Market Posts Fourth Straight Week of Gains
The market posted its fourth straight week of gains as the S&P 500 and Dow Jones Industrials clawed their way back to within hailing distance of where these benchmarks began 2016. Unfortunately, the biotech sector remains firmly mired in its biggest bear market since the financial crisis. Large cap stocks within the sector continued to outperform their smaller brethren by a solid margin this week, and overall the biotech sector ended the week slightly down. Our portfolio added some additional distance from our benchmark as we got a solid performance from our large cap holdings.
On Wednesday, the sector was hit by news that the Center for Medicare & Medicaid Services (CMS) has proposed a pilot program testing a new reimbursement scheme for Medicare Part B, which covers drugs administered in hospitals or doctors’ offices. Currently, CMS pays back the price of the drug plus 6% for the health care provider. Under the proposed rule, doctors would get just a 2.5% premium plus a flat fee of $16.80 per drug per day.
I think the declines this caused in some of the large cap biotech stocks was an overreaction. First of all, this is just a test that does not even apply to the entire CMS provider network. Second, the covered drugs would be mostly infused or injected treatments for serious conditions. I doubt many oncologists or other specialists are going to change their primary treatment courses because reimbursement is slightly different for these critical drugs. By Friday, most of the large caps had already recovered from the dip this caused in the middle of the week.
Performance Update:
Our benchmark the iShares Nasdaq Biotechnology ETF (NYSE: IBB), the largest ETF focused on the biotech sector with almost $9 billion in assets, is now down 23.85% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are now down 6.48% on average while our small cap portion of our portfolio is now down 30.36% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 18.42%, 543 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 12.45%, 1140 basis points above the benchmark.
Portfolio News:
As mentioned, our large cap stocks performed solidly this week despite slight losses in the sector overall over the past five trading sessions. Mylan (NYSE: MYL) was our standout performer in this part of the portfolio, gaining nearly 10% on the week. Gilead Sciences (NASDAQ: GILD) also had a solid week among our large caps.
In our small cap holdings, Merrimack Pharmaceuticals (NASDAQ: MACK) acquitted itself well in its first week in the portfolio and Xencor (NASDAQ: XNCR) rode a couple of positive comments from analysts to get back above its recommendation level.
Pernix Therapeutics (NYSE: PTX) disappointed with its financial results when it released earnings. It had to give bigger discounts than expected to gain expanded coverage in networks and had costs associated with a bigger sales force as it integrates Zohydro into its product portfolio and cross-trains its sales representatives.
We will watch this one closely to see if Pernix can ramp up Zohyrdro sales sufficiently to cover the discounts given primarily for its other products. The company is also rumored to be exploring opportunities to sell itself. This would make sense as a larger player with an established sales force would benefit greatly by adding the company’s product portfolio to its own. Even with a substantial premium, an acquisition could be significantly accretive.