It was one of the most powerful -- most lucrative – moves of the last six years.
Between January 2011 and July 2015, the NASDAQ Biotech Index (IBB) moved from a low of 95 to a high of 401, returning gains of 322% as compared to S&P 500 returns of just 67%.
Then it all came crashing down.
A year later, the IBB plunged from that July 2015 high of 401 to 240.
As the IBB dropped, we found many biotech stocks had become severely undervalued, trading at extremely low prices. That’s why we recommended Rigel Pharmaceuticals (RIGL) at just $1.95 a share in the April 2016 issue of The Cheap Investor. It hit a high of $2.98 for potential gains of 53%.
We also recommended Adverum Biotechnologies (ADVM) at just $3.55 in the July 2016 issue. It shot to a high of $4.86 for a potential gain of 37% in less than two months.
It’s tough to ignore a sector being fueled by 80 million retiring baby boomers, millions of newly insured Americans, new innovation, new drugs, greater demand for care, and a rash of mergers and acquisitions.
In fact, just weeks after finding its bottom, the IBB has bounced 25% to a high of 299. And I can assure you the run is far from over.
A New Biotech Boom has begun
The biotech rebound was stimulated by earnings growth, merger and acquisition activity, as well as the several catalysts named above.
Amgen (AMGN) – for example – beat second quarter estimates and raised guidance. A 6% jump in revenue with an 11% increase in profits was better than the company had projected. It also lifted full-year guidance to a new range of $22.5 billion to $22.8 billion, and increased EPS guidance by about 20% to a range of $11.10 to $11.40.
Celgene (CELG) reported EPS of $1.44 on revenue of $2.75 billion, beating estimates for EPS of $1.39 on revenue of $2.70 billion. A year earlier, the company posted EPS of $1.23 on $2.28 billion in revenue.
In short, these are exciting times to be a biotech investor.
And, after more than $605 billion worth of biotech mergers and acquisitions throughout 2015, we’re seeing a new wave of impressive deals.
For instance, Galencia just cut a deal to buy Relypsa for $1.53 billion -- a 60% premium – giving it global rights to Veltessa, the first new medicine in 50 years to be approved for hyperkalemia (a condition where there is too much potassium in the blood).
Sanofi (SNY) recently bid $9.3 billion for Medivation.
In June 2016, Merck (MRK) agreed to acquire Afferent Pharmaceuticals, whose lead drug candidate (AF-219) was being evaluated as a treatment for refractory, chronic cough and idiopathic fibrosis. Prior to this deal, Merck paid $8.3 billion for Cubist Pharmaceuticals.
The IBB rally has been spurred by an upswing in large biotech companies, and most of the smaller biotech stocks haven’t participated in this rally yet. That means there are still some great long-term opportunities in smaller biotech names. In fact, I may recommend a new biotech trade in the September 2016 issue of The Cheap Investor.