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Emerging Biotech Investment System (EBIS) Update

By Joe Duarte on September 21, 2015

In this issue:

  • The Big Picture: Biotech Sector Nears Major Decision Point
  • In Depth: New EBIS Pick – DYAX Corp (DYAX) – High Risk, High Potential
  • EBIS Portfolio Alerts: Alert: EBIS Portfolio Pricing Updates
  • News Update: New FDA Commissioner Nominee Could Foster New Climate at Agency

The Big Picture:  Is The Biotech Sector Heading Lower Again?

The Federal Reserve delivered a non-decision decision last week by leaving interest rates unchanged.  And the stock market – including the biotech sector – responded negatively, setting up what technical analysts describe as a potential “retest” of the recent lows in prices.  
NBI biotech index 2015 09 18

This week’s charts are indicative of the potential for lower prices in the short to intermediate term.  First, it’s important to note that the Nasdaq Biotech Index (NBI) has been tracing a very similar price trend pattern to that of the S & P 500 (SPX) after the July 2015 top.  This price pattern similarity has correlated even more closely since the August swoon and the subsequent rebound, a sign that biotech is not likely to escape the general trend of the market.  
SPX chart 2015 09 18


Second, and an equally important point, is that biotech is holding up better than the overall market. NBI is still up 16.5% for the year while the S & P 500 is down 4.9%, as of the close of the market on 9/18/15.  This is further evident because NBI is still above its 200 day moving average (red line) while the S & P 500 is well below its 200-day line.  The 200-day moving average is considered the dividing line between bull and bear markets.   Thus, this is a sign that the odds that the S & P 500 is already in a bear market are higher than they are for biotech, at least as of the close of trading on September 18th.

Finally, we direct the reader to the trend lines and arrows in both charts.  Note that both the S & P 500 and NBI closed below the rising trend line (arrow) which had been acting as price support since the August 24 bottom.  This could be a sign that the sellers have regained the upper hand and that the short to intermediate term could be in the hands of the bears.  The answer should be fairly clear over the next few days.  A significant further breakdown in prices for NBI could take the index back to a test of the 3200 area.

Still, it is clear that these are very unusual market conditions, given the macro environment.  That means that anything is truly possible.  Therefore, we continue to run, block, and tackle and continue our quest for sound companies that over the long term will deliver price appreciation to our subscribers, including this week’s pick, DYAX Corp., which is highlighted in our In Depth section below.  Yet, we recognize that this is a dangerous period in the markets. Thus, we remain cautious commend the following strategy for your existing portfolio:

  1. Monitor the price of all current positions in your biotech portfolio. If your holdings are holding their own, keep them in your portfolio.
  2. Watch the response of your positions to external forces, especially the Fed, China’s economy, and the current political climate.  Always monitor your portfolio’s response to the market and only sell stocks that are showing significant weakness and fall below their sell stop.
  3. Consider using BIS to hedge your biotech portfolio during periods of weakness for the market and the biotech sector. Our July 27th, 2015 update has an excellent tutorial on how you may go about doing this.  Also, see below for our latest BIS recommendation.  For further reading on portfolio protection techniques and risk management also consider a copy of Dr. Duarte’s “Trading Options for Dummies.”
  4. If you choose to buy new stocks, be cautious. A good method for building positions in a volatile market is to buy small lots of stock over a few weeks to months, depending on the overall trend. When this is coupled with a long term time horizon it’s much easier to weather the volatility.

In Depth:  New EBIS (Emerging Biotech Investment System) Greatbatch Inc. (GB) Continues to Surge

Alert New Pick Update:  DYAX Corp. (DYAX) – Speculative Buy Range up to $28.  Sell Stop at $21.

DYAX Corp – A High Risk High Potential Reward Diamond in the Rough

In our weekly Big Picture segment, above, we discuss being cautious on the market.  So it may seem counterintuitive for our monthly portfolio addition to be a speculative buy.   Yet, DYAX is an interesting choice because it’s getting very close to having a real shot for FDA approval for DX-2390.  DX-2390 is a treatment of Hereditary Angioedema (HAE), a genetic disorder that occurs in 1 in 10-50,000 people.    HAE causes swelling of tissues in the body in response to antigens.  DX-2930 is a monoclonal antibody that blocks kallikrein, a key substance in the chemical reaction in the body that leads to the swelling.  In some cases HAE, especially of the tongue or the airway, can be very serious or deadly.   DYAX already has one product on the market, also aimed at treating HAE; Kalbitor.   Sales for Kalbitor in the second quarter of 2015, at $17.8 million, a 7.2% increase measured year over year

DYAX, although having solid fundamentals for its stage of development as a company, is a high risk stock due to its dependence on niche drugs and potential FDA approval issues.    But it does meet the characteristics of a good EBIS stock, especially since it has lots of cash on its balance sheet and good management.  The company reported some 127 million in cash as part of a 413 million current asset stash on June 30, compared to 110 million in total liabilities and some 22 million in current liabilities. That’s an excellent balance sheet for a biotech company in the research to product transition stage where the huge potential growth tends to start if it is successful.   So barring a major change in its finances and its fortunes, it is likely to have enough cash to withstand an FDA approval disappointment, as a company.  The stock would undoubtedly get crushed if there is a failure at the Phase 3 clinical trial for DX-2390 or the FDA does not approve its drug.

DYAX also has some current momentum in a generally downbeat market, which is a sign of strength.  The company seems to think that it has an above reasonable chance to get DX-2930 approved based on the drug being classified as a Breakthrough Therapy by the FDA.  It has recently signed an agreement with an experienced product manufacturer, Rentschler, a sign that the drug has enough promise to move on to the next step.  Phase 3 clinical trials are expected to start late in 2015. 

Investors should consider the following.   There is no guarantee that DX-2390 will be approved for any condition, or that it will sell well in the current and likely future environment of cost cuts in global health care.  Yet, the company’s cash hoard and the fact that it’s signed on with Rentschler and moving on to Phase 3 with DX-2390 for HAE are encouraging at this point and make for a good very speculative pick.

DX-2390 may also be useful in treating eye swelling related to Diabetes. The company plans to register for FDA approval for that indication in 2016.  It also has two other drug candidates in the pipeline, DX-2507, aimed at antibody mediated diseases and DX-4012, a blood thinner.   

Here are the EBIS details:

The EBIS Score for DYAX is 8 (BUY) based June 30, 2015 data.  

  • Cash on hand: (+1) DYAX reported $127 million in cash compared to $32 million in September 2014.
  • Cash on Hand growth (year over year) (+1): The year over year cash grew by 396%.
  • Revenues (present or not): (+1): Revenues are steady and growing.
  • Revenue growth (10% or greater)(+1): Revenues grew nearly 20% on a year to year basis.
  • Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1)DYAX has a 0.051% ratio, which means that it could survive a very nasty scenario.
  • Earnings (Present or Not Present): (0): DYAX has no earnings.
  • Net Income Growth (Year over Year): (0): DYAX  has no earnings growth.
  • Products on the market: (+1):  DYAX has one product on the market, Kalbitor.
  • Pipeline Strength: (+1): DYAX has a credible pipeline with its DX-2930, DX-2507, and Dx-4012 in late stages of development. 
  • Late Stage Clinical Trials and Product Launches: (+1): DYAX is putting together its manufacturing infrastructure for DX-2930 and is planning for Phase 3 clinical trials in late 2015 and into 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 Holds Its Own – Again!

Our EBIS portfolio remains in good shape despite another week of volatility on Wall Street.

Greatbatch Inc. (GB) – Buy issued up to $55 on August 17, 2015.  August 17 entry point at the close was $53.51.  9/18/15 closing price $61.69.  New Buy range up to $62. Stop loss:  Raised to %54.  Dr. Duarte owns shares in GB.

Masimo Corporation (MASI) – Buy up to $44.  (Buy issued July 20, 2015. MPP: $40.65).  9/18/15 closing price: $42.45. Dr. Duarte owns shares in MASI.

Masimo remains within our buying range and has held up well in a volatile market over August and September.  

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 – 9/18/15 closing price $17.67.  Dr. Duarte owns shares in VIVO.

Meridian remained near its buying range on the week that ended on 9/18/15.  We remain positive on the stock.

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. 

On September 9, management adjusted expectations for the full year of revenues of $195 to $200 million and expects revenue growth in the 3-5% range with earnings in the .86 to .90 cents range for the full fiscal year. 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 near $800 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.

Alert: Sell stop raised to $42. Neurocrine Biosciences (NBIX) (BUY 6/16/16 at 46 – 9/18/15 closing price $54.90 – Sell Stop 42). Dr. Duarte owns shares in NBIX.

Alert: Neurocrine is rated HOLD. Neurocrine hit its sell stop on the Flash Crash in August, but we still like the stock as a speculative play and recommend holding on to the shares if you didn’t use the sell stop.  The stock held its own on the week that closed 9/4/15 but due to its inherent volatility is best avoided in the short term.  If this scenario changes we will update our recommendation.

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.

Emergent Biosolutions – Buy up to $36.

Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* $30.63 – 9/18/15 Closing price $32.17). Dr. Duarte owns shares in EBS.

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 showed some weakness in the week that ended 9/4/15.  We are still constructive on the stock but are watching its activity very closely. 

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.

Update:  Trend Following ETF Model

We are still holding the ProShares Ultrashort Biotech ETF (BIS) as the only ETF in the model for now.  It is rated hold.

ProShares Ultrashort Biotech ETF (BIS) – Buy up to $29.  Stop Loss $27. (Buy 7/27/15 MPP* 27.99.  9/18/15 closing price 28.57.)

*MPP – Median Purchase Price

Dr. Duarte owns shares in BIS.

News Update – New FDA Commissioner Nominee Could Foster New Climate at Agency

The Obama administration has nominated Dr. Robert Califf as the next head of the FDA. Dr. Califf has been serving as FDA Deputy Commissioner for Medical Products and Tobacco.  The consensus is that he is a well liked and capable researcher with excellent knowledge of the drug approval process.  He headed a prominent research lab at Duke University and has published key articles that have changed the therapeutic approach for Diabetes treatment.

For investors, it is plausible to consider that Dr. Califf may be a key player in developing the infrastructure for faster drug approvals.  According to Fierce Biotech, Dr. Califf ‘told Time magazine earlier this year that the FDA’s role includes both “regulating an industry and creating the conditions where the industry can thrive.”’

 

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