Mehta Biotech Capital: Week 1 Update

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Biopharma investors are in a funny spot. Where small/mid-cap biotech and pharma stocks have been pulling back for over a month now, the broader markets only began to slide this week, with the S&P 500 losing 5% and the Dow Jones Industrial average dropping 530 points in the Friday session alone. Biotech indices, meanwhile, are already down by 15-20% since peaking in July, as investors have first vacated smaller, less mature drug developers in order to reduce risk. Like the broader market, large biopharma companies like Gilead Sciences (GILD), Amgen (AMGN) and Regeneron (REGN) hadn’t been as adversely effected as the smaller names up until this week; GILD, for example, fell almost 10% between Wednesday and Friday’s close. This is the norm. The biopharma stalwarts tend to go later in a risk-off environment, which is exactly what happened into the end of the week.

The IBB (iShares’ NASDAQ Biotech Index Fund) broke below its 200-day moving average on Friday and is quite close to tapping the 50-week moving average at $331.50. Reaching these two moving averages has marked a bottom for every one of the sector’s corrections going back nearly four years. The question is whether this is just another blip in what’s been an orderly bull market.

We wrote about this on Thursday, explaining what’s driving this latest sell-off and when biotech investors might look for a tradable bounce, at least in the short-term. At Mehta Biotech Capital, we’ve been taking profits in many of our recent winners over the last week, and now we want to be prepared to put capital back to work if we see some stabilization. During the last, deeper correction in March/April of 2014, it took an entire month for the sector to base before resuming the march higher. With that in mind, trying to nail the bottom is likely a fool’s bet. Bear in mind that simply trading sideways is a very realistic outcome with timing of the first interest rate increase from the Fed still up in the air: September, as has been expected, or delayed to December. And, this dip isn’t as insular as last year’s pull-back.

Year-to-date, it’s still been great to be a biotech investor. Where the S&P 500 is now down 4%, IBB is up 12%, and the equal-weighted XBI (more indicative of small- and mid-cap performance) is up 14%.

Esperion Therapeutics (ESPR) jumped the gun on Monday, detailing the outcome from an end-of-phase 2 meeting with the FDA that took place last week. The company hadn’t planned to discuss the outcome until receiving minutes from the meeting this September, which made Monday’s news a bit out of left field.

Most importantly, Esperion confirmed that data from a planned cardiovascular outcomes trial - which will require 5+ years, tens of thousands of patients, and >$300 million - will not be required for approval of the company’s cholesterol-lowering drug, ETC-1002. ETC-1002 is basically eligible for the very same label that Regeneron’s (REGN) PCSK9-inhibiting biologic Praluent received just a month ago, initially targeting hypercholesterolemia patients in the “secondary prevention” setting. Though smaller than the market that Esperion has been talking up, with a successful phase III program ETC-1002 could be indicated for 9-11 million patients in the U.S. Though ESPR made a hasty slide to recent lows, we remain bullish on the equity.

You can learn more about Mehta Biotech Capital here: