2017: Year of the Great Biotech Comeback

We’re just a few weeks into 2017 trading—but biotech stocks already need to take a handful of pep pills.

The SPDR S&P Biotech ETF (NYSE:XBI) dropped for the third straight trading day to begin the week. It’s now given back nearly all its gains from earlier this month.

But we’re not ready to throw in the towel just yet…

After all, health care stocks exploded out of the gate to start the year.

It was the strongest sector on the market during the first trading week of 2017, launching back above its 200-day moving average for the first time since November. The broad market posted a strong start to the year with the S&P 500 gaining 1.7%. But Healthcare stocks were the bigger winner during week one. The group jumped almost 3% to finish the short trading week near 2-month highs.

But the party stopped there (at least for now). Once again, politicians talked down the biotech stocks. This time, Trump got in on the act as he claimed the pharmaceutical industry is “getting away with murder” when it comes to those pesky price increases…

The result has been some more dreaded downside action in pharma and biotech stocks. The health care sector has finished lower for five straight trading days. After a picture-perfect New Year’s surge, these stocks are back at square one.

But all is not lost…

After 18 months of pain, the market is hinting at a biotech rebirth in 2017.

“There’s every reason to remain optimistic,” our own biotech expert Ray Blanco explains. “Last month, a health care overhaul passed Congress and was signed into law. Called the 21st Century Cures Act, it makes it easier for small biotechs working on lifesaving cures to bring new therapies to market.

“This will be great across the entire biotech universe, but parts of the bill favor certain segments of biotech and pharma in particular. Nearly 1,000 pages long, it addresses everything from drug regulation to innovation to basic research funding.”

And that’s just one of the 2017 catalysts that could send the biotech sector to new highs.

The market’s also on the verge of a potential biotech buyout frenzy…

“In an Ernst & Young poll conducted late last year, 43% of biopharma executives said they had five or more deals in the works, compared with just 6% last April,” MarketWatch reports. “Gilead CEO John Milligan recently said in an interview that buyouts would be a ‘critical’ part of what the company will do this year to put new products in its pipeline.”

While Big Pharma has flagging drug pipelines and patent expirations to contend with (along with the headline risk that comes with Trump on Twitter), a buyout binge could be just what the doctor ordered to give the industry a kick in the pants.

“Big pharma will either have to innovate, or buy innovation through acquisitions,” Ray explains. “FDA reform makes it easier to innovate, too. So it’s a push-pull scenario we are looking now at the start of 2017.”

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning