Buyers Seem Like Deer-in-Headlights: RBC Capital; Analyst Comments on Biotech Rout

In a research note after the close of trading Monday, RBC Capital discussed the recent sell-off in biotech stocks and key levels of support to watch for.

Analyst Michael J. Yee noted the pullback in the Nasdaq Biotech Index (Nasdaq: IBB) is similar to the pullback during the 2008 finance crisis and worse than the May through April 2014 pullback. While the original trigger for the sell-off was comments from Hillary Clinton related to drug pricing, Yee believes follow through was tied to selling by fund managers and hedge funds.

"... healthcare has historically been overweight and feedback is fund managers are getting more equal weight given the pain here and in broader market, in turn causing a money flow and rotation issue as assets are allocated into less risky sectors; hedge funds also required to take down a lot of exposure given volatility, further adding pressure," said Yee.

Yee noted that following yesterday's headlines related to government subpoenas of over drug prices, some fund managers are worried the so called ‘pricing’ headlines are not ending soon. Others are like deer-in-headlights and afraid to step in, he said.

"... buyers seem like deer-in-headlights and afraid to step in as they don't want to catch a falling knife on many charts and biotech has broken several technical levels."

Yee noted events that could turn things around include earnings -- with Amgen (NASDAQ: AMGN), Celgene (NASDAQ: CELG), Vertex Pharma (NASDAQ: VRTX) likely to report strong Q3 results --- as well as M&A. Yee also discussed valuation.

"The 4-horseman (AMGN, BIIB, CELG, GILD) are now trading at 14x on '16E and at the same market multiples as the S&P500 (14x) which has been a historical support level over the past decade except during the 2009-10 Obamacare days," said the analyst.

Yee added, "we are closing in within 10% of some theoretical bottoms for companies near "no pipeline value" floor levels. (1) BIIB: trading around 15x but $250-270 levels would assume Tecfidera goes away in 2020 at $250 and $270 assumes no pipeline yet has 4-5 catalysts in 2016. (2) GILD at $85 assumes HIV goes away in 2018 and HCV gets cut to $8B....This also coincides with an 8x P/E or the 2008 floor during HIV patent worry days. (3) AMGN now trades at 13x, getting closer to the uberbearish 10-11x during the EPO bundling/safety days implying $120-130 levels. (4) CELG a bit farther away at 18x on 2016E and given higher multiple stock but $85-90 provides no pipeline and assumes settlement in 2023. (5) VRTX trades at 10x P/E on theoretical $10 EPS power and trades at a theoretical floor based solely on the homozygous CF market with no heteros. $85-95 levels assumes 4x peak sales which is bearish for a takeout-candidate and chronic orphan drug."

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