| March 23, 2020
Biopharma has provided one of the few defensive sectors during the coronavirus rout and our news sentiment data can help investors make the most of it.
The great hope that someone will develop a coronavirus vaccine has seen certain companies within the BioPharma space make massive stock market gains.
And whilst the terrible human cost of the virus makes us reluctant to talk of speculation at this time, it is a fact that the Biopharma sector happens to be one in which our news sentiment data has been proven to be of particular value to investors.
In fact, there happens to be more high-quality research proving the value of our data in BioPharma than in any other sector, and with most stocks falling precipitously, it offers one of the few remaining oases still available to investors.
A case-study recently written by our data science team, for example, uncovered a close relationship between the number of times a company was co-mentioned with COVID-19 in the news and its stock price.
The chart below shows the regression analysis of the relationship between co-mention volume with cumulative excess returns, over the entire period since January 14th.
The same study using share of news on February 14 (roughly a month earlier) is shown below.
This shows that it already provided an accurate forecast of where the three stocks that were positive outliers - Moderna, Regeneron and Gilead - would end up in roughly month’s time on March 12.
Even before the epidemic, however, the value of RavenPack news analytics in the BioPharma space was already well documented.
For example, research carried out by advisory firm Empirical Research Partners, using RavenPack data, showed how the market did not appear to efficiently price in many important news events in the Biopharma sector, providing investors with an opportunity to exploit the delay to generate alpha.
In the case of news announcing a new drug’s patent approval, the rise in the stock price on the day of the release was usually not very large.
In fact, Empirical found the stock price would often continue drifting higher after the announcement for up to a year ahead as it steadily absorbed the good news into the stock price.
Stocks that benefited from positive patent sentiment as gauged by the RavenPack news sentiment index would make an average of 7.0% more than the sector over the next year.
Referring to the chart above, Rochester Cahan, the U.S Portfolio Strategist at Empirical says: “So what you can see in the middle of the chart is that on the news day, if you do get a positive patent approval, yes the stock does bump up a little bit but not huge, but what is really intriguing is that by the end of the year - so one year later - the stocks that had positive patent news on average outperformed their sector by 6-700 basis points. And those that have negative patent news underperformed by 100-150 on average.”
He goes on to say: “If you are a fundamental analyst covering the sector and your stock gets a new patent approved you might think ok that’s useful but on average such stocks have outperformed the market by 7.0% points relative to their sector.”
The chart below shows the one-year returns following other major news events.
“What we are looking at here is the events that lead to the biggest one-year price drifts after the fact,” says Cahan.
Note how the event which generates the highest returns was ‘product pricing’.
In this case, it was found that RavenPack’s news sentiment worked in a contrarian fashion.
After news the company was raising prices - considered positive - the price actually declined versus the rest of the sector over the next year; whilst when the news was about price cutting - considered negative - the price actually rose by over 7.5% over the next year.
The explanation for the contrarian effect was partly that it was due to the recent drug pricing scandals.
BioPharma particularly lends itself to this type of news sentiment analysis because of all the “moving parts,” says the strategist, “a lot of it has to do with the regulatory drug approval process, FDA and all of that, particularly in the U.S.”
“One of the really cool things about the Ravenpack database is that you have in that something that is called ‘event sentiment’, so instead of calculating sentiment for the entire news story, what the technology does is actually identify pre-defined events that can occur to companies, so, you know, like ‘announced earnings’ or ‘subject of a takeover’,” says Cahan.
“In every industry, you can probably find events that are underpriced by the market, at least, initially,” concludes Cahan.
Traders can easily tackle Alternative Data with the RavenPack Analytics Platform, which includes sentiment data on over 250,000 individual entities and 6,800+ market-moving events, available on visual dashboards or via web APIs. Request a trial today.
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