In recent years, the decision of whether to own big pharmaceuticals or big biotech has been easy. Until recently, the problems facing the large drug manufacturers -- such as Vioxx and similar products having various issues -- have driven these stocks to multiyear lows.
This was a boon for the large-cap biotech stocks, as the so-called "safe" drug stocks were no longer safe, forcing money-seeking pharmaceutical exposure to other areas, such as biotech. Not the start-ups or single-product companies, but the more mature, established companies that became an alternative for investors.
There was a lot of debate over whether these larger biotech companies were the new big drug companies, with their deeper pipelines of products and better growth prospects. Most investors bought into this story, whether out of belief in their prospects or out of the necessity to keep pharmaceutical exposure in their portfolios.
As a result, the large-cap biotechs, such as
, rallied, while the big drugs suffered through a horrific decline on litigation concerns and a plethora of other issues associated with their drugs.
Well, the good fortune of biotech based on the bad fortune of popular drugs seems to have come to an end. With the large-cap drug stocks having been sold and the biotechnology stocks bought, the roles have been reversed. The biotech stocks now have the greater risk.
Suddenly, there are issues with existing products for Amgen -- with its two best products, in fact. There are also concerns with the ability of these companies to maintain their growth rates. It is an issue of decelerating growth that may be impacting these stocks now. Another concern facing these stocks is a tougher regulatory environment, as a consequence of the drug controversies.
The current environment is promoting better opportunities, despite their slower growth, in the large-cap pharmaceuticals. This is evidenced by the charts as well. Again, this is not a unilateral comparison, as there are a few standout stocks, but in general, we would favor big drugs over biotechnology at this point. We will compare Amgen and
to demonstrate our point.
Merck has been rallying over recent months, a rally that started in mid-2006 and has been gaining upside momentum of late. The stock has made an orderly advance, forming consolidations along the way. This is bullish price action; the gains are held, and these consolidations allow the stock to regain upside momentum without becoming extended.
The recent rally that began in April began with a gap higher on increasing volume. This is a sign of strong demand for the stock. We would use the current pullback to be a buyer of Merck.
Compare this with Amgen over the same time frame, and we find the complete opposite occurring. Since mid-2006, Amgen has traded in a sideways range, preventing any real upside progress. Then, after an aborted rally attempt in January, the stock entered a sharp decline and remains in this intermediate-term downtrend. This weakness has been accompanied by increasing volume -- a sign of distribution. There is still significant downside risk in this issue, and a break of the $52 level would signal that a new down leg is underway.
At the time of publication, John Hughes and Scott Maragioglio were long Merck. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.