I am recommending the sale of Novo Nordisk NYSE: (NVO) and Emergent BioSolutions (NYSE: EBS).  Both companies failed to meet expectations and are likely to run into further headwinds as the biotech and healthcare dynamic changes gears and price cutting pressure in the U.S. starts to gather steam.

Emergent BioSolutions Inc. (EBS) reported a second-quarter loss of $10.9 million (-18 cents per share), after reporting a profit in the same period a year earlier.  Estimates were for a loss of 17 cents.  The company recently spun off its conventional biotech operations now known as Aptevo (Nasdaq: APVO) and disappointed investors when it received a smaller than expected government contract for its BioAnthrax vaccine. My big concern is that over the past two quarters EBS has failed to execute cleanly and it looks as if their best days are past for now as they seem to have way more on their plate than they can handle.  Worst of all is the accounting gimmicks that they are using to make their results look better.   According to their press release, on a per-share basis, the real loss was 27 cents. The adjusted losses were 18 cents per share. Adjusted is code-speak for spin.  Spin may work in politics but not in the world of earnings.  EBS posted revenue of $101.5 million in for the quarter.

Novo Nordisk (NYSE: NVO) is a different story.  It’s a well run company, with excellent products that is a victim of circumstances.   But none of that will likely matter much in the new world of rapidly evolving cost cutting as Medicare moves toward payment bundling methods of payments to doctors, hospitals, and vendors.  The company met or beat its current quarter’s targets but decreased its guidance for the year citing U.S. pricing pressures as the problem.  The major reason for the estimate cut is that CVS-Caremark has removed Novo’s newly approved combination diabetes drug from its formulary because of its price. This is going to happen to more companies more often in the future as cost cutting will become the major goal of the entire U.S. healthcare system based on the Affordable Care Act triggered cuts across the entire system.  I don’t see Novo recovering from this for several quarters. 

I will have more details on this dynamic on Monday’s BTP Weekly.

Disclosure:  I own, and will be selling my shares in NVO and EBS.