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I hope the entire Real Money Pro community is having a joyous holiday season. Christmas did seem to come early to the biotech space on Friday. The main biotech rose over 2% on the day. Small-caps led the charge. A dozen small-cap biotech stocks I own were up at least 7% in Friday's trading. This was led by Portola Pharmaceuticals (PTLA) , which was up by a third after the FDA accepted its drug Betrixaban for priority review. This compound is Portola's entry into the new breed of anti-coagulants. Synergy Pharmaceuticals (SGYP) was also up over 20% on the day after announcing positive Phase III trial results for plecanatide for irritable bowel syndrome with constipation.
Hopefully, this is the start of a "Santa Claus" rally for the sector. Its beaten-down investors could certainly use some relief after substantially underperforming the overall market since biotech's last peak late in July of 2015. The chart for biotech right now looks remarkably similar to the one for the energy sector approximately one year ago, before it made a significant move up this year: Approximately 18 months of underperformance with a peak-to-trough decline of 40%. Hopefully biotech investors enjoy the same rally in 2017 that energy investors have seen over the past nine months or so. There are two main themes I will be watching to confirm my enthusiasm for this sector in 2017.
First, do no harm:
The surprising election of Donald Trump has buoyed the prospects of financials, energy and industrials. After an initial surge, health-care and biotech have not benefited nearly as much as other industries but definitely not as badly as utilities or consumer staples. I think the election was neutral for biotech's prospects and certainly not the worst-case election scenario for the industry by a country mile. I believe biotech investors will need to see if Trump will abide by the key feature of the Hippocratic Oath. First, do no harm. Despite some tweets about concerns around drug pricing, I think this will be the case. However, investors should still be in a "trust, but verify" mode that new harmful legislation to the industry is on the horizon.
M&A needs to pick up:
This year was a very down year for both M&A activity and IPOs in the biotech space. I believe this changes in 2017. Tax reform could free up hundreds of billions of dollars stuck in overseas operations at the pharma and biotech industry giants. Funds that could be used to boost purchases. Pfizer (PFE) has made over $20 billion in acquisitions since its mega-merger with Action Alerts PLUS holding Allergan (AGN) was derailed by the Treasury Department in April. Allergan has also been active of late with the $40 billion it received this year from the sale of its generics business to Teva Pharmaceuticals (TEVA) . It continued this recent spree by buying privately-held LifeCell last week for some $2.9 billion.
I expect these two giants to be joined by Gilead Sciences (GILD) , Merck (MRK) and other large players in the industry that need to replenish their pipelines and certainly have the financial firepower to make significant acquisitions. In turn, a pickup in acquisitions should trigger a nice rally in biotech's small- and mid-cap space, buoying biotech overall.
If we get confirmation of these two items early in 2017, I think the sector should substantially outperform the overall market in the New Year.