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Do Oil and Biotech Mix?

By Joe Duarte on February 16, 2016

In this issue:

  • The Big Picture: Do Oil and Biotech Mix?
  • Short Term Trading Portfolio: Short Biotech ETF Still Active
  • Long Term Holding EBIS Portfolio Update: EBIS Stocks Weather the Storm
  • Trend Following ETF Model: Short Biotech ETF
  • ALERT – In Depth: Restating the Case for Cerus Corp.  Think Blood and Zika Virus.
  • News and Analysis: Zika Virus: The Numbers and Some Thoughts
  • Shopping List

The Big Picture:  Do Oil and Biotech Mix?

The world is upside down and so are many investments that had good runs in 2015. At the center of the market’s decline is the price of oil.  The conventional wisdom dictates that oil is the bellwether for the global economy.  Stout demand for oil is interpreted as a sign that the global economy is growing.  Yet, as any astute energy analyst or trader will tell you, oil prices are more about supply than demand. The key word is “more,” as demand is still an important part of the price equation, while supply is the dominant factor.  

WTIC chart 2015 02 12

NBI biotech index 2016 02 12

 

 

 

 

 

 

 

 

 

 

So we watched the response of the biotech sector to the rally in crude oil prices that took place on February 11 and 12 as rumors that OPEC was about to cut back production rallied the S & P 500 and noticed an interesting relationship.   Thus,  we are comparing the chart of West Texas Crude (WTIC) and the Nasdaq Biotech Index (NBI).  The main questions for biotech investors are whether there is a correlation between the price of oil and if there is such a correlation, what is it telling us at the current period and the potential for the price action in the biotech sector?

The charts are quite clear.  Until the start of 2016, biotech was outperforming the price of crude oil, but in 2016, biotech has fallen under the negative spell of the price of crude oil.   What that seems to be saying is that we should watch what happens to the price of crude oil in the next couple of weeks.  If crude continues to fall, it would be interesting to see what biotech does in response.  A rally in biotech in the face of falling crude prices would suggest that the price of oil and biotech stock prices are no longer in sync. 

To be sure, we could speculate about why this may or may not happen.  For example, if biotech rallies one could consider the following: Is the Zika virus alarm starting to become more serious in the mind of investors?  If so, which biotech stocks are starting to move and which are lagging?  Or is there a paradigm shift that is starting to develop in biotech?  Are we moving the yardsticks in biotech away from oncology and into infectious diseases and vaccines?

On the other side of the coin,  if biotech falls along with a new price decline in oil, is it a sign that investors are no longer thinking about the fundamentals of individual biotech companies? Or is it something bigger than that which is difficult to understand at the moment? No one knows at this point.  But the questions are important because no one knows whether OPEC is reallly going to cut production. Their record of sticking to agreements is not very sound.  And there is a lot to think about in regard to Iran’s new role in the cartel. 

Little has changed in the short term for our portfolio of trading stocks.  Two trades ended as Opko and Vertex were stopped out.  Meanwhile our Short Biotech ETF (BIS) pulled back but continues to do its job well over the longer term. The ETF has delivered an excellent paper profit as of February 12, since we recommended it on January the 4th. We’ve raised the sell stop to $46 on BIS effective February 12 and are not recommending purchase of this ETF for now.  

So even though it’s tempting to panic or to buy biotech stocks indiscriminately, this is a good time to be patient and to hedge bets unless you are a very experienced short term trader.

Otherwise here is what to do:

  1. Pay close attention to the overall market, especially the price of oil. Review our weekly recommendations, adjustments, and our new EBIS picks and portfolio updates.
  2. Monitor the price of all current positions in your biotech portfolio individually. Look at each stock separately and keep up with Sell Stops and any trading rule that we include in our recommendation.
  3. Pay attention to news items, especially as related to products, mergers, takeovers and geopolitical events. Stories about biotech stocks are likely to increase given the political situation in the world, the U.S. election and the rise in viral outbreaks due to globalization and geopolitical related migrations.  
  4. It’s time to take profits on our BIS trade but it still won’t let us. The Sell stop has been raised to $46 as of February 12. BIS is a hugely volatile ETF and has a new entry point as of our November 9 update.  See below for details.  Our July 27th, 2015 update has an excellent tutorial on how you may go about doing using this ETF to hedge your portfolio.  For further reading on portfolio protection techniques and risk management also consider a copy of Dr. Duarte’s “Trading Options for Dummies.”
  5. Don’t get over confident. Risk is still high. But this could be an excellent opportunity to build an excellent portfolio for the long term. A good method for building positions 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.

Short Term Trading Recommendations

These are stocks that have the potential for trending profits over shorter periods of time, sometimes days, but mostly weeks to perhaps months.  The fundamentals are secondary in this portfolio, which is geared for momentum type stocks.

Trading stocks are only recommended as trades based on technical analysis and momentum.   These are not stocks meant for long term holding periods. 

  • Trading stocks are not EBIS type stocks. This means that they are more volatile and that any moves by these stocks, up or down, can be very fast and treacherous. 
  • Follow the trading guidelines and recommendations issued with each stock in detail.
  • Trading guidelines are not applicable to our longer term holdings in the EBIS portfolio.

Active Trading Recommendations:

  • ProShares Ultrashort Biotech ETF (BIS). Bought at $30 on 1/4/16. Closing price on 2/12/16 $29.12. Sell stop raised to $46. 
  • Opko Health Inc. (OPK) Buy Range $8-$11. Bought 2/1/16 at $8.  2/12/16 closing price $7.89.  Sell Stop $6.  We think the market is wrong on this one as it has expanded its company through acquisitions that have delivered profits and operating capital and that buying it now could prove to be an excellent longer term play.  We are also looking to add this company to our EBIS list in the not too distant future.
  • Emergent Biosystems (EBS) Buy Range $36-$39. Bought 1/25/16 at $36. 2/12/16 closing price $35.86. Sell Stop $33. 

Long Term Holding Portfolio Update:

Meridian Biosciences (VIVO) Buy $18- $21 – 2/12/16 closing price $19.74.  Stock initially recommended on June 29, 2015. We still like Meridian Biosciences and suggest adding to shares on weakness.  The company still has a 4.37% dividend yield and despite its decreased earnings, its results are comparable to its peer group.  The longer term fundamentals are still positive given the increased likelihood of rising infectious diseases based on immigration and demographic patterns that are emerging in the U.S.

VIVO 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. 

Meridian delivered $47.07 million in revenues and $8.47 million, or 20 cents per share in net income for its December 2015 quarter.  This was a 10.58% decrease in earnings on flat revenues.  And while this sounds disappointing, it’s actually a pretty good set of results.   The company’s gross margins increased as did the amount of cash on its balance sheet, which are both excellent signs of management that is looking toward the future.  Vivo also kept its quarterly dividend at 20 cents per share.    Meridian delivered a mixed earnings report on November 5, 2015, beating on revenues at $47.5 million and missing on its net income by one cent at 20 cents per share.  Estimates averaged $46.64 million in revenues and 0.21 cents per share for earnings.   This was a reversal of the previous quarter.  The stock paid a 20 cent dividend on 11/12/15 and yields 4.4%.  Dr. Duarte owns shares in VIVO.

Novo Nordisk A/S (NVO) –  Buy Range $50-$55. Recommended 12/21/15. Bought at $55 on 12/21/15.  2/12/16 closing price $48.90. Sell Stop $42.

Trend Following ETF Model

We currently have an open position in the Ultrashort Biotech ETF.  See our Trading Recommendations above for details.

PowerShares Dynamic Biotech ETF (PBE) – Bought at $48 on 10/23/15 – 12/11/15 stopped out at $48.  Return 0.

ProShares Ultrashort Biotech ETF (BIS) – (Buy issued 7/27/15 @ MPP* $27.99.  10/27/15 closing stopped out at $32 – Return + 14.3%.

*MPP – Median Purchase Price

In Depth:  EBIS (Emerging Biotech Investment System) Pick: Cerus Corp. (CERS)

Alert: Restated Buy Recommendation:  Cerus Corp (CERS) –  Buy Range  $5-$7. This stock was initially recommended 11/16/15. Bought 11/16/15 at $5 – 2/12/16 closing price $5.11. 

Cerus Corp. (CERS) will report its earnings on February 26, 2016 and it will be interesting to see what the company says about its recent past.  But more important will be what the company says about its rapidly changing future, which looks potentially bright if current emerging trends remain in place.   We first recommended Cerus in November 2015 as a niche play in blood testing. And as the market’s volatility tells us to be cautious, we thought it would be worth having a second look at this small company and provide a detailed update on why we still like it.

Cerus is a niche play on blood testing and the neutralization of infectious agents including hepatitis, HIV, the agent that causes syphilis and other infectious agents and may be a play on the Zika virus based on case reports and recent data from the company.  Cerus has a proprietary technology, the Intercept system, which is used to test blood components, plasma and platelets, for parasites and viruses and to inactivate them.  Cerus has been expanding its market share steadily in the last 6-12 months, having signed key agreements for the use of Intercept with key regional blood supply agencies in the south of the United States and elsewhere.  It already has a presence in Europe, Africa, and South America, which may be its most important asset at the moment.   Cerus, in our opinion,  may be a focal company  as the Zika virus dynamic plays out,  due to its the potentially pivotal role in the prevention of  blood supply contamination with resurging infectious agents.  The company, on February 9, announced a multi-year deal with the American Red Cross for the use of the Intercept system for testing of plasma and platelets. The American Red Cross is the largest supplier of blood products in the United States.

It’s important to recognize that Cerus’s potential market is huge.  It does not have FDA approval for Intercept to test red blood cells, yet.  But it is in the process of attaining that approval.  And if it does receive it, we would expect the shares to explode to the up side, regardless of market conditions as the global market for blood transfusions is huge, with over 100 million potential transfusions per year possible.  Consider that there is now a huge influx of immigrants from the undeveloped world entering Europe but also increasingly the United States.   This one dynamic, when coupled with normal travel patterns of Americans to global destinations where mosquito borne diseases are not rare, raises the potential for a resurgence of infectious diseases rarely seen in the U.S., and thus their entering the blood supply.  Just recently the incidence of dengue fever, a mosquito transmitted virus that can lead to heart disease has increased in the U.S. where cases have been reported in Texas as well as Hawaii. The state of Hawaii has declared a state of emergency for mosquito borne diseases including dengue fever and the newly recognized and more emergent Zika virus even though their incidence is seen as declining.

We previously reported that analysts Dan Cohen and Scott Matusow make an interesting case for the Intercept system, noting an August presentation by the company regarding the Zika virus and the potential use of Intercept as a way to reduce the spread of the virus via the blood supply.  The authors also noted that CERS has received approval in Brazil for such a use with Intercept.  Both authors report ownership in shares of CERS.

CERS currently has FDA approval for testing plasma and platelets, but not red blood cells.  Studies are under way for red blood cell application of the Intercept system.  The bottom line is that it is plausible to consider that CERS shares could spike at any time within the next twelve months if its Intercept system proves to be useful in the treatment of Zika virus by early detection and eradication of the virus via testing and treating of the blood supply as well as the implications of further gains in the shares if the company receives approval for application of the Intercept system for red blood cells.

Dr. Duarte owns shares in CERS.

CERS gets a +7 EBIS rating, HOLD.  It is, however, a very attractive and moderate risk company with excellent long term potential as its focus on blood supply testing seems to be extremely timely given the current geopolitical situation and the resurgence of infectious diseases.

Here are the EBIS details:

The EBIS Score for Cerus Corp (CERS) is + 7 (HOLD) based on September, 2015 data.  

  • Cash on hand: (+1) CERS had $58 million in cash on hand in September 2015 compared to $22 million in December 2014.
  • Cash on Hand growth (year over year) (+1): The year over year cash was 32%.
  • Revenues (present or not): (+1): Cerus reported $8 million in revenues in its September quarter compared to $9.5 million a year earlier.
  • Revenue growth (10% or greater)(+0): Revenues fell by 16% year over year in the September 2015 quarter.
  • Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1) CERS has a 0.30% ratio, which means that it can cover all its expenses with its cash and current assets in a worst case scenario and continue to operate the company.
  • Earnings (Present or Not Present): (+0): CERS had a $16 million loss in its most recent quarter
  • Net Income Growth (Year over Year): (+0): CERS cut its losses by 22% year over year in September.
  • Products on the market: (+1):  CERS has products on the market and is making strides in expanding its market share.
  • Pipeline Strength: (+1): CERS has one key product in late development stages in its pipeline.
  • Late Stage Clinical Trials and Product Launches: (+1): CERS has several important products in critical stages

The EBIS system consists of ten 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.  The stocks in this portfolio are companies with long term profits. Our goal for this portfolio is to include stocks which we expect will be held for periods of at least twelve months, but likely longer.

ALERT: CERS has huge Potential as Zika Virus Play, as described below.

Zika Virus:  The Numbers and Some Thoughts

Investors in pharmaceutical companies are often too early or too late in making what could be significant investment decisions.   So with the current news about Zika virus, we thought a man on the street summary of the situation would make sense in order to give our readers some information with which to understand some of our content and to consider whether investing in Zika related stocks makes sense.

Zika virus is transmitted by mosquitoes.  It originated in Africa and made its way to the Pacific in the early 2000s.  But then something changed as the virus moved to South America where it is believed that as many as one million Brazilians could be infected.  

And while in Africa the virus was little more than a nuisance – causing a flu like syndrome – the most recent data suggests that in Brazil it has caused severe defects in the brain of the unborn, leading to a higher incidence of microcephaly, a condition where the brain and the head remains small and thus the sufferer does not fully develop intellectually.  There have now been reports that as many as 5000 pregnant women in Colombia may be infected.  There have been reports of cases in Puerto Rico as well.

A recent study suggests that the virus could expand its reach further via the blood of travelers who have been bitten by virus carrying mosquitoes as they return to the U.S. from other parts of the world and that the virus could be brought into areas of the U.S. which hold as much as 60% of the population. Let us put that into proper perspective.  This would mean that over 200 million people could be exposed to Zika virus in the U.S., according to a study of travel patterns and projections by the National Institutes of Health (NIH).  And the story is unfolding, which means that we don’t know what we don’t know at this point.  What we have is some preliminary data based on studies from Brazil and French Polynesia which suggests that there is a link to central nervous system defects in newborns and Zika virus as well as case reports and rapidly emerging information in many formats from other areas of the world.  Other conditions aside from microcephaly that may be related to the virus could include a viral paralysis syndrome and other nervous system abnormalities in newborns. 

The bottom line is that Zika virus is a real threat, although its full reach is yet unknown.  This uncertainty is likely the reason why companies that are being linked to Zika are having some false starts.  It is, however, worthwhile to keep Zika virus in mind as it could be the canary in the coal mine.  This humble doctor’s opinion is that we may be in the early stages of a resurgence of infectious diseases as major contributors to the status of public health in the U.S., and the world. 

Shopping List

  • Regeneron (REGN)
  • Bio-Rad Labs (BIO)
  • Amgen

2016 EBIS Portfolio Results:

  • Emergent Biosolutions (EBS) (Bought 5/11/15 MPP* 30.63) 1/7/16 Stopped out at $36. Return 17.63%.
  • Cambrex Corp. (CBM) Position Closed– Sell Stop Triggered at $50 on 12/18/15. Bought 10/20/15 at $44.  Return 13.6%.
  • Masimo Corporation (MASI) –Buy issued July 20, 2015. MPP: $40.65). Sell Stop triggered at $38 1/6/16.  Return (-) 6.5%
  • Sirota Dental Systems (SIRO) Buy Range $104-$108. Bought 1/26/16 at $104. 2/5/16 closing price 106.57. Sell Stop hit at $98 on 2/12/18.  Return (-) 5.76%.
  • Vertex Pharmaceuticals (VRTX) Trading Buy Range $96-100. Bought 2/4/16 at $96. 2/5/16 closing price $86.61. Sell stop hit at on 2/5/16 at $86.  Return (-) 10.41%.

2015 EBIS Portfolio Results: 

  • DYAX Corp (DYAX) – Position Closed. Company taken over.  Originally bought 10/7/15 at 22.  11/6/15 closing price was 34.52.  Trade return:  9%.
  • Trading Recommendation Position Closed: Celldex Therapeutics (CLDX) Stopped out at 16. Recommended 10/26/15. Buy range entered 10/26/15 at 13.22.  Total Return 21%.   
  • Trading Recommendation Position Closed: Alnylam Pharmaceuticals (ALNY) – Trading Buy triggered at 85 on 10/9/15. Stopped out at 100 on 11/16/15.  Total Return 15%.
  • Trading Position Closed – Sell Stop Triggered at $78 – Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Bought 10-27-15 at $76.50 post 2 for 1 split). Return 1.96%.

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