In this issue:

• The Big Picture: Is Biotech Dead Money?
• In Depth: New EBIS Pick:  Whitewave Foods (WWAV) – Food. Science. Momentum.
• Special Situation Trading Portfolio: Biotech ETF Short Term Trade Details
• Long Term Holding EBIS Portfolio:  VIVO News, Breakout – Updated Buy Range
• News and Analysis: Biosimilars:  Behind the Generics Curtain
• Shopping List

The Big Picture: Is Biotech Dead Money?

This wild and crazy market continues to befuddle even the most experienced traders, which reminds of that old saying that the market’s primary function is to make fools out of all of us as often as possible.

Last week we noted that we expected a big move in biotech but that the direction was uncertain.  We also added a leveraged ETF long position via the ProShares Ultra (UBIO) ETF in order to capitalize from a move to the up side in biotech, if it materialized, which it didn’t.  We also noted that the already open position in the Ultrashort ProShares Biotech ETF (BIS) should remain open while raising the sell stop.  What we got was a bit of a whipsaw which saw us adjusting our sell stop in UBIO to $19 where it remains.  We raised the sell stop on BIS to $42, where it remains.

So the S & P 500 (SPX) rallied when the Federal Reserve Open Market Committee made it clear that it may not be as aggressive on raising interest rates as it might have been a few weeks ago.  But, honestly, we don’t think the Fed knows what it’s doing better than anyone else anymore. So we’re left with our own best guesses and analysis. And what those are telling us right now is that this market can move higher in the short term, but that risk is no longer on the low side.

The S & P 500 is back above its 200 day moving average, which is a positive.  The rally for the broad market has also been impressive with the number of stocks advancing on a daily and weekly basis swamping the number of stocks that decline in price. This is another positive, and together a nice move up by the S & P 500 accompanied by a broad participation of stocks is a bullish development.

Now we get to the cautionary side of things; Biotech. The Nasdaq Biotech Index (NBI) is still stuck in the mud, badly lagging the broad market.  And while biotech stocks may have stopped falling, as a group, they are not looking as if they want to rally.  An even more disquieting sign is seen in the chart of NBI (above).  There we see the interesting indicator known as the Ulcer Index (UI).  It’s an obscure indicator that can be useful, especially when you’re trying to measure risk.  When the UI rises, risk is higher.  If you compare the UI in the S & P 500 chart to the UI on the NBI chart, you see that the former’s UI is flat, hugging the bottom of the panel. Not so with the NBI chart, where the UI has turned up, signaling that risk is rising.  That’s a nasty little thing to see for sure, since NBI has gone nowhere of late, and now the UI is saying that risk is rising.   This is the major reason that we are still holding on to the short biotech ETF position (BIS) as insurance in case the Ulcer Index is right about biotech and our highly speculative long ETF (UBIO) position sells off and hits its sell stop at $19. 

What it means is that a change of tactics is called for.  So while we remain interested in biotech as a long term viable sector and we are still keeping our long term picks in our EBIS portfolio, we are expanding our horizons to include companies that aren’t exactly straight biotech picks such as drug and biological compound manufacturers but that are in biotech related areas or that use biotech, science and technology as a means to an end. 

Are we abandoning biotech? No! We still like biotech as a sector. We still think there are opportunities there.  And we still like the traditional biotech stocks in both our Special Situation and our EBIS portfolios.   In other words, we are still going to recommend biotech stocks when we find suitable candidates for our portfolio.  But it is getting difficult to find up side in the mainstream biotech sector, as a whole, while the applied biotech and broader science sectors are offering excellent opportunities at this time.

If we’re wrong and biotech rallies in a big way, we will likely participate via the UBIO position as well as with our core EBIS portfolio holdings.  If biotech falls, the BIS position should hedge our positions and give us time to think about our next move.

Our guidelines are evolving:                                

1. Broaden your horizons while maintaining a biotech focus.   Think in terms of individual holdings and of how companies use science and technology to develop, test and manufacture products.  Monitor each position separately. If they hold their value there is no need to sell.  If they trip their sell stop we recommend selling.
2. Pay attention to news items, especially as related to products, mergers, takeovers and geopolitical events. Politics may overshadow other fundamentals in the short term.  Be aware of this and follow our price guidelines.
3. Focus on risk management and on the fundamentals of any open position. Our July 27^th, 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.”
4. Don’t get over confident and stick with what’s working. Risk is still high in this market but a long term strategy reduces risk because of the time horizon of the expected payoff.

EBIS (Emerging Biotech Investment System) Pick: The Whitewave Foods Company (WWAV)

Food. Science. Momentum.

In the emerging world of applied science, Whitewave Food, a spinoff from Dean Foods (DF) is prototypical of an emerging sector, that of applied science without the emphasis on electronic products such as phones and PCs.  The company harnesses the power of nature with its focus on plant based food products.  Heavy on organic and vegan choices, Whitewave is steadily increasing its market share, deploying an aggressive growth strategy, and steadily taking over the super market shelves in the U.S., China, and Europe through the aggressive use of applied science via automation, software and an emphasis on rapid research and development. 

If you’ve seen Horizon organic milk, Silk almond milk, tried a So Delicious snack or had a Vega protein shake you’ve experienced a Whitewave product. But what makes this a huge applied science play is the $10 million Louisville, Colorado research and development center where the products are developed and tested.  A recent web search we ran just out of curiosity turned up Whitewave job listing that were mostly concentrated in software development, IT and supply management as well as machinery and tool repairs.  This confirms two things. The company is expanding, and its focus is on technology in order to speed up its research, development, marketing cycle and its supply chain.   This type of attention to detail and heavy leaning on a scientific process that incorporates multiple disciplines has led the company to rapid growth via organic development (sorry) as well as acquisitions, including the addition of the popular Earthbound Farm products brand.  In fact, its reliance on technology allowed the company to offer fifty new products in 2015 with a goal of another 50 being released in 2015.

The healthy food segment is a pure growth play which is resurging under a different guise.  While the banner for healthy foods was carried by Whole Foods (WFM) in the past, Whitewave adds a new wrinkle; it’s as much a science company as it is a food company.  The company has also been mentioned as a possible takeover candidate over the last six months, which makes owning the stock interesting as well. 

The only sign of caution is the rising debt that the company has accrued as it expands. This, thus far, has been neutralized by its successful expansion and aggressive sales growth. 

Here are the EBIS details:

The EBIS Score for Whitewave Food (WWAV) is + 9 (BUY) based on December, 2015 data.  

• Cash on hand: (+1) WWAV had $38 million in cash on hand in December 2015 compared to $31 million in March 2015.
• Cash on Hand growth (year over year): (+1) The year over year cash growth was 24%.
• Revenues (present or not): (+1) WWAV reported $1.03 billion in revenues in its December quarter compared to $911 million a year earlier.
• Revenue growth (10% or greater): (+1) Revenues grew by 16% year over year in the December 2015 quarter.
• Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (0) CERS has a 4.97% ratio, which means it has a lot of debt.
• Earnings (Present or Not Present): (+1) WWAV had a $47.58 million gain in net income in its most recent quarter
• Net Income Growth (Year over Year): (+1) WWAV grew its net income by 47% on a year to year basis
• Products on the market: (+1) WWAV has major products on the market and is making strides in expanding its market share.
• Pipeline Strength: (+1): WWAV has a robust and aggressive research and development program
• Late Stage Clinical Trials and Product Launches: (+1) WWAV has 50 product launches potentially possible for 2016.

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.

Buy White Wave Food (WWAV) up to $44.

Long Term Holding Portfolio Update

Cerus Corp. (CERS) – Buy Range $5-$7. This stock was initially recommended 11/16/15. Bought 11/16/15 at $5 – 3/18/16 closing price $5.95.

Cerus Corp. is a core long term portfolio holding. The company reported its earnings on March 8^th after the close coming in with a 15 cent per share loss and $9.7 million in revenues.  Estimates were for $9.72 million in revenues and a loss of $0.16 (16 cents per share) in net income. The stock reacted well, especially in a tough period for the overall biotech sector.

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.  It’s important to recognize that Cerus’s potential market is huge, estimated at $2 billion

A key future development is receiving FDA approval for the Intercept System to be used for red blood cells.  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.  Dr. Duarte owns shares in CERS.

Alert – Extend Buy Range.  Meridian Biosciences (VIVO) Buy $20-23 – 3/18/16 closing price $21.36.Stock initially recommended on 6/29/15.

Meridian Biosciences delivered an upside breakout on 3/18/16 as the company announced the release of a new component to its EPIK system of miRNA detection and analysis tools from wholly owned subsidiary Bioline.  This addition to the EPIK system will allow research and diagnostics users to figure out what diseases and conditions they may be dealing with via smaller samples and faster response time to results.

 We’ve liked Meridian Biosciences for a while and are increasing the Buy Range on the shares to $20-$23. VIVO still has a 3.9% dividend yield and stable earnings. 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 and RNA amplification and enzyme related materials used in research.

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. 3/18/16 closing price $54.16. Sell Stop at $46.

Special Situations: Short Term Trading Recommendations

These are stocks or ETFs 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.

• Special Situation 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.

Updated Recommendation Alert – ProShares UltraPro Nasdaq Biotech ETF (UBIO) – Buy $25-$27.  Stop loss $19.  This is a short term recommendation based on the possibility that the biotech sector may stage a catch up rally to the S $ P 500 in the next few days to weeks. If we are correct and this rally exists, we would expect the Ultrashort Biotech ETF (BIS) position that is currently open (see below) to be stopped out.  UBIO is a leveraged ETF that rises and falls at 2X the rate of the Nasdaq Biotech Index (NBI). 

New Recommendation Alert – Medidata Solutions Inc. (MDSO) – Buy $36-$39.  Bought 3/7/16 at $36.  3/18/16 closing price $36.83.  Sell Stop $32.

Medidata crunches big data for health care companies at the research level. It not only has apps that help organize and study the research starting from the project stage to the clinical trial stage but it also has an app that allows patient input into the data.  The company also has a financial tracking system that lets its clients keep track of who is getting paid and how much as well as keeping trends and other financial variables in focus.  They are expected to report earnings in late April.  Revenues and earnings have been steadily rising.  In the current environment where money for health care expenses is expected to decrease, MDSO is well positioned.  Dr. Duarte owns shares in MDSO.

Rollins Inc. (ROL) – Buy at $27-29. Bought 2/22/16 at $27.38. 3/18/16 closing price $27.97. Sell Stop at $22. Initially recommended on 2/22/16.

Rollins Inc. (ROL) is well positioned for the increasing awareness of how infectious diseases are transmitted.  The stock has been steadily climbing since our recommendation on 2/22/16.  This is a very special situation with a relationship to biotechnology in the current environment. Rollins owns Orkin, the exterminating company, and could be a big beneficiary of the current health concerns regarding Zika virus. It also owns other businesses, including TruTech and Critter Control which focus on wild life control. The company also focuses on bed bug and other pest extermination. This is a highly speculative trading situation which may have a short term lifespan but may also be increasingly powerful given the current potential for the rise in incidence of parasitic and animal vector related diseases. Thus, in the current market it’s an interesting story stock to consider.

Rollins is not a cheap stock trading at 39 times past earnings. Its most recent quarter delivered modest growth in both earnings and revenues, in the 5-6% range, which although not too exciting, is likely sustainable given the nature of the business. The company continues with a steady expansion plan including the addition of several international franchises, focusing on areas with large pest populations. It continues to invest in technology, recently updating support and analysis systems and including communication and software tools to its employees in order to maximize their interaction with customers.  Dr. Duarte owns shares in ROL.

ProShares Ultrashort Biotech ETF (BIS) Bought 2/28/16 at $48. 3/18/16 closing price $47.37.  Sell stop changed to $42.

Opko Health Inc. (OPK) Buy Range $8-$11. Bought 2/1/16 at $8. 3/11/16 closing price $10.21. Sell Stop raised to $8.  This stock is in a stealth bull market.

Note: We think the market is wrong on this one as management has expanded the company through acquisitions which have already 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.

Opko delivered a well received earnings report in late February that showed that the company is consolidating its recent acquisitions. It has made several advances on its current business lines and products in development as well as ongoing successes and milestone payments from collaborations from other companies.  Dr. Duarte owns shares in OPK.

News Update and Analysis:  Biosimilars: Behind the Generics Curtain

Pharmaceutical companies have traditionally lost money when their drug patents expire and generic competition offers the potential for lower prices. But one company’s recent moves suggest that big pharmaceutical companies have learned their lesson and that they have found a way to try to make up their losses.

Anyone who’s read our column lately is aware that the biotech sector is under significant amount of pressure.  The familiar causes of the reversal of fortune for the darling sector of the stock market until 2015 are numerous but worth noting, as they all share a common cause, money is starting to dry up.  Simply stated, biotech drugs are expensive and Medicare and private insurers are tired of footing the bill. When you add the fact that a lot of biotech companies have become large drug companies and that many are in danger of losing their ability to adapt swiftly to market conditions while risking the lost of patent protection on some of their biggest blockbuster drugs, it’s not difficult to understand the current decline in the large pharmaceutical and biotech sector, as investors begin to factor the potential for profit and revenue declines in the future.

What is not commonly appreciated outside of the “inside baseball” sector of biotech is that generic competition is coming to biotech in the form of “Biosimilars.” This is another term for drugs that are close enough to the real thing to be able to compete in the marketplace.

But there are two big factors that, at least conceptually and historically, argue against at least some of these substitutes.  Close enough may not be good enough.  If generic drugs are any guide, many of them are pretty good, but equal numbers of them are not so good or not so good as often as the brand name drugs. This is commonly seen in painkillers and in blood pressure medications where some patients do not get reliable results to generic drugs or generic drugs from different manufacturers. 

So there is an emerging strategy.  Some large pharmaceuticals, like Pfizer (PFE) are aggressively getting into the Biosimilar mode.   Consider that Allergan bought Actavis, a leading manufacturer of generic and Biosimilar drugs in 2015 and that soon thereafter, Pfizer and Allergan tied the knot.  To be sure, the Pfizer Allergan wedding was pitched as a tax related inversion since Allergan is headquartered in Ireland. But a deeper look suggests that the Actavis acquisition by Allergan was attractive to Pfizer which is going to lose a lot of drugs to patent expirations, including its market leading nerve function pill Lyrica over the next couple of years.

In other words, Pfizer and other companies are buying the production capacity to make generics and Biosimilars in order to maintain their revenue streams.  If they sell less volume of the brand name drug, they can raise the price.  And by owning the generic or Biosimilar of the same drug they can make up the rest of their lost revenue and even come out ahead. In many cases, they may not even have to alter the manufacturing process beyond labeling.

What’s most interesting is that Pfizer’s stock looks like any other biotech stock at the moment, hovering near its recent lows.  What that tells us is that investors aren’t buying into the latest strategy of large drug companies buying their way into making their own generics via the acquisition of another company and changing the corporate structure or name.  It’s a clever strategy to be sure. But it doesn’t seem to be convincing any investors at the moment.

Shopping List

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

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%.
• ]Emergent BioSolutions (EBS) Buy Range $36-39. Bought 1/25/16 at $36. 3/4/16 Stopped out at $34 on 2/8/16.  Total return (-) 5.5%.

 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: 56.9%.
• Celldex Therapeutics (CLDX) Trading Recommendation Position Closed: Stopped out at 16. Recommended 10/26/15. Buy range entered 10/26/15 at 13.22. Total Return 21%.  
• Alnylam Pharmaceuticals (ALNY) – Trading Buy triggered at 85 on 10/9/15. Trading Recommendation Position Closed: Stopped out at 100 on 11/16/15. Total Return 15%.
• Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Bought 10-27-15 at $76.50 post 2 for 1 split). Trading Position Closed: Sell Stop Triggered at $78. Return 1.96%.

Note to readers:  I am looking forward to meeting you personally at our Las Vegas Summit, May 12-13.  As an added bonus and as a special way to thank you I will be revealing a “summit only” stock recommendation in Las Vegas and as a very special bonus I will be discussing my favorite technical indicators in detail to help you in your personal trading.  Hope to see you all there and thanks for your support. And if you have a copy of “Trading Options for Dummies,” bring it and I’ll be glad to sign it. Joe Duarte