(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of ALKS and CELG.)
Biotech shares surged on Monday following news that Celgene Corp. (CELG) would buy Juno Therapeutics Inc. (JUNO) for $9 billion, while Sanofi (SNY) would buy Bioverativ Inc. (BIVV) for $11.6 billion. The two deals led the SPDR S&P Biotech ETF (XBI) to surge by about 5.5%, and the iShares Nasdaq Biotech ETF (IBB), by roughly 3%. The S&P Biotech ETF tipped a new high, and cleared a critical technical resistance level. (For more, see also: Top 5 Biotech Stocks for 2018.)
The technical breakout in the S&P Biotech ETF is enormous and indicates that more gains are likely to come as the sector comes back to life. The group has struggled since last peaking in July 2015, followed by a plunge of nearly 55%, as drug pricing rose to center stage during the presidential election of 2016. But acquisitions have re-emerged in 2018 and are helping to fuel the group's rise leading to the historic breakout.
The chart below shows how the ETF has had a tremendous breakout, rising above $91, while the relative strength index (RSI) still suggests the rise is not overbought and likely not over.
The breakout in the S&P Biotech ETF is also confirmed by a breakout in the Nasdaq Biotech ETF. The chart below shows that the ETF crossed crucial resistance around $113.50, and could lead to a further rise of about 6%, from its current level on towards $122.50—the next area of resistance. (For related reading, see: Here Is Why a Biotech Bounce Is Coming.)
The rally in the S&P Biotech ETF in 2018 has been relatively broad-based with 22 out of the top 25 trading higher, with more than half rising by 10 percent or more on the year. For the year the S&P 500 Biotech ETF has risen by over 10%, and the Nasdaq Biotech ETF has risen by about 8%.
(Data provided by Ycharts)
Bioverativ and Juno both surged in trading on Monday by nearly 62% and 27%, respectively, after the acquisitions announcements. But they were not the only big winners, with Array BioPharma Inc. (ARRY) and Bluebird Bio Inc. (BLUE) also having big days as well, rising on the coattails of the news.
The group's rise is likely not over, with M&A returning to the forefront of the sector as large-cap biotech and pharmaceuticals companies search for future sources of revenue and ways to bolster their pipelines.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.