Biotechs Recover from Drug Pricing Pressures (For Now)

Alnylam (ALNY) Ends Heart Drug Trial on Safety Issues-Stock Plunges

Last Thursday during the latest Deutsche Bank AG (DB) crisis biotech stocks lost 3% .The biotech downdraft was unrelated to the macro issues but attributed to uncertainty about drug pricing reform and another round of political rhetoric with Congressional hearings on Mylan NV (MYL) and Hillary Clinton attacking high prices. Today the Mylan EpiPen was in the news again with Congressmen stating that the Company overcharged Medicaid for decades. Nonetheless biotech stocks recovered above last week’s lows and we need to see if the Alnylam clinical news affects sentiment.

The IBB closed up 0.88% today to $290.8 about 10 points lower than the intermediate resistance and 6 points above 9/29 lows hit the day of the 3% drop. The XBI is a bit more volatile but clearly outperforms the IBB over one month with support at $60. Nasdaq was up 0.5% today.

Overall the tape was pretty bullish with a green screen despite the small ETF gains and mixed market for the large cap leaders. Alexion (ALXN) was up 1.7% but is still down 34% YTD. Biotech stocks are recovering but the sector is still in a bear market. Some mid-caps ($5-10B range) did better today presumably because of being on the M&A radar. But recently some mid-caps took big hits like Intra-Cellular (ITCI) down 63% in one month and today Alnylam (ALNY), a leading RNAi therapeutics Company,dropped 26 points after hours to the $41 level after it discontinued its Revusiran drug development because of a poor benefit-risk profile and safety concerns for a rare heart disease.

Many smaller more speculative names soared indicating a good appetite for trading in the sector. Our top speculative pick bluebird bio (BLUE) was up 5% after hitting a YTD high near $74.

Here are several strategies to employ for the 4th Quarter with the assumption that we will hit new highs by year-end:

1. Buy a Portfolio of stocks focusing on large caps paying dividends. Many of the large caps are trading near their lows for the year because of lower growth: ABBV, GILD, RHHBY.
2. Hold the IBB looking for a rally by year-end. Add the XBI for smaller stocks and a better chance for big M&A winners.
3. Add a mutual fund (SHSAX) or (PRHSX) for broader Life Science exposure in diagnostics and tools.
4. Despite huge upside opportunities if you are trading speculative  biotechs the overall portfolio damage needs to be limited if the Company has only clinical stage products and no product revenue. M&A is still the driver because large biopharma needs to expand late stage pipeline.

We are in the mid-range of the current rally with good support at early September lows. But as we can see from the free-fall last Thursday and from the recent drops in ALNY and ITCI due to clinical trail failures the sentiment can change abruptly. Watch XBI tomorrow for ALNY impact.