Credit: Shutterstock photoDespite believing that the start of 2016 will be, at best, slow for equities, there are a couple of sectors that have sufficient potential to make investing in them now worthwhile. Yesterday I talked about the first of those, oil. There are signs that this commodity may have found a bottom, so the risk of not holding oil-related stocks going into the year is probably higher than that of owning them. Although not commodity based, the same risk/reward calculation can be applied to the second area that should be held, or even actively bought… the biotech industry.
That may seem counterintuitive given the expectation for a rough start to the year. I mean, isn’t biotech the ultimate speculative, risk-oriented sector which gets sold off heavily during periods of volatility? Well, yes, but that applies mostly to the smaller firms, where the success or failure of one drug or therapy in trials will decide the fate of the company. The larger firms in the space, such as Amgen (AMGN)*, Biogen (BIIB), Regeneron (REGN) and Gilead (GILD), still have some product risk, but it is the execution on existing, proven therapies and the introduction of new revenue streams that will provide the catalyst for increases in stock prices next year.
The one year comparative chart above shows that there is very little correlation in the industry, with performance last year varying enormously. As these companies mature, and actual sales and execution come to the fore, that trend will continue and maybe even intensify, which is why it is important for investors to diversify when considering biotech. In many such cases an industry ETF is the easiest way to achieve that, but in this case that strategy has an inbuilt disadvantage. The major ETFs have a heavy weighting towards the big firms, but also include many smaller, more speculative companies which could suffer heavily in a “risk off” environment.
It would seem only logical that that would be true for the big boys too, but there are a couple of factors that should limit that. Two of the companies mentioned above, AMGN and REGN (in partnership with Sanofi: SNY: ADR), launched drugs known as PCSK9 inhibitors earlier this year. These are a new generation of cholesterol controlling medications that have the potential to be as big as statins were for the likes of Merck (MRK) and Bristol-Myers Squibb (BMY) in the 1990s and early 2000s, and early indications of actual uptake of the drugs will come next year. PCSK9 inhibitors have the potential to be game changers for the industry leaders who have drugs either on the market or close to approval. Any hint of positive early results in terms of sales will lift the sector as a whole.
The other factor that could give large cap biotech stocks a boost next year is at the opposite end of the spectrum from new, patent protected therapies. Mindful of the effects of generics on big pharmaceutical companies over the years the large biotech firms have been acting to undercut the imitators that will undoubtedly come as patent protection expires on some of the early therapies. Generics in the biotech world are known as “biosimilars”, and the big firms have their own programs in place to produce and market them. If they are successful, any potential worries about biotech’s own patent cliff will be dispelled.
There are, then, several reasons to believe that 2016 will be an interesting year for large biotech. The first quarter of the year in particular will give some interesting long term indications of actual profitability rather than prospects. If, as expected, the news on those fronts is positive, most of the growth in the stocks will come at the front end of the year, making big biotech a must own, even in an otherwise weak market.
Finally, I would like to wish you all a very happy holiday season. Thank you for reading and for your support over the last year, and especially thank you to those that have commented on articles. I enjoy reading them, and I am often enlightened and educated by your analyses and opinions…keep them coming!
*In the interest of full disclosure, my wife works for and is a stockholder in Amgen.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
