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Nearly one year ago, I wrote that my target DJIA price for 2017 was 23,000. Furthermore, I stated that this first leg of the bull market would not end until the small and micro cap medical stocks had advanced. Both of these events have occurred. The first leg of this bull market began in 2009, with stocks extremely undervalued (as is a priori the case at the end of a bear market). The rising tide of the stock market lifted most securities. I maintain that we are now approaching the end of this first leg, characterized by stocks being in an “equilibrium phase”. The importance of this fact is that, from now through the end of the second leg, there will be stocks that significantly outperform while others underperform, based on the underlying fundamentals. This is the period where hedge funds are supposed to “earn their money”. There will be opportunities on both the long and short sides.
In the medical stock area, we have seen some of these downward price movements recently (eg: REGN, GILD, CELG, FPRX, CYAD, FGEN). The key is to not buy these stocks simply because they have “declined x%”. Now, more than any recent time, it is critical to own stocks of companies that will have results (earnings, clinical trials) that exceed expectation. It is also a time to sell short stocks of those companies that will fall short of projection, if one is comfortable. From my perspective, interesting “shorts” include ICPT, FGEN, REGN. Interesting longs include ARDX, KERX, ONCE, CYRX, AIMT, NVS, ABBV, CYRX, DRRX, ABUS. I think Galectin Therapeutics (GALT, $2.86) will either trade for $0.50 or $17.00 in six weeks. Separately, Intuitive Surgical (NASDAQ:ISRG) is the Boston Celtics (or is it the New England Patriots?), and CRISPR/cas9 is revolutionary.
Regarding Intercept Pharmaceuticals (NASDAQ:ICPT), I maintain that Ocaliva will not prove successful as a therapeutic agent for NASH. The various causative pathways in the development and progression of NASH imply the need for multi-drug regimens. Furthermore, I believe that the side effect profile of Ocaliva will be more of a negative than is perceived, especially with other agents in the class, albeit earlier in development, that have better safety profiles.
As it relates to Fibrogen (NASDAQ:FGEN), I expect there to be significant safety concerns with its lead drug, roxadustat, a HIF-inhibitor in clinical trials for anemia in chronic kidney disease.
As for Regeneron (NASDAQ:REGN), which has done an admirable job of drug discovery over the past two decades, the competitive landscape in both ophthalmology and dermatology is increasing.
On Gilead (NASDAQ:GILD) , I recently commented that the stock should not be purchased until the bar was appropriately reset for 2018 and 2019 earnings, given the rapidly declining Hepatitis C revenue stream.
At this point in the stock market cycle, I believe it is critical to be invested in those companies that will either exceed earnings expectations or prove to have a pipeline more valuable than is perceived currently. As to the former, my example is Intuitive Surgical (ISRG). For the latter, I would focus on Ardelyx (ARDX), Arbutus (ABUS), DURECT Corporation (DRRX), Novartis (NVS), Spark Therapeutics (ONCE) and AbbVie (ABBV).
Disclosure: I am/we are long ISRG, ARDX, KERX, DRRX, CYRX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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