Why Did These 3 Biotechs Fail to Rally?

Why Did These 3 Biotechs Fail to Rally?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Last week saw a strong rally across the biotech sector, with more than 100 companies ending the week in positive territory. Yet unlike other biotech rallies so far this year, there were also a fair number of losers. As a result, broad-based biotech indices such as the NASDAQ Biotechnology (^NBI) showed only modest gains for the week, ending up 2.14%.

With that in mind, here's a look a three biotechs that failed to rally in this sea of winners.

Why Incyte got injured
Incyte Corporation limped along last week, falling by 2.80%, which is somewhat surprising given the company's stellar performance year to date. Although a clear-cut reason for Incyte's tepid week isn't obvious, my bet is that the market had a mildly adverse reaction to a recent private offering to the tune of $750 million.

Per the terms of the deal, every $1,000 in notes can be converted into 19.3207 shares of common stock. In short, the offering is dilutive in nature, but definitely not something investors should dwell on going forward. With growing sales of its blood-cancer drug Jakafi and a number of clinical catalysts on the horizon, my bet is that Incyte is probably going to resume its upward trend.

That said, I personally find Incyte shares to be too rich for my blood, given that the company already has a stately market cap of $7.5 billion, and is still a good ways from becoming cash flow-positive. Simply put, Foolish investors with a long-term outlook might be best served by exercising caution with Incyte for the time being, even though the company does have a number of short-term catalysts.

Questions at Questcor
Questcor Pharmaceuticals
continued its recent downward trend ending the week by falling another 2.26%. It's no secret in the biotech industry that Questcor is being investigated by the U.S. Attorney's Office for the Eastern District of Pennsylvania for its marketing practices for Acthar.

Acthar, the company's sole commercial product, is currently approved for 19 different indications. And Acthar sales have been growing at a breakneck pace the last few years, with sales increasing an astonishing 21% over the last two quarters alone. As such, Questcor shares are selling at a mere six times their annual sales, making the company a rare relative bargain in the biotech sector.

It seems like this investigation is scaring investors, and even steadily growing Acthar sales don't seem to slow the shares' recent slide. Questcor shares are now down nearly 13% this quarter, despite the company's growing revenues and increasing dividend.

Not knowing any of the details of the pending investigation makes this a hard call, but at just six times sales, you have to imagine that at least some of Questcor's risk is already priced into its shares. And the fact that sales are still showing positive momentum makes me believe in Questcor's long-term prospects. In short, I think that investors may want to keep a close eye on Questcor, based on its fundamentals.

What's troubling Techne
Techne Corp
also failed to fall in line with the broader sector rally, dropping 1.72% last week. The good news is that this minor drop appears to be little more than traders playing Techne for its quarterly dividend of $0.31 per share, most recently paid out on Nov. 25. It's not uncommon for stocks to rise and fall around their dividend payments.

So does this modest weakness represent a good entry point? I believe the answer is no. Techne has grown sales of its clinical diagnostic products modestly since acquiring Bionostics Holdings for $104 million in cash last July, but this has fueled a nearly 30% climb in share price. As a result, Techne shares are now priced at more than 20 times annual sales. Foolish investors may thus want to look elsewhere for better bargains.

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The article Why Did These 3 Biotechs Fail to Rally? originally appeared on Fool.com.

George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published