The biotechs might be saved from disaster by the lack of supply that's been let loose at these exalted levels -- at least so far. As I look over the charts of the stocks that are now flailing after their incredible run into the end of last week, I see good signs and bad signs.
The good signs:
- Only a couple of these stocks took advantage of the big gains and did equity offerings.
- For the most part, the news flow is for later-stage drugs, not formulations in their infancy.
- They are targeting unmet needs, not me-too business.
- There were not a lot of initial public offerings during the run-up. That means there's not a lot of supply sloshing around.
That's quite different from what happened last year at this time, when there was a flood of stocks and a lot of the IPOs came at a big premium and then collapsed almost instantaneously, never to be heard from again. When I look at the carcasses of those companies, most are just footnotes to another one of those zany eras of overheating.
These moves, on the other hand, were based on companies that have the prospects for legitimate blockbuster drugs and could, without a doubt, in some cases be the next Pharmacyclics (PCYC), the company with a drug that could be so big that it had three suitors, with Abbvie (ABBV) snapping it up at a huge premium.
And what's not so good? I think that, when you have such violent moves down, you develop a new class of sellers when the stocks lift -- sellers who recognize that they were playing with fire and didn't realize the risks. These people are now the enemy of the investors who want to wait things out. They are people who you saw selling every time the stocks journeyed into the black yesterday.
You can look at almost all of these biotechs and see a big decline at the opening and then a nice bounce and then another hammering as people are so grateful to be given a chance to go, and then another bounce, more anemic than the previous one. Some finished up, some finished down but all of them have a newfound volatility that I think, in the absence of another takeover in the group shortly, will lead to distribution and top-calling.
My take? The group needs to rest. If you have the stock of a company with a specific catalyst and that catalyst goes well, I bet the stock will do well too -- as opposed to last year when good news just didn't matter.
But if there is no catalyst? I would join in with those who are selling on a bounce, unless there is real earnings power: Regeneron (REGN), Celgene (CELG), Gilead (GILD) or Biogen (BIIB), or a definite soon-to-be-blockbuster drug that would be the second coming of Pharmacyclics.