Large biotechnology funds have diverged sharply in recent months, with the equal-weighted SPDR S&P Biotech ETF (XBI) posting an all-time high while the market-cap weighted iShares Nasdaq Biotechnology Index Fund (IBB) struggles deep within a two-year trading range. This conflict reveals unusual strength at the lower end of the capitalization spectrum, telling us that junior biotech plays are attracting substantial speculative interest.
These issues tend to offer strong upside potential with equally strong risk because the majority of drug applications fail to survive the gauntlet of research trials and FDA approval, or they get undermined by a superior competitive product. That's why many of these stocks can be traded with greater safety during early trial phases, taking aggressive profits before actual results generate further upside or overnight destruction. (See also: The Biotech Sector: A Primer.)
U.K.-based Adaptimmune Therapeutics plc (ADAP) researches and develops T-cell based cancer immunotherapy products, funded through a collaboration and licensing agreement with GlaxoSmithKline plc (GSK). Adaptimmune came public on U.S. exchanges at $19.25 in May 2015 and topped out in the low $20s a month later, rolling into a steep downtrend that posted an all-time low at $3.76 in November 2016.
The stock completed a triple bottom reversal in March 2017 and entered an uptrend that stalled just above $9.00 in September. A rectangular consolidation pattern gave way to a powerful breakout this week, after the company reported earnings and positive research results. Pullbacks into the $9.00 to $9.75 price zone could now offer low-risk buying opportunities in anticipation of a rally that reaches the November 2015 swing high near $15. (For more, see: Adaptimmune and Merck in Myeloma Deal.)
Progenics Pharmaceuticals, Inc. (PGNX) develops a variety of prostate cancer treatments, highlighted by Azedra, currently in Phase IIb trial. The stock ended a strong uptrend near $100 in 2000 and entered a multi-year downtrend that finally hit bottom at $1.41 in November 2012. The subsequent recovery wave stalled just above $11 in 2015, at the same price level that ended an advance into early 2012. A decline into 2016 found support at $3.61, yielding a third failed test at resistance in March 2017.
The stock posted a higher low at $4.60 in August 2017 and bounced off that support level last month. It has now rallied to an 11-month high in a recovery wave that could reach long-term resistance once again in coming weeks. On-balance volume (OBV) has risen to an all-time high, pointing to growing institutional sponsorship while raising the odds for a breakout that targets the low $30s. Pullbacks into the 200-day exponential moving average (EMA) near $6.50 may offer low-risk buying opportunities in this bullish scenario. (See also: Progenics Azedra Succeeds in Mid-Stage Trials.)
Clearside BioMedical, Inc. (CLSD) develops products and therapies to treat blindness and other eye diseases. It came public at $8.00 in June 2016 and entered a strong uptrend three months later, lifting vertically into an all-time high at $25.08 in October. It carved a double top pattern at that level and broke down in December, descending at the same trajectory as the prior uptick before bottoming out at just above $5.00 in March 2017.
The stock ground sideways through the rest of the year and into 2018, testing last year's low in February. Support held into early March when it took off like a rocket in reaction to positive Phase III results for suprachoroidal CLS-TA, which treats macular edema. The uptick stalled and reversed at double top resistance in the low teens, while the pullback into this week has relinquished about four points. The March 5 breakaway gap between $7.90 and $10.00 should offer strong support, ahead of an uptrend that could reach the 2016 high.
The Bottom Line
A basket of biotech stocks with capitalizations below $1 billion are attracting strong buying interest in this March market, posting breakouts that should support superior gains well into the second quarter. (For additional reading, check out: Small-Cap Biotech Stocks to Watch.)
<Disclosure: The author held no positions in aforementioned securities at the time of publication.>