Mylan Reaches Settlement and Stock Pops
The biotech sector continued to pull back last week and ended approximately two percent above a trading floor that has been in effect since the area’s big rally in July. Luckily, the election is now less than a month away and despite the Republican nominee’s recent troubles and revelations, the most likely outcome is a divided government with the Republicans at least keeping control of the House. This should take significant legislative changes on the pharma and biotech industries off the table.
In addition, one of our lagging large cap “core” positions got good news after the bell on Friday and is already up this Monday morning. This will help the overall performance of the Biotech Gems portfolio nicely in the week ahead.
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 17.40% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are down 6.57% on average while our small cap portion of our portfolio has shown marked improvement and is now down 4.59% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 5.58%, 1,182 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 6.08%, 1,132 basis points above the benchmark.
Portfolio News:
As stated in the opening narrative, one of our core holdings released big news Friday. Mylan (NYSE:MYL) announced after the bell on Friday that it has reached a settlement with the government around not giving the proper amount of rebates on its EpiPen products to government programs like Medicare and Medicaid.
The company will pay just over a $450 million charge to cover the cost of this agreement. This is a significant amount of money. However, the EpiPen pricing saga has knocked more than $6 billion off of Mylan’s market capitalization since it began. This was the right move for Mylan because they settled the issue quickly and can now refocus the market’s attention on their earnings growth and cheap valuation, therefore spurring share price appreciation and investor interest.
Investors can now concentrate on the huge underlying value of Mylan. The company reduced guidance to $4.70 to $4.90 a share in EPS this year and sees $6.00 in earnings by FY2018. The stock was selling at $36 a share before news of the settlement, making Mylan one of the cheapest stocks in the S&P 500. The stock popped nearly 10% so far this Monday morning and I expect the generic drug maker to post solid gains for the portfolio this week.
The portfolio drifted down almost exactly in line with the main biotech indices this week. The only two real exceptions that stood up well and advanced were Lexicon Pharmaceuticals (NASDAQ:LXRX) and Amicus Therapeutics (NASDAQ: FOLD) both of which are advancing their pipelines and have upcoming near-term catalysts.