Concerns about increased government scrutiny on drug pricing have led to a well-publicized downturn in biotechnology stocks, but large-cap pharmaceuticals have also begun feeling the pain. With some stocks in the sector already breaking down, several names — including Merck & Co. Inc. (MRK) — look vulnerable to further downside in the weeks ahead.
The weakness in biotech has caused the iShares Nasdaq Biotechnology Index (ETF) (IBB) to lose more than a third of its value since its mid-July high. Large-cap pharmas have been slower to roll over, but this week has brought breakdowns in both Pfizer Inc. (PFE) and Abbott Laboratories (ABT). One result of these trends is that Health Care SPDR (ETF) (XLV) has fallen to a key support level at $65.
It will take very little in the way of additional downside from here to push the entire healthcare sector into breakdown territory.
Pharmaceutical stocks that have not yet broken down stand to suffer the most if the downtrend continues.
To varying degrees, Merck, Eli Lilly and Co (LLY), AstraZeneca plc (ADR) (AZN) and Bristol-Myers Squibb Co (BMY) are vulnerable at their current levels, as shown in the charts below.
All of these stocks are well-supported by their healthy balance sheets and above-average dividends, but the rhetoric on drug pricing is only likely to increase, rather than fading away as an issue, as the election draws closer.
BMY, 3-Year Chart
Keep a close eye on all of these stocks, and be ready to capitalize on a breakdown in the coming weeks.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
