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Biotechs Trading Lower in Q4 on Macro Uncertainty, Tepid Q3

Zacks Equity Research
Updated
WF vs. BEN: Which Stock Is the Better Value Option?

The biotech industry turned around this year after the drug pricing issue crippled its performance last year.

It had a number of things going in its favor. Strong quarterly results, new product sales ramp up with rising demand, successful innovation and product line expansion, strong clinical study results, more frequent FDA approvals and continued strong performance from legacy products played a pivotal role in bringing the sector on track this year.

However, after rising 15.4% in the first nine months of the year (January-September), the Medical-Biotech /Genetics industry has declined 13.4% so far in the fourth quarter (Oct 1 - to date). Both macro and industry specific factors resulted in the sudden downfall.

Uncertain Macro Picture

A big component of this sell-off is the confusion over the passing of the tax reform. The reform aims to bring down corporate tax to stimulate economic as well as employment growth.

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The proposed tax reforms, if approved, will leave more cash in the hands of biotech companies. The cash can be invested for mergers/acquisitions, which have been relatively fewer this year compared with the last. It goes without saying that significant uncertainty regarding the timely passing of the U.S. tax reform has cast a shadow over the future of the biotech sector.

In October, President Trump once again criticized high drug prices. This came at a time when investors had started to expect that Trump's action on drug prices may not be as onerous as previously feared, sending health-care stocks lower.

Tepid Q3 Results

Coming to some industry specific factors, most big biotechs beat estimates for earnings and sales in Q3. However, shares of most of these companies declined post earnings release for various reasons.

Although Gilead GILD topped both earnings and revenue estimates in the third quarter, it witnessed continued decline in sales of its HCV drugs — Harvoni and Sovaldi — as a result of competitive and pricing pressure.

Amgen AMGN also beat expectations for both earnings and sales in Q3 and raised its earnings guidance for 2017. However sales declined year over year, which resulted in share price decline post the earnings call. Sales of its PCSK9 inhibitor, Repatha, were also disappointing.

Celgene’s CELG shares plunged following the release of third-quarter results. Although Celgene’s earnings topped estimates, revenues fell short. Moreover, the company lowered its 2017 outlook for Otezla sales as well as its total revenue and earnings outlook for 2020.

Although Biogen’s BIIB third-quarter results were better than expected, shares were down 3.9% on concerns regarding the company’s multiple sclerosis franchise sales as well as U.S. sales of its recently launched spinal muscular atrophy (“SMA”) treatment, Spinraza.

Alexion ALXN topped earnings estimates but missed on revenues in the third quarter.

Vertex VRTX and AbbVie ABBV were the only two outperformers in Q3.

Conclusion

We believe that the biotech space should be back on track if there is more certainty regarding the timing of the tax reforms. This is because the fundamentals of the sector remain strong. Meanwhile, with the Q3 earnings season now behind us, stocks should start picking up. Positive data from key clinical studies can drive the sector up as share price of biotechs is correlated to success in key studies. 

The major biotech players need an infusion of new growth drivers in their pipeline/product portfolios — either from internal development or from buying assets from outside. Strategic deals signed by these biotechs can also push the stocks higher.

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