A Sustained Rally Becomes a Trend
The biotech sector had another decent week, ending up once again and now starting a refreshing trend in the beginnings of the second quarter. This reverses the direction the industry spent most of the previous six months moving on a regular basis during its huge bear market. Our large cap positions on average have crawled back into the black, a pretty remarkable achievement given biotech is just starting to recover from its largest overall decline since the financial crisis.
Numbers came out on drug spending in the United States this week. Spending was up over 12% in 2015 to a record $425 billion. It should be noted, however, that these government statistics do not include rebates and discounts. If they were included, drug spending would be up just less than three percent year-over-year. If a company reported revenue figures like that, they could expect the S.E.C. to come a calling with an audit. Look for the politicians to neglect the true spending growth number as they continue their election-driven rhetoric about drug price “gouging.” However, it does show the secular tailwinds for pharma and biotech remain in place as the population ages and new treatments are developed.
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 18.41% since we launched the Biotech Gems service at the start of May 2015.
Our large cap core positions are now actually up a small but still positive .53% on average while our small cap portion of our portfolio is still struggling but slowly improving off its recent lows and is down 23.50% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 11.49%, 692 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 5.48%, 1293 basis points above the benchmark.
Portfolio News:
Merrimack Pharmaceuticals (NASDAQ: MACK) pulled back some after its recent strength. Eagle Pharmaceuticals (NASDAQ: EGRX) fell early in the week on the sour sentiment from some recent setbacks, but stabilized and had a decent rally late in the week. I have added to my stake in Eagle on this decline as I believe the downturn is an overreaction to recent news.
Relypsa (NASDAQ: RLYP) sold off on Friday as two negative reports came out on the stock from the website Benzinga. One was from a freshly minted college grad who says “someone” at the company told him that Relypsa had dismissed their investment banker Crestview Partners. The second was a hit piece by a longtime permabear on the company at Morgan Stanley who probably did not look so good after the stock’s 65% surge on April 8th.
It should be noted that the company has stated it works with multiple investment banks so even if the dismissal of Crestview could be confirmed, I would not read too much into it. The Morgan Stanley thesis was that the drug was slow to take hold in the market based on the doctors the analyst canvassed. It does not seem the analyst even bothered to survey the specialists in the area that would be the most likely to prescribe Veltassa and his comments around the chronic market were fairly lubricious as well.
I also find it curious that both pieces hit the day of monthly options expiration. I am sure the holders of puts with $20 strike prices were most grateful for this stroke of “luck.” I would not be surprised if the stock bounces back this week as nothing has changed around the company’s value or buyout potential.
Ending on a brighter note. Gilead Sciences (NASDAQ: GILD), Celsion (NASDAQ: CLSN), Lexicon Pharmaceuticals (NASDAQ: LXRX), and Tracon Pharmaceuticals (NASDAQ: TCON) all had nice gains for the week. In addition, Synergy Pharmaceuticals (NASDAQ: SGYP) made a nice move on Friday on some vague speculation it might become a buyout target for Allergan (NYSE: AGN).
It remains to be seen if anything comes from this specific buyout rumor and I am doubtful on this prospect at the moment , but I do believe M&A activity will start to pick up now that mega-mergers seem to be off the table thanks to the derailment of the Allergan and Pfizer (NYSE: PFE) tie up.
Our next monthly edition of Biotech Gems should hit your “in” box by next weekend.