Last night on CNBC’s Fast Money Meg Tirrell interviewed Merck CEO Ken Frazier. As usual, Meg ran a great interview.
Since healthcare related stocks are not my forte I found myself looking down at my Bloomberg screen (multi-tasking) during the interview. I wanted to get a sense how big Pharma stocks like MRK have performed in comparison to Biotech stocks. This on a day when Biotechs both large and small imploded, with the Nasdaq Biotech etf, IBB closing down 3.5% and nearly 14% on the year, and the S&P Biotech index closing down 5.5%, now down 18.5% on the year.
First let’s look at the XBI. Yesterday it broke key two year support, down 37% from its all time high made last summer:
From its 2014 lows, to its 2015 highs the XBI rallied, more than 130%, but has now broken the long term uptrend:
I see similarities between the Biotech run and the Nasdaq’s last dash in the late 1990s into its early 2000 highs, and its subsequent collapse:
Not pretty. Back to MRK, like other big Pharma stocks their charts are different than Biotech. MRK and others bull market gains were slow and steady over years, but many made highs in early 2015, and have a sort of rolling over feel. While many large cap pharmas sport healthy dividend yields and cheap valuations, momentum is waning, with MRK now below the 5 year uptrend and threatening to break key support at $50, the 2013 breakout level:
There are exceptions. Bristol Meyers (BMY), while down 10% from its recent highs, has held its uptrend. But $70 looks like formidable technical resistance and possibly an epic double top. It’s likely a great spot to take profits on a bounce, or possibly fade a breakout:
Not all big Pharmas are created equal in yield or valuation. MRK has a 3.6% dividend yield, trades about 13.5x expected 2016 eps, which consensus has growing 5% vs BMY which trades at 27x expected 2016 EPS that show grow 20%. I have to check why EPS is expected to have such a large bump from low single digits as sales growth is only expected to be 6% from 3% growth in 2015.
Any way you look at Big Pharma-Tech, momentum is waning. At its core it has to do with two things. Scrutiny on drug pricing, which will remain a hot topic in a presidential election year. And the fact that a good bit of the performance had to do with consolidation in an unparalleled m&a frenzy fueled by cheap borrowing costs. It’s our view that you want to avoid Biotech, as they are likely to overshoot on the downside, as they did on the upside, and pick your spots in big Pharma, as we did late last year in Pfizer (PFE – here) and look to spike the yield when possible in a group that is likely to remain side-way-ish.