The presidential election is roughly two weeks away, but the war on the pharmaceutical sector has been raging for at least a year and the effects are starting to be felt more acutely across the sector. As a result we are making decisions on key portfolio holdings including our Amgen options trade (NSDQ: AMGN) and our long term holding Meridian Bioscience (NSDQ: VIVO).  I will also be updating the recent JNJ put option trade.

The War on Pharma

‘“We have started the war with pharma!!” wrote (Hillary Clinton’s) Senior Policy Advisor Ann O’Leary, on Monday, Sept. 21, 2015 as the candidate’s Sunday tweet was reverberating through the drug industry, according to a WikiLeaks extract first reported by Endpoints News.’ – Fiercebiotech.com

First, I want to address the potentially detrimental effect of the U.S. presidential election on the healthcare sector, especially on pharmaceutical companies. Anyone who owns healthcare stocks knows that the entire sector, especially the pharmaceuticals subsector, is limping into the election. The Nasdaq Biotech Index (NBI) is down nearly 21.5% since September 21, 2015, the same day in which a tweet from presidential candidate Hillary Clinton suggested that she would go after pharmaceutical companies for “price gouging.” 

What was unknown then but has recently been revealed via the Wikileaks email hack of her presidential campaign manager, John Podesta, is the delight expressed by her campaign as the biotech sector tumbled in response to the tweet. An excerpt of the reaction is posted above. A full description and documentation of the events is highlighted here, and is worth exploring.  

This is not a political analysis. I am merely pointing out that from an investment standpoint the health care sector is potentially ripe for more trouble, and what happens in November could have significant repercussions to our portfolios. More important, gauging the recent action in biotech stocks, the reaction from investors to this news seems to be gathering steam as NBI has lost nearly 11% of its value since September 23^rd as Mrs. Clinton has been rising in opinion polls.

There is no excuse for price gouging, such as what is known about Mylan, Valeant, and Turing. But when a political campaign delights in the damage done by a statement from its candidate to an entire stock market sector, where not all companies are alleged to be price gouging, it should be taken seriously and as a potential sign of things to come if the candidate is elected. It is thus plausible to consider that as drug companies review the information that is available there will be other significant consequences, beyond portfolio damage, should the candidate be elected. 

Already, companies are such as Pfizer (PFE), Astra Zeneca (NYSE: AZN), Teva (NSDQ: TEVA) and Novo Nordisk (NVO) and others have been and are laying off employees, cutting budgets, and restructuring business units.  Here is another example of what could happen: Glaxo Smithkline (NYSE: GSK) is leaving the U.S. cervical cancer vaccine market due to “low demand.” In the past the company might have fought for market share. Now, it’s just walking away. 

Say Goodbye to Meridian Biosciences

I first recommended Meridian Biosciences (NSDQ: VIVO), a Cincinnati, Ohio-based laboratory testing company specializing in easy-to-deploy field testing equipment for infectious agents on June 25, 2015. The company has had a history of steady growth and has paid a dividend of 4.25% over the ownership period. But on October 19, VIVO previewed its earnings for the most recent quarter and was not able to convince investors to remain patient until its recent acquisitions and other business plans deliver a much needed shot of growth. After the company preannounced, the inevitable analyst downgrades followed and the stock tumbled. It looks increasingly weak, fundamentally due to its business’ lack of growth and technically as the stock has broken through several important support levels. It’s time to sell VIVO. 

Buy Johnson & Johnson December 16, 2016 115 Put

Johnson & Johnson (NYSE: JNJ), a diversified developer and marketer of a broad range of pharmaceutical products is vulnerable to the current political environment. Owning puts on this behemoth offers us an opportunity to hedge the long portion of our portfolio while affording us the potential for some gains if the selling in the large pharmaceutical stocks gathers steam.

The trade is based on expectations that rising prescription costs for patients, decreasing insurance coverage and government pressure will affect sales, revenues, and earnings for JNJ and others in the same sector. I expect, and am already seeing in my medical practice, that higher deductibles and insurance premiums will squeeze consumer pocketbooks and this will eventually hit the big drug companies. If I’m right, and especially if Mrs. Clinton gets elected, analysts will start to ratchet down their unrealistic earnings expectations for large pharmaceutical companies. The current weakness in JNJ shares suggests that the smart money is starting to ease out of the shares. 

Buy Johnson & Johnson December 16, 2016 115 Put Option (JNJ_121616P115) up to $4.

Hold Amgen Option Position until Earnings are Released

I’ve had several questions on the Amgen call option trade, which so far has not been going as planned. Just for the record, I own the option and feel your pain so let’s put this trade in perspective. The rationale for the original recommendations was that Amgen, over the last five quarters, had tended to rise in the month leading to its earnings report, which is scheduled to be released on October 26^th. The stock has not risen as its recent history suggested it would, and consequently the option has not done well. There is no particular single news item that is suggesting terrible earnings for the company, so I’m thinking that the selling may be at least partially due to the negative macro in the sector and the fact that Amgen shares are liquid. 

Here is the history of how the trade has unfolded:

Part 1) Amgen October 21, 2016 175 Call Option (AMGN_121616C170).  Bought 9/23/16 at $3.25. Rolled 10/2/16 at 0.50.  The original trade was posted here.

Part 2) Buy up to $6. Amgen December $170 Call (AMGN_121616C170).  Bought 10/03/16 at $4.53.  10/14/16 closing price was $3.48.  Hard Sell Stop at $3.  Dr. Duarte has a position in this option roll.  The roll recommendation was posted here.

Here is what to do now:

If you own the option, keep it and see what the stock does in response to earnings. If you don’t own the option I recommend staying away from it at this time. If you have not rolled the option as I subsequently recommended, then you can keep the first leg and let it expire worthless or roll the option and wait for the earnings release. I will be keeping my rolled over option until after earnings are released. I will issue an update after the release for further instructions.

Portfolio Summary

Changes this week

Buy Airgain (Nasdaq: AIRG) up to $17.  Recommended 10/20/16.  Bought 10/20/16 at $14.15. 10/21/16 close $13.94.

Buy Johnson & Johnson December 16, 2016 115 Put Option (JNJ_121616P115) up to $4. Bought 10/21/16 at $3.20. 10/21/16 closing price $3.65.

Sell Meridian Biosciences (VIVO) – 10/21/16 closing price $18.80.  Stock initially recommended on 6/29/15.  Dr. Duarte owns shares in VIVO.

Option Roll:

Part 1) Amgen October 21, 2016 175 Call Option (AMGN_121616C170).  Bought 9/23/16 at $3.25. Rolled 10/2/16 at $0.50.

Part 2) Hold Amgen December $170 Call (AMGN_121616C170).  Bought 10/03/16 at $4.53.  10/21/16 closing price $3.10.  Hard Sell Stop $3.  Dr. Duarte has a position in this option roll.