks have reached new highs—with the NYSEArca Biotechnology (BTK) and the NASDAQ Biotechnology (NBI) indices up 4.0% and 4.4%, respectively, since the beginning of March. The BioInvest Model Portfolio is up 6.4% and the Trader's Portfolio is up 9.1% since the last issue of the Medical Technology Stock letter (MTSL). Even more impressive, year-to-date, the Model Portfolio is up 41.1% and the Trader's Portfolio is up 71.4%. Individual stocks have fared even better, with truly impressive gains by some MTSL names (e.g., Pacira Pharmacueticals Inc. [PCRX:NASDAQ]) and others (e.g., Celldex Therapeutics Inc. [CLDX:NASDAQ]).

Sound sector and company fundamentals are intact, and improving in some cases. The industry gatekeeper—the U.S. Food and Drug Administration (FDA)—continues to be cooperative. The bullish stock market also bodes well—as cash flows into healthcare funds remain abundant—driving many stocks to what appear to be extended levels.

In addition, as biotech stocks rise, so does the short interest. In fact, some of the most heavily shorted stocks have seen the best recent appreciation (e.g., Isis Pharmaceuticals Inc. [ISIS:NASDAQ], Incyte Corp. [INCY:NASDAQ]). Despite a steady increase in biotech company financings, the balance of supply and demand favors being long. For now.

As spring approaches, an abundance of scientific and investor conferences occur at an overwhelming pace. The most favorable company development since the last issue, in our view, is The Medicines Company's (MDCO:NASDAQ) impressive Cangrelor phase 3 trial at the American College of Cardiology. In addition, Gilead Sciences' [GILD:NASDAQ] HIV "cure" and encouraging Ranexa data (at ACC) were released, as was Celgene Corp.'s [CELG:NASDAQ] solid Pomylast data in psoriasis (at the American Academy of Dermatology meeting).

Onyx Pharmaceutical Inc.'s [ONXX:NASDAQ] stock continued to play catch up, with Krypolis receiving a positive recommendation from the National Comprehensive Cancer Network, and the company held an analyst day. The FDA accepted Biogen Idec Inc.'s [BIIB:NASDAQ] biologics license application for recombinant factor IX Fc fusion protein (rFIXFc) for the treatment of hemophilia B and granted the company a standard review timeline. The majority of news flow has been positive.

The next big biotech event is the upcoming approval of Biogen Idec's BG-12, a pill for multiple sclerosis, that many believe will be the sector's next blockbuster drug. The PDUFA date is March 28. With Biogen Idec shares up ~20% year-to-date and at a new record level, great expectations exist for BG-12.

With the biotech indices and many individual stocks at all-time highs, in many instances expectations are also very high. While we believe BG-12 will gain timely approval, it is by no means a guarantee. And while one event is unlikely to derail the biotech train, a negative outcome would surprise most. Biogen Idec is a widely owned blue-chip sector darling.

Often times change and stocks fall when least expected. Technically the NBI, the broader of the two indices and therefore more aligned with the MTSL portfolio, appears overbought on a short-term basis.

John McCamant
Medical Technology Stock Letter

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