Do These Biotech Rallies Have Legs?

Biotech stocks Regeneron Pharmaceuticals Inc (NASDAQ:REGN) and Biogen Inc (NASDAQ:BIIB) may run into technical troubles

May 16, 2016 at 4:04 PM
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It's been a big day for biotech stocks, with one getting a big boost on blue-chip buyout news, while another soared ahead of potentially "transformative" drug data. Meanwhile, long-troubled Valeant Pharmaceuticals Intl Inc (NYSE:VRX) brushed off news that a major investor liquidated its stake. Elsewhere in the pharmaceutical sector, Regeneron Pharmaceuticals Inc (NASDAQ:REGN) and Biogen Inc (NASDAQ:BIIB) made healthy gains of their own. But can these stocks keep their rallies going?

REGN added 6.1% to $391.95 on news that Temasek Holding more than doubled its position in the stock. The security is also getting a boost after a cover story in Barron's that called REGN "the best bet in biotech stocks," and estimated the shares could add 35% over the next year (subscription required).

REGN is still behind nearly 28% in 2016, though, and today's upward action puts the share head-to-head with their declining 80-day moving average -- a trendline that shut down the stock's most recent rallies. In fact, REGN hasn't closed above this trendline a single time this year. And analysts appear wary at best, with nine rating the equity a "buy" or better, compared to 12 recommendations of a "hold" or "strong sell."

Elsewhere, short interest dropped more than 13% during the latest two-week reporting period, and now represents less than 4% of REGN's total float. While at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have bought to open 1.65 REGN calls for each put over the last 10 weeks -- a ratio higher than 94% of all comparable readings in the past 12 months. This bullish backdrop suggests there may not be enough buying power on the sidelines to help Regeneron Pharmaceuticals Inc (NASDAQ:REGN) power through resistance on the charts.

Meanwhile, BIIB is up 1.6% at $266.26 after the company announced a collaboration with the University of Pennsylvania to create gene therapy and editing programs -- a project that could cost as much as $2 billion. Longer term, the stock is down 33% year-over-year. And since last July's huge bear gap, the shares have been making a series of lower highs, forming a trendline that could create technical troubles for BIIB.

Traders seem undaunted by the potential costs, however. In fact, the stock has a 50-day ISE/CBOE/PHLX call/put volume ratio of 1.70 -- in the 81st percentile of its annual range. Echoing this call-skewed backdrop is BIIB's Schaeffer's put/call open interest ratio (SOIR) of 0.66 -- lower than 84% of the past year's readings. That indicates near-term traders have rarely been as call-heavy toward BIIB as they are now.

Outside of the options pits, 11 of the 17 analysts providing coverage maintain a "buy" or better rating on the equity. And short interest dropped by nearly 23% during the two most recent reporting periods, now accounting for less than 1% of BIIB's available float. This abundance of bullish sentiment among a weak technical picture suggests an unwinding of optimism could drive Biogen Inc (NASDAQ:BIIB) lower.

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