What Will Drive the next Leg of the Biotech Rally?
“Under democracy one party always devotes its chief energies to trying to prove that the other party is unfit to rule — and both commonly succeed and are right.” H.L. Mencken
The biotech sector spent yet another week marking time before the upcoming election. The main biotech indices rose ever so slightly since our last update. Based on the latest state polls, it appears likely that the House of Representatives will remain in Republican hands. The Senate race is basically a coin flip; it could easily end split exactly down the middle when all the ballots are counted.
If the government remains divided between the two parties after the election, I will feel good about the biotech sector through yearend and beyond. After an over 30% decline since its peak in the summer of 2015, a lot of bad news is already priced in. I expect both the biotech and pharmaceutical sectors to have a nice yearend rally provided politics are accommodating.
Performance Update:
Our benchmark the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB), the largest ETF focused on the biotech sector with almost $9 billion in assets, is now down 22.15% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are down 8.86% on average while our small cap portion of our portfolio has shown marked improvement and is now down 9.70% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 9.28%, 1,287 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 9.07%, 1,305 basis points above the benchmark.
Portfolio News:
Most of the movement within the portfolio, as it usually does, took place in our small cap holdings this week. Merrimack Pharmaceuticals (NASDAQ: MACK) rose some 10% on the week. Its primary drug compound Onivyde was approved in Europe for pancreatic cancer. Even though marketing and distributed by partner Shire (NASDAQ: SHPG), this is a nice win for Merrimack even though it was expected.
Amicus Therapeutics (NASDAQ: FOLD) also had a nice up week. The company has several upcoming milestones over the next few quarters, and I would not be surprised to see the stock run up into those events. Synergy Pharmaceuticals (NASDAQ: SGYP), Eagle Pharmaceuticals (NASDAQ: EGRX) and Ardelyx (NASDAQ: ARDX) also rose in a very listless tape. Other than that, there was little movement within the Biotech Gems holdings this week. It and we are basically just waiting for the outcome of the upcoming election to be known, which will resolve itself soon enough.
Last week I published our October issue. In it you will find an exciting recommendation on a small developmental company that uses its wholly owned and novel technology to develop cancer and anti-inflammation treatments. The company is well-funded and has some important short-term catalysts right around the corner that give it a favorable risk to reward profile.