Nasdaq 100 component Vertex Pharmaceuticals Incorporated (VRTX) fell a staggering 20.5% on Thursday after discontinuing development of a major pipeline candidate for the treatment of liver disease. The $70.4 billion company ranks 16th out of 702 pharmaceutical and biotech companies trading on U.S. exchanges, generating a swiftly negative reaction on the iShares Nasdaq Biotechnology ETF (IBB) and other sector plays.

Key Takeaways

  • Vertex Pharmaceuticals fell more than 20% in one session after discontinuing a drug candidate.
  • The downtrend could bottom out quickly between $180 and $200.
  • The stock could enter a long period of range-bound action before a larger-scale recovery.

Vertex has benefited from cash flowing into the sector as a result of the pandemic, even though it has no major candidate in the race for a vaccine. However, a successful drug pipeline has translated into a decade of rapid growth and an endless string of new highs. Even so, the stock has traded poorly since posting an all-time high at $306.08 at the start of July and has now dropped more than 30% off the summer peak.

This week's downdraft has also broken support at the 200-day exponential moving average (EMA) for the first time since 2016, confirming a downtrend that shows plenty of support below $200. However, bottom fishers should probably avoid exposure until the descent drops through that level and downside momentum eases. That's likely to take several months at a minimum, given the sheer force of this week's selloff, which posted the highest volume since 2013.

Wall Street analysts lowered targets after the news but haven't changed ratings yet, with a "Moderate Buy" consensus based upon 13 "Buy" and 5 "Hold" recommendations. No analysts are recommending that shareholders close their positions. Price targets currently range from a low of $267 to a Street-high $328, while the stock opened Friday's session nearly $50 below the low target. Expect more targets to get lowered in coming days, with this potential revenue source getting taken off the table.

Momentum is the speed or velocity of price changes in a stock, security, or tradable instrument. Momentum shows the rate of change in price movement over a period of time to help investors determine the strength of a trend. Stocks that tend to move with the strength of momentum are called momentum stocks.

Vertex Pharmaceuticals Long-Term Chart (2000 – 2020)

Chart showing the share price performance of Vertex Pharmaceuticals Incorporated (VRTX)
TradingView.com

A parabolic rally topped out at $99.25 in 2000, posting a high that wasn't challenged for the next 14 years, ahead of a steep decline that "burst the bubble." It settled at support in the single digits in 2004 and turned higher, stalling in the mid-$40s in 2006. That level marked resistance into 2013, when the stock confirmed a breakout, with subsequent upside completing the long journey into the post-millennial peak in 2014.

Mixed price action finally cleared that barrier in 2017, giving way to a shallow advance, followed by rapid gains into the July 2020 all-time high above $300. This week's selloff is rapidly approaching the 2018 and 2019 highs in the $190s, marking strong support that should slow or end the downside. The 50-month EMA is now lifting into the same price zone, raising the odds for a strong bounce at or below $200.

However, timing isn't fortuitous for a reversal in the next few weeks because the monthly stochastic oscillator is engaged in an active sell cycle that predicts weakness all the way into year end. In turn, this suggests that the stock will bottom out quickly and enter a range-bound phase that could last for months before lifting into a new uptrend or breaking through the trading floor and heading for much lower price levels.

Range-bound trading is a trading strategy that seeks to identify and capitalize on stocks trading in price channels. After finding major support and resistance levels and connecting them with horizontal trendlines, a trader can buy a security at the lower trendline support (bottom of the channel) and sell it at the upper trendline resistance (top of the channel).

The Bottom Line

Top biotech performer Vertex Pharmaceuticals lost more than 20% of its value on Thursday after discontinuing a major pipeline candidate.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.