A story was crossing the CNBC World channel this morning about Lupus and a new drug to treat it. OK, a friend has Lupus, so my ears perked up. “First New Drug” in a very long time… lots of potential for effective treatment… but the stock was being downgraded. What?
Seems it’s a cost issue. The projected cost is expected to limit market size to smaller than previously expected…
OK, it’s a joint venture of Human Genome Sciences Inc HGSI and Glaxo Smithkline GSK.
Is there any monetary “juice” here?
First up, GSK looks to be a basic “market match” with the SPY S&P 500. It does have a nice 5+% dividend and is a pretty “safe” drug company. Just the kind of thing for a “sleep well” long term investment. For trading, you could just as easily trade the SPY and avoid any company and segment specific risks… but without that dividend. If you are in 2% bonds, getting more than double the yield with some growth is not a bad choice. Here’s a “5 Year Weekly Interval” chart comparing it to the S&P 500. You can clearly see the ‘market match’ then the ‘crash’ and that it has lagged in the recovery phase.
You can reasonably expect that it will eventually get closer to that S&P match space again as markets settle. For now, we see the ‘SMA Stack’ is weaving and it’s more of a ‘flat roller’. Trades could be made on a range basis or on a Slow Stochastic basis (at this time scale) with MACD confirming. Right now MACD looks like it’s setting up for a crossover to the downside (but that same ‘birdy beak’ look is also what happens in a long slow steady rise…), and that ADX line below 25 says the trade indicator to use is Slow Stochastic. Since this is a weekly chart, we could just move to the daily chart and trade it based on the slower indicator. (A Fast indicator, like the “Slow” Stochastic, on a slow chart does about the same as a slow indicator (like MACD) on a faster chart…)
Here is the 1 year Daily Interval chart. Notice that MACD is below zero, and DMI is “red on top”. Not a moment to be buying. Also note that price has crossed the SMA stack and is coming back at it from the bottom side. Looks like a top rolling over to me. So wait a bit for any desired ‘buy’. You can likely pick this up with a 6% or maybe even a 7% dividend if the price drops some more. But don’t expect it to go too far. That dividend will defend the stock to the downside… Also notice that even at the Daily Interval scale, it has ADX below 25. This is not moving either way very fast.
OK, so much for Glaxo… how about HGSI?
The 5 year chart is interesting. We see a great honking spike on some news or other a year and a half ago (probably the pre-release rumor on the new drugs) and then a rolling flat as folks waited for The News. (“Buy the rumor, sell the news”) So I’d expect this to be a ‘not right now’ stock too. We’ll see.
DMI “red on top” and MACD “red on top” and near / at zero. Not much to see here… The “action” was all a year+ ago. Now it’s just a ‘toppy roller’ and might be worth a faster trade, but not much else. Biotech is very hard to trade. It’s always news driven and you find out AFTER the spike, that something interesting was about to happen. You buy it when it’s beaten down and nobody cares, not when ‘good news’ is in the air. Then you wait. Sometimes for years. IFF the Giant Pop happens, then you sell and wait for the next re-entry. Only do this on companies with the cash to live through the down cycle…
On a one year daily interval chart, it’s looking like a potential trade (as the present news flow has been negative with downgrades for ‘loss of market size’ on the price of the drug).
RSI ‘near 20’ with MACD looking like a ‘crossover soon’ (maybe) and ADX has a downward ‘kink’ in it as it inflects. Promising. IFF MACD has a ‘crossover to the upside’ with ‘blue on top’ (and preferably crosses the zero line during the trade) AND we get DMI with “blue on top” as we have a red/blue cross over; then it would be a nice entry in a rebound from bad news as the reality of a new drug drives some earnings expectations (regardless of price).
So what was this news? If you click on the ‘news’ tab on the Bigcharts chart for HGSI you find this story on the top:
By Matt Andrejczak, MarketWatch
SAN FRANCISCO (MarketWatch) — Two analysts downgraded Human Genome Sciences Wednesday after a U.S. Food and Drug Administration panel showed support for a lupus drug Human Genome is co-developing with GlaxoSmithKline PLC.
The key concern: Sales for the lupus drug called Benlysta may not be as big as previously thought, according to analysts at Citigroup and Bank of America who both downgraded Human Genome and cut their stock-price targets before the stock market opened.
OK, this is typical ‘double speak’. We’ve got a new drug announcement and an approval from the FDA being likely and ‘supported’ but the stocks get downgraded. What? Why?
Lupus is an inflammatory connective tissue disease. It occurs mostly in women and is characterized by fever, skin rash, and arthritis.
An FDA panel late Tuesday voted 13-2 to recommend the FDA approve Benlysta. A separate vote on the effectiveness of drug was 10-5.
It all looks great up to this point. FDA panel saying it is recommended. Effectiveness looks good too. What’s not to like?
In a research note, B. of. A. analyst Rachel McMinn said FDA panel feedback at Tuesday afternoon’s meeting “underscored concerns that Benlysta will have a smaller than expected role in lupus treatment.”
McMinn had previously assumed treatment using the lupus drug would run $40,000 per patient. She lowered that calculation to $35,000.
OK, they don’t expect quite so much lucre per patient. Good news for the patient, not so good for the company. But still, 35 vs 40? Not that big a hit…
Citigroup analyst Yaron Werber downgraded Human Genome to “hold” from “buy” and cut his price target to $30 a share, from $35.
He now expects Benlysta to reach global sales of $1.6 billion by 2015, down from a previous assumption of $2.6 billion.
OK, we’ve got a $5 a share gain expectation from where the price is today. Not great, but not bad either. But you can make that much in a 2 month swing trade as it wobbles back and forth… Don’t think I’d invest in it, but I’d be willing to trade it.
On the TV show there was talk about the cost being prohibitive for wide spread use. The company rep did not ratify the $35,000 cost projection, but did say that pricing was not settled and that they intended to find a way for folks who needed treatment to get it, despite what the cost might be. I took that to mean “get the government to subsidize it via other people picking up the tab”. And folks wonder why I think government ought not to be in the middle of economic transactions. Too easy to bypass market signals that the price is too high and they ought to cut it. Instead, just dip in some other persons pocket… but I digress…
OK, the good news is that for the first time in a very long time there is a reasonably effective new treatment for Lupus. The bad news is that it’s going to be terribly expensive, but not expensive and widely used enough to make the company a boat load of money (just a small yacht worth…) and that money will need to be laundered through a government agency.
Sorry, not seeing a lot of investment here. Good for ‘news driven trades’ though as various government agencies do / don’t approve and do / don’t agree to pay with other peoples money.
If I had Lupus would it be worth $35,000 to me? That would likely depend on just how bad I felt… but the pattern of these things is such that when one company finds a Very Expensive Drug that works, other companies find slight variations on the molecular shape that work too, and price cuts arrive in a few years. So there is some hope that in 4 or 8 years, we’ll see cheaper versions, and then this drug price will drop. (And I have no idea how this will work with GSK in the UK and the National Health Service…)
To me it looks like HGSI is a nice trade vehicle with a potential for an entry ‘soon’, and GSK is a ‘sleep well’ dividend payer for the spouses retirement account, maybe with a ‘nibble’ now and then a ‘fill out the position’ if / as it drops just a bit more.