Most stock traders still don’t ‘get’ this market


The financial worriers are back.

Down goes the Australian stock market – by 0.5%.

And down goes the Australian dollar – by more than a cent against the US dollar since the start of the week.

What’s caused it? A drop in business spending.

The market thinks that’s bad news. But it’s not, it’s good news. Just not in the ‘bad news is good news’ kind of way.

Here, let us explain…

First off, here’s how the Sydney Morning Herald reported the latest news:

The Reserve Bank is facing a new headache as a big drop in company spending adds to the evidence that the rest of the Australian economy is struggling to take up the slack from the slowdown in mining.

The Australian Bureau of Statistics reported business spending expectations for the three months to December fell by a greater than expected 5.2 per cent.

Analysts had expected businesses to forecast spending of $139 billion, while the actual number was $124.9 billion.

You know what that means don’t you? That’s right, interest rates if they move at all, are only going in one direction, down. Yet the market hasn’t figured that out yet.

Currency traders get it, stock traders don’t

In recent weeks the market has fallen for the spin from the Reserve Bank of Australia (RBA). That’s the idea that the interest rate cutting cycle is over.

That’s why the Aussie dollar stopped falling and bounced back two weeks ago. But with the latest business forecast for lower spending, the Aussie dollar is on the way down again.

Why? Because currency traders must reckon interest rates will stay low and perhaps go lower.

That should be good news for stocks. But surprisingly, the Australian stock market fell too.

It’s funny. Because it seems as though stock investors have forgotten all about the impact of low interest rates on stocks. They’ve forgotten that when interest rates are low, it forces investors to look for alternative investments.

The natural beneficiary of this are stocks…in particular dividend-paying stocks.

That’s why it doesn’t make any sense that stock prices would fall. We can only think that most investors have forgotten about the impact that low interest rates have on stocks.

Clearly most investors have short memories.

Now, we’re not saying that dividend stocks will put in the same type of gains that you saw from late 2012 through to 2013. Our bet remains that growth stocks are the best place to put your money in 2014.

But it does suggest that with the Aussie dollar on a downward move again, currency traders have worked out what stock investors have missed.

Recession yes; falling stocks? Maybe not

Of course, as we mentioned earlier this week, the level of the currency doesn’t really matter when it comes to Aussie stock prices.

Looking back over the past 10 years the correlation between the Aussie dollar and Aussie stocks has been minimal at best.

What’s more important is the direction of interest rates. And despite all the recent talk of the end of the interest rate cutting cycle, we’re still sticking to our call that the RBA will cut rates to below 2% before the year is out.

If that happens, it should help boost stock prices over the coming year, pushing them towards our near-range target of 7,000 points. After that, even bigger gains are on the cards.

If that’s not good news we’re not sure what is. But at least the market hasn’t fallen into the ‘bad news is good news’ trap. The market reacted exactly how you’d expect it to react. That tells us the market still isn’t looking far enough into the future, which means it’s still a great opportunity to buy into stocks.

So when the RBA starts making noises about cutting rates or actually goes ahead and cuts them (perhaps as early as next Tuesday), you can expect stocks to put in a good run as growth investors consider the positive impact of lower interest rates, and income investors begin to scout out the best dividend stocks on the market.

Our old buddy Dan Denning says 2014 is the year that the Aussie economy goes into its first recession in 22 years. We won’t argue with that. The one thing we will say is that Aussie stock prices may have already built in that possibility.

China still dominates

So rather than a recession creating bad news for stocks, it could have the opposite effect as investors begin to look past the expected bad news and look ahead to a recovery, especially as China’s economy keeps growing.

In short, when reading the headlines, it’s hard to look past them. But if you take a moment to think things through, you can start to look past the report’s surface, and instead focus more on the consequences of the news.

The consequences of a poor near-term outlook are likely to mean interest rates stay lower than most people think, and that should mean good news for stocks.


PS: You can quiz me on my bullish stock market views in person at the upcoming World War D conference in Melbourne at the end of next month. I’ll be on the stage with global finance gurus Dr Marc Faber, Jim Rickards, and Satyajit Das. You can find out more here about what I consider to be the best money and finance conference in Australia this year. Click here for the revealing trailer…


GBPUSD moves sideways between 1.6582 and 1.6730

GBPUSD moves sideways in a trading range between 1.6582 and 1.6730. Support is at 1.6582, a breakdown below this level will confirm that the uptrend from 1.6252 had completed at 1.6822 already, then deeper decline to 1.6400 area could be seen. Resistance is at 1.6730, above this level will signal resumption of the uptrend from 1.6252, then the following upward movement could bring price to 1.7000 zone.


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The Importance of Buying Stocks at the Right Price


Think to yourself – have you ever made an investment loss which you could have sold for a profit?

If you answered yes to this question, you’re not alone. 99.9% of investors have done the same thing.

Even the best investors make mistakes. But they’re successful because they learn from their mistakes.

One of my investment mentors said to me, ‘it’s the absence of big losses, not the big gains, that makes an investor truly successful‘.

This quote transformed my life as an investment analyst.

It made me truly understand the importance of capital preservation. I then became obsessed with understanding the true risks behind each company.

I can assure you that 99% of investors don’t understand the real concept of risk (even after they lose money). This is why many people continue to repeat their mistakes as they spend all their time thinking about the reward, and rarely think about the risks.

Well, I take protecting your capital seriously. My goal as resource analyst for Diggers & Drillers is two-fold: 1) Helping my readers make money and; 2) Helping them protect their capital.

In fact this is what Diggers & Drillers investment director Kris Sayce wrote in a previous weekly update:

Let me address one point made by subscriber John where he wrote, ‘OK [the previous] recommendations mainly fell over but it was due to being a victim of the times.’

John may be fine with stocks that turn into losers, but I’m not. While it’s impossible to pick a winner every time, we’re not happy with the idea that investors should be ‘victims of the times’.

Too many analysts and investment advisors take that view. They lap up the praise when a stock idea goes well, and then claim they are a ‘victim of the times’ when a stock idea goes bad.

There are plenty of great investors who have blown themselves up by not properly considering the risks.

Look at Jesse Livermore; he could have been one of the greatest investors of all time (some even argue that he is). Livermore started with nothing and by 1929 had an estimated net worth of US$100 million (or over one billion dollars in today’s value)…before going on to losing it all due to ignoring his risk principles.

Stock markets are volatile. Prices can quickly rise and fall. As a result, we publish what we call a ‘buy-up to price’ with each recommendation in Diggers & Drillers. I take the buy-up-to price seriously, and so should you.

A buy-up-to price is similar to what Warren Buffett calls his ‘margin of safety’.

A ‘margin of safety’ is a share price that an investor should pay which is significantly below its intrinsic value. This will minimise the risk of investment losses and maximise the opportunity for gains.

The ‘buy-up-to price’ isn’t a randomly selected share price. From the hours of research I spend analysing stock recommendations, I attempt to comprehensively understand the investment risks.
As such, the buy-up-to price reflects the maximum price you should pay for taking on the level of investment risk.

Let me briefly explain my thought process when recommending the buy-up-to price.

In the February issue of Diggers and Drillers, I recommended a small-cap energy company. In the report I flagged the key risks investors should keep in mind before buying the stock.

At the time of recommending the stock, with the share price closing at a few cents, I set a buy-up-to price slightly higher.

Considering the risk for reward, this was the margin of safety I recommended readers buy in at. But the share price shot higher overnight and, based on that price, the risk far outweighed the reward.

Sure, possible future events could double the stock’s share price, but equally readers could lose up to 50% of their investment if nothing happens. And if readers bought at the higher price (which none should have done, following my buy-up-to price), which is more than 20% above my suggested maximum buy price, they’ve just increasing their risk.

For readers to invest in this new recommendation on the off chance that it dips to or below the maximum buy price, one option is to set a limit order at or below the buy-up-to price. Online share trading platform will give easy instructions for placing limit orders.

Considering the high volume and share price rally, I wouldn’t be surprised if the share price did fall below the maximum buy-up-to price. That little bit of patience could make a huge difference in protecting investor’s capital.

I hope that makes things clear and that you understand the importance of buy-up-to prices. It’s a strategy that Kris implemented nearly four years ago in Australian Small-Cap Investigator, and they have worked to good effect to make sure you don’t overpay for a stock.

Next week I will discuss some of the investment strategies for the Diggers and Drillers buy list, such as knowing when to sell, an important part of any investor’s strategy that is often overlooked.

Jason Stevenson+
Contributing Editor, Money Morning

Ed note: The above article is an edited extract from Diggers and Drillers.

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Evaluate Biotech Stocks with Cynicism: Debjit Chattopadhyay

Source: George S. Mack of The Life Sciences Report (2/27/14)

Biotech investing is a risky business, so investors should thoroughly examine a company’s vital statistics before taking the plunge. That’s the recommendation of Managing Director Debjit Chattopadhyay of Emerging Growth Equities, who brings a strict scientific discipline to stock analysis. As a former medical researcher, Chattopadhyay comes by his skepticism honestly, and in this interview with The Life Sciences Report, he brings five exciting—but critically scrutinized—growth names to investors’ attention.

The Life Sciences Report: Debjit, you’re a biomedical engineer by training, and did your post-doctoral fellowship at Memorial Sloan Kettering Cancer Center. You have authored more than 20 peer-reviewed papers, and you have two patents. Is there anything I’ve missed?

Debjit Chattopadhyay: My background is in drug delivery and medical devices, and subsequently, at Sloan Kettering, I was with the translational medicine group, primarily focusing on radioimmunotherapy and antibody-drug conjugates.

TLSR: And today you’re a sellside analyst, working with institutional investors and hedge fund managers. Most times it’s not easy for a scientist to translate his/her knowledge into stock valuation skills. What mental shifts did you make when you became an analyst performing stock valuations?

DC: One of the key lessons that I learned, in grad school and as a research fellow, is that when you look at scientific data, you have to be skeptical. You also must be data-driven and objective. Those three attributes go a long way in evaluating stocks. If you are valuing a company using a discounted cash flow (DCF) model, you want to make sure your inputs are correct. That’s not very different from running a scientific experiment in the lab. Are your assumptions correct? What do the numbers really tell you? How does it compare with other experiments (comparative and peer group analysis)? The language of finance and the language of science may be different, but the discipline is the same. Just for the record, I also have a master’s degree in finance.

TLSR: As a scientist and analyst you have watched preclinical candidates migrate into human clinical trials. The odds of a phase 1 candidate getting to market are very long. A product never gets into a human without meticulous preclinical work evaluating both safety and efficacy. What goes wrong when a promising preclinical molecule fails in the clinic?

DC: I think what is often missed is that drugs are only as good as their human handlers. Lots of preclinical data and many experiments go into selecting a drug candidate, but success depends on how high you set the bar for a candidate. If the bar is set too low, a product advancing into the clinic is being set up for failure—and with the risk of endangering people’s lives. Many companies lose objectivity because vested interests—the combination of career risk and the availability of cheap capital—cause them to pursue a product or concept to the grave.

In a late-stage failure, the human element is often overlooked, which just compounds the single-digit success rates (from pre-investigational new drug application to new drug application (NDA)/biological license application approval). Success in phase 3 comes down to how well a product candidate has been assessed and vetted step-by-step along the development path.

TLSR: You’re saying that you can enhance a candidate’s chances of success in the clinic by being more stringent on the product preclinically?

DC: Even clinically. Drug development is a very long and arduous process. For a drug to get from phase 1 to an NDA might take six to 10 years, depending on the therapeutic area. There are plenty of options between phase 1 data and the last time point of a pivotal trial in which trials can be stopped. But developers think of candidates as their children and don’t want to let them go.

Back in August, for example, there was the failure ofVical Inc. (VICL:NASDAQ) Allovectin (velimogene aliplasmid) vaccine for metastatic melanoma. It didn’t achieve its primary or secondary endpoints, and should never have gotten into phase 3 trials. In fact, if you look at the data, there was actually more harm done to patients in the treatment arm of the study than in the control arm. GlaxoSmithKline’s (GSK:NYSE)antidiabetic drug Avandia (rosiglitazone) increases the risks of heart attacks and death; there were signals in the data. Look at the COX-2 inhibitors—specifically Vioxx (rofecoxib) from Merck & Co. Inc. (MRK:NYSE). The drug, intended for chronic use in pain, as in osteoarthritis, is not on the market any longer because of the increased risk of heart attack and stroke in long-term use. This happens in small companies like Vical and large pharmas like Merck or Glaxo.

TLSR: Is there a single most important factor you like to see in a small-cap biotech company?

DC: Yes. The single most important factor, especially for an early-stage company or a company with no revenue, is the quality of the management team. Companies with proven management teams have better access to quality capital, which can be deployed to attract talent and diversify the pipeline. Experienced, good management can also make the right capital allocation decisions. Management teams who have done it all before are most likely to get high quality, long-term capital that is not loaded with warrants that will dilute out investors when the company has some success.

TLSR: Generally speaking, you follow stocks that have market capitalizations from $200 million ($2M) to about $1billion ($1B). This is what I call the sweet spot, where stocks are large enough to be owned by hedge funds and some mutual funds, but small enough to achieve triples, quadruples and more. In many cases these companies have a single product in clinical trials, and sometimes are not even in the clinic yet. What factors do you consider to offset the risk of these single-candidate companies? And how do you decide that a product is worth taking a risk on?

DC: I try to stick to a laundry list of do’s and don’ts. I begin with the working assumption that a drug is more likely to fail than to succeed. Then I try to evaluate whether the candidate has a class effect. Have other drugs of similar class been successfully approved? How does this candidate compare with those? If the candidate is a new chemical entity (NCE), I’m interested in the robustness of the data so far, be it preclinical or in early-stage human trials.

Then I look at the quality of the trials. Where were trials conducted? There are numerous examples of trials done ex-U.S that have not been replicated in a phase 3 setting in the U.S. or in Europe. Novelos Therapeutics Inc. [now Cellectar BioSciences Inc. (CLRB:OTCBB)] had a phase 3 program with its non-small cell lung cancer (NSCLC) product NOV-002, with ex-US data supporting it, but the compound did not work out in a global randomized trial.

I try to stay away from signs or claims of efficacy derived from subgroup analysis. That’s a big no-no for me. We see this in oncology especially, where it seems to be the norm for companies who don’t get a positive outcome with phase 2 data to go back and look at subgroups, and then power a phase 3 trial based on that subgroup analysis. This practice hasn’t worked out very well. A case in point is Oncothyreon Inc. (ONTY:NASDAQ) and the phase 3 trial of its cancer vaccine tecemotide in more than 1,500 patients with unresectable stage 3 NSCLC. This trial was based on subgroup analysis from a phase 2 trial. The fully enrolled phase 3 trial did not work out. The company delivered that bad news in December 2012.

Then I look at how a trial is designed. Does the data come from a randomized trial or from an open-label, single-arm trial? I also like to see a reliable biomarker used as a surrogate endpoint. This is becoming more important in oncology, and to some extent in the cardiovascular setting. The availability and suitability of a surrogate marker in molecularly targeted therapies could do wonders for clinical trial outcomes. If a biomarker is identified for the right patient population, it could shorten the duration of a trial and increase the probability of success. It could also lower the toxicity profile of the drug.

TLSR: To justify the enormous expense of the long drug development process, one must think about reimbursement. Patients generally can’t pay out of pocket for a brand new drug. This must be something you think about.

DC: Yes. We look at the proposed product from a commercial perspective. Is there a first-mover advantage here? Is the product significantly differentiated from what’s in the market already?

This is becoming a big focus for payers. If it’s a me-too product, then the reimbursement situation is not going to be great. If it’s not a first mover, are there other advantages that differentiate the compound? Is there a dosing advantage? A safety advantage? Is the product more convenient—perhaps once-a-day dosing versus three times a day? Could the compound be given orally instead of intramuscularly? This goes to pricing power and how the payers are likely to view it.

TLSR: All of us understand how a new drug can create amazing shareholder value in a small company. But you follow at least one company with diagnostic exposure through its reference lab/service provider model. How do you grow revenues and margins in the lab business?

DC: I focus on the oncology setting in the reference lab business because that’s where most of the innovation is happening in terms of molecularly targeted therapies. This is where you identify which patient is going to benefit from a particular therapy.

The reference lab segment also poses a very interesting dilemma. Given the cost of oncology treatment, specifically with regard to the evolution of therapies from random annihilation to molecularly targeted therapies, investing in an appropriately positioned reference lab is almost a no-brainer. However, the Centers for Medicare & Medicaid Services (CMS) is run by bureaucrats, and in their bureaucratic wisdom they seem to think cost containment means nickel-and-diming lab service fee schedules. In my opinion, this is myopic. You don’t give Herceptin (trastuzumab) to every woman with breast cancer. You need to know if she’s HER2/neu positive or not. That’s why I call this a dilemma: It should be a no-brainer to be in these names, but CMS is acting as a headwind to investment in this sector.

TLSR: What do you look for in a lab company?

DC: When I look at lab services companies with an oncology core focus, it is critical for a company to have a diversified revenue stream from products that accommodate both solid tumors and hematological malignancies. The company also must have a rapidly evolving product mix, because the landscape for molecular diagnostics is changing so quickly. I want to know if company management has shown strong financial operational acumen given the rate cuts that these companies have faced. Investors should stay away if management is not being proactive as to what should be expected from CMS.

TLSR: You’ve painted a mixed image of the reference lab industry. Is there good news?

DC: Yes. A few companies are thriving, although they will surely experience bumps along the way. The successful names are not managing for the next quarter or the rest of the year; they are implementing strategies for the long term, which make them attractive both from a fundamental basis and from a potential acquisition perspective. Given reimbursement pressures from CMS, I think this segment is going to see a lot of consolidation.

TLSR: Why don’t you go ahead and talk about a name in the industry?

DC: The reference lab company that I currently follow is NeoGenomics Laboratories (NEO:NASDAQ). For full disclosure, I have a Buy rating on the stock. Every box on my laundry list of factors—and then some—is checked for this company.

NeoGenomics has faced very significant rate cuts. If you go back and look at Q2/12, the average revenue per test was around $520. At the end of the last reported quarter, which was Q3/13, the average revenue per test was down to $470. With such a significant decline you would typically expect a company’s gross margin to be declining. NeoGenomics did take a hit immediately following the initial rate cut from CMS, but the margins are now higher than they were before that event occurred. The company has been implementing internal control strategies, making its processes more efficient, and simultaneously benefiting from volume-driven operating leverage, allowing it to absorb the rate cuts and not see an impact on gross margins. For example, during Q4/13, test volume increased by 28% year over year (YOY), and despite an average revenue/test decline of 3.7%, the company delivered a 15.3% decrease in average cost of goods sold/test. As a result, NeoGenomics delivered 80% of the YOY revenue increase to gross profit during Q4/13, and increased net income by almost $1M.

NeoGenomics is now in the process of launching next-generation sequencing (NGS) for the clinical trial market. It’s also in the process of launching a lab-developed, patient-paid, plasma- and urine-based prostate cancer test. It also has an agreement with Covance Inc. (CVD:NYSE), a contract research organization (CRO), to do clinical studies for pharmas. If you factor in the implications of these three programs, I think NeoGenomics’ dependence on the CMS revenue is going to be cut by about 45% over the next 3–4 years. Instead of perpetual revenue pressure, the company should grow its average revenue per test. The impact on the bottom line is going to be much greater than the impact on the top line.

TLSR: The Covance revenue stream is coming indirectly from pharmas doing clinical trials?

DC: Yes. Pharmas have been outsourcing clinical trials to CROs, and Covance is one of the two biggest CROs around right now. Covance did $2.2B in revenue last year, and I would say at least $300–$400M came directly from oncology-related clinical trials.

TLSR: Debjit, you mentioned the need for biomarkers as surrogate endpoints in clinical trials. Are the Covance assay services provided by NeoGenomics for biomarkers, or are they for routine lab studies, such as liver enzymes for toxicity, etc.?

DC:It will be primarily derived from a fluorescence in-situ hybridization/immunohistochemistry/NGS-based revenue stream. It’s important to note that pharma is primarily focused on molecularly targeted therapies. To use those you need to identify which patients have that specific chromosomal translocation or particular gene mutation. You must have the most sophisticated molecular diagnostic assays, the kind that NeoGenomics can provide. CROs are not set up to handle that, so the deal with Covance sets the stage for NeoGenomics to go to the next level, as the sole oncology-related service provider for Covance.

TLSR: NeoGenomics seems to be developing a tremendous amount of dependence on Covance. How much risk is there in this deal?

DC: Covance should start impacting NeoGenomics’ top line in Q4/14. The NeoGenomics facility in Tampa, Florida, is being expanded to absorb the volume that is supposed to come from Covance. This is a five-year deal with a two-year extension. In the near term, unless NeoGenomics suddenly forgets how to run tests, I find it very hard to believe that this business will be pulled away from the company. In the end, it is the most efficient lab with the shortest sample turnaround times out there.

TLSR: NeoGenomics shares are up about 37% over the last six months, but flat for the last three months. Do you see this as an inflection point in the stock price, with these new sources of revenue coming online?

DC: This is a critical juncture for NeoGenomics. This company now has catalysts, like a biotech stock. It’s not just a quarter-to-quarter, revenue-and-margin story anymore. The company is in a position to talk about its first proprietary product—its urine- and plasma-based prostate cancer test. Looking at other diagnostic companies, like Genomic Health Inc. (GHDX:NASDAQ) or Myriad Genetics Inc. (MYGN:NASDAQ), they trade at much higher multiples because they have proprietary products. The company is planning a staggered launch of the patient-paid NeoSCORE prostate cancer test during Q2/14. While NeoGenomics has not guided to the NeoSCORE price point, we believe a test priced between $600-1,000 is likely to be well received.

TLSR: Is this prostate diagnostic going to be competitive with OPKO Health Inc.’s (OPK:NYSE) 4Kscore test?

DC: We’ll have to wait for additional data, but preliminary data from a small, 142-patient study is encouraging. The NeoSCORE scoring system, incorporating two algorithms using urine and plasma biomarkers, highly predicts the presence of Gleason score ≥ 7 prostate cancer in 75% of patients, while in 25% of patients, the system can be used only to distinguish between the presence of cancer and benign pathology. I think the big advantage for NeoGenomics is that OPKO has to build out its lab, plus OPKO doesn’t have the reach that NeoGenomics has in the oncology market. Although NeoGenomics is behind OPKO in stage of development, it is the premier oncology reference lab, and it already has a huge number of customers. That’s a big differentiator.

TLSR: A the end of Q3/13 the company had $4.83M in cash on its balance sheet. Does the company need to recapitalize itself?

DC: NeoGenomics filed a $100M shelf registration at the end of December 2013, and it’s approved. The company has said it is going to be opportunistic in terms of mergers and acquisitions (M&A), looking at smaller independent labs struggling with CMS concerns. I would expect NeoGenomics to acquire a lab doing $10–20M in revenue, which would add 14–25% to the top line and would make the company a 25%+ revenue growth kind of story. Even without an acquisition, the company would grow its top line 20% in 2015, putting revenue at $90M+. If NeoGenomics does an acquisition, you’re looking a $100M-run rate company in 2015. When NeoGenomics raises money, it’s going to be for M&A, not to extend its cash runway.

TLSR: You follow a couple of companies in the muscular dystrophy space, Sarepta Therapeutics Inc. (SRPT:NASDAQ) and PTC Therapeutics Inc. (PTCT:NASDAQ). They have different platform technologies and I’d like to hear why you like them.

DC: Let’s start with Sarepta. Right now it has become an enigma because the market has not figured out how discussions with the U.S. Food and Drug Administration (FDA) regarding its lead compound, eteplirsen, are going to shake out. Eteplirsen is being developed for the treatment of Duchenne muscular dystrophy (DMD), which is caused by an out-of-frame deletion mutation of exon 51. Sarepta’s competitor in the space is a Dutch company called Prosensa Holding N.V. (RNA:NASDAQ), which I also follow. Prosensa’s DMD drug, drisapersen, failed in a large phase 3 trial targeting the same exon with basically the same mechanism of action. Because of the similarity, there is skepticism at the FDA surrounding Sarepta’s eteplirsen.

Sarepta was trying to get accelerated approval based on a surrogate marker, dystrophin, the lack of which is the underlying cause of DMD. The accelerated approval had opened up, with the FDA being collaborative in evaluating an application, until the competitor’s drug blew up. That caused a change in stance at the FDA.

TLSR: On Jan. 16, you raised your rating on Sarepta from Accumulate to Buy, so it’s clear you like the company. What are the differences between Sarepta’s eteplirsen and Prosensa’s failed drug?

DC: There are subtle differences between Prosensa’s failed drug and Sarepta’s drug, which is likely to succeed despite a very similar mechanism of action. The biggest difference is the underlying chemistry platform. Sarepta’s eteplirsen is not taken up by any tissue in the body except for the muscles, and is excreted out quickly. Based on that fact, Sarepta can dose at a much higher level compared to the failed product, which accumulates in the proximal convoluted tubules of the kidneys. It was probably accumulating in the liver also, because there were clear signs of elevated hepatic enzymes. Drisapersen was also causing very severe injection-site reactions. Clearly, because of this side-effect profile, you could not dose the molecule at a therapeutic level.

One other thing in eteplirsen’s favor is that there has never been a drug or a disease-modifying NCE approved in DMD. The FDA is in the process of understanding the natural history of Duchenne patients, and trying to establish whether Sarepta’s drug has shown enough efficacy to warrant an accelerated approval, or even a conditional or compassionate use approval. The reason the competitive drug failed is not because exon skipping doesn’t work, but because the drug could not be given at the right dose.

TLSR: The fact that no toxicity has been observed with eteplirsen is a very important factor because these drugs are to be given for a lifetime.

DC: Exactly. That’s what makes this Sarepta story so interesting.

TLSR: Debjit, just to confirm, eteplirsen has shown efficacy, hasn’t it?

DC: Yes. But Sarepta has another problem right now. The company cannot enter the European market because Prosensa has the European patents to the exon 51-skipping technology. Sarepta cannot enroll patients in Europe, and there aren’t enough patients in the U.S. to do a 200-patient randomized trial. The company is dealing with two different issues simultaneously—the FDA in the U.S. and the patent issue in Europe.

From the FDA’s perspective, if there is a class effect and FDA gives accelerated approval, patients could be harmed. But if you ask the patient community and thought leaders in the space, the eteplirsen families have clearly seen how the drug has benefitted patients. Duchenne patients typically exhibit toe walking, and can’t do heel walking because their calf muscles are weak. But over the course of 120 weeks, we have seen eteplirsen-treated boys go from toe walking to a normal walk. That’s not a placebo effect. That’s not something you can learn.

These boys are getting older, and this disease is progressive. We’re talking about the law of small numbers here, and the company will have to do a larger trial. The question is, can the company do a single-arm trial? It cannot enroll enough patients otherwise. Also, from the patient-family perspective, they don’t want their sons enrolled in a randomized trial because there’s a 50% chance that he’s going to get a placebo. If I have a boy with Duchenne muscular dystrophy who is 10 or 11 years old, I know that, over the course of the trial, his disease will progress on placebo. After a year, he will have reached the point of no return—he’s not going to be ambulatory, no matter what drug he is given.

From a high-up point of view, I think the drug works, and it’s just a matter of time before Sarepta comes to an agreement with the FDA on a rational trial design that won’t delay approval to 2017 or 2018— which is the speculation right now.

TLSR: Go ahead with PTC Therapeutics, please.

DC: If you look beyond ataluren, the company’s most near-term, late-stage asset, you will see that PTC Therapeutics is becoming a well-positioned company. But over the next 12 months or so, we are likely to see its spinal muscular atrophy (SMA) drug, SMN2, move into the clinic. The SMA program is partnered with Roche Holding AG (RHHBY:OTCQX) and is funded by both Roche and the Spinal Muscular Atrophy Foundation. The program is nondilutive for PTC Therapeutics shareholders, who will retain under 20% of the economics if the drug gets approved. Potentially, we could also see PTC’s BMI1-targeted drug, PTC596, in the clinic for chemo-resistant colon cancer, and an antibiotic targeting gonorrhea going into the clinic as well. The early-stage pipeline is maturing quickly in some really niche indications.

TLSR: But ataluren is certainly the company’s current value driver. Go ahead with that.

DC: Ataluren is directed against nonsense mutations (nm) both in cystic fibrosis (CF) and DMD, and has potential applications in up to 3,500 other diseases caused by nonsense mutations. The company is currently conducting a 220-patient phase 3 trial in DMD, which should be fully enrolled by the middle of this year, with top-line data due in the middle of 2015.

On the cystic fibrosis side you’re looking at a potential trial in class 1 nmCF starting sometime in the first half of this year, with trial enrollment complete sometime in the middle of 2015. PTC is going to become a very catalyst-rich company as you look into 2015.

Of course, PTC Therapeutics is not without its controversy. Ataluren, technically, has failed its late-stage trials in DMD as well as CF. But I am willing to give management the benefit of doubt because of the rarity of the disease indications. PTC was the first company to run a large trial in DMD, and when you are first in a rare disease space, with little known about the natural history of the target disease, you can make mistakes because there is no precedent to follow. It’s the same thing with CF. I think management has learned some very good lessons on how to get ataluren to the market. I am very bullish on ataluren’s activity in DMD and even more so in CF.

TLSR: Debjit, did PTC Therapeutics implement the lessons learned in the 174-patient phase 2B trial in nmDMD with regard to inconsistent use of corticosteroids that could have contributed to the trial not meeting its endpoints? Have the issues been resolved so that phase 3 data might give a better picture of efficacy?

DC: Yes, absolutely. If you look at the phase 3 trial design, everybody in the trial is on corticosteroids, and the patients are all over the age of seven, which should address intrapatient variability. Also, the patients are in what is called “the decline phase” as it relates to the six-minute walk (6MW) distance test, and are not stable. Those are the three big lessons learned—corticosteroids, age of patients and baseline 6MW distance.

TLSR: Do you think of ataluren as a disease-modifying drug?

DC: Interesting question. If you look at the preclinical data in CF, you see disease-modifying effects. If patients are losing 1% lung function every year, and you get a 5% benefit, that gives patients back five years of lung function. Looking at it this way, it is a disease-modifying drug. Ataluren does not change the fact that these patients have the nonsense mutation, but it does promote the read-through of the gene so that protein synthesis can continue.

TLSR: You are also following Derma Sciences Inc. (DSCI: NASDAQ) and Ampio Pharmaceuticals Inc. (AMPE:NASDAQ). Could you address these, please?

DC: Let’s start with Ampio, which has a single asset. The company has finished enrolling a phase 3 trial with its lead drug Ampion (a derivative of human serum albumin) for the treatment of osteoarthritis of the knee (OAK) and associated pain. Traditionally, osteoarthritis has been treated either with painkillers or through viscosupplementation with hyaluronic acid (HA)-based therapies—or the next step, which would be whole knee arthroplasty (joint replacement). If you look at the efficacy of HAs, it’s borderline, with limited efficacy in early-stage disease but not much in end-stage OAK—which makes this disease an unmet medical need.

TLSR: How many patients could Ampion address?

DC: Estimates of the population of OAK patients, in terms of moderate to severe disease, vary from 1.5 to 3M patients in the U.S. alone. About 10,000 patients will hit the age of 65 every day for the next 15 years. Coupled with the growing incidence of obesity, that implies the number of OAK patients is going to grow exponentially. Ampion seems to be effective in the advanced stages of the disease. The phase 2 SPRING trial, which was the prelude to the current phase 3 trial, was fairly large, enrolling about 329 patients overall. It was an all-comers trial, with moderate to severe osteoarthritis patients making up 65% of the population. The results were statistically significant. It will be a quick, 12-week endpoint, so Ampio should report its phase 3 data by the middle of this year.

TLSR: Ampio’s results with Ampion were dramatic in the phase 2 SPRING study. It was also well powered. Stunning results, wouldn’t you say?

DC: Let me answer this way. There are indications that Ampion’s therapy goes beyond being a painkiller. It might have disease-modifying properties, which are now being investigated. I think a group of patients from the phase 3 trial will undergo further investigation with high-resolution magnetic resonance imaging (MRI) to show if there really is cartilage regeneration. If that is the case, this will be a huge homerun, because a disease-modifying treatment for osteoarthritis would be akin to disease-modifying drugs in rheumatoid arthritis, which is $10B+ per year market.

TLSR: And, if this is successful, it could supplant hyaluronic acid therapy.

DC: Exactly. And it appears that the drug is safe. There have been no safety signals so far because this is a natural derivative of human serum albumin.

TLSR: Would it be possible to see an approval in 2015?

DC: Yes. If everything works out, I think we could see approval by the first half of 2015. In the grand scheme of drug development, when you have a company reporting phase 3 data in 4–5 months, investors will start looking at the stock because a positive outcome will transform the company from development-stage to the throes of commercialization.

TLSR: You have one more company on your list today, Derma Sciences. Could you tell me about it?

DC: Derma Sciences just did a fairly large financing—$86M—so the company has $100M+ on its balance sheet, enough capital to fund its growth strategy as well as rapidly enroll its phase 3 trial.

To understand Derma Sciences, you need to look at it with two different lenses. The underlying core business is wound care, and there are two segments to that—advanced wound care and traditional wound care. The two segments together will do about $90M in revenue this year. The reason this company is not profitable, even with that kind of revenue, is because it’s investing heavily in its growth. The company’s general and administrative expenses, and its sales and marketing expenses, are fairly high, because the company’s unique product mix will allow it to get to $115–120M on its top line over the next two years or so.

Derma is uniquely positioned in the advanced wound-care market. I think the grand vision for the company is to become the one-stop shop in diabetic wound care, which is a staggering market considering there is no really effective therapy for patients. Without effective wound therapy, many diabetic patients end up having an amputation, and mortality is very high within five years post-amputation. In fact, the five-year mortality rate after amputation is higher than for most common malignancies.

In the company’s advanced wound-care segment, it just acquired a product for cell-based therapy to address the more advanced chronic wounds arising from foot ulcers. The company already has the TCC-EZ cast, which is probably the gold standard in offloading. It’s in the very early stage of launch, and I think the product could do $15M+ in revenue. The TCC-EZ cast is a big product in wound care. Derma also has its medical-grade honey product, Medihoney [used in wound healing], which is generating $12-14M in revenue. If you just value the advanced wound-care segment in terms of acquisitions in that space, the company is completely undervalued.

Then there is Derma’s DSC127 (an analog of angiotensin), which is in phase 3 trials. The data thus far have been very compelling. The trial has been relatively slow to enroll because Derma has been very selective with regard to patients, but if the trial is successful, this company does, indeed, become the one-stop shop for advanced wound care. In my opinion DSC127, if successfully developed, could exceed $387M in peak sales across multiple indications, including scar healing and radiation-induced dermatitis. In diabetic foot ulcers, we are currently modeling peak sales of $262M, driven by the product’s superior mechanism of action and ease of use, which should deliver significantly higher wound closure rates than currently achieved in clinical practice.

TLSR: I’ve enjoyed this very much. Thank you.

DC: Thank you.

Debjit Chattopadhyay is managing director with Emerging Growth Equities, concentrating on diagnostic, pharmaceutical and biotechnology companies. Previously, Chattopadhyay was a senior biotechnology equities analyst at Boenning and Scattergood. Chattopadhyay’s research universe at Boenning spanned 20 micro, small and midcap companies. Prior thereto, Chattopadhyay was a medical strategist for IPG Group, 81Q/D Medical Knowledge Group. He has a Ph.D from the University of Connecticut and a master’s degree in business administration (finance) from Drexel University. Chattopadhyay completed his post-doctoral fellowship at Memorial Sloan Kettering Cancer Center with the translation medicine, leukemia service and pharmacology group. He has authored more than 20 scientific publications and has two patents.

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1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: OPKO Health Inc., NeoGenomics Laboratories. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Debjit Chattopadhyay: I or my family own shares of the following companies mentioned in this interview: Sarepta Therapeutics Inc. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: NeoGenomics Laboratories, PTC Therapeutics Inc., Derma Sciences Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.

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Bryan Brokmeier Remains Bullish on Life Sciences Tools and Diagnostics Companies

Source: George S. Mack of The Life Sciences Report  (2/27/14)

This will be a great year for life sciences tools and diagnostics companies, says Bryan Brokmeier of Maxim Group. And no, growth won’t be driven by irrational exuberance, the senior analyst explains in this interview with The Life Sciences Report. Instead, the industry is bolstered by powerful tailwinds fanning new demand for molecular diagnostics, and by the clamoring of academia, pharmas and biotechs for specialized assay platforms. As Brokmeier lays out his sector growth theory, he also highlights a group of stocks with value drivers that could power a portfolio with biotechlike growth potential.

The Life Sciences Report: You wrote a note on Jan. 24, ahead of earnings, saying that you were bullish on life sciences tools and diagnostics, and that you expected 2014 to be a great year for both. Why are you bullish? What is driving these stocks?

Bryan Brokmeier: For the life sciences tools sector in 2014, we should see strength across all its end markets, particularly due to an improved academic funding environment and the strength of the global economy. But separate from those drivers, I expect pharma and biotech markets to improve as investors continue to fund more initial public offerings (IPOs) and secondary offerings, as well as because specialty pharma, generics and contract research organizations (CROs) show continued strength. All these entities require tools.

As for diagnostic stocks, these should perform well as the sector gains increased attention from investors focused on positive secular trends, the development of companion diagnostics, and because of recent U.S. Food and Drug Administration (FDA) clearances of various instruments and assays, including Affymetrix Inc.’s (AFFX:NASDAQ) CytoScan Dx Assay, for the postnatal detection of DNA copy number variants; Bruker Corp.’s (BRKR:NASDAQ) MALDI Biotyper, for identifying bacterial colonies; andIllumina Inc.’s (ILMN:NASDAQ) (ILMN:NASDAQ) MiSeqDx, for DNA sequencing.

Also, life science tools and diagnostics companies have been investing in their own infrastructures and making acquisitions, and tools companies are partnering with diagnostic companies to further penetrate long-term opportunities in those markets.

TLSR: You have listed a bunch of interesting factors, but would you say that an improving global economy is the single biggest factor?

BB: The global economy positively impacts most of the end markets for tools companies to some extent but, most directly, it impacts the industrial and applied markets, which represent an estimated 36% of the industry. An improving global economy is an important tailwind, but there are many drivers of growth, many of them looking better in 2014 versus 2013. Gross domestic product (GDP) growth certainly helps, and I’m seeing that growth in GDP is projected to be about 1% higher in the G10 countries compared to 2013, including a strong improvement in the U.S. and Europe. Also, 2013 was negatively impacted by the difficult funding environment, and an improvement in funding is as important as the improving global economy. I’m talking more about life science tools companies in this case. The academic funding environment is significantly better now than it was last year.

TLSR: Improvement in academic funding sounds counterintuitive to me, because we’re in an environment currently where some representatives in Congress are loath to support academic research. Could you tell me why you feel that academic funding from government will be improved?

BB: While there are many in Congress who would reduce government spending on everything, most of them understand that cuts to research and development (R&D) funding aren’t the solution to improving the competitiveness of the U.S. economy. Governments across the globe are funding R&D; the U.S. lead in R&D is narrowing, and Congress knows that. While I don’t expect Congress to do enough to stop the narrowing R&D lead, the overall trend should be positive. Looking at the 2014 budget, which was recently passed, the National Institutes of Health (NIH), the largest funder of biomedical research in the world, saw a 3.5% increase to about $30 billion ($30B) in 2014. That increase should be a very positive tailwind for tools companies.

TLSR: I think of life sciences tools companies’ customers as being institutions, biotechs and pharmas. Are tools companies finding their way into clinicians’ offices, clinics and facilities, where healthcare is provided directly to the patient? I’m asking because the tools markets—whether in academia, government, biotech or pharma—are large-dollar markets, but narrow.

BB: A number of tools companies are developing or acquiring diagnostic businesses of their own. Some, such as Illumina, which acquired Verinata Health Inc. in early 2013, are developing diagnostic tests that will be sold directly to physicians and hospitals. Illumina is also allowing diagnostic companies to act as conduits to penetrate healthcare markets by developing tests on Illumina’s instruments.

Affymetrix is another example. It sells its CytoScan to diagnostic laboratories such as Laboratory Corporation of America Holdings ([LH:NYSE]; LabCorp) and Quest Diagnostics (DGX:NYSE), but then it also has its Powered by Affymetrix Program, where diagnostic companies develop tests on its instruments for sale to healthcare markets. We saw one deal in Q4/13 that provided a significant one-time revenue item to Affymetrix because of a licensing agreement it signed with one of its Powered by Affymetrix members. I think we could see more deals like this for Affymetrix, and other companies in the space, in 2014.

Pacific Biosciences of California Inc. ([PACB:NASDAQ]; Pac Bio), on the other hand, is largely focused on the academic research and agriculture biomarkets. But through its partnership with Roche Holding AG (RHHBY:OTCQX), which it announced in September 2013, it will develop a diagnostic version of its single-molecule, real-time (SMRT) technology system. Roche, one of the largest diagnostic companies in the world, will have the exclusive rights to develop diagnostic tests that it will then market.

Companies are taking different approaches to penetrating the diagnostic market, whether they’re doing it on their own or selling tools to the diagnostic companies that develop the tests. Over time I expect more integration, but I think that larger tools companies will always have their own diagnostic businesses, selling directly to the markets, as well as have partners that are more nimble and better able to identify opportunities in the market.

TLSR: You mentioned Pacific Biosciences and its deal with Roche. Currently you have a Buy on Pacific Biosciences, with a target of $9. Is this company in a position to begin receiving milestone payments for its SMRT technology partnership with Roche? I know that it got an upfront payment, but what about the milestones?

BB: Based on comments the company has made and conversations I’ve had, it’s possible Pacific Biosciences could receive a milestone payment in 2014, but that is not currently in my model. I think it’s more likely that the company will receive a milestone in 2015. That would be a significant catalyst for the company—not just receiving the payment, but also actually achieving a milestone. Many investors do not understand how quickly Pac Bio could achieve FDA approval for its instruments, and any steps in that direction will be a positive catalyst for the stock.

This is part of the reason that Pac Bio is our top pick for 2014. The company is much smaller and less flashy than its key competitor, Illumina, which is the industry darling. Management has done a great job of improving the performance of Pac Bio’s instruments, expanding research applications and proving to the market that it can deliver. The CEO has been a consistent buyer of shares, which demonstrates his confidence in the company’s opportunities as well.

TLSR: Pac Bio is up about 83% the past 12 weeks, and it’s up 3.5x over the past 12 months. Are you anticipating that you could up your target price from $9?

BB: It could go higher. A number of catalysts are upcoming in 2014. Pac Bio presented at the Advances in Genome Biology & Technology (AGBT) meeting in mid-February, and the stock has had a really nice run since then. The company didn’t have any huge, flashy announcements, but it certainly was positive that Pac Bio produced data for the first full assembly of the human genome using its SMRT sequencing technology. It was a big positive, and is getting a lot of attention from researchers. But the Street is still not giving Pac Bio enough credit for what it is accomplishing.

TLSR: After phenomenal appreciation, this stock has settled down some. Do you see this as a good buying opportunity?

BB: I think it is. As I’ve said, it’s my top pick for 2014, after a really strong 2013, and these shares are still well below the IPO price, even after the strong share price appreciation. A lot of sellside analysts still aren’t paying enough attention to it, and neither are many of the buyside firms. Once Pac Bio starts to get upgrades from other analysts, the buyside will pay more attention and start getting into the stock. This company is primed for takeout in 18–24 months. More investors will pay attention to that opportunity, on top of the improving fundamentals, as well as to when the company hits its milestones with Roche.

TLSR: Can you mention another name?

BB: I really like Sequenom Inc. (SQNM:NASDAQ). It’s an out-of-favor name that has been severely impacted by molecular diagnostic reimbursement issues throughout 2013, and we believe its shares are severely undervalued. Not only should Sequenom continue to be the leader in the rapidly growing noninvasive prenatal test (NIPT) market, along with privately held Ariosa Diagnostics Inc., but we also expect the company to modestly diversify its revenues with penetration into the cystic fibrosis (CF) market with its Heredi-T Cystic Fibrosis Carrier Screen for couples planning a pregnancy, as well as the introduction of other new diagnostic tests. The catalysts include improving reimbursements, which is most important, the narrowing of its cash collection cycle and the sale of the company’s bioscience business, which we anticipate will occur in H1/14 and which should provide Sequenom with enough cash to achieve profitability later this year.


TLSR: What is the growth driver here? Is it still the MaterniT21, which tests for fetal trisomy 21 (a third chromosome 21, which results in Down syndrome) in maternal blood? Or are other tests, such as the CF test or the SensiGene Fetal RHD Genotyping test, which screens for Rhesus D incompatibility, also drivers?


BB: The growth driver is still the MaterniT21. Sequenom keeps adding content to this test. It’s not just trisomy 21; it also tests for trisomies 18, 13 and some rare chromosomal abnormalities such as trisomies 16 and 22—and other things as well.


The company is also adding more payers to its list of contracted managed-care companies, which is increasing the number of covered patients and thus improving its reimbursement. Most of its revenues are still on a cash basis and not on an accrual basis. I expect that to improve during 2014 and into 2015. Another major growth driver for Sequenom is the penetration of international markets, which still represent a very small percentage of its total revenues but represents a huge opportunity for the company.


TLSR: You mentioned the other big player in the NIPT market, Ariosa, as well as Verinata and Natera (private), which are carving out market share. I know you like Sequenom very much, but how much pressure do you expect from competitors? What will be their effect?


BB: They are putting pressure on Sequenom, but it’s a huge market opportunity, and I think there’s room in the market for more than one player. Sequenom has a very strong sales force, and so does LabCorp, which is partnered with Ariosa. So does PerkinElmer Inc. (PKI:NYSE). But I don’t feel that Natera and Verinata have gotten as much traction in the marketplace as Ariosa and Sequenom have. They are starting to catch up, but Sequenom and Ariosa still have very strong leads over those other companies.


Over the long term, as I said, international markets are going to offer significant opportunities to all these companies. As the costs of sequencing come down and as throughput improves, it may make more sense to bring this kind of testing into the average maternal-fetal risk market, which represents a huge opportunity. Instead of about 700,000 (700K) annual high-risk births, you’re now talking about 4M annual average- and high-risk births in the U.S. As the market grows, so does the opportunity, which will be huge if Sequenom’s test is recommended for average-risk pregnancies.


TLSR: Your target price on Sequenom is $6, which implies a double from current levels. This stock is down about 45% from 12 months ago, and it’s been weak all year. From your perspective, is this a good buying opportunity?


BB: It’s a great buying opportunity for a stock that has a lot of upside. Given the competitive environment and all the lawsuits among the players in the space, there is certainly risk, but there is huge upside to the company.


TLSR: Another company you might mention?


BB: Fluidigm (FLDM:NASDAQ) has very strong intellectual property. It also has a first-mover advantage in the nascent field of single cell analysis. We’re increasingly confident that the company is poised to grow organic revenue of about 20% for the next couple of years, given recently announced investments and the single-cell targeted sequencing workflow that was released in late 2013. Fluidigm plans additional single cell protocols in 2014 and early 2015.


In addition to the opportunity in single cell sequencing, we expect the company to introduce a new instrument in the next six months, which would further support its growth trajectory. Moreover, the recently announced acquisition of DVS Sciences further strengthens the company’s leadership position in single cell analysis. The acquisition also creates synergies, including potential development of a microfluidic cell culture instrument ahead of DVS’ CyTOF 2.


TLSR: Another company?


BB: While Pac Bio, my top pick for 2014, is going to perform extremely well, Bruker is my top pick over the next 18–24 months. Bruker is a solid company with huge, unprecedented, margin-expansion opportunities over the next few years, particularly with an improving outlook in academic research, which is Bruker’s strongest market. There is huge upside from the consolidation of facilities, outsourcing of certain products and manufacturing, as well as from working capital improvements. We saw huge improvements in 2013, particularly around the company’s inventory management, and there is opportunity in 2014 to drive further working capital improvements, which will improve Bruker’s cash flow position.


TLSR: Could you mention another company?


BB: Affymetrix is another strong name that has pulled back recently. The company came out with strong revenue growth guidance for 2014, but it is going to be spending more money than what a lot of investors were expecting.


In 2013, members of the company’s management team waived bonuses for themselves, and that helped the company free up its cash position as it further paid down debt and improved the balance sheet. But management is going to take bonuses in 2014. Because of the strong run-up in the stock over the last year, stock option grants are going to be at a much higher level than in 2013. The company also sees great growth opportunities ahead due to R&D investment over the last year, and with the introduction of a number of new products. The company sees a lot of opportunity to further penetrate international markets if it invests the money, and so it will be investing more money in its sales and marketing efforts in China and the Middle East, which I think will pay off over the next couple of years and over the long run. The spending makes sense.


In the end, what really matters in this industry is the revenue line. Yes, Affymetrix is spending the money, but it will pay off for investors in the long run.


TLSR: Bryan, the gene expression business is not a growth driver anymore. Where is Affymetrix’s growth coming from?


BB: The reason the stock pulled back over 2009, 2010 and 2011 is because the company’s gene expression business has been declining. Affymetrix was the market leader in this area, but that business is a much smaller piece of the company’s revenue now. Gene expression currently accounts for only 30% of the company’s total revenues, and half of that is from newer, growing product lines, such as the Human Transcriptome Array, which is not something investors properly recognize. Investors are expecting that 30% of Affymetrix’s business will decline 10–15%, but really only half of that gene expression business is going to decline at that level. As the company delivers on growth in 2014, I think it will be well positioned as a potential takeout target later this year.


TLSR: You follow diaDexus Inc. (DDXS:OTCMKTS). Did you want to comment on that?


BB: This is another stock that’s been oversold recently. DiaDexus has been putting up very strong growth over many years. But investors were looking at the company as a play on GlaxoSmithKline’s (GSK:NYSE)darapladib drug opportunity. Darapladib was intended to reduce lipoprotein-associated phospholipase A2 (Lp-PLA2), which is what diaDexus is testing for in GSK’s large, phase 3 STABILITY trial. GSK has been using diaDexus’ PLAC Test to test for levels of Lp-PLA2. The data on darapladib came out on November 12 of last year, and it wasn’t positive. The trial missed its primary endpoint, and so diaDexus’ stock pulled back significantly. It has come back a little, but not enough.


However, not even looking at the other growth opportunities that diaDexus has ahead of it, darapladib isn’t dead quite yet. The GSK CEO has recently commented that he and his team have seen more information than the Street on the STABILITY trial, and the drug may still work in a subset of patients. On top of that, a second phase 3 clinical trial is expected to be completed in March, which could further support the commercialization of darapladib and the opportunity for the PLAC test to be used as a companion diagnostic. On top of the darapladib possibilities, diaDexus continues to grow its base business at a solid, double-digit rate and it has very strong profit margins. It is also working on improving its product pipeline, about which we may start to hear some more information during 2014.


TLSR: Bryan, are you saying that even if GSK or someone else does not develop an efficacious Lp-PLA2inhibitor, diaDexus is still a growth play?


BB: Yes. A couple of research publications have been put out that call high Lp-PLA2 levels a risk factor for cardiovascular disease, and that is upping the importance of a diagnostic test that can measure Lp-PLA2. More doctors are adding this to their lipid panels.


TLSR: Are there other names you could mention? Any larger-cap companies?


BB: LabCorp and Quest are larger companies. These clinical laboratories have been beaten up because of molecular diagnostic reimbursement code problems—the same kind of thing that has impacted Sequenom, the overall reimbursement pressures seen throughout the clinical diagnostic industry. We expect those reimbursement issues to continue to be a problem in 2014. However, we expect volumes to start improving as more patients come into insurance enrollments via the Patient Protection and Affordable Care Act, and also due to longer-term secular trends that are driving growth.


TLSR: Are mergers and acquisitions (M&A) an important factor for both these companies—LabCorp and Quest?


BB: M&A is an important factor. LabCorp has a long history of making accretive acquisitions. Quest recently made a nice acquisition of Solstas Lab Partners, which will help drive revenue growth and margin expansion in 2014 and 2015. It also creates the opportunity for further M&A in the space in 2014. Quest has a new management team that has been delivering on the promises to cut costs and improve the company’s overall organizational structure, with the goal of positioning Quest for improved growth over the next few years. While these companies continue to face a number of headwinds, they also have long-term secular trends working in their favor. These stocks have been oversold to their current levels. For investors who have a long-term investment horizon, now is the time to start looking at these stocks.


TLSR: Best wishes, and thank you.


BB: Thanks.


Bryan Brokmeier, senior life science tools and diagnostics analyst, covers medical device, healthcare service and life science companies as a vice president of equity research at Maxim Group. Brokmeier has been with Maxim Group since 2009, when he joined as an associate analyst covering medical device, healthcare IT and service companies. Previously, he worked as an associate analyst at Credit Suisse and as a senior portfolio accountant at Brown Brothers Harriman. Brokmeier has been quoted in numerous financial publications, such as The Wall Street Journal, Barron’s, Investor’s Business Dailyand Bloomberg News. He holds a master’s degree in business administration (finance and accounting) from Indiana University’s Kelley School of Business, and a bachelor’s degree in finance and applied economics from Ithaca College. He is a CFA charterholder, and a member of the New York Society of Securities Analysts, the CFA Society of Chicago and the CFA Institute.


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1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Bryan Brokmeier: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None My company has a financial relationship with the following companies mentioned in this interview: Sequenom Inc., Fluidigm Corp. and diaDexus Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.


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Bitcoin and the Forex Trading World


Bitcoin, which is a digital currency and is widely used by online retailers, was all the rave in 2013. Many companies were scrambling to accept bitcoins so they would not miss the boat. The bitcoin craze had even reached the mainstream media. Over the past year, both CNN and FOX News have had many stories on bit coin.

Being a currency like other currencies, a valuation has to be assessed on bitcoins, thus the need for an exchange. Several exchanges appeared over the past couple of years and several Forex brokers that did not want to miss out on the bitcoin craze, started offering bitcoins to be traded on their forex trading systems like MetaTrader 4.  Since banks were not offering bitcoins, the streaming prices needed to come from these online exchanges like Mt. Gox.

The past week has seen the bitcoin world fall flat on its face. The largest exchange, Mt. Gox, and its website shut down and has not returned deposits to its customers. As a result, the price of bitcoins has dropped dramatically. The Forex brokers, that were once with this large bitcoin exchange, have since had to get their data feeds from secondary exchanges. With public confidence in bitcoins looking completely lost, the next question is whether bitcoin will survive this event?

As we saw in 2008, markets need public confidence and trust. It will take a lot for them to regain the public trust in bitcoins. But in time with the right players involved and with some oversight, bitcoins could come back.

Learn more please visit


Disclaimer: Trading of foreign exchange contracts, contracts for difference, derivatives and other investment products which are leveraged, can carry a high level of risk. These products may not be suitable for all investors. It is possible to lose more than your initial investment. All funds committed should be risk capital. Past performance is not necessarily indicative of future results. A Product Disclosure Statement (PDS) is available from the company website. Please read and consider the PDS before making any decision to trade Core Liquidity Markets’ products. The risks must be understood prior to trading. Core Liquidity Markets refers to Core Liquidity Markets Pty Ltd. Core Liquidity Markets is an Australian company which is registered with ASIC, ACN 164 994 049. Core Liquidity Markets is an authorized representative of Direct FX Trading Pty Ltd (AFSL) Number 305539, which is the authorizing Licensee and Principal.






The Ty Cobb Approach to Retirement Investing

By Dennis Miller

When baseball fans talk about players from the early 1900s, Babe Ruth is normally the first person mentioned. He was a great home-run hitter with 714 career home runs, a record that stood for almost 40 years. Only two men have surpassed it. Ruth struck out 1,330 times—a record that also stood for several decades.

Most people think of Ty Cobb as a gritty player who held the career stolen-base record for many years. But let’s look a bit deeper. Ty Cobb broke into major-league baseball in 1905 at the age of 19 and hit .240 his first season. For the next 23 seasons, he hit over .300.

Cobb holds a lifetime batting average of .367, a record that still stands today: 85 years and counting. His career strikeout total is 357. He averaged 14.9 strikeouts per season, striking out 3.1% of the time, a remarkably low average.

Young people love to swing for the fences and hit those huge gains. With retirement money, an occasional home run is nice; however, our overriding goal is to preserve capital and avoid catastrophic losses. Ty Cobb didn’t hit as many home runs as Babe Ruth, but he was a model of consistency.

Once you’ve built your nest egg, you’re not trying to run up the score; you’re trying to stay ahead.

Anyone who has tried to play catch-up with his portfolio can tell you there’s no such thing as a five-run homer. Newsletters touting the chance to double or triple your money can grab our attention, but experienced investors realize that those gains are only possible if you’re willing to take on the commensurate risk.

Swinging for the fences with retirement money won’t get the job done. With money that must last forever, putting your emotions aside and focusing on safety and consistency is paramount.

Safety First

Have you ever watched a thin-ice rescue scene? A person standing with all of his weight on thin ice can easily fall through as all his weight is concentrated. The rescuer trying to reach this person normally lies flat across the ice, spreading out his weight.

The same approach works for today’s retirement investor. Step one is to spread risk through diversification among (and within) asset classes, selective investments, position limits, and real-time monitoring of your portfolio via stop losses. While we like the income, avoiding catastrophic losses is our mantra.

It’s also worthwhile to reassess just what “safe” means. We can’t count on inflation remaining at historical 2% levels. FDIC-insured CDs and US Treasuries are now guaranteed money losers when you factor in inflation. (“FDIC insured” does not shield us from inflation.)

This brings us to the Step two in the Ty Cobb approach: inflation protection. Investing in long-term, fixed-income investments during times of high inflation can result in catastrophic losses—precisely what we need to avoid.

Step three: find investments with low interest-rate sensitivity. Ross Perot coined the phrase “giant sucking sound” to describe jobs leaving the US. That will pale in comparison to the giant sucking sound when interest rates start to rise and everyone tries to exit the market at once. The scene after Bernanke’s tapering remark was a small preview. Interest-rate-sensitive investments will be hit hard and fast.

The long-term bond market offers a good example of interest-rate sensitivity. Take an A-rated, ten-year corporate bond paying 3.68%, for example. Now imagine you bought $10,000 worth; you’d receive $368 per year in interest until maturity. If, however, market interest rates rise during that time, you’d have to discount your selling price to resell that bond in the aftermarket to compensate for its below market interest rate.

“Duration” is the term for calculating that discount. The duration for this bond is 8.41. For every 1% rise in market interest rates, the resale value of your bond will drop 8.41%, or $841.00—more than two years’ accumulated interest. Should this happen, you’d have two lousy choices: You could hold on to the bond at a lower-than-current-market-value interest rate until it matures; or you could sell your bond for less than you paid for it.

If inflation is the reason interest rates are rising, that decreases your buying power even further, particularly if you choose to hold on to the bond.

While top-quality bonds are considered safe, that safety stops at the borrower’s ability to repay you. It does not protect your investment from a reduced resale value in the aftermarket, nor does it protect you from inflation. At the risk of sounding like a broken record, let me repeat myself: holding long-term, low-interest-paying bonds at the wrong time can produce catastrophic results.

Interest-rate sensitivity isn’t limited to bonds. The stock market now has a similar problem. Many companies paying high dividends are so flooded with cash that they’ve become interest-rate sensitive. Utility stocks, for one, come to mind. When Bernanke said “taper,” the prices of utility stocks tumbled.

It is important to understand that this is a distinct type of risk. Should the market rise dramatically, stocks and bonds with high interest-rate sensitivity will be extremely vulnerable.

The final step in the Ty Cobb approach is finding a way to maintain your quality of life while managing your portfolio. While “set it and forget it” isn’t an option, no one wants to spend all of his or her time fretting about money. Finding ways to accomplish your investment goals and to sleep comfortably at night is what it’s all about.

So, to recap, your overriding objectives are to:

  • avoid catastrophic losses;
  • protect ourselves from inflation;
  • minimize interest rate sensitivity; and
  • free up time to enjoy life.

Your Investment Pyramid

Core holdings should make up the base your investment pyramid. Core holdings—precious metals, farmland, foreign currencies—are about survival. Hopefully you never have to touch them. No, I’m not suggesting that you prepare for the apocalypse, but we all need survival insurance. Mentally and practically, it should be separate from your active portfolio.

On the other hand, the investments recommended in the Money Forever portfolio are for income and profit. These investments are meant to keep you going for the rest of your life.

Here are the allocations you should use in today’s market. As conditions change, you may have to make adjustments, but we’ll help you do just that as events unfold.

The Ty Cobb approach uses three investment asset classes:

  1. Equities providing growth and income and a high margin of safety;
  2. Investments made for higher yield coupled with appropriate safety measures; and
  3. Conservative, stable income vehicles.

50-20-30 Equals Bulletproof

You can balance yield and safety in today’s market. How safe is the Miller’s Money Forever approach? Bulletproof, in my opinion. And that comes from a former Marine who understands that bulletproof is doggone safe—but nuclear trumps all. There are some cataclysmic events that are effectively impossible for individual investors to predict or protect against. So, unless you’re the “build a nuclear bunker” type, our approach should let you sleep well at night and enjoy retirement with minimal financial stress.

We currently recommend holding 50% of your portfolio in solid, diversified stocks. These stocks should provide dividend income and growth through appreciation. Invest no more than 5% in any single pick, and use a 20% trailing stop loss. This way, the most you can lose on any single pick is 1% of your portfolio. Sometimes we recommend tightening our stop losses on specific stocks—we’ll notify you of those circumstances in a timely fashion.

If you follow the 5% rule, you should have no more than 10 stock positions in this 50% slice of your portfolio.

You might be wondering: Why not just invest in an S&P 500 fund? When the market swings, S&P 500 fund investors will be the first ones headed for the door, with the program traders that short the S&P chasing them out. We got our clue with the “taper caper,” and we want to mitigate that risk.

For the Money Forever portfolio, we searched for solid companies that are not so flooded with investor money that they’ve become interest-rate sensitive. Dealing with our picks individually allows us to limit our positions and set stop losses. We’re better off trading a little bit of yield for the safety of investing in solid companies that are less volatile than the market as a whole.

Catching a peek our Bulletproof portfolio is risk-free if you try today. Access it now by subscribing to Miller’s Money Forever, with a 90-day money-back guarantee. If you don’t like it, simply return the subscription within those first three months and we’ll refund your payment, no questions asked. And the knowledge you gain in those months will be yours to keep forever.

The article The Ty Cobb Approach to Retirement Investing was originally published at

Doug Casey: “There’s going to be a bubble in gold stocks”

By Doug Casey

The following video is an excerpt from “Upturn Millionaires—How to Play the Turning Tides in the Precious Metals Market.” In it, natural-resource legends Doug Casey and Rick Rule discuss the deeply undervalued junior mining sector and the rare opportunity for spectacular returns it offers investors right now.

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Discover for yourself how to make life-changing gains in the new bull run in junior mining stocks. They still trade at deep discounts, but not for much longer. To learn more, watch the full “Upturn Millionaires” video here.




Five of the Biggest Dividend Payers Just Got the Axe

By Five of the Biggest Dividend Payers Just Got the Axe

This past Friday, released a list of “10 Big-Name Stocks Going Ex-Dividend this Week.” Many traders utilize dividend ex-dates in an attempt to hold a stock just long enough to collect its dividend. But many investors confuse this strategy with investing.

Here at Dividends & Income Daily, we know that just because a company is big and pays a dividend, it’s not necessarily a solid income investment.

So, with that in mind, I decided to run them through our seven guiding principles of dividend investing and see how they really measure up.

Hint: Only half survived.

Chiseling it Down

Starting with the first rule – a simple business model – we can go ahead and immediately remove Honeywell (HON) from contention.

While it’s a solid company and meets the majority of our other requirements, there are just way too many moving parts to this conglomerate for me to consider it safe.

Since the remaining companies all meet our requirement for steady demand, let’s skip right ahead to the next prerequisite on our list – positive cash flow.

All of the remaining nine companies do have positive cash flow, but to varying degrees. What we’re after are companies that can comfortably meet their dividend payments due to ample free cash flow (FCF). All of the companies pass this test.

Moving right along to requirement four – high cash balances – the remaining nine companies all pass muster. Ditto for requirement five – minimal need for credit.

The Homestretch

The last two requirements in our strategy are strong earnings buffers and a history of dividend hikes.

One of the best measurements of earnings buffers is the dividend payout ratio (DPR). We prefer a company with a DPR of 80% or lower. Any higher and we increase the risk of holding a stock that gets its dividend cut in the future.

Once again, all eight remaining companies pass the test, with DPRs well below our required level.

When it comes to dividend growth, however, not everyone survives.

Whirlpool (WHR) failed to hike its dividend in 18 of the past 27 years. We like to see a more solid record of raises, so it’s officially out.

After running’s list through our seven requirements for solid dividend investments, we’ve narrowed it down to eight companies.

There’s one last test I always use before making a purchase… and that’s valuation.

When buying any stock, we only want companies that are a bargain compared to their peers.

With that in mind, we can knock two more companies off the list – Nike (NKE) and Novartis (NVS).

They meet all of the other requirements, but have high price-to-earnings (P/E) ratios and trade at premium valuations to their respective industries.

In fact, Novartis trades at a 25% premium to its industry, while Nike trades at a 20% premium.

A Few Final Thoughts

Since we’re looking for the most solid income-generating investments, Goldman Sachs (GS) is out, too. GS may be a great company, but with a yield of just 1.23%, there are other more suitable stocks to add to our income portfolio.

So there you have it…

Ten stocks enter, but only five stocks emerge income-investment worthy – Lockheed Martin (LMT), Time Warner (TWX), McDonald’s (MCD), Omnicom Group (OMC) and L-3 Communications (LLL).

Bottom Line: Ex-dividend dates are important when implementing a dividend capture strategy. But we shouldn’t confuse this trading strategy with income investing. And just because someone puts together a list of stocks and sends it to you, doesn’t mean you shouldn’t do your own research before investing in them.

Until next time…

Safe (and high-yield) investing,

Jason Williams

The post Five of the Biggest Dividend Payers Just Got the Axe appeared first on Wall Street Daily.

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Original Article: Five of the Biggest Dividend Payers Just Got the Axe

Egypt maintains rates, sees limited inflation risks

    Egypt’s central bank held its main policy rates steady, including the benchmark overnight deposit rate at 8.25 percent, saying “pronounced downside risks to domestic GDP combined with the persistently negative output gap since 2011 will limit upside risks to the inflation outlook going forward.”
    The Central Bank of Egypt (CBE), which has held rates steady this year after cutting by 100 basis points in 2013, said downside risks to the global economy from the challenges facing the euro area and softening growth in emerging markets could pose risks to the domestic economy.
    Egypt’s economy has remained weak since political uprisings in 2011 and in the third quarter of 2013 – the first quarter of the 2013/14 fiscal year – Gross Domestic Product expanded by only 1.04 percent from the same 2012 quarter. It was the seventh quarter in a row with declining growth. In the 2012/13 fiscal year, Egypt’s economy grew by 2.1 percent.
   The lack of economic growth is leading to high unemployment and in the fourth quarter of 2013 the unemployment rate was steady at 13.4 percent from the third quarter, highs not seen for decades.
    The economy was characterized by modest growth in manufacturing and construction while tourism and petroleum sectors declined in the first fiscal quarter.

    “Investment levels remained low given the heightened uncertainty that faced market participants since early 2011 and weak credit growth to the private sector,” the CBE said.
    The CBE said upside risks to inflation had continued to ease as international food prices were unlikely to rise due to recent global developments and it projects inflation will ease in coming months.
    Egypt’s headline inflation rate declined to 11.4 percent in January from 11.7 percent in December and November’s 12.97 percent, a high for 2013 and the highest since February 2009.
    Core inflation also eased to 11.7 percent in January from 11.9 percent in December.
    Economists had expected the central bank to maintain rates, following a surprise rate cut in December to boost growth.