2016 and Biotech - A Recap

Many will agree that 2016 was a year of ups and downs. From the highly contested 2016 US presidential election, to the many deaths of our esteemed celebrities, to the Syrian Civil War, to the Chinese repositioning of the South China Sea, to the Iran Nuclear deal, the ever expanding Black Lives Matter protests, and the spread of the Zika Virus, the increasing ISIS attacks across Europe, and Britain's exit from the European Union (BREXIT). These events mark a tumultuous political and economic climate that pervaded 2016. As populist sentiment began to take hold, many throughout the world expressed fear and indignation at the populist movement that saw many countries government's move to the right. The aim was clear - this rightward movement signaled a repudiation to globalism and trade deals that stripped the wealth from the middle class of a number of countries. 2016 saw populations across the globe begin to push back against establishment politicians. This push has enabled fringe groups to once again become relevant and to engage in political discourse. That's not to say that these fringe groups are all negative or regressive in their politics - many present alternatives to the status quo and thus create fear in their political opponents. People fear change.

What does all this have to do with the biotech sector?


2016 Biotech Performance 

Many look to the IBB or to the NBI to see how biotech stocks are performing in relation to the market. Although these are great to gauge the sectors performance, they are limited in their components. NBI only has 164 components while the IBB only measures the performance of 166 companies. An analysis for all biotech stocks found  that the general performance of biotech was under-stated, but not by much. As you can see in the table below, the 2016 was a dismal year for biotech. 2016 saw biotech stocks get battered by a storm of controversy. Firstly, they began 2016 in a free fall decline as an overall market correction wiped out biotech stocks.  The first week of 2016 saw the IBB drop by ~10%. By May, the IBB had taken a cumulative loss of 25%.  By October, some recovery was underway as the YTD loss retraced to 21%. In early November, following the election results, the NBI jumped 9% as the rhetoric for price controls coming from the Hillary camp faded into the abyss. Other price control measures coming from the states were reigned in by voters that disagreed with the measures. However, the populist rhetoric wasn't done yet. In December, 2016, biotech stocks were again battered when President-Elect Trump stated (in the Times Person of the Year article) that he would bring down drug prices because he doesn't like what has happened with them. The market reacted and biotech stocks, as measured by the IBB, fell by ~4%. 2016 biotech stocks ended down more than 20%. 2017 may provide some relief for investors, but the potential for unforeseen turbulence remains.

Time Horizon	S&P500 Performance	NASDAQ Performance	NBI	IBB	SPSIBI	Cumulative Biotech Performance
366 Day Performance	8.50%	6.26%	-22.24%	-22.14%	-16.42%	-24.97%

Blood in the Streets (potentially)

It is no secret that there are pharmaceutical companies that seek to pad their earnings by increasing the price of their respective drugs. It is not illegal to do so, but is seen as immoral because it is forcing larger costs on the end-user, a sick patient that is already down on their luck. Because of this outlandish behavior 2016 saw biotech stocks take a well deserved whipping from Wall Street as fears that regulations would crimp biotech earning potential ran rampant. It seems that biotech CEO's still haven't gotten the message as pharmaceutical costs are expected to increase by 11.6% in 2017 - a pace far greater than projected increases in wages and the cost of living. According to consumer reports, roughly one in three Americans felt the pharmaceutical pinch in 2016 as they were hit with higher drug prices. We have yet to see any substantial plan from President-Elect Trump regarding drug pricing, but his rhetoric suggests that it is a real possibility. Last time a political figure voiced concerns on pricing over Twitter, the IBB took a -5% bath when Hillary Clinton tweeted about reigning in pharma pricing. President-Elect Trump communicates with the his millions of followers through his Twitter account and now has the power of the presidency to pursue regulations against what is perceived to be an immoral practice. It is entirely possible that a similar tweet from the President-Elect would send biotech prices tumbling downward far more than the 5% seen when Mrs. Clinton voiced her concern. This hypothetical scenario seems rather unlikely considering that such legislation would have to be ratified and passed by Congress. Should the middle class begin to feel the pinch with increasing premiums and unrealistically high co-pays for medicine, this scenario might eventually lead to more than just a slap on the wrist for all pharmas.


2017 - Fundamentals

2016 will be remembered as the year of the bear, at least for the biotech sector. Many still don't believe we are in a bear market, but when a sector remains down and pessimism persists (as insinuated by the annual decline of >20%) in the overall sector, it is safe to assume that the bears run the show. There is still plenty of pessimism to go around. However, there are plenty of great deals in biotech stocks. There are several that are trading under cash and there are many that are great products (with significant preclinical and clinical evidence), but have little to no investor confidence. Finding value is what investors should aim for in this market of uncertainty. Just be aware that if you become too bullish, the bears will take you for a ride. I am confident that biotech will rise from the 2016 ashes. There are number of major datasets due for a number of drugs in 2017.  January 4th, 2017, should be an indicator for first month performance.