Don’t look now, but there’s some competition brewing atop the equity market standings.
US indices have been ruled by mega-cap technology companies and financial firms for much of the period since the presidential election in November. But after some bullish news last week, drug developers now look poised to give them a run for their money.
The Nasdaq Biotechnology Index (NBI) surged 9.2% over the five days, its biggest increase since the week of the election. Portola Pharmaceuticals and Clovis Oncology led the charge for the 162-company gauge, both climbing more than 55%.
In addition, an exchange-traded fund tracking the gauge absorbed more than $US700 million during the three days ended Friday, the biggest inflow since early November for a period of that length.
While a significant portion of post-election stock market gains have resulted from optimism around proposed political policies, biotech drove returns the old-fashioned way: by getting good news.
According to recent reports from Kaiser Health News and Politico, the Trump administration is preparing an executive order that’s shaping up to be favourable to drug companies. On Tuesday, The New York Times reported on the contents of a draft of the executive order, reaffirming the administration’s likely more relaxed, industry-friendly stance on drug pricing.
That marks a stark departure from the anti-drugmaker rhetoric floated by Donald Trump in recent months, with the president even going as far as to say back in January that biotech companies are “getting away with murder.”
It’s the latest twist and turn for biotech stocks, which have been taken for a wild ride since the election. The NBI rose a whopping 12% in the week following November 8 amid expectations that Trump would have a positive effect on the group, which was blasted by Hillary Clinton on multiple occasions on the campaign trail.
But it wasn’t that simple, as Trump made comments over time that led investors to believe that he too was targeting drugmakers. For instance, on March 21 said that he wanted to slip drug pricing into the GOP Obamacare replacement plan. The NBI dropped 2.8% that day.
While the future for drugmakers may have looked bleak at times, the recent surge in index was actually foreshadowed by options traders. As of May 18, they were paying the lowest premium since October 2013 to protect against losses in the NBI, relative to hedges on the S&P 500, Bloomberg data show. That’s an extremely bullish signal.
Now that things have been looking up for biotech, investors are starting to pay a higher premium to protect gains.
Beyond the recent news flow, investors may also be buying biotech shares in preparation for the earnings recovery the sector is expected to enjoy in the second half of the year.
Drugmakers will grow profits by 5.7% in the fourth quarter, lifting its full-year 2017 earnings expansion to 4.8%, according to estimates compiled by Bloomberg. While that will lag the broader S&P 500, it’s a welcome sign for a an industry just finding its legs again after some turbulence.