President Trump wasted no time in increasing the potential for healthcare disruption on his first day in office. Within a few hours of being inaugurated he signed an executive order that gives the heads of federal agencies whose jurisdictions are related to Obamacare what sounds like carte blanche to reshape the law until it is fully repealed and presumably replaced.

This dynamic sets up the potential for an explosive move in the entire healthcare sector, as well as possibly other areas of the market including positions in our portfolio. 

I knew this day would come.  Over the past few weeks I have restructured the healthcare portion of the BTP portfolio to meet the challenge of Trumpcare.  Specifically, I constructed four option straddles at the end of 2016.  One of them, based on United Healthcare (NYSE: UNH) already delivered a 22% profit, while we sold a second straddle based on shares of Gilead Sciences (NSDQ:  GILD) for a small loss since the stock wasn’t moving.  That leaves two open straddle positions, the Molina Healthcare June 2017 55 straddle and the HCA June 2017 80 straddles as potential movers. 

Molina’s straddle has been marking time of late on low volume and little movement. But this could change quickly as Trump’s executive order is studied by traders.  Molina is particularly vulnerable to any type of action which limits or affects Medicaid, since it is a leading provider of Medicaid HMO plans – key cogs in Obamacare.  If Molina’s contracts with the government are affected negatively by this executive order, the put option portion of the straddle could be a sizable winner.

Molina Healthcare June 2017 Straddle

Buy to Open Molina Healthcare June 16, 2017 55 Call Option (MOH170616C00055000) up to $8. Bought 12/7/16 at $8 – 1/13/17 closing price $8.05

Buy to Open Molina Healthcare June 16, 2017 55 Put Option (MOH170616P00055000) up to $8. Bought 12/7/16 at $7.80 – 1/13/17 closing price $4.30

Initial Straddle Value $15.80.  Current Straddle Value $12.35.

HCA May Get a Reprieve

HCA is the world’s largest hospital chain and its bottom line is likely to be affected if the new executive order slows or halts the implementation of bundled payments to hospitals – where the hospital is mandated to provide care for 90 days to patients for a lump sum regardless of the particular situation or risk profile of the patient.  Bundled payments for total knee and total hip replacements are in their second year of implementation while 2017 is the first year for bundled payments related to care for patients with heart attacks.  HCA has recently reported slightly better than expected quarterly earnings and the call portion of the straddle has been rising.  If the market sees this executive order as a positive development I expect the call option to move higher.

HCA June 2017 Straddle

Buy HCA June 16 2017 80 Call (HCA170616C00080000) Below $6. Bought 12/12/16 at $3.50.  1/13/17 closing price $5.45

Buy HCA June 16 2017 80 Put (HCA170616P00080000) Below $12. Bought 12/12/16 at $9.80. 1/13/17 closing price $5.80.

Initial Straddle Value $13.30.  Straddle Value on 1/6/17: $11.25

Pleasant Surprises Possible

Our three direct healthcare picks, Bristol Myers Squibb (NYSE: BMY), AMAG Pharmaceuticals (NSDQ: AMAG) and Biotelemetry  (NSDQ: BEAT) are all poised to benefit from any directive related to President Trump’s executive order.  Generally all three of the companies could see general sector-related benefits if the market likes what it sees in the executive order.

While AMAG has some product specific issues on its plate,  Bristol Myers, which has recently fallen on news of problems with its Opdiva cancer franchise, could see a nice bump from its blood thinner Eliquis, especially if it can start to apply some pricing pressure. Eliquis is steadily becoming the number one blood thinner in the business.  BMY also has Orencia, another rapidly rising agent aimed at treating rheumatoid arthritis, which can also benefit from some loosening up in insurance company and Medicare purse strings.   I recently recommended a call option purchase on Bristol Myers after the recent oversize dip in the share price.

Biotelemetry can benefit in a big way if bundled payments for heart attack care are stopped.  Many patients with heart attacks suffer irregular heartbeats and BEAT’s product line may find expanded markets if cost conscious hospitals have been reverting to older heart rhythm monitoring methods which are less effective clinically but cheaper.

I have open positions in HCA, MOH, BMY and AMAG

Portfolio Update

Recent changes:

Buy Biotelemetry Inc. (NSDQ: BEAT) up to $25. Bought 1/19/17 at $21.70 – 1/20/17 closing price $21.90 – 

Buy Bristol Myers March 17, 2017 Call Option with a $50 strike price (BMY_170317C005000).  Bought 1/20/17. 

Biotelemetry Protective Put

Buy May 19, 2017, 21 Biotelemetry Inc. Put Option (BEAT170519P00021000), bought 1/19/17

– Joe Duarte

Simulations Sets Record

Simulations Plus (NSDQ: SLP) has reported a record-setting fiscal first quarter as net revenues shot up 12% year-over-yearto $5.42 million, pushing gross profit 8.7% higher to $4.08 million. While expenses also crept up in the quarter, earnings per share increased 22% to $0.078 from $0.064 in the same period last year.

New users helped push software revenue 7.2% higher, with 28 new clients, or new departments at existing clients, adding licenses. Strong renewal rates also made a solid contribution, but the real help came from consulting services. Consulting revenue rose 21.1% as 13 new clients signed up for services and a five-year consulting agreement with a major research foundation, worth nearly $5 million, is also beginning to show up in revenue.

Revenue and earnings are expected to move higher over the course of the year with new releases planned for all of Simulations Plus’s major software packages. Workshops to educate users are new packages are planned in the US, Europe and Asia, which should help boost consulting revenues. As a result, analysts are predicting that full-year EPS will grow by better than 10%, hitting $0.32.

That expectation is bolstered because most companies, regardless of whether its pharma and biotech or aerospace, are still paying close attention to their bottom lines. That means cutting costs wherever possible and using Simulations Plus’s software to model the aerodynamics of a new plane design or how a drug will behave in the human body is significantly cheaper than building prototypes or expensive testing. Thanks to advances in artificial intelligence and machine learning, the company’s simulations prove to be just as accurate as “real world” testing, which is the biggest reason the company has been able to grow its client base so consistently.

Despite the solid first quarter result and strong growth outlook, the company remains attractively valued. Trading at just 33.5 times trailing earnings, it is only slightly above its own five-year average and well below the industry average of 72.8 times. It’s PEG ratio, which compares PE to growth, is also slightly negative, meaning to company is also undervalued compared to expected growth.

Buy Simulations Plus up to $12.

– Benjamin Shepherd