Health care stocks had a tough week with the Nasdaq Biotech Index (NBI) losing nearly 8% from its Monday close, which was the high for the week. The selling in the sector was across the board with few stocks moving higher on the week. Among the biggest beneficiaries of the week was the ProShares Ultrashort Biotech ETF (BIS), which gained 13% for the week. As a result, I am raising the sell stop limit price on BIS, as detailed below in the Portfolio Summary – Changes This Week.

The big question is whether this is the start of further selling or if the downdraft we saw last week is temporary. The answer, of course, is that no one knows. Yet, as we do know, inordinate selling often leads to opportunity. This week I’d like to focus on two stocks that were sold off aggressively but whose prospects, at least fundamentally, remain undimmed. This suggests that fear and impatience are on the rise, especially given the current status of the presidential election and of the unveiling of recent Medicare guidelines for physician payments. 

Without getting into the weeds or the politics of Medicare, the new rules are another step toward decreasing payments across the health care sector.  As I noted recently, the bundling of payments to hospitals for certain procedures is already under way, and there have been some consequences beyond falling stock prices. In my private practice I am having difficulty finding orthopedic surgeons, rheumatologists, and even primary care doctors that will accept patients covered by Medicare and Medicare policies for joint replacements. 

I also know multiple physicians who have chosen early retirement or have become employees of large medical systems in order to sidestep the coming cost cuts. This will most likely result in fewer physicians, longer wait times and reduced access to care. From a business and stock market standpoint, it will mean a squeeze in revenues and profits for many companies. The upside will likely be a consolidation wave among large pharmaceutical and medical equipment companies. But before that happens, I expect more selling pressure as the realization that this is really happening finally hits the hedge funds.

Finally, as the election season nears its climax expect more volatility in the markets, but also in the health care sector, which remains the great unknown. In this environment it is important to remain patient, focus on the fundamentals of each company, and to be hedged against risk. I remain very cautious in this market.

Medidata Solutions – Buy up to $58

I am recommending adding to positions in Medidata Solutions (NSDQ: MDSO) after last week’s selling spree which took the stock down to near $49. MDSO offers biotech and pharmaceutical companies cloud-based solutions, including clinical trial planning and designing software as well as automating record keeping and all pertinent add-ons required to monitor, adjust, and document the progress of the trials, including assistance with FDA applications.

Much of the selling was based on a series of insider sales registered during the third quarter of 2016 by company Vice-Chairman Stephen Isaac Hirschfeld. All of those sales came after the company reported earnings on July 20th. Interestingly, Medidata’s most recent quarter was excellent and the company reaffirmed its full year guidance. Mr. Hirschfeld seems to be the only insider selling his shares at the moment. More interesting is the fact that the pace of insider selling has slowed in Medidata, which could be a sign that the upcoming earnings report, due to be released on October 25^th, may be better than expected. The company has recently announced contracts with Polaris Pharmaceuticals, Pluristem Therapeutics (PSTI) Stanford affiliated startup Biotech 47, and Biogen (BIIB) among other university affiliated oncology programs.

Buy Medidata Solutions up to $58. I own shares in MDSO.

Impatient Investors Dump Cerus Corp.

Shares of Cerus Corp. (NSDQ: CERS), the producer of blood bacteria, parasite, and virus neutralization systems for blood components, have taken a beating over the last few days as investors became impatient with the perceived pace of progress being delivered by the company. Cerus makes the Intercept System, which inactivates a broad spectrum of microbes in platelets and plasma, rendering the blood supply safer. The big profit opportunity, though, is in gaining FDA approval for using Intercept for red blood cells (RBCs). The RBC transfusion market would likely translate into a several hundred million dollar boost in revenues in a relatively short period of time after the approval.

Cerus is a highly speculative stock but the payoff could be huge, especially given the ongoing migration patterns in the world, the rise of new germs such as Zika (which Intercept has gained FDA approval for as a possible aid in keeping out of the blood supply), and grant support the company has received from the U.S. government. Most important, CERS has partnered with the Red Cross, the largest blood component distribution network in the U.S., as well as other blood centers in order to deploy the Intercept system throughout the country. Even more encouraging is the recent application from a key blood center which, if granted, will allow for interstate transfer of Intercept treated platelets, a significant step toward wider dissemination and use of the system. 

Yes, CERS is moving slowly; but it’s not making mistakes. In other words, for those with a long term time horizon, the stock’s recent plummet could be an opportunity to add to positions. The CERS story is nowhere near written. The final chapter of the current drama will come when the FDA decides whether Intercept will be used for RBC pathogen neutralization. 

Buy CERS up to $9.  I own shares in CERS.

Portfolio Summary – Changes this week

Special Situations Trade: Buy ProShares Ultrashort ETF (NYSE Arca: BIS) up to $36 with a trailing 8% Sell Stop. Raise Sell Stop to $32. Bought on 8/25/16 at $33.44; closing price on 10/14/16 was $36.87.