Wrapping Up the 2016 Third Quarter
The biotech sector had a disappointing end to the third quarter dropping more than two and a half percent since our last weekly update. However, the third quarter overall was a positive one. The biotech sector has largely been in a narrow trading range from between 280 to 300 on the IBB since its huge rally in July but gained more than 10% during the quarter. This is its best quarterly performance in over a year.
Our small cap holdings have had an even better performance during the quarter as a noticeable uptick in M&A activity bolstered this portion of the industry. This included our very own Relypsa (NASDAQ: RLYP) which was bought out for a 60% premium in late July by Galencia.
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 15.83% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are down 5.27% on average while our small cap portion of our portfolio is now down just 3.85% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 4.06%, 1,173 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 4.92%, 1,091 basis points above the benchmark.
Portfolio News:
Mylan (NASDAQ:MYL) continues to be problematic for our “core” holdings as EpiPen pricing has become a political talking point this election year. Even assuming a 15% haircut on the current consensus for the company’s FY2017 earnings estimates, the stock sells for around eight times next year’s profits. I have added a few shares to my holdings and think after the election results in a still divided government Mylan will be substantially undervalued and sentiment will improve on it by year-end.
We continue to see good performances from the small cap portion of our portfolio. Both Eagle Pharmaceuticals (NASDAQ: EGRX) and Ardelyx (NASDAQ: ARDX) continue to add to their recent gains. Progenics Pharmaceuticals (NASDAQ: PGNX) jumped some 10% on Friday on no news I could find and Tracon Pharmaceuticals (NASDAQ: TCON) was also strong on the week despite the overall weakness in biotech.
Merrimack Pharmaceuticals (NASDAQ: MACK) also announced a major restructuring and that its CEO is out. On the surface, this could be viewed as bad news. However, from what I have been able to gather the current leader of the company was known as an “empire builder” and resistant to selling the company to a larger player. A bigger concern with an established sales force could substantially boost the current trajectory and pipeline development of Onivyde for other indications. I think these moves make the company a more likely acquisition target. We will see if the market agrees with my view this week.
If you have not yet read the September issue where I go over the investment case for our latest promising stock that’s attempting to prevent opioid abuse in painkillers, please click the link below. The PDUFA date (when the FDA announces approvals of new drugs) is coming up in 11 days or less so there is not much time left before their important announcement that could drive the share price much higher.
Click here to see the latest addition to our portfolio, Egalet.