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Biotechs: Boom or Bust?

04/21/2014 9:00 am EST


John McCamant

Editor, Medical Technology Stock Letter

Biotech stocks have fallen victim to a major sentiment shift; in our view, the sector will soon regain its luster as one of the premier areas for growth investors, forecasts John McCamant, editor of The Medical Technology Stock Letter.

Investors have rotated from growth to value and sold their biotech winners at a very painful and mind-blowing pace.

Momentum players, who follow the charts, and generalists, who are often the last ones in, have fled the group in droves as the technicals reversed and less sophisticated investors couldn’t handle the inherent and extreme volatility that can occur in biotech investing.

While we expected a pullback after the strong January and February performance, the magnitude and speed of the drop has put a cloud over the market’s previously best-performing group.

The sector initially collapsed on March 21, the day when Gilead (GILD) received a now infamous letter from three Congressmen pressing the company on the pricing of its HCV blockbuster Sovaldi. The letter sent shockwaves through the biotech market, prompting a vast exodus from all stocks, big and small.

Simultaneously, the biotech index broke cleanly through its 50-day moving average—the first time since November—sending the momentum boys into attack mode on the minus side.

In our view, politicians questioning expensive drug prices is not uncommon, but we strongly believe GILD will easily defend its $84,000 pricing of Solvadi.

It is much cheaper, way more effective, much safer, and better tolerated than Incivek ($100,000 per year) and interferon combination—the previous standard of care. In fact, in most HCV patients, Sovaldi , unlike Incivek, leads to a cure.

Hence, while the damage is done and a complete re-pricing of biotech valuations and multiples has taken place, we remain steadfast in our view that the sector fundamentals are intact and the recent sell-off will be short-lived.

Taking a somewhat longer-term view, the long-term chart of the biotech sector, while losing some momentum, remains solidly intact. In our view, that is because the fundamentals of biotech stocks are around.

The FDA—the sector’s primary gatekeeper—is still quite accommodative. In addition, biopharmaceutical pipelines are overflowing solid sales, and earnings growth rates of the top companies look rather sustainable, and the explosion in new technologies—antisense, gene therapies, immunotherapies, etc.—is leading to true revolutionary drug breakthroughs.

Cash flow is abundant and being put to use everywhere (e.g., collaborations, M&A, clinical development) and companies big and small are in their best financial positions ever.

Long-term biotech investors have been handsomely rewarded and, we believe, will continue to do so. The silver lining of the recent correction is that, by getting rid of weak hands and re-setting stock multiples, future growth expectations for investors are that much more attainable.

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