The market has been good the past couple of days with biotechs continuing higher, although it still seems to me that we are in a pause that should refresh as opposed to being ready to move higher. In some ways it depends on the macro environment but perhaps we will finally get to a stock pickers market, so I will focus on specific stocks today. Of course, people have been calling for that for awhile but correlations remain higher, so I would not hold my breath.
1. Sometimes it is better to be lucky than good and I certainly feel that way with CNAT. It was a company I met with at JPM and I finally had time to circle back to it more recently. I mentioned it a couple of days ago as an under the radar NASH play but it is certainly more than that. Joe mentioned his buy and I decided to initiate a position sooner than I planned. It turned out to be fortuitous as the stock got a nice boost from a recent Seeking Alpha article. If you are interested in the company, then the article does a good job at summarizing it. While the focus for many will be on the NASH potential, as that is the new shiny indication, I would not underestimate the post-Hep-C infection indication. They are looking to use the drug to treat liver disease for those who just had their hep-C infection cured. That will be a market that continues to grow over time (dramatically as we see from the Sovaldi launch). Even with the recent run the stock is not particularly expensive but, as always, I dislike adding (or buying) after a spike higher.
2. So GILD had more blockbuster Sovaldi sales this week and is still on pace to crush $5B in 2014 sales. So why is the stock price stuck in the mud? Of all the explanations that I’ve heard, I think the most likely is the fear that a re-warehousing effect will occur as patients/doctors wait for the new combo in late 2014. I think that is a reasonable “bear” thesis (if you can call it that) but the company has been asked about it and they did not think it would be an issue. Of course, the company could be wrong and we might very well see a slowdown in sales as we get close to the new launch. So what would this mean? First, for total 2014 sales it would likely still place them well over $5B but the path there would not be linear. Second, from a trading perspective it might mean that GILD gets weak in the near term. Of course, this could be counteracted with an increased buyback by the company so the effect on the stock price is not clear cut. So what would be needed to disprove the bear thesis? I doubt it will be any singular event but each week the sales do not slowdown puts more pressure on that thesis and at some point there will be a capitulation. I do not know when that would be. Under either scenario, however, total 2014 sales are still great and they will be great again in 2015 and so on. If the bear thesis ends up being correct and we see a significant selloff, then that appears to me more of a buying opportunity as it would not discredit the longer term GILD thesis.
3. I put a stop loss on my ONTX position even though the risk/reward looks good from a pure price perspective. I am starting to worry more about the delay in the data, although we are still within the first quarter. I am certainly concerned about the insider selling, which at best is tone deaf and at worse a bailing before the data. Given how close we are to having the data locked (if it is not locked already), I do not want to be the last person holding the bag if the trial fails. A move below the 50-day will likely cause more selling and I think we are close enough to the data that a breakdown in the stock price is much more likely to be related to news. I said before that the longer we go without news the more likely the control arm is outperforming the estimates. This is not to say the company did not make the best estimate for the control arm but there are so few studies on how BSC would perform that the variance on that estimate is quite high. Also, given how low the estimated OS is for that arm (under 5 months) it is not very likely that they will live significantly less, so the most likely scenario would be the control arm living longer. I said before that if we are into March my estimate for success would drop to 50/50, but I am not going to wait an put it there now. I would drop it even lower if we do not get data before March.
With that I will call it a week. I hope everyone enjoys their long weekend.
Disclosure: Long CNAT, GILD, and ONTX (with stop loss at $13.40).
