Few industries have recovered from the malaise of the global financial collapse of 2008 quite like pharmaceutical stocks.
Since January of 2009, the Dow Jones U.S. Select Pharmaceuticals Index has skyrocketed 300% in the markets, easily outpacing the benchmark S&P 500, which itself has gained an impressive 150% over the same time frame.
A significant chunk of the turnaround in pharmaceutical stocks occurred quite recently. In 2013, the Dow Jones Pharmaceutical Index gained 35%, and in 2014, it added 30% in market value.
The new year shined very brightly for pharmaceutical stocks in general, with the index shooting up to nearly 9,662 points on March 20, up nearly 18% from the start of 2015. With more than three quarters remaining, Big Pharma looked to be on a roll.
Then something happened. After a sharp but quick correction, bullish investors of pharmaceutical stocks attempted to build off of March’s high.
While the bulls were successful in incrementally raising the ceiling of the index’s trend channel, each attempt was immediately responded to by the bears. This volatile motion created the dreaded broadening wedge pattern, which has steeply negative implications for publicly traded pharmaceutical stocks.
No one is suggesting that Big Pharma is the next Greece. However, there are critical warning signs that even the most reputable of pharmaceutical stocks are exhibiting — signs that could lead to near-term problems if they are ignored.
Here are three pharma companies that might see some choppy waters ahead.
GlaxoSmithKline (GSK)
On surface level, drug manufacturing giant GlaxoSmithKline plc (GSK) may seem an odd choice for a volatility warning. GSK stock is favored in the markets for its generous dividends payouts, and it recently received a ratings upgrade by research firm Liberum.
But GSK stock is a rollercoaster ride — one that will give motion sickness to investors of pharmaceuticals stocks looking for yields and stability.
In the two-and-a-half years since January 2013, GSK stock has netted a paltry 7.64% in the markets, yet the difference in the high and low over the same time frame measures a comparatively large 36%. Year-to-date, GSK stock is down 3.1%, which provides an important clue as to how irregular the trading behavior for GlaxoSmithKline shares can be.
Even worse, bullish investors of GSK stock have shown little progress in reversing a selling cascade that began in mid-April of this year. The overbearing pressure has resulted in GSK stock trading at the lower end of its declining trend channel. If the bulls don’t get something going soon, we could soon see share prices drop below $40.
Given the sudden shift in market sentiment for pharmaceutical stocks, be careful with GSK stock, which has a history of unpredictable dynamics.
AstraZeneca (AZN)
It’s been a rough start to the year for Big Pharma stalwart AstraZeneca plc (AZN). In the days following the release of its first quarter results on April 24, AZN stock lost more than 6% of market value, a victim of investor skepticism amidst a lackluster financial performance.
The biggest impact to top-line sales came from knock-off variants of its popular Nexium drug — a direct consequence of AZN stock’s failed patent wars. AstraZeneca’s management team is taking things in stride, choosing instead to focus on its oncology therapeutics efforts, but will it be enough to overcome big questions in the markets?
Year-to-date, AZN stock is down 8%, having absorbed the aforementioned news as well as its recent setback concerning its termination of a partnership with Amgen Inc. (AMGN).
The fracturing of the relationship was precipitated by failed trails of a psoriasis drug in which human subjects reported experiencing suicidal thoughts after taking the drug. Since the public disclosure of the termination, AZN stock dropped 5.5%.
The monthly technical chart for AZN stock doesn’t provide much optimism either. The defining feature is a sharply declining year-long trend channel that is in stark contrast to AZN stock’s earlier run-up.
In addition, July’s price action so far is characterized as an “inside day” pattern — a Japanese candlestick term to describe a session’s trading range that is inside the trading range of the prior session. While it’s very early into the month, the bearish implications of AZN stock’s chart as a whole is difficult to ignore.
AZN stock may eventually recover … but expect near-term pain for now.
Merck (MRK)
Out of the pharmaceutical stocks mentioned on this article, Merck (MRK) has the most positive outlook.
Just recently, MRK stock ticked up 0.76% when it was announced that the Big Pharma giant sold its license for a preliminary-stage migraine solution to Allergan PLC (AGN). The reported upfront cost to Allergan was a cool $250 million in exchange for exclusive international rights to further develop and market the migraine treatment.
Year-to-date, MRK stock is technically in the black, although only by an unimpressive 1.4%. In fact, Merck shares have pretty much gone sideways in the past year — down 1%. It also had its fair share of negative surprises, particularly the one-week period last year between October 8 and 16, where MRK stock lost 11% of market value before quickly regaining lost ground.
While it may seem foolish to have bearish concerns towards a blue-chip giant like Merck, the charts sing a different tune. MRK stock appears to be forming a broadening wedge formation similar to that affecting the pharmaceutical stocks index. This almost surely means further choppiness ahead, and if the bears smell blood in the water, MRK stock could potentially take a trip down to around $48 before it finds technical support.
Over the long-term, Merck has many positives that make it a desirable investment, but for now, MRK stock may soon be facing some turbulence.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
