Pharmaceuticals

The previous Insight showed that S&P pharmaceutical index outperformance is well supported by both endogenous and exogenous forces. The same is not true for the riskier biotech space. As discussed in previous research, biotech stocks have exhibited all of the characteristics of a mania. Now the forces that propelled the group higher are working in reverse. Speculation is rapidly being reined in, warning that the flows into biotech stocks are drying up. Margin debt has crested, reinforcing that the high-octane fuel to support momentum stocks is starting to evaporate. Biotech IPOs are going from feast to famine: if share prices continue to fall, expected returns will follow suit, warning against expecting further capital inflows. Consequently, we expect biotech stocks to remain on the mania track, which has not entered the bubble-bursting phase (top panel). (Part II) Pharmaceuticals And Biotech Are Parting Ways (Part II) Pharmaceuticals And Biotech Are Parting Ways

Pharmaceutical stocks have broken from their correlation with biotech stocks, and we expected this divergence to be sustained. Pharmaceutical profits remain one of the few bright spots within the corporate sector. Drug demand continues to boom, as measured by consumer spending data. Inventories have moved higher at both the wholesale and manufacturing level, but this appears to reflect demand-driven stocking of product, given ongoing strong pricing power gains. In a deflationary world, the ability to significantly lift selling prices warrants a premium valuation. Yet the S&P pharmaceuticals index still trades at a large discount to its historic average relative valuation. If domestic economic disappointment mounts, as we expect, it will provide another catalyst for a relative performance re-rating. Stay overweight the S&P pharmaceuticals index. Importantly, it will be important to differentiate pharma from biotech, please see the next Insight. (Part I) Pharmaceuticals And Biotech Are Parting Ways (Part I) Pharmaceuticals And Biotech Are Parting Ways