NOTE: The info below was originally distributed via 2 emails on January 13, 2015.
Since I sent out a note earlier that featured a discussion on biotechs, that I lessened in topic importance over the past year, I figured I’d discuss it a bit more…but, from a different angle. Sure, I can list out 10, 20, even 30 good biotechs off the top-of-my-head. Many of them have good science behind their experimental treatments. Some have decent fundamentals via their financial statements, ratios, potential market pool, etc. A few may even have good technical set-ups via specific chart patterns, etc. But, that does not guarantee good stock performance…specifically during various trading periods. You MUST know the “story” and continually follow it.
What do I mean by “story”? Every company and, in the case of biotechs…every drug treatment, has a story or sequence of events that make up the saga of the company’s or drug’s development. Learning and understanding this story is often very time-consuming, but can provide valuable insight into your investment. I normally learn these stories via stock-specific news articles/headlines (found on almost any stock site like YahooFinance, Google Finance and trading portals – Scottrade, TD Ameritrade, etc). I also simply use internet search engine(s)…like Google. Yes, you have to read through the articles and information. I often read back through at least a year or two of articles. I definitely key-in on any news that occurs around the date that I may notice dramatic stock price movements…to gain understanding of the company’s stock.
Let me give you a few brief examples. To date, my best biotech play was DNDN and it’s prostate cancer treatment – Provenge…about 5 years ago. As the company was going through an FDA advisory panel to gain a recommendation for approval by the FDA, the stock initially was rejected. But, later, it was published (though, I never confirmed) that one of the panel members that had close ties to a competing company. Then, later during this company’s saga, when they went up for FDA’s approval/rejection decision, I heard on mainstream network news about a Congressional hearing being held for prostate cancer advocates. I immediately realized that this hearing was being held on the same day that DNDN was set to hear from the FDA. That couldn’t have been a coincidence. Needless to say, I bought as many option contracts as I could and, well…you know…there was an overnight approval. The stock spiked like crazy…over $55/sh from $40/sh the night before…and from about $27/sh just a few months earlier. So, you can imagine how those options paid off! As I always do, I sold everything on the FDA news announcement. Getting a drug approved and successfully bringing it to market are two completely different animals. DNDN had taken on too much debt and needed a corporate partner…that wasn’t there. So, as the mainstream media broke the story that night…to bring in the “rookie wanna-be traders” the next morning…the stock started it’s long fade down. Today, 5 years later, the stock is selling at 13 cents/share.
Speaking of Congress…I’m dealing with an interesting “story” right now. I took a stock position on ZGNX a few weeks ago. (I’m still in the position, but with a tight stop…as the stock is failing to break through strong resistance at $1.48 – $1.50 per share. So, I’m not recommending this trade.) Anyway, ZGNX received approval for Zohydro, a pure hydrocodone pain medication with an extended-release mechanism. But, last year, the company was pressured to stop selling it due to a wave of anti-opioid-abuse sentiment in the news. Who could have predicted this given other opioids used for pain, like morphine, oxycodone, etc. One of the main forces behind this wave was Sen. Joe Manchin (D-WV). A bill was even introduced to stop ZGNX from selling Zohydro unless it was abuse resistant. Well, guess who happens to be Joe Manchin’s daughter? Heather Bresch…the CEO of competing drug company Mylan. (Two years earlier, Mylan was forced to recall lots of their own hydrocodone drug, that was mixed with acetaminophen.) Coincidence? idk. Just telling the story, as best I know. You’re probably wondering why am I into the stock. Well, ZGNX has now developed an abuse-resistant version of Zohydro ER and is scheduled for an FDA decision on January 30th. I’m trying to play a run-up trade. But, may soon take my profits as the stock has been acting weak of late.
In a way, GILD provides another example. GILD developed a combo-treatment of Solvadi and Harvoni that essentially cures Hepatitis C. A major reason that traders/investors like biotechs is due to their pricing power. If they develop a relatively safe and effective treatment, they can often charge whatever they want…at least, here in the US. Thanks Capitalism. (Other countries have systems in place to negotiate drug prices.) Well, GILD decided to charge $84,000 for this 8-week curative treatment. Even though there are other treatments, that do not actually cure a disease, that cost more…somehow, a wave of criticism came out against GILD. A Congressman publicly inquired about their pricing process, which set off the news media. GILD held firm. Nevertheless, a competing company, ABBV, developed a competing treatment that basically cures Hep C over 12 weeks. Now, enter Medicare, private insurers and pharmacy benefit managers (PBMs). A few weeks ago, ABBV cut an exclusive deal with ESRX (a PBM) to be their treatment for Hep C, but ABBV had to agree to a discounted price relative to GILD. This sent shockwaves through biotech traders/investors…as we kinda see dark clouds on the pricing-power-horizon…that can cost other biotechs revenues. (Note: GILD just recently cut an exclusive deal with CVS…a natural PBM.) But today, at the JPM Healthcare conference, ESRX gave a presentation indicating that other new biotechs, like those immune-therapy companies, may have to negotiate with them. This is something to keep an eye on…as some price run-ups may be dampened a bit.
[F/U Insert from a January 14, 2015 email… Then, wouldn't you know...just as I send out those notes, yesterday, on upcoming biotechs...that f/u note I discussed about ESRX started bringing them down. This Pharmacy Benefit Mgr gave a presentation yesterday and overtly placed a target on the new cholesterol-lowering and cancer treatment companies. I mentioned something like this would happen; I just didn't know they would take such a direct shot. So, as I suggested, wait to let those companies fall back down before considering any trades/investments. Moreover, one old fly-by-night company scored big in the new Car-T cancer research space. ZIOP announced a sweet deal with another company (XON) and MD Anderson Cancer Clinic in TX. (Careful...the easy money has already been made in after/pre-market trading. It was crazy last night.) Personally, I was not very impressed with the early-stage data associated with their research. But, that small micro-cap biotech just garnered a lot of attention. Check the chart.]
I explain all of this to simply make you aware of the “stories” that you need follow. This is real-world stuff. Oft times, it ain’t pretty and can blindside you…which can cost you alot of money. After I take a position, I often do more research than leading up to the stock/option purchase. That is especially important with biotechs! I can’t stress that point enough.
The market sure started off strong today, but has weakened considerably. Not sure why. But, if you are interested in any of those biotechs I mentioned in my previous email, don’t chase them! Wait for the one you like to fall back hard. Many of those stocks have “gone parabolic”…which means they are due for a sell-off (hopefully). Just understand “why” they dropped before taking a position. As you can see…I’m always concerned when discussing risky speculative stocks…as I don’t want any novices trying to dip into this pool and wind up losing all his/her money. Know what you’re doing…and that includes fundamental research; technical analysis; understanding the science; and, knowing/following the story. Otherwise, look into something else.
(Not a professional)
P.S. I’ve been talking to a few of you, recently, about GPRO. A rumor hit the market today that AAPL had been granted (or trying to receive patents) for a similar technology. Hence, GPRO’s sell-off. I’ve often told folks that it should be only a matter of time before someone moves into GPRO’s “space”. If the rumor is true, that could hurt GPRO down the road. Yet, I did hear that GPRO was looking into expanding into drones. idk. To me, it’s just another video camera tied to a lifestyle with good marketing.
[My “previous email” referenced above that was sent out earlier on that same day – January 13, 2015.]
First, let me start off by wishing you a Happy and Financially-Lucrative New Year! Let’s Get It In!!
Oil continues its slide lower. I remember last month or so thinking that $75/barrel on WTI had to hold. NOT. Then, I thought $50/barrel would hold. NOT. Keep in mind, these were simple psychological/emotional price-points. Yet, I publicly indicated in my last 1-2 emails for you to watch the oil futures “curve” for the contango formation to start changing over into backwardation. I still stand by that. But, this time, instead of “thinking” on a price-point for oil to hold, I’m going to mention the $40/barrel mark right now. Looking over a long-term oil price chart, you can see that $40/barrel is an important support level. We’re currently at $44.75 right now. Granted, weeks ago, I heard experts stating that oil would go to $40…and even lower into the $30s. I didn’t pay much attention to those predictions, but it sure looks like we’re heading to (or close to) $40. If we go below, it may just be an overshoot. But, if we go below $40 and solidly stay there for awhile (as that support level immediately turns into resistance), we may become range bound for awhile. But, I’m thinking that $40, give or take a few bucks, may become “a” or “the” bottom. But, you must confirm that with the futures curve pattern-shift noted above. If contango remains, then oil may go even lower…and “may” start affecting the general market even moreso…as investors start worrying about a deflationary environment.
OK…that’s all based on technical mumbo-jumbo. What fundamental factors could help stop oil’s slide? I don’t know. The explanation on what’s going on with oil, fundamentally, remains the same…as I described on my blog. But, the US economy remains relatively strong based on the recent jobs report. AA (Alcoa) just kicked off earnings season last evening and posted good numbers, in part, due to solid demand of aluminum from the auto and aerospace sectors. (Remember my call on BA based on the aircraft-upgrade supercycle. BTW – Airbus just announced this morning that they had record airplane deliveries for 2014!) Anyway, it seems as though oil production worldwide continues at its same pace, which will continue to create a glut in supply and hurt weak E&P (exploration and production) companies saddled with high debt and/or high operating costs. Nevertheless, I’m now wondering what may happen later this month…around the 22nd (I think) in Europe via the ECB. They have a meeting scheduled and I don’t think the “jawboning” by Mario Draghi about QE will continue working…as if it ever really worked on the world markets. If he pulls-the-trigger and fires off some big-guns (ala Ben Bernanke) to help inflate Europe’s economy, this could reverse the positions of oil speculators…as well as other sideline hesitant investors. Watch around that time (1/22/15) and listen to business news to know what’s going on across-the-pond. It may just pay off for you, if you’re properly positioned in the market.
As an aside, keep an eye on the Greece elections about 2 weeks from now. If the current front-runner, who is somewhat anti-ECB-financing, wins…things may definitely change. There is talk that Greece may leave the European Union…thus throwing up “the finger” to the Euro and all the financing that it has obtained. Bank run rumors are already taking hold over there. Greeks are already notorious for not paying taxes. I don’t know the ramifications of a “Grexit” from the EU, but things could get a little interesting. In fact, some (like Germany’s Merkel) may actually want Greek to leave. idk. I haven’t followed this stuff closely. Just be aware.
I had a nice convo this past weekend with one of you (JC) about retail stocks and banks. You may (or may not) have noticed that I rarely discuss the retail sector. I’m not a shopper and really don’t get into sales trends. I seem to always find out after-the-move about strong retail stocks. So, I simply don’t discuss them much. But, you would think that based on this de facto US tax cut via lower gas prices that certain retail stocks should do well…or, at least, post strong fourth quarter numbers from this past holiday season. I’m not going to venture out and name any companies, though my friend likes BBY. If you can figure out the winners vs. losers, go for it.
As for the banks, which seemed to have stalled out a bit. I’m thinking that’s because of the interest rate “yield curve” or the continuum of short-term – to – long-term interest rate yields. I’ve discussed this in the past, but as world investors continue to flock-to-safety via US Treasuries, the yields on those Treasuries remain low. (Higher bond prices from increased demand mean lower “yields”.) Let’s face it…the US is the best house in a relatively bad economic neighborhood worldwide. This is why mortgage rates have remained low for so long. Banks make money by borrowing on the “short-end” of the yield curve (1-5 yr short-term bonds/Treasuries) and lending on the “long-end” of the yield curve (20-30 yr mortgages). As overall interest rates rise, the slope of that yield curve steepens…allowing banks to make more money. As the curve’s slope remains shallow, banks don’t earn as much. Of course, there are other factors to consider…like the number/demand for mortgages and business loans; housing sales trends; etc. So, by watching the slope of the yield curve, you can get a clue on when bank stocks may start moving higher. Just note that when an economy experiences a “flat” moving into an “inverted” yield curve…which inverts for quite awhile…just sell all your stocks. That’s often the first and most widely followed factor that precedes a recession (or worse). Remember…the bond market is MUCH larger and more influential than the stock market. Serious investors always monitor trends in that market…as well as in the currency (foreign exchange) market, which is even BIGGER than the bond market!
OK…I had a few more things to discuss. But, went a bit long above. So, please indulge me with some biotech stuff…as I’m now seeing biotech go mainstream. There’s ALOT of new money coming into the sector now…and for good reasons.
There is a medical treatment revolution taking place right now. While many of these new treatments, if successful, won’t be available to the general public for a few more years…investors are jumping all over them right now! Let’s be clear…these are all very risky and speculative. So, I’m not suggesting that you just jump into any of them. But, I feel the need to mention them. (I may have briefly mentioned a few in previous notes.) There are so many…I’m not going to go into much detail. I just want to possibly pique your interest, if you’re into this sector. First, the biotech stalwarts…that I used to discuss 3-5 years ago…CELG, GILD, BIIB, REGN. I’d even throw in BMRN, AMGN, and NVS. If you don’t like investing/trading individual biotechs, there’s always the two main ETFs – IBB and XBI. Just know the specifics of whichever biotech or ETF you may happen to choose. Gotta do your deep research on this stuff or risk losing a lot of your money! But, if I was assembling my own biotech fund, I’d start with those aforementioned companies.
Now, there are some newcomers right now that are going crazy. NOTE: the easy money has already been made! Be very careful. I do like BLUE, which has developed a genetic therapy protocol to not just treat, but cure certain blood diseases…like beta thalasemmia and sickle cell. (Yep, you read right.) But, this therapy is still in its early phase. It must still prove itself on later-stage FDA trials. But, look at this stock’s 2014 performance after its IPO. (If you carefully read my previous notes, I mentioned this stock a couple of times last year. Another strong new biotech is AGIO. This is one biotech that simply got away from me. This stock took off like a rocket and never looked back! This company is partnered with CELG and working on blood cancer treatments. Speaking of cancer treatments, there are a couple of new immuno-therapies that seem to be ground-breaking. I’ve hinted about them about 2-3 years ago, after catching an NBC news piece on the University of Pennsylvania’s medical breakthrough. Anyway, Univ of Penn licensed the technology to NVS. I think this immuno-therepy stuff (Car-T and PD-1 treatments…I’m tempted to explain in detail, but I’ll spare you will totally change the way we deal with cancer in the next 5-10 years. Other biotechs to check out include JUNO and KITE…current stock-rockets. (Be careful…the easy money has been made.) There are a couple of even smaller biotechs attacking ALS and Parkinson’s, with promising early-stage data. I don’t feel comfortable mentioning them right now…as one has additional data coming public by the end of this month. VRTX is attacking Cystic Fibrosis. There’s a lot of buzz in the Hep B and NASH “space” after GILD and ABBV, both, have cures for Hep C. There’s an interesting gene therapy treatment being researched for Hemophilia B. I continue following 3 companies dealing with DMD. Whew! I could go on and on. We are definitely living in interesting times! But, again, let me emphasize that these speculative biotechs have, yet, to prove their treatments/cures. If you do not understand the science behind these experimental treatments, simply move on. Note: I still post a few of my spec trades on Twitter in close-to-real-time. But, I don’t post all. Nevertheless, I’ll probably profile a few, in more detail, on my blog during the coming months…stay tuned.
[3/10/15 Note: Last week, I stumbled across a great HBO documentary, called Vibe: Killing Cancer, that gives terrific insight into some of the aforementioned new cancer therapies. Check it out - http://www.vice.com/read/watch-vice-on-hbos-special-report-on-killing-cancer-217.]
OK…thanks for indulging me. I’m still bullish on the US economy right now. It is a bit surprising that there is talk about the Fed waiting a bit longer before raising interest rates. But, I’m sure such a decision would be data-dependent. I’m still a Yellen fan. Gotta run! An important biotech conference, sponsored by JPM, is taking place this week. Lots of info/data coming out.
(Not a professional)