Tax Loss Selling Drives the Pullback
It was a tough week for investors across a variety of sectors as the post-election rally started to fade. Biotech had a rough outing this week along with small caps and technology. The main biotech indices have now given back approximately half their recent rise in November. About the only two areas of the market that went up this week were energy and financials. The former was helped greatly by a spike in crude oil to over $50 a barrel as OPEC finally reached a long awaited and anticipated deal around production cuts. Financials continue to be buoyed by the rise in interest rates along with the prospects of quickening economic growth in 2017.
Biotech is also being hindered by tax loss selling given its declines over the past year. Luckily, this headwind will ebb in coming weeks and come to an end along with the close of 2016. I also expect M&A activity to pick up substantially in 2017 after a down year in 2016 now that we have political certainty. This should provide a nice boost to this beaten down sector in the coming year.
Performance Update:
Our benchmark the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), the largest ETF focused on the biotech sector with almost $9 billion in assets, is now down 21.38% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are down 8.39% on average while our small cap portion of our portfolio is now down 7.99% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 8.19%, 1,319 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 8.29%, 1,309 basis points above the benchmark.
Portfolio News:
Our large cap holdings held up much better than the overall biotech indices this week which is why our portfolio widened its lead over its benchmark despite the weakness in the sector.
No stock within our portfolio fell more this week than Amicus Therapeutics (NASDAQ: FOLD) which fell significantly after the FDA declined to give accelerated approval to its drug candidate galafold and will require an additional study before giving the green light for the treatment of Fabry. This will push back approval to late 2019 or 2020 and is just the latest in a string of curious FDA decisions given European authorities approved the drug for this rare disease in the second quarter of this year. The company will still see a revenue stream from Europe for this compound and has two other drugs in development, both of which have key readouts coming up.
Merrimack Pharmaceuticals (NASDAQ: MACK) also posted a significant decline on no new news while Progenics Pharmaceuticals (NASDAQ: PGNX) held up better than most small caps this week and is holding on to its recent large gains.
Vascular Biogenics (NASDAQ: VBLT) bucked the downward bent of the market this week as it reported solid mid-stage trial results on one of its pipeline candidates. Egalet (NASDAQ: EGLT) filed a supplementary NDA this week “to expand the label to include abuse-deterrent language around intravenous abuse” for its primary drug candidate ARYMO ER. This should be viewed as a positive. Cantor Fitzgerald certainly took it that way as it used this event to reiterate their Buy rating and $21.00 a share price target.