Gilead Misses, but Market Overreacts
Stocks had their worst week since the market bottomed in the second week of February. Biotech was particularly weak especially on Friday after Gilead Sciences (NASDAQ: GILD) disappointed investors with its earnings. Despite the miss in Gilead, our portfolio pretty much tracked its benchmark for the week.
It felt a good portion of the trading Friday was driven by algorithmic programs as both Amgen (NASDAQ: AMGN) and Celgene (NASDAQ: CELG), which both beat quarterly expectations, also sold off on Friday. In addition, it appears M&A activity is starting to pick up again with mid-cap Medivation (NASDAQ: MDVN) triggering a bidding war that could see it eventually go for north of $10 billion when things are said and done. The stock has doubled over the past six weeks already.
AbbVie (NYSE: ABBV) also committed almost $6 billion to buy privately-held stem cell therapy developer Stemcentrx. The drug giant also beat by two pennies a share when it reported quarterly results as well. If M&A activity continues to pick up, it could provide a significant tailwind to the biotech sector going forward. After an almost straight move of 20% off the lows of mid-February, some profit taking was overdue. I would not be surprised if we regain some of last week’s declines in the days ahead.
Performance Update:
Our benchmark the iShares Nasdaq Biotechnology ETF (NSADAQ: IBB), the largest ETF focused on the biotech sector with almost $9 billion in assets, is now down 22.10% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are now down 5.40% on average while our small cap portion of our portfolio is now down 25.03% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 15.22%, 688 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 10.31%, 1,179 basis points above the benchmark.
Portfolio News:
As noted, Gilead missed on its quarterly results after beating for the eight straight quarters prior. Although disappointing, I think the market overreacted to the news and I added to my core holdings right at $89 on Friday. There were several tidbits of good news investors chose to overlook on Friday. These included Gilead having $3.9 billion in operational cash flow this quarter, giving it a 12.5% cash flow yield at current prices. In addition, HIV revenues surged 19% during the quarter from the same period a year ago as the company continues to improve it product portfolio in this core franchise where it is the market leader. Finally, the company hiked its dividend payout almost 10% as well.
After the bell on Friday, beaten down Pernix Therapeutics Holdings (NASDAQ: PTX) spiked more than 50% in a thinly traded after-hours market after rumors surfaced that Steve Cohen’s Point 72 fund had taken a significant stake in this small cap firm. I have been unable to confirm this as we go to post but it is a development that we will watch closely this week.
This week Mylan (NYSE:MYL) whose stock has been under pressure last week, like most pharmas, reports quarterly results. Hopefully, the generic drug giant can make it four beats out of five in the first quarter for our “core” positions.