Why Being Patient Matters in This Market

In this issue:
  • The Big Picture: Why Being Patient Matters In This Market
  • In Depth: New EBS Pick – Greatbatch Inc. (GB) An Industrial Medical Equipment Turnaround Story with a Twist
  • EBIS Portfolio Alerts: EBIS Portfolio Components Show Some Grace Under Pressure
  • News Update: Research Stage Biotech Companies Feel the Pinch

The biotech sector again fell on the week that ended on August 14th, along with the S & P 500.  On the negative side of the ledger, the Nasdaq Biotech Index (NBI) closed the week below the 3900-4500 area for the second straight week. So 3900 was key support, but now becomes resistance.  That means that there may be some selling if and when the index bounces back toward 3900. And while 4500 has been our upside target, NBI needs to close back above 3900 before we start considering 4500 again.  NBI also remained below its 50-day moving average for the past two weeks, which may be very meaningful at some point in the future if things don’t change.   It is possible that NBI may work its way lower in the short term, with the 3600-3700 becoming the next support area.
NBI biotech index 2015 08 14 SPX chart 2015 08 14

On the positive side, if this is a temporary correction, it may give us a good opportunity to buy some individual stocks that have pulled back to more attractive prices.

No matter what, now is the time to pay close attention to how the stocks in our EBIS portfolio are doing as well as looking for other stocks to add to a Buy list.  As the EBIS list shows below, the stocks in our portfolio held up fairly well during the selling spree last week. This is due to the fact that, all but Neurocrine Biosciences (NBIX), the EBIS portfolio companies that we are currently recommending feature products used for research, testing, and patient monitoring.  They are also profitable and delivered credible earnings and positive guidance in their most recent quarter.   Also important is the inclusion of the inverse biotech ETF (BIS) as a hedge.  Those who have followed that directive are likely to have fared better in the past couple of weeks.  Here are three sensible things to do in the short term:

  1. Monitor the price of current positions.
  2. Watch the response of your positions to external forces, especially the Fed, China’s economy, and the current political climate.
  3. Consider using BIS to hedge your biotech portfolio. Our July 27th, 2015 update has an excellent tutorial on how you may go about doing this.  For further reading on portfolio protection techniques and risk management also consider a copy of Dr. Duarte’s “Trading Options for Dummies.”

In Depth:  New EBIS (Emerging Biotech Investment System) Pick: New Recommendation – Greatbatch Inc. (GB)

Alert New Pick:  Greatbatch Inc. (GB) – Buy up to $55.  Sell Stop $44.

Greatbatch Inc.: An Industrial Medical Equipment Turnaround Story with a Twist

Greatbatch is a restructuring story which looks ready to move higher over the next 6-12 months.  The company manufactures medical equipment under contract to original equipment manufacturers with a focus on the cardiac pacemaker, orthopedics, and spinal cord stimulation segments.  And, here is the twist; it also manufactures batteries and electronic equipment for oil drilling rigs. 

GB gets an 8 EBIS rating, garnering a BUY recommendation.  The company has a diversified product line and has been making strategic acquisitions and selling off unprofitable business lines as it restructures.  And here is the big news.  Even as GB moves through a transitional period, in a challenging environment, it has continued to make money.   Consider the following:

  1. It’s spinning off its spinal cord stimulator business into a separate company it will call Nuvectra, while it continues to generate revenue from manufacturing the equipment for Nuvectra. Spinal cord stimulation is likely to be a money loser or a reduced revenue generator under the Affordable Care Act, despite the fact that it may be expanding its focus beyond pain management into the treatment of paraplegia.
  2. GB has recently bought CCC Medical, enhancing its cardiac neuromodulator equipment line and has already seen an increase in sales contribution from the acquisition. Cardiac remains profitable for now.
  3. It’s growing its orthopedics equipment business. Although the Affordable Care Act could lead to some pricing pressure on this line of products, the demographics for joint replacements are only improving as the population ages. Also, the trauma related product line, including equipment to repair fractures, could benefit from defense related developments in the future if the geopolitical climate worsens.
  4. The company is on schedule to move significant manufacturing capacity to Mexico, expecting significant cost reductions and a positive contribution to the bottom line. This could be a negative in the current political environment but it is something that could lower costs and increase earnings for GB.
  5. Most of the company’s product lines are growing except for the vascular related segment, which is separate from its cardiac product line. In its recent conference call, the company cited improving visibility for this line of business in the second half of 2015 and into 2016; as its customers work through inventory and new products are introduced, especially in GB’s catheter line.
  6. GB has a strong engineering and design team which is addressing issues in the energy sector, including improving design for batteries and exploration equipment. Any turnaround in energy could also provide a boost to the stock price.

Here are the EBIS details:

The EBIS Score for GB is 8 based June 30, 2015 data.  

  • Cash on hand: (+1) GB reported $72.34 million on hand up from $61.58 million in September 2014. 
  • Cash on Hand growth (year over year) (+1): The year over year cash grew by 17.4%.
  • Revenues (present or not): (+1): The company delivered a small revenue growth rate in its June quarter compared to the year earlier. What is important is that its revenues are not falling even as the company restructures.
  • Revenue growth (10% or greater): GB is not growing its revenues currently but has given positive guidance for the second half of 2015 and 2016.
  • Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1)GB has a 0.91 worst case scenario ratio. That means it can cover all of its liabilities in a worst case scenario without borrowing money.
  • Earnings (Present or Not Present): (+1): GB reported flat earnings growth in its June quarter. Again the company is restructuring and still makes money.
  • Net Income Growth (Year over Year): (+1): The company has delivered stable but not growing earnings.
  • Products on the market: (+1):  GB has a broad array of products on the market and a broad customer base.
  • Pipeline Strength: (+1): GB is working with its customers and has a credible pipeline in place.
  • Late Stage Clinical Trials and Product Launches: (+1): The company’s pipeline is nearing launch of new products later in 2015 and 2016.

The EBIS system consists of eleven fundamental criteria that are updated every quarter after the earnings results for each company are published. Each criterion gets a value of +1 or zero.  A total of 8 or more points earn a Buy rating.  A total of 5-7 points earn a Hold rating.  Less than 5 points delivers a Sell or Avoid rating.  EBIS was introduced in the June 15, 2015 issue of the Biotech Report.

Portfolio Update:  EBIS Portfolio Components Show Some Grace under Pressure

Our EBIS portfolio held up fairly well in the week that ended on 8/14/15 despite a volatile market and selling pressure in the biotech sector.  See details below:

Masimo Corporation (MASI) – Buy up to $44.  (Buy issued July 20, 2015. MPP 40.65).  8/14/15 closing price: $42.70

Masimo manufactures equipment modules that monitor vital signs during difficult clinical and logistical circumstances.   Masimo pioneered Signal Extraction Technology (SET) a process that lets the pulse oximeter measure the oxygen content of blood without punctures of arteries at states of low blood pressure, where it become a most critical piece of data. 

MASI reported adjusted earnings of 43 cents per share, 13 cents ahead of expectations in the second quarter of 2015, while revenues came in at $ 155 million ahead of the $147.93 million estimate.  The company raised its full 2015 guidance to total revenues of $621 million, up from $608 million and earnings per share from $1.48 to $1.51.    The stock remains well within its buying range of 40-44 and keeps a 9.5 EBIS rating based on its June 2015 quarter.  MASI is a well run company with plenty of cash on its balance sheet and a growth agenda.  We like Masimo because it has innovative products, an excellent growth rate, and a nice stash of cash on its balance sheet which it could use to make acquisitions or to plow into research and development. 

Meridian Biosciences (VIVO) Buy up to $21 – 8/14/15 closing price $18.18.

Earnings/Dividend update:  VIVO met its earnings expectations on 7/23 but fell short on its revenues estimates. The company delivered net income of $9.1 million, 22 cents per share on revenues of 48.2 million vs. expectations of 48.9 million.  Management reaffirmed expectations for the full year of revenues of $193 to $200 million. The stock remains near the lower part of its trading range.   Vivo paid dividend of 0.2 per share on July 20th. The dividend yield is a nifty 4.4%, while the stock price is not particularly volatile. This is a combination which makes having a long term perspective worthwhile.

VIVO has a market cap of $767 million but is a consistent money maker.  The company develops, manufactures, and markets diagnostic testing kits focused on gastrointestinal infections, virus detection, and parasitic illnesses.  It also produces reagents and key testing and DNA amplification and enzyme related materials used in research.  It has recently released a new product, the Para Pak single vial transport system for parasite testing which simplifies the transport of samples to the lab by using one vial instead of the more complicated multiple package systems that are currently on the market. 

We expect VIVO to benefit from the global immigration trend and the potential for infectious diseases to expand their territory via travel related transmission channels.  The company has a well established global platform including a recently opened office in Beijing (January 2015).  Dr. Duarte owns shares in VIVO.

Neurocrine Biosciences (NBIX) (BUY 6/16/16 at $46 – 8/14/15 closing price $45.87 – Sell Stop $40)

Neurocrine Biosciences reported a net loss of $24.0 million, or $0.28 loss per share, compared to a net loss of $13.4 million, or $0.18 loss per share, for the same period in 2014. For the six months ended June 30, 2015, the Company reported a net loss of $25.2 million, or $0.30 loss per share, as compared to net loss of $25.2 million, or $0.35 loss per share, for the first half of last year.   Estimates were for revenues of $650,000 and a loss of 29 cents per share. 

The stock has the potential to move to the 55-58 area over the next few weeks to months.  We originally highlighted NBIX in our 5/29/15 update.  We like the stock based on the prospects of its Elagolix drug for treating endometriosis a condition of pre-menopausal women linked to the menstrual cycle and pelvic pain.  Dr. Duarte owns shares in NBIX.  Neurocrine is also advancing phase III clinical trials of its NBI-98854 drug aimed at the degenerative neurological disease tardive diskynesia.   Neurocrine expects further input on Elagolix by early 2016.

Neurocrine is a speculative stock. This is a research stage company with no products on the market but several potential blockbusters at key stages of development and nearing the FDA approval process.

Repligen (RGEN) Buy up to $44.  Sell Stop $32.

Repligen (RGEN) (Trading Buy 4/20/15 – MPP $33.23. Buy 5/11/15 MPP Price $38.45 – 8/14/15 Closing Price $34.78)

Repligen reported revenues of $21.5 million and net income of 11 cents per share on August 6, 2015. Both were ahead of expectations.  Estimates were for revenues of $20.05 Million and earnings of 8 cents per share.  The stock has been very volatile of late but remains within our buy area.  

RGEN is the world’s leading producer of Protein A, the basic component of monoclonal antibodies used for research and biopharmaceuticals manufacturing.  Biogen and other major drugs are based on monoclonal antibodies (MAB). If the number of new MAB drug candidates decreases it could affect RGEN’s earnings for the future.

In a recent presentation, spring 2015, the company reiterated its expectations for rising organic growth rates in the 25-29% range due to recent and scheduled product launches.  The company also noted that they have 350 potential molecules in their pipeline. 

Emergent Biosolutions – Buy up to $34.

Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* $30.63 – 8/14/15 Closing price $34.16) – EBS shares had a very credible week ending on 8/3/15.  EBS reported earnings of 36 cents per share for its second quarter of 2015 beating analyst estimates of 26 cents.  Revenues climbed 14% from the year-ago period to $126.1 compared to an estimate of 124.25 million.   The company also announced that it will spin off its biosciences unit, whose focus is oncology to investors.   See our news section for details and commentary below.

EBS announced receiving a $44 million contract from the Centers for Disease Controls to increase the supply of smallpox vaccine.  The previous week EBS announced a $19.7 million two year contract from the Biomedical Advanced Research and Development Authority (BARDA) on July 20th  an agency of the U.S. Department of Health and Human Services.  EBS also makes BioAnthrax, a preventive anthrax vaccine and is working on a new generation of the vaccine.  Dr. Duarte owns shares in EBS.

Bio-Rad – Buy Limit Raised to $155.  Sell Stop at $138.

Bio-Rad Labs (NYSE: BIO). Buy (5/18/15 – MPP) $146.25 – 8/14/15 closing price $146.25). Bio-Rad remained in a consolidation pattern as it has been during the last few weeks and is giving investors a rare second chance to enter at the original buy area near 146.

Bio-Rad introduced new product, the IH-500 blood typing system, a self contained unit that performs a large variety of transfusion related tests. The product is available in Europe, Asia, Africa, Australia and Latin America.

Bio-Rad beat estimates for its most recent quarter on August 6. Revenues were $506.1 million, down 5.7 percent compared to $536.8 million reported for the second quarter of 2014.  Net income was 0.97 cents per share.  Estimates were for revenues of $498.85 Million and earnings of 78 cents per share.  Biorad’s guidance was sketchy as they cited currency effects as being increasingly negative in the future. 

Update:  Trend Following ETF Model

  • ProShares Dynamic Biotech and Genomics ETF (PBE) (Buy 5/11/15 MPP $55.80 – 8/14/15 Closing price $55.75.) Sell stop $52
  • ProShares Ultrashort Biotech ETF (BIS) – Buy until $29. Stop Loss $25. (Buy 7/27/15 MPP* $27.99.  8/14/15 closing price $28.83.)

*MPP – Median Purchase Price

Dr. Duarte owns shares in PBE and BIS.

Results of trades in Trend Following Model

I-shares Nasdaq Biotech ETF (IBB) (Buy 5/11/15 MPP $352.96 – Sell stop triggered at $363 on 6/29/15 – Gain 2.84%.

I-shares Nasdaq Biotech ETF (IBB) – (Bought 7/7/15 at $375 – 7/24/15 closing price $377.78. Sell stop hit at $380.  Gain 1.33%.

News Update:  Research Stage Companies Feel the Pinch

Companies large and small are pulling back their horns as they mull the effect of decreased payments for therapies from third party payers as the Affordable Care Act and its effects dig in.

  • Roche is pulling away from a joint venture with German firm Wilex. Roche is putting its emphasis on immune system related oncology projects.
  • GlobeImune (GBIM) has hired Cantor Fitzgerald to advise the company of its options. The company’s foray into producing a Hepatitis B vaccine failed at a Phase II trial and the company’s market value has shrunk to $15 million.  GBIM recently layed off most of its staff.
  • Avalanche Biotechnologies (AAVL) has pulled the plug on its gene therapy trial before diving in further into a Phase II trial aimed at treating macular degeneration.