Raygent

Biotech stocks perked up today emboldened by a new month and ISM data including some positive growth from China’s manufacturing sector. Apple headlines with the iPOD and Apple TV helped catalyze the NASDAQ move. Biotech went along for the ride with most ETF’s up 2%+ and our Mid-Cap Biotech Index up 2.25%.Some notable movers within the Rayno Life Science Portfolio up 2.5% overall are:

Alera (ALR) up 4.4%, Alnylam (ALNY) up 5%,Cephalon(CEPH) up 3.7%, Nektar (NKTR) up 4.4%, Micromet (MITI) up 6%, and Neogen(NEOG) up 5.5%.

Genzyme (GENZ) stock was flat at $70.50 as the Sanofi-Aventis (SNY) takeover appears stalled because of  Genzyme’s management rejection of the SNY $69 offer.An analyst at Sanford Bernstein, Geoffrey Porges upped his price target to $76 saying that Genzyme has the upper hand with a likely price in the  $77 range. One big issue is Genzyme’s manufacturing problems which took the stock down to the $50 level, so the bulls are saying that GENZ is well on their way to quality improvement and getting product sales and profitability back in a growth mode. The five year high on the stock is the $77 range. From Yahoo current monthly data out of 20 analysts 14 have a hold and 4 have a strong buy. For those holding the stock who want to hedge, sell  the January 70 calls for $4.50.

Exelixis (EXEL) looks like a speculative buy in here at $3.30 as it is making a technical bottom,has a broad pipeline of products, strong partners and heavy insider buying. Market cap is $350M. More on EXEL later.

Rod Raynovich 2009-2010 Life Science Portfolio, BIOgraph Exelixis (EXEL), genzyme

See Part One of the August review regarding the “bondfest”.

We’ll spare you the review of what happened in August but now you know what worked- bonds and gold.

Gold ended the month up 5.61% as it survived a correction under 1200 and brought in investors as fears of double dip and a waek dollar prevailed.We are near the 12 month  high of 1250:

Rayno Life Science Portfolio: Biotech Outperformed Tech

The Rayno portfolio was down about 4-5% for the month after  a great July led by Tools and Diagnostics stocks.We urged caution and hedges on August 11 and since then most biotech indices are down 5-8% for the month despite a little M&A activity. Smaller caps were beaten up a lot more. Stocks in the portfolio that have held up well in August and YTD are:

Biogen (BIIB) $54, Cubist (CBST) $22,Arca Biotech ETF (FBT) $32.11, Illumina (ILMN) $43.50, NeoGen (NEOG) $29, Sequenom (SQNM) $6.10, Targacept (TRGT) $20.7 and ViroPharma (VPHM).

Rod Raynovich BIOgraph, Macro biotech stocks, FBT NEOG CBST SQNM ILMN, Gold, VPHM

The gloom and doomers are still out in force today but facing a little headwind as the market is stable to up helped by home prices and consumer confidence. Apparently the bulls were on vacation this August or frozen from clicking on something to buy except bonds. However the bond bulls rule  led by PIMCO talking their book about 2% 10 year yields and the endless recession. Tech stocks were supposed to be the big movers but are down over 10% spooked by Intel and Cisco’s cautious forward looking anxiety. Trading volume on NASDAQ is at a Five Year Low. Who cares about equities when you can make 10% in safe bonds in 8 months? Bond trading strategies abound. Saturday’s WSJ on page B9 “Bond Tips for Yield Chasers” by Ben Levisohn speaks to the risks of chasing bond yields but junk bonds are still hot. Guggeheim Partners says put half your money in 15 year zero coupon treasuries and half in short term debt of junk-rated companies. JPMorgan has a mish-mash portfolio of all types of bonds that yields 3.4% with a hedge on interest rate risk. What used to be boring is now the only place for your money.

Aug 30 Barron’s has two cautious articles on bonds:

Vito Racanelli on p13 says the bond rally is overdone and equities are oversold . A contrarian indicator is developing .

An Interview with Michael Lewitt on p36 in the August 30 Barron’s has some excellent comments on the ” financial mess” the most important point being, ” a misallocation of capital toward speculative rather that productive activities.” Some of Lewitt’s recommendations are a payroll tax holiday, low capital gains taxes, and the banning of naked cradit default swaps.On equities Michael thinks stocks are cheap but could get cheaper but a PE of 12 is a good measure of value. He also likes double-B/triple-B bonds of large cap companies. However he is cautious on bonds with the interest rate under 2.5% for teh Ten Year so the “Black-Swan trade is betting on inflation.”

Volume hits new lows on NASDAQ:

Rod Raynovich Macro, RAG

Sequel to our Aug 11 post on “End of Summer Rally”

If you hedged or exited stock positions on August 11 or  a couple of days earlier you would have saved 5% and much more on tech and smaller cap stocks.Since John Chambers of Cisco came on with his cautionary statements on August 11 the stock is down over 15%. Ditto for Intel at its YTD low of $18.18. All of the seasonal investing cliches are working: sell in May and go away, sell the summer rally and beware of September and October. To make matters worse individual stocks with good news cannot fight the overall bearish mood of the market and the economy. If jobs are down stocks are down.If the S&P is down all sectors are down. Fundamental analysis of stocks is of little  use in this market. Macro trends and trading rule. Deflation concerns paralyzes investors. Here are some points to ponder:

• A trading mentality permeates the market. Abaxis (ABAX) was $21.18 on Aug 11 after announcing good earnings and is now at $18.2. MicroCap SeraCare (SRLS) is down 40% from June highs after volume dried up.
• For the past 17 weeks there have been  mutual fund outflows to cash and bonds.Preservation of capital and yield dominate investing. Treasury 10 year yields hit a new low at the 2.50% level.
• There is a weekly obsession with new data: jobs, housing, GDP, double dip, bond bubble. Bernanke and the FED. We escaped depression 18 months ago so shouldn’t 1.5% growth be expected? Good corporate earnings are ignored due to bearish expectations.
• M&A usually sparks rallies but now the translation is.. “they must know revenue growth is slowing and need a product boost”.
• Blue chips yield 3-5% better than 30 year treasuries but there is concern that taxes on dividends will be increasing way north of 20% from the current 15%. And we have learned dividends are no guarantee.
• Theme and macro trades abound: e.g. buy gold and silver, hedge with ETF’s, buy volatility, short the CPI, sell covered calls, buy potash, buy wheat etc.
• Technical trading dominates fundamental analysis.

The next big call might be the mood shift out of deflation with the money flowing out of  low yielding bonds as investors  accept the “new normal” of slow growth. Then they would see equities as better value than bonds.Or technical traders will see the trading channel holding and spark a fourth quarter rally. But for now the “gloom and doomers” hold the upper hand.

Rod Raynovich 2009-2010 Life Science Portfolio, Macro csco, seasonality, summer rally

The IPO market is setting up for continued investor interest in the biotech sector. Two high profile genomics companies,Complete Genomics and Pacific Biosciences, have filed S-1 Registration Statements with plans to go public in the fourth quarter around the time when market seasonality becomes more bullish. Biotech has been a strong sector  in a choppy 2010 market with the NYSE Arca Biotech Index up 15.3% YTD. Selected molecular diagnostics stocks  have fared well YTD with GenProbe (GPRO) up 12%, Illumina (ILMN) up 50% , and Sequenom (SQNM) up 44% . Recent data from a Piper Jaffray Report in April quantifies the molecular diagnostic market at $4.1B and growing at 12%. Piper sees long term growth coming from genetic testing with pharmacogenomic testing for cancer and sequencing for genetic conditions. Piper believes that lower sequencing costs down below $5000 will enable the convergence into molecular diagnostics.

Complete Genomics (GNOM) filed on 7/30 for an $86M IPO with UBS and Jeffries and Co. as underwriters. The Company was founded in 2005, has 159 employees and has a proprietary DNA sequencing platform with integrated software and bioinformatics providing services for genomic based research.(see Raygent.com Profile Feb 15 (http://www.raygent.com/?p=189). Applications for the complete genome sequencing services are cancer research,Mendelian Disease Research, Rare Variant Disease Research, and clinical trial optimization. The Company has raised $95.4M since inception through six VC’s and 5% shareholders : Orbimed Advisors,Essex Woodlands Health Ventures,Prospect Venture Partners III,OVP Venture Partners,Enterprise Partners and Highland Capital Management. The Company has 30 past and current customers for its services including the National Cancer Institute (NCI). Accumulated deficit since inception was $89.6M and revenue for 2010 was $336k with a loss of $14.3M as of 3/31/10. Cash position was $2.4M.

Pacific Biosciences (PACB) filed on 8/16 for a $200M IPO with JPMorgan and Deutsche Bank as underwriters. The Company has developed a third generation  single molecule, real time  sequencing platform called SMRT that enables real time analysis of biomolecules with single molecule resolution. The Company states SMRT the technology provides long readlengths of DNA, flexibility in experimental design,ease of use and fast time to result that enables new types of biological research. According to the Prospectus the innovations of SMRT are: a cell with a 75,000 “ZMW” array to incorporate labeled nucleotides, phospholinked nucleotide chemistry all integrated with the PacBio RS  instrument. The strategy is to dominate DNA sequencing then expand applications beginning with RNA. The Company was founded in 2000 and has 369 employees in 164k square foot facilities.

According to Scienta Advisors the market for sequencing is $1.2B in 2009 growing to $3.6B in 2014. Current revenues of Pac Bio were $1.174M  primarily from government grants for the first six months of 2010 with a backlog of $15M. The loss for six months was $63M with cumulative losses of $236M since inception. Cash position was $138M and a total of $356M has been raised since inception.

Between July 2008 and July 2009 and aggregate of 27M shares were sold in Series E convertible stock at a price of $7 and proceeds of $188M. The major 5% investors in the Company are Mohr Davidow Ventures, Deerfield Partners, The Blackstone Group, Maverick Capital Ltd., Alloy Ventures, ,GenProbe Inc.(GPRO), and KPCB Holdings.

As of June 30,2010 the Company had over 75M shares outstanding including about 17.6 shares of common exercisable with options at an exercise price of $2.70.

The Use of Proceeds will be for expansion of R&D,manufacturing, admin and marketing

Renaissance Capital of Greenwich CT (www.renaissancecapital.com) data shows a pick-up of U.S. IPO filings in 2010 with 179 filings an increase of 397% over last year and 26 more than all of 2008 with more than 4 months to go.If the market co-operates we could approach filing levels of 2005-2006. In the US 86 IPO’s have been priced YTD  with total proceeds of $13.1B. a 140% over last year. There were 24 technology IPO’s the most of any sector. The average IPO return from offering price was -5.4%.

The IPO market has not provided significant liquidity for venture capital over the past few years. And venture capital investments are close to an all time low this decade. As we hear about the trillions of dollars on the sidelines waiting for the next opportunity, we can get some fresh air with a little IPO window in biotech.It is about time money flowed out of derivatives,mortgage vehicles and macro trades and into technology and companies that can grow over the long term. A few successful IPO’s could lift the biotech sector overall.

see also from May 2009:

VC Lock-Down Mode Paralyzes Bioindustry

Rod Raynovich 2009-2010 Life Science Portfolio, BIOgraph clinical diagnostics, diagnostics, genomics, pharmacogenomics

Microfluidics released earnings on Tuesday with good results:

• $4.5M in Q2 Revenue a 30% increase over the same quarter in 2009.
• Net Income of $143k compared to a loss of $177k in the same quarter of 2009.($396k before EBITA).
• Achieved a gross margin of 64%.
• Began shipping the LV1 low volume Microfluidizer.
• R&D,Selling and G&A increased by $552k over June 30,2009.
• Weighted Ave diluted shares outstanding are about 10.613,000.
• Stockholder equity has improved to $1,654,000 from $1.290.000.

Cash is $1,945,000 and the Convertible Debt held by Abraxis (ABII) is $4,707,000. Abraxis has been sold to Celgene (CELG) for $2.9B which is expected to close by Q4 2010. It is not known whether Abraxis will retain its non-core investments in biotechnology such as any Microfluidics license or whether they go to Celgene. Abraxis is currently investing about $35.9M in R&D in the June quarter of 2010.

Assuming an $18M running rate for revenues and the current market cap of $8.85M the P/S of Microfluidics is 0.49.

Without having details of the Abraxis debt deal but modelling the conversion of all debt to equity at $1.20 would result in about 14,550 shares at $1.20 giving a market cap of $17.5M. Price to Sales would then be about 1.

The Microfluidics stock is not being traded in any volume as there are few sellers under $1.00 due to large insider holdings. Liquidity is lacking in the stock so it is more like investing in a private Company.MFLU is a value investment thesis based upon current valuations and the potential of expanding the market for creating nano-particles in the pharmaceutical and cosmetic industries and top line sales growth.

Disclosure :Raygent has a small position in the stock.

Rod Raynovich 2009-2010 Life Science Portfolio, BIOgraph

Be thankful for the July rally that brought you 8-10% gains.It is time to protect your portfolio and play defense as market seasonality favors the bears from mid-August through mid-October. September can be the worse month so be patient for the year-end rally.To make matters worse this market has a trading mentality where metrics and news don’t seem to matter only technical levels. Volume remains light so watch for a trend toward year-end  after the November election.

Bulls and Bears Consider Market Seasonality — Seeking Alpha

Before today’s 2-3% sell-off small caps were up 3%, the S&P flat and the Dow up 2%. We are now back where we started at the beginning of the year. The NYSE ARCA Biotech Index is the bright spot up 17% YTD but the FBT  is off 3.5% today. The other biotech ETF’s IBB and XBI are both off more than 3% with other indices today. Large cap pharma stocks are also down about 2% but slightly better than the market as they are perceived more defensive. The life science stock market is tracking macro trends worried more about jobs and the economy and ignoring good news.

This article from the RaynoReport presents the FED problem and the technical “triple top” on all rallies in 2010.

The Rayno Report | Market Update: Batten the Hatches

Rod Raynovich BIOgraph, Macro Rayno Report

The market recovered from bigger  losses with the S&P down 0.7%. The FED said economic growth will be modest and made two decisions for a neutral policy :  taking money from mortgage securities to buy treasuries and  keeping its balance sheet unchanged. This means money will not be drained from the system with the option of a loose monetary policy. The New York Fed balance sheet will be targeted at $2.053T. Interest rates remain unchanged with the belief they are already low and lower rates would not affect mortgages nor the economy.

With one hour to the close,investors found value and/or dividends in large cap pharma and medtech stocks: ABT 51.46 up 1.14%,  BDX 72.49 up 0.85%,BMY 26.65 up 0.57%, GILD 36 up 0.64%, GSK 37.43 up 1.6%, LLY 37.69 up 1.98%and  PFE  16.51 up 0.58%.

Biotech stocks were mixed with large caps like Amgen and Celgene up and smaller caps down.

Now that the healthcare reform storm has passed, investors are looking for  global stocks with modest earnings growth that can do well in a slower economy. These multinationals would also offer a hedge on a weaker dollar.

Rod Raynovich BIOgraph

Two companies that have been restructured through M&A announced yesterday.

Celera(CRA) was added to our model portfolio recently at 7, traded down 2% to $6.75 on missed guidance and a net loss of (.08) compared to a loss of 39 cents the same quarter of  previous year. Revenue guidance was lowered to $135-145M  from $145-155M with analysts’ EPS in the (0.28) range for the FY. Product sales from the Abbott partnership were up to $10.9M; BHL sales were down to $19.6M due to business changes but sample volume was up over six quarters; cardio-genetic tests should help growth in future quarters.Revenue Estimates for 2011 are in the $170M range though still with a loss projected. The net cash position is $319M.

Caliper Life Sciences(CALP) had Q2 revenues of $29M with strength in Imaging(IVIS) and LabChips.EPS was flat with a forecast of (0.8) for 2010 on Revenue estimates of about $119M. The stock traded down 0.5% to $3.99. The current P/S is about 1.67. The net cash position was $37.6M.

Rod Raynovich RAG life science tools

Rod Raynovich 2009-2010 Life Science Portfolio, BIOgraph