Biotech, Bubble or Risk ON Trade
BIOTECH INDEX IBB broke below the 50 day moving average on Friday during a sharp broad based biopharm selloff.
The Index has touched the 50 DAY moving average five times in the last year, always breaking off of the bottom, and moving back upward creating good entry points for longer holders or traders, the break was sharper on Friday, and some would suggest the trend is broken.
Some have suggested Biopharms have been over heated the last year, potentially forming that four letter word….bubb le. When a sector is on edge, it doesn’t take much to trip it and apparently Democratic lawmakers questioning the pricing of Gilead Sciences Inc.’s new hepatitis C drug, (Sovaldi), provided the catalyst for the selloff.
Lawmakers diddling and markets reacting are nothing new. A bubble can lift all ships and some such as our resident biopharm experts, zzlangerhans and Porteuille have questioned the rafts rising with the yachts. When a sector sells off, all ships can also sink, but eventually the bouyant will usually rise.
This is hard to calculate in the biopharm world as many are at different levels in their pipelines.
Many that sank in share price Friday do not have drugs on the market and few have a drug costing $84,000 for six weeks. It’s very hard to justify pricing on drugs, but if they extend life, clearly they are wanted by those with the disease. Having a drug in approval does not mean a company will be profitable. For example DNDN, SVNT (Q), XOMA). A shift from approval, to marketing, to acceptance by insurance, to prescription by doctors can be difficult for some companies to achieve. They usually hope for a buyout.
Biopharms are high risk/high reward (when successful), but you have to know when to buy and when to sell. There are cycles in development, phases of testing, approval risks, interaction, effectively, etc. Anyone who believes any biopharm is a sure thing is probably betting with conviction bias. It’s great to think the best, that all companies will succeed and improve the human condition, but that just doesn’t happen. Shorting a BIOPHARM, or down thumbing it on CAPS is not anti humanity, it’s looking at all sides of the valuation and possibility.
Some biopharms “know” they will never succeed, but pursue the path, fund raising, presentations, press releases as if they believe they will.
Drug development takes time and money, and not all will be successful. Drug prices are usually high based on the cost/risk to bring it to market, but also because the patent time is short and generics will eventually take over.
It is very unlikely the government will do anything about pricing. Is this recent selloff weakness to buy into? I think not in the short run. While technical analysis generally can only show what has happened and trends that might develop, the perceived bubble will cause hesitation to ride that wave back up.
Still, when a market is high, and many believe we are getting there on the indexes, money tends to go more heavily into risk to try to generate better returns. Where the smart money will go is hard to say, but I think some will be more careful about biopharm.
This does not mean to avoid them, but always weight the higher risk, especially those in development. The cream will rise, but don’t buy the coffee grinds.
ZZ gives great pitches, he doesn’t so much time his calls, so riding along can put a dent in your CAPS spread for awhile, but the 80% accuracy in this arena is extremely commendable. Still, as with any CAPS player, you can’t always figure in timing.
While not biopharm, I tagged ADZ as an ETF trading about 15% above Net Asset Value (NAV). I see some Fools followed along, but either didn’t read my small print, or didn’t use a limit order. Their calls kicked in 15% lower than mine, near NAV. With a Biopharm, there are multiple catalysts and sometimes you have to be nimble. ZZ’s call on APPY is such a call. HE can have a downthumb one week and an upthumb the next week. Biopharms trade on catalysts. The upthumb does not denote long term expectations as an approval of APPY1 will not necessarily translate into sells, and with ZZ, I think APPY will be like SVNT and DNDN even if they receive approval. Still the filing and then the approval could gererate short term share rising catalysts. Tradeable, but requiring timing, and always at risk.
It’s good to understand a sector and learning the players. Learning which ones are rafts and which ones are yachts, when the market has bid one up with the other or down with the other.
I would be careful of the risk laden biopharm Index, the potential bubble, and understand the ultra high risk, especially of those in development stage. Study the index and then find the cream. If you try to time an analyst, a CAPS player, or a pump/dump newsletter, your timing may be donating to someone else’s early retirement as you drift further from your own.
Disclosure: I make a few biopharm trades. I like ZZ's thesis on APPY. I'm holding BLUE. I didn't hold JAZZ long enough, so I've got the BLUES to back me up.
Disclosure: If I knew anything would I be posting here??
The Biopharm Index dropped hard, suggesting close monitoring, but not all ships are rafts and not all are yachts and I'm often stuck in a dingy or bailing. Average in, don't bet the pharm....ummm farm.....
The Sky is not falling today, but I wish someone would keep the politicians locked up better.