Biotech, drugmakers, healthcare new champions of the stock market …


Scientists researchers laboratory biotech
A couple of chemists
celebrating biotech’s big week.


U.S. Army
RDECOM / Flickr



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
$700 million during the three days ended Friday, the biggest
inflow since early November for a period of that length.


ibb fund flowBusiness
Insider / Andy Kiersz, data from Bloomberg

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 favorable 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, t

he 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 SP 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.


ibb spy vol spreadBusiness
Insider / Andy Kiersz, data from Bloomberg

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 SP 500, it’s a welcome sign for a an industry just
finding its legs again after some turbulence.

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