Are Biotech Stocks Oversold? - Analyst Blog

Are Biotech Stocks Oversold?

After Friday's 4.7% drop, the IShares NASDAQ Biotechnology ETF IBB, continued its slide into Monday morning's trading activity.   Combined, the two day slide has caused the ETF to drop more than 8%, and has shown no signs of a quick reversal.

The recent selling pattern is believed to be caused by two major factors;  First, on Friday, House Democrats on the House's Energy and Commerce Committee requested a briefing on Gilead GILD Zacks Rank #1 (Strong Buy), regarding the high price of their new Hepatitis C drug ($84,000 for the drug).  Which has sparked some fears regarding potential regulatory risks, and or pricing caps for the sector.  Second, jittery retail investors.  These Retail investors have seen Biotech stocks consistently appreciate over the past 16-18 months, as they have easily crushed the market (comparison chart below shows the performance of the Nasdaq Biotechnology ETF verse the S&P 500), though they now appear to be facing some selling pressure.

Looking Forward

Currently, the NASDAQ index is more than 400 times PE, and almost 94 times estimated earnings.  Naysayers have been searching for bubbles, and with the Fed unwinding the QE, bubbles are bound to appear.  It appears as though, Biotech is one of the first areas under attack.

In reality, most analysts believe that this correction is to be expected, and that it will reign in the recent Biotech rally.  Even with the Bear Investors looking for a bubble, jittery Retail investors, and House Committee investigations, the street is not too concerned about the recent expected correction.    

Stocks To Consider During this Time

Gilead Sciences Inc. GILD, Zacks Rank #1 (Strong Buy), seems to have been the catalysts for the recent Biotech downturn, but the investigation does not imply that GILD did anything wrong or is not growing.  More specifically, Sovaldi (Hepatitis C drug), saw a 7% week over week increase of total prescriptions written (up from 6835 to 7313) for the drug.  It is estimated that Sovaldi will bring in $1.4 billion in Q12014.

Over the past sixty days, Gilead Sciences has seen their Q1 2014 earnings estimates rise from $0.63 to $0.73, and the fiscal year earnings estimates go to $3.76 from $3.33.  Furthermore, Gilead has had two consecutive positive earnings surprises, with an average surprise of 6.25%.  This indicates that not only can GILD meet expectations, but has a history of beating them as well.

The chart below shows Gilead Sciences Price and Consensus:

Alexion Pharmaceuticals ALXN, a Zacks Rank # 1 (Strong Buy), recently concluded reimbursement discussions with the French government, which allowed the company to recognize $88 million of additional product sales in Q1 2014.  Due to this, management increased guidance, both top and bottom lines, by an additional $62 million and $0.30 of additional upside for the company.  Guidance was raised from $2.0-$2.02 billion to $2.15-$2.17 billion. 

This change in guidance has caused earnings estimates to rise over the past thirty days; Q1 2014 rose from $0.77 to $0.98, and fiscal year 20014 earnings estimates have risen from $3.50 to $3.81.  Moreover, Alexion has had a positive earnings surprise for the past four consecutive quarters, with an average positive surprise of 8.07%.  Like GILD, Alexion Pharma has a strong history of not just meeting expectations, but beating them.

Bottom Line

The decline of Biotechnology Stocks over the past two trading days is an anticipated correction for the sector, as well as some fresh political risk.  While the sector is declining, there are several companies that can, and will resist the downward trend.  This could be a great opportunity to get some value out of the Biotech sector. 

While GILD, and ALXN are Zacks Rank #1's, there are a two more Biotech companies that might be worth your consideration, if you are inclined to invest in this sector; Amgen Inc AMGN, and Myriad Genetics Inc MYGN, both carrying a Zack's Rank #2 (Buy), and may also be well-positioned for long term gains after this recent slide.    

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