March 25 Biotech Update- Would it Help to Cry Uncle?

Today certainly started as a better day in the sector but I would be careful of chasing this move. Ideally, we spend time building a base but a day or two of running is possible given the oversold conditions in the space. At this point I would lean towards the sector having put in a bottom but that is a low confidence idea. At this point the IBB looks as if there was exhaustion selling Friday and Monday, which usually occurs at lows. At the very least, I think the recent lows set nice stop loss price points because if those levels fail, there will be another significant leg lower. If we do move lower I would look at the 200-day in the IBB as a magnet. What was interesting in the morning trading was the divergences seen in the tape in that it there were very clear underperformers. I read this as investors cautiously dipping their toes back into the water as opposed to blindly buying. Of course, the negative was the weakness of the rally and how quickly it pulled back and this is why I have low conviction on the bottom.

1. FMI was one of the weaker stocks to say the least. I still think this is related to the upcoming secondary combined with the recent run combined with general sector weakness combined with even more skittishness with non-cash flow positive biotechs. I still like the long term fundamentals (assuming you agree with my thesis that they will be able to convince payers of the benefits of testing) but would still wait for the secondary and broader sector to stabilize before adding to my position.

2. PCYC has been one of the weaker stocks recently (which is tough to do in such a weak sector) despite the ibrutinib launch beating expectations (sounds familiar if you have been following GILD). There was that recent mix up with double count scripts from one of the providers but even taking that into account, ibrutinib is ahead of expectations. These major run downs are not uncommon with PCYC and in the past they have always been followed by strong rallies. Is this time different? Possible but unlikely. At $8.3B market cap PCYC is certainly priced for a good launch and any hiccup will hit the stock hard but given the dynamics of the early launch, it remains on pace to beat 2014 expectations. I think the real question is similar to the question that dogs GILD and that is sustainability. While ibrutinib has the B-cell malignancy space to itself (in terms of the next generation of treatments), you have GILD with idelalisib coming later this year and then ABBV with ABT-199 in out years and then possibly CART treatments in the longer term. So the question is not whether ibrutinib will do well this year (it is/will) but how it will do with the added competition. As we have seen with GILD this is not an easy question to answer over the short term (in fact it is likely impossible) but this is where money can be made. If you believe that ibrutinib will be able to grow in the face of the upcoming competition, then these dips are buying opportunities for a long term hold. You do, however, have to have confidence in the out years. I have been bullish on ibrutinib for awhile and still think it offers the best combination of efficacy, safety, and convenience. Combine that profile with the skill of the JNJ sales force and it seems like a winner. That being said the threats are real and the competition each have their areas of strength and but reasonable people can disagree with that thesis. But if there were no questions as to a bull thesis, the stock would be priced to perfection and there would be no opportunity to make money.

3. I updated what I think will be the new bear thesis in ECYT in my street article. Despite being wrong on two counts, there is enough gristle left on the bone for the bears to continue their arguments. In fact, I already saw these arguments circulating on twitter today. It is critical to understand the bear thesis as all stocks have reasonable bear theses and if you cannot find one then it probably means you are too confident in your bull thesis. In general, at these levels it will be more difficult to make money on ECYT because expectations are higher. That being said there are two catalysts that should drive further upside. First, the interim phase III results from the PROC trial. The most likely scenario is they upsize it to better power for OS and this would implicitly mean a higher probability of hitting the PFS endpoint. The risk here is futility would make the CHMP decision meaningless and eliminate any chance of US approval. That is certainly possible but not the most likely scenario but it would crush the stock so perhaps having a black swan hedge would be a conservative approach. The second catalyst would be a go decision by MRK for a phase III trial in NSCLC. Given the talk about the adenocarcinoma subset, I suspect that the phase III trial would focus on those patients but that is simply speculation at this point. Of course, the risk here is that MRK decides to not pursue a phase III but I think that is less likely especially if the adencarcinoma data are markedly better. If these catalysts are positive, then ECYT continues higher but keep in mind that at these levels expectations are higher, so the hurdle for success is raised.

I will end it here and hope that the rest of the day and week brings us a better rally than this morning.

Disclosure: Long ECYT, MRK, GILD, PCYC, and ABBV.

Leave your comment