Back in April, we purchased shares of the SPDR S&P Biotechnology ETF (XBI), which as of August 1st was up approximately 20%.
However, its sister ETF, the SPDR S&P Pharmaceuticals ETF (XPH), had remained relatively flat through mid-July.
One of the reasons for the delayed growth could be a function of the ETF’s composition. While XBI consists of a number of small companies, XPH contains many big, common “household names” – Johnson & Johnson, Merck, and Pfizer to name a few.
These companies tend to be more stable than biotech companies, and as such took less of a drop from the Turing Pharmaceuticals affair. However, they also are slower to grow, as you can see in the chart below.
We had been closely following XPH since purchasing XBI in April, noting several reasons to expect future growth.
For one, several companies focused on mid- to late-stage drug candidates that look promising, rather than starting a new drug from scratch, saving significant money and time.
Some companies had also divested “non-core” business, enabling them to better focus on their strengths. A number restructured so as to cut costs and streamline operations.
Additionally, new products that gained FDA approval last year should start generating revenues in the near future.
In mid-July, XPH broke back up through our Buy Threshold, and although it was out of the “buy zone,” we purchased shares in early August expecting the ETF to continue its climb.
Unfortunately, like the price increases seen in March and May 2016, this recovery was only temporary. Had we been stricter about following our strategy, we either would have purchased shares earlier when the fund was closer to $40/share, or would have held off and not purchased at all.
We all make our mistakes, and I’m not afraid to admit that this was one of mine.
Fast-forwarding to November, the XPH chart below demonstrates how the ETF leveled and then resumed a downward trend. It not only fell through our Buy Threshold set in August, but in November also fell through a new, lower Buy Threshold.
Of note, the pharma industry was once again the victim of bad publicity after the Department of Justice announced an investigation into allegations of price collusion between Teva Pharmaceuticals, Mylan, Endo Pharmaceuticals, and others, resulting in a sharp drop in early November.
It still appears that this sector is overly depressed, with many companies suffering from collateral damage due to a few bad actors.
The industry still appears to have many upsides discussed above that are still valid, making its long-term outlook positive.
With XPH again below the Buy Threshold, we purchased additional shares in early November…this time before it climbed above the threshold.