In This Issue:

• Argos Therapeutics: Speculative Buy On Track
• Emergent Biosolutions Back to a Buy
• Cerus Options Trades
• Portfolio Summary
• Sell Workday

Argos on Track for June Announcement

By Jim Pearce

After the stock market close last Thursday, Argos Therapeutics released operating and financial results for the first quarter of 2016. The company announced a loss of 57 cents per share, a penny below expectations. For an R&D firm like Argos, making a profit at this point in its development is not expected, but managing the “burn rate”, or negative cash flow, at a sustainable pace is critical to remaining solvent which it appears to be doing.

To that end, Argos also confirmed that the first round of financing from the investor group that has agreed to purchase up to $60 million of ARGS stock has hit its bank account. This group agreed to pay $5.44 per share for ARGS (its price back in March when this deal was struck), and has also received warrants (long term options to buy more stock later on) at the same price. Despite Argos’ negative cash flow during the first quarter, the addition of nearly $20 million in cash from this consortium increased its liquid assets from $7.2 million to $13.8 million.

The company’s CFO commented on this infusion of new capital, saying “We expect that the proceeds from this initial closing to fund ongoing expenses into the third quarter of 2016, and that the proceeds from all three closings, if they all occur, will enable us to fund our operating expenses related to the ADAPT trial of AGS-003, the ongoing and planned investigator-initiated Phase II clinical trials of AGS-003,  the funding of certain manufacturing costs of the investigator-initiated eradication study of AGS-004 and certain other costs relating to our commercial manufacturing strategy into the second quarter of 2017.”

Based on those comments, it appears Argos has gone “all-in” on the outcome of these trial results, and is taking the steps necessary to ensure that it can finance its operations until they are completed. Last month’s layoffs at its research facility appear to be nothing more than a tightening of the belt, described by the CFO as “an effort to streamline our budget and refocus all functions on the core elements and activities needed to complete the ADAPT trial and prepare for the BLA filing.”

The company went on to discuss its expectations regarding the Phase 3 ADAPT clinical trial that is near its midway point, with company CEO Jeff Abbey making the following comment regarding the timing of the trial results: “We are looking forward to the next meeting of our Independent Monitoring Committee, or IDMC, in early June when the IDMC will review the data from the ADAPT trial, primarily to evaluate safety and futility. We expect to report the outcome of that meeting shortly after it occurs.”

Based on these comments it appears the timetable for releasing the interim trial results has been pushed back to mid-June, which is consistent with the company’s announcement last December that they would be released no later than the end of the second quarter of 2016. Until then, we expect that ARGS will continue its volatile trading behavior based on a variety of factors that could have nothing to do with its long term prospects. Day traders appear to be in the stock, and short sellers may have jumped in after last month’s layoff announcement.

Thus far there has been no an action or information from Argos to suggest that these trial results will be disappointing, so we remain committed to our original thesis which is based on the efficacy of its revolutionary cancer treatment. For that reason we continue to recommend ARGS as a speculative buy for risk-tolerant investors with a long term time horizon.

The Return of Emergent

By Joe Duarte

Buy Emergent BiosBuy (EBS) up to $43 on Solid Turnaround

We are returning to the biotech/defense sector by revisiting a stock from our 2015 portfolio, Emergent Biosolutions (EBS). EBS makes Bioanthrax, the leading vaccine against the potential bio-terror agent Anthrax.  We first bought EBS in May of 2015 and sold it for a 17.63% profit in January.  The stock became volatile and lost nearly 16% by March after the company reported some “foreign particles” in a batch of Bioanthrax, and there were questions about whether the Centers for Disease Control (CDC) would keep buying the vaccine.

At the same time, EBS spun off its unprofitable oncology business into a company named Aptiva, and began to expand and eventually replace its manufacturing facilities. This created an uncharacteristic amount of uncertainty for a company known to be well-run and reliable. The net result was that the stock began to sputter and then the company missed on analyst expectations.

But now management has seized the reins again and EBS is back on course. The stock has come off of its March 2016 lows and has been consolidating its price near the $40 area for the past two months.

What makes it especially attractive is EBS vastly exceeded its earnings expectations in the most recent quarter.  It posted a 292% increase in sales year over year, and turned a $21.52 million loss in the March 2015 quarter  a  into a $4 million profit in the March 2016 quarter.  The company also reported a nice increase in cash on its balance sheet from $216 million to $340 million.

It also  received a letter of intent from the CDC for a new Bioanthrax contract.  The new manufacturing plant is also on track, as is  the Aptiva spinoff, a move that will allow it to concentrate on its profitable defense-related business.

EBS has historically been an excellent, well-run biotech company with a heavy emphasis on the medical treatment of the results of biological and chemical warfare.  The company’s other products include treatments for chemical and nerve agent related warfare.  

The EBIS (Emergent Biotech Investment System) score for Emergent Biosolutions (EBS) is + 9 (BUY) (March 2015 data).  Here are the details:

• Cash on hand (+1): EBS had $340 million in cash compared to $216.5 million in March 2015.
• Cash on Hand growth (year over year) (+1): The year-over-year cash increase on the balance sheet was 57%.
• Revenues (present or not) (+1): EBS reported $111 million in revenues in its March quarter compared to $63.3 million a year earlier, a near doubling of the number.
• Revenue growth (10% or greater) (+1): Revenues grew by nearly 100% on a year over year basis for the March quarter.
• Trailing Total Liabilities/Current Assets (<1=+1, >1=0) (+1): EBS has an estimated $580 million in current assets versus an estimated $400 million in total liabilities.
• Earnings (Present or Not Present) (+1): EBS has very reliable earnings.
• Net Income Growth (Year over Year) (+1): EBS reversed a loss for March 2016 compared to March 2015.
• Products on the market (+1): EBS has multiple products on the market.
• Pipeline Strength (+0): EBS has a fair but not a great pipeline.
• Late Stage Clinical Trials and Product Launches (+1): CBM is expanding its manufacturing facilities and is looking to expand through mergers and acquisitions.

Details on the outlook for the entire portfolio can be found at the bottom of this article.

Trade Update and New Options Recommendation for Cerus

Trade Update: We issued an alert (4-30-16) on Cerus to buy before and after earnings (5/3/16) in expectations of a drop in price in the short term to be followed by gains in the stock over the next six weeks. The stock has been falling in price, as we expected, but may be close to forming a bottom near the $5.30 area. As we said last week it could still drop some more in the short term, but that does not change our recommendation at this point.  So, if the post earnings pattern on CERS holds up, our target for the shares is for a price of around $8 on or around June 15^th  . We’ll be monitoring this trade as it develops and have found two call options that may be useful. 

Alert: Options Recommendation – Buy CERS Call Option in preparation for post earnings seasonal trade.

We have provided both a slightly in-the-money and a more deeply in-the-money options trade recommendation below.  CERS closed at $5.61 on May 13.

• Slightly in the money- Buy CERS June 17 Call Strike Price $5 – Option Price (5/13/16) $0.55
• Deeply in the money – Buy CERS June 17 Call Strike Price $4 – Option Price (5/13/16) $1.35

These two option trades are recommended with a target date of June 15 for CERS share price moving toward the $8 area in mind.  Our expectation is that the stock moves up, and that it reaches or comes as close as possible to our $8 target within that time frame.  This trade is specifically designed to deliver clearly defined profits while limiting the risk of loss. Take profits if and when the option price gains up to or above 35-50% of the purchase price.  Given the implied volatility for each option, a $1 move up in the stock should goose the option price to the desired gains if the options behave as expected.  If the desired gain is achieved on the upside at any time before June 15, we recommend the sale of the option before expiration, which is June 17.  On the flip side, a $1 move down in the stock should be used as the guide for the limit loss on the options.  If the stock falls $1 then the option should be sold to close out the trade.  Remember that time value will start to erode rapidly with these options given their June 17 expiration date.

Portfolio Summary

This Week’s Changes:

There are no changes in our existing portfolio this week.

No Changes in the following positions:

Biorad Laboratories (BIO) – Bought 5/16/15 at $146.25.  5/13/16 closing price $143.07– Sell Stop $132.

Celldex Therapeutics (CLDX) – Buy $4-$7.   5/13/16 closing price $3.74.  Dr. Duarte owns shares in CLDX.

Cerus Corp. (CERS) – Buy Range $5-$7. This stock was initially recommended 11/16/15. Bought 11/16/15 at $5 – 5/13/16 closing price $5.61; Dr. Duarte owns shares in CERS.

Medidata Solutions (MDSO) – Buy $40-$42.  Sell Stop changed to $39. Bought on 3/7/16 at $36 –  5/13/16 closing price $42.06.  Dr. Duarte owns shares in MDSO.

Meridian Biosciences (VIVO) – Buy $20-23 – 5/13/16 closing price $19.16 .Stock initially recommended on 6/29/15.  Dr. Duarte owns shares in VIVO

Novo Nordisk A/S (NVO) – Buy  $55-59 (4/7/16).  Sell Stop to $49.  Recommended 12/21/15.  Bought at $55 on 12/21/15 –  5/13/16 closing price $54.08.   Dr. Duarte owns shares in NVO.

Opko Health Inc. (OPK) – Buy Range $8-$11. Bought 2/1/16 at $8. 5/13/16 closing price $9.75. Sell Stop raised to $9.  Dr. Duarte owns shares in OPK.

Rollins Inc. (ROL) – Buy at $27-29. Bought 2/22/16 at $27.38. 5/13/16 closing price $27.27. Sell Stop at $22.  Dr. Duarte owns shares in ROL.

White Wave Foods Company (WWAV) – Buy up to $44.  5/13/2016 closing price $44.08. Dr. Duarte owns shares in WWAV.

Personal note:  It was great to meet all of the attendees at the WESO Summit in Las Vegas last week.  You are all terrific and highly knowledgeable investors. I had a wonderful time and I look forward to seeing you next year.  Joe Duarte

Sell Workday

By Benjamin Shepherd

When you start a new company, you need a severe case of optimism. Building a business from the ground up is grueling work, especially when there are already major competitors in your market.

That was the case with Workday (NYSE: WDAY), which sells cloud-based business software used for human resources and financial management. Since opening in 2005, it has faced an uphill battle against competitors such as SAP (NYSE: SAP) and Oracle (NYSE: ORCL). It‘s been successful, though, with revenue rising from about $25 million in 2009 to more than $1 billion last year.

Despite its impressive revenue growth, the company hasn’t turned a profit on a GAAP basis. When you’re competing against larger, established companies, you have to burn a lot of cash on both product development and your sales force to gain market share.

Last year’s final quarter perfectly illustrated  the problem. S&P Capital IQ reports that while Workday brought in $226.3 million in revenue, cost of goods sold amounted to $70 million, while SGA (selling, general and administration) costs were $117.7 million and R&D (research and development) costs amounted to $89 million. That leaves an operating loss of $50.4 million.

While Workday has done an excellent job of adding customers, with roughly 1,000 clients using its HR software and more than 200 using its financial management software, it’s client list is a shadow of its larger competitors. Yet it still has to pump money into R&D to remain competitive. At this point, I just don’t see how the company can gain enough market share to start turning a profit soon without sacrificing on R&D and sales efforts.

At the same time, there’s nothing particularly innovative about its products. In the new Breakthrough Tech Profits, we’re looking for companies that are doing truly innovative work that will prove disruptive to entire industries and Workday doesn’t fit that bill.

While I applaud Workday’s optimism, it doesn’t fit our strategy anymore.

Sell Workday.