(This commentary originally appeared on Real Money Pro on Friday. Click here to learn about this dynamic market information service for active traders.)
I am going to dedicate my column today to answering a couple common questions I have received over the past week around the biotech sector and a notable stock within this area of the market.
Can the February rally in biotech continue?
We have had a nice run so far in the month, with the main biotech indices up roughly 7% to 8% so far in February. Earnings largely are in for the fourth quarter, so in order to continue the recent rally we are going to need to see merger-and-acquisition activity continue to tick up. Deal volume is off to a good start, especially compared to the early weeks of 2016.
There is lots of recent speculation around potential buyout targets, including Tesaro (TSRO) , Acadia Pharmaceuticals (ACAD) and even drug giant Bristol-Myers Squibb (BMY) . I think for the next leg up we will need confirmation via purchases of some more mid-caps in the space for healthy premiums.
We also are closing in on the $300 level on the iShares Nasdaq Biotechnology ETF (IBB) , which is the largest and probably most-followed biotech ETF. This approximate point was a ceiling throughout 2016 and a few rallies already have failed to breach this level over the past year. If we break decisively above $300 here, I think the strong rise can continue. If not, I would not be surprised if the main biotech indices continue to be somewhat range-bound.
Has Gilead Sciences Bottomed?
It certainly feels like Gilead Sciences (GILD) bottomed in the mid-$60s last week. The stock has recovered nicely after dropping about 10% after significantly lowering revenue guidance for 2017 thanks to declining hepatitis sales projections earlier this month. The rise has been helped somewhat by vague rumors that noted activist Carl Icahn might be eyeing the shares for a significant stake. The stock also was oversold.
The market is giving little value to the company's hepatitis C franchise and pipeline in the mid-$60s. The company for the most part is not losing sales due to increasing competition in the hepatitis C space. The company simply has cured a good portion of the sickest and even mid-stage hepatitis C carriers in the developed world. While great for society, this development is not good for Gilead's near-term growth prospects. However, it's likely the company still will deliver more than $20 billion in hepatitis C product revenue over the next three years. While that pales in comparison to the $19 billion in sales that franchise produced in 2015 alone, it still will throw off huge cash flow for the company.
Gilead also has some potential winners in its pipeline, especially in some mid-stage candidates targeting nonalcoholic steatohepatitis (NASH), which the company hopes will be its next core franchise. In addition, the other parts of Gilead (which are now about 55% of overall revenues and growing) are delivering revenue growth in the mid-teens. Finally, the stock has a 3% yield after hiking its dividend payout by about 10% earlier this month.
Given the preceding, I think we have seen or are very close to a bottom in Gilead shares. That said, I don't see the stock rallying significantly until it does some M&A deals to change the narrative on the company.