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Movers and Shakers: the Week so Far in Biotech

By
Jennifer Aldershot
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biotech

It’s been a pretty strange start to the month in biotech. Companies with seeming upside catalysts have sold off, and institutional money is pouring into stocks that wider markets have hammered over the last few months. Of course, this latter situation might just be the smart money doing its thing – picking up discounted exposures in the wake of wider market weakness. Here are two companies that fall into these categories so far this week.

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Aquinox Pharmaceuticals Inc. (NASDAQ:AQXP)

Small cap biotech investors will likely already know this company. In August last year, and based on the release of some promising phase II data in a bladder pain trial, it’s stock rocketed from just shy of $2 a share to intraday highs of $56, then collapsed to $18 at close. Since then, it’s gradually trended back down towards it’s pre-rally levels, and in line with the rest of the biotech space (and wider markets), lost nearly 40% of its market capitalization during the first few weeks of the year.

As January drew to a close, however, Aquinox volume picked up as the company released the minutes from a December meeting with the FDA to discuss the protocol of a pivotal trial for its lead – AQX-1125 – and it came to light that multi billion-dollar healthcare hedge fund Baker Brothers Advisors had built on their exposure to the company. The fund’s holding now sits at close to 45% of Aquinox’s outstanding shares, or 7.28 million shares.

The FDA meeting minutes were mixed as far as sentiment is concerned. The press release announcing them contained a lot of jargon, but essentially it says that the company is still figuring out how best to conduct the trial. It wants to weight it towards men, but this brings complications from a data collection perspective, so the FDA has stated it may require an expanded trial, or additional phase II data. This could be expensive, and could drag out any potential approval timeframe. With a little over $109 million cash on its balance sheet, an expanded trial (and the cost associated with it) likely wouldn’t be an issue, but it just means a position in the company would be more of a long hold than a short term speculative allocation. For Julian and Felix Baker, this doesn’t look to be an issue. For the average investor, however, it may not be so attractive.

Neos Therapeutics, Inc. (NASDAQ:NEOS)

It seems that every few weeks we return to Neos. The company will open Tuesday’s session at $10.88 – a 20% decline on it’s week open and a 25% discount to it’s 2015 close. The decline comes despite Neos announcing just last week that the FDA had approved its lead clinical candidate, Adzenys XR-ODT, for an ADHD indication in children six years and above. The approval opens up a market that analysts expect will reach $7.1 billion by 2017, and currently contains some household name therapies, such as Novartis AG (NYSE:NVS) Ritalin. It’s an extended release treatment, the only one of its kind in the space, meaning it has the advantage of reduced dosing frequency requirements over current SOC, which will bolster Neos’ sales pitch when it sets its team loose on US physicians (commercialization expected sometime during the second quarter of this year).

So why the decline? Well, the company is strapped for cash, and loses nearly $10 million a quarter on practically non existent revenues (circa $200,000 at last count). In order to fund the commercialization of its ADHD drug, it needs to raise money, and is doing so through a just-announced secondary offering. We don’t yet know how much Neos will price its offering at, but we know the company is targeting a $69 million draw, which will likely dilute the holdings of current investors.

This paints Neos as a bit of a conundrum from a value perspective. On one hand, the company is trading at a discount to historic prices and just got an approval for a unique drug in a huge market.

On the other, it’s got a lot of work to do if it is to successfully launch the drug, and even more before it can sure up its bottom line, and work is costly. The takeaway? One to watch, but warily.

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Revlon Inc (NYSE:REV) Might Be On The Verge Of Major Restructuring

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Stiff competition in the beauty industry and the pressure from Revlon Inc (NYSE:REV)’s largest shareholder, Ron Perelman, are the leading factors impacting the possible restructuring of the company. Perelman recently made public his intention to start searching for a strategic alternative for the company. The above factors might not signify sufficient reasons, but struggle in financial growth by Revlon is the main factor towards restructuring. This company experienced a lackluster performance between January and September in 2015 stating currency headwinds as being the major factor in this slowdown.

Revlon has faced stiff competition from both L’Oreal SA (EPA:OR) and, Estee Lauder Companies Inc (NYSE:EL) which are much bigger companies with substantial resources for research and marketing. This gives them the ability to expand into newer geographical areas while also exploring more modern products. L’Oreal recently introduced its first wearable, which can detect ultraviolet rays whenever a user’s skin is exposed. It also spent approximately $1.0 billion in research and development during the year 2014. Estee Lauder on the other hand recently introduced an extensive portfolio of new products.

The competition has been tough, but L’Oreal and Estee Lauder are earning much more in comparison to Revlon. L’Oreal, for instance, had $30 billion in revenues for the year 2014. Estee Lauder, on the other hand, had $10 billion while Revlon only managed around $2 billion.

Revlon has been trying to maintain its identity and stay in the competition. Some of the strategic moves the company has tried include: Revlon acquired Colomer Group in 2013, Revlon exited China and Venezuela after facing loss and unprofitable business respectively, Revlon acquired a fragrance business in the U.K, in 2015 Revlon launched its first new fragrance label know as ‘Love is On’. While these are great strategic moves for the company they fail to to be seen on the bottom line of the balance sheets.

Perelman has been noted to attempt an acquisition of the remaining stake in the company while still undervalued. The price estimate for Revlon’s stock is $34. This is almost a 15% premium to the current market price. Most analysts have stated that if Revlon is given the right leadership and direction, it has a significant potential for future growth. This is what Perelman might be planning to do.

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Alcoa (NYSE:AA) Inducts Three New Directors to Its Board

By
Carol Harper
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Alcoa Inc (NYSE:AA)

Alcoa Inc (NYSE:AA) disclosed today that it would induct three new people onto its board of directors effective February 5. These are Ulrich ‘Rick’ Schmidt, John Plant, and Sean Mahoney. The aluminum maker said that the appointments would strengthen the company and add value and experience in the automotive and aerospace fields to its board. The appointment comes ahead of the separation of the company into two entities, scheduled to occur in the second half of the year.

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As a result of the current announcement, Alcoa’s board would be expanded to 15 directors. The company also indicated that it struck a deal with Elliott Management affiliates to support its nomination of directors at the annual meeting of shareholders. Mahoney would be included in the firm’s nomination of directors for election at the meeting.

On the other hand, the other two directors, Schmidt and Plant would be included along with the directors whose terms expire in the next two years, i.e. 2017 and 2018. Elliott Management’s Senior Portfolio Manager, Dave Miller, said that the company was going in the right direction as it was moving forward with its separation. He said that it was a pivotal moment and presented an opportunity to create considerable shareholder value. He felt that he was happy to work constructively with the leading aluminum manufacturer.

Management Comments

Alcoa’s Chairman and CEO, Klaus Kleinfeld, said that as the company was ready to split into two companies, it has been working actively to ensure both of them have world-class directors on their boards. He said that everyone in the new directors list was a high caliber executive as they have established proven track records.

Alcoa’s CEO said that all the new directors are bringing in their valuable skills that are relevant to the markets that the company has been focusing on like automotive and aerospace. The company is looking to gain their expertise to make the two independent firms a success.

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Janney Upgrades First Cash Financial (NASDAQ:FCFS) To A Buy

By
Andy Parker
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Analysts at Janney have demonstrated their faith in the future of First Cash Financial Services Inc (NASDAQ:FCFS), upgrading their rating on the stock to Buy from Neutral in their latest note on the company. The development follows First Cash’s fourth quarter results that would have been strong had it not been for adverse forex impact. The analysts are of the view that there is demand for First Cash’s products and services and that the company is poised to deliver better results going forward.

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4Q earnings highlight

First Cash reported adjusted EPS of $0.73 last quarter. That compared with the consensus estimate of $0.76. The results in the quarter were largely hampered by a stronger U.S. dollar versus a weaker Mexican currency.

2016 guidance

For 2016, First Cash is looking for EPS in the band of $2.20 to $2.40. That’s short of Janney’s estimated EPS of $2.78 and the consensus estimate of $2.70. Once again though, Janney is of the opinion that the adverse forex environment was the greatest impediment for the firm. As such, First Cash still acknowledges that forex will remain a headwind in the near-term, but should ease with time.

Nevertheless, Janney doesn’t believe that the forex issue is a serious challenge that should keep anyone on the sidelines. That explains why the firm also boosted its fair value estimate for the stock for the next 12 months to $45 from $44. Janney’s fair value estimate signals more than 50% upside potential from the prevailing stock price.

Citing the near-term impact of adverse forex fluctuation, Janney has trimmed its 2016 EPS estimate for First Cash to $2.36 from $2.78. The firm has also introduced 2017 EPS estimate of $2.83.

First Cash recently invested $45 million to acquire hundreds of pawn stores in Guatemala, El Salvador and Mexico and the assets are expected to contribute to growth this year.

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Wedbush Upgrade Rating For Select Comfort (NASDAQ:SCSS) To Outperform From Neutral

By
Andy Parker
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Wedbush analysts have upgraded Select Comfort Corp. (NASDAQ:SCSS), to outperform from neutral stating the company has a much brighter future than they had previously thought. SCSS’s 12-month price target has been reiterated at $23. The stock is currently changing hands in the vicinity of $21.

Unique products

One of the reasons Wedbush is positive about the prospects of Select Comfort is that it believes that the company has clearly differentiated products.  As such, the company stands a better chance of improving sales even in the highly commoditized industry that it is playing in. Among other things, Wedbush cites SCSS’s air-chamber mattresses that it says are unique.  Because of unique products, SCSS is better placed to sell more mattress products than rivals, especially the larger mattress producers.

Checks reveal improving trend

The ERP implementation by Select Comfort caused challenges that lowered customer satisfaction ratings. However, analysis by Wedbush shos that SCSS is quickly recovering from the unfortunate development, especially helped by increased marketing campaigns and new satisfaction ratings by Consumer Reports and J.D. Power.

Opportunity amid challenge

Wedbush sees opportunity to buy SCSS when the issues of ERP are still around, because the negative sentiments have served to make the stock cheaper to own. In terms of operating performance, Wedbush sees SCSS being able to achieve its 2016 guidance, pushing shares higher.

Estimates

Based on its assessment of SCSS on multiple fronts, Wedbush has increased its 2016 EPS estimate for the company to $1.53 from $1.43. SCSS’s new marketing efforts should contribute to better results in 2016.

Risk to estimate

As much as Wedbush remains optimistic on the prospects of Select Comfort, it does believe that some factors beyond the control of the company can impact performance, possibly leading to the company missing or exceeding its estimates. Such factors include marketing effectiveness, execution, rising expenses and discounts that may lower gross margins.

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Nokia (NYSE:NOK) Strikes Deal with Samsung

By
Carol Harper
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Nokia Corporation (ADR) (NYSE:NOK)

Nokia Corporation (NYSE:NOK) struck a deal with Samsung resolving their lengthy patent dispute. However, investors appeared unsatisfied with the financial terms of the agreement. Their anger was evident as the stock price was down more than 11% in premarket trading this morning. The deal increases sales revenue from the patent unit to approximately $1.1 billion or €1.02 billion, up from €578 million. This included catch-up payments.

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As far as Nokia was concerned, the patent business was a small part of its strategy following the planned takeover of Alcatel Lucent SA (NYSE:ALU). The takeover deal was worth about €15.6 billion.

As a result of the latest deal with Samsung, the patent unit’s run-rate is currently pegged around €800 million on an annualized basis. This was lower than the average analysts’ expectations of €900 million. Some believe that the agreement does not reflect the expectations that Nokia would be able to make more money from its patent portfolio. This is in comparison with its rival Ericsson (NASDAQ:ERIC), which has a run-rate of approximately €1.2 billion with Apple.

Cash Infusion

Nokia indicated that it expects to get a minimum of €1.3 billion in cash between 2016 and 2018 due to the settlement ad ongoing arbitration. The company has a similar dispute with another Korean firm, LG Electronics. Nokia is also said to be ready to commence negotiations with Apple in upcoming years.

A few years ago, Nokia divested its phone making business to Microsoft Corporation (NASDAQ:MSFT). As a result, the company is now focused on network equipment and retained a big handset patents portfolio.

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Factory Data Drags China Stocks Lower

By
Carol Harper
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bluebird

Chinese shares witnessed another drop today as Shanghai shed 1.78% on Monday after the manufacturing PMI fell to 49.4 in January. This was lower than the previous month’s 49.7, as well as missing expectations of 49.6. Though the miss owas only minor, the disappointment came from PMI for services, which eased to 53.5. Official data indicated that it slipped to its weakest since 2012.

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Investors were hoping that consumption would take over from industry in China. However, the data has challenged such hopes at least in the near-term. For the eleventh consecutive month, a privately-conducted survey, the Caixin/Markit manufacturing PMI of China indicated shrinking factory activity. Today’s market reversed gains witnessed on Friday in China following Japan’s central bank putting interest rates into negative territory.

According to ANZ’s Chief Economist for China, Li-Gang Liu, the manufacturing sector would not likely to see a turnaround this year. He said that there was already overcapacity and weakening global demand. The Chinese government was also currently focused on tackling pollution, which could further hurt economic growth. The Australian Bank expects that China will cut key reserve requirements in the next few months in response, though recent leaked memos from the People’s Bank of China have suggested no lowering of reserve requirements would be made in the near future.

In 2015, the Chinese government had propped up the stock market. However, so far this year, there are few natural buyers. Investors have been taking every rise in stock prices as an opportunity to lock in profit and exit positions.

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HSBC (NYSE:HSBC) Freezes Hiring, Pay In 2016

By
Andy Parker
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HSBC Holdings PLC (NYSE:HSBC) has instituted a global freeze on hiring and pay in 2016. The bank made the announcement to its employees on Friday through email.

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According to the email, the bank is planning to use the strategy to make major cost reductions by 2017 as also indicated in the investor update where it stated its plans to bring down costs by $5 billion. HSBC intends to lay off 8,000 employees out of the 48,000 workers in the UK, and a total of 25,000 employees globally.

HSBC, the biggest bank in the UK, claims that the cost-slashing measures are in response to tighter global restrictions and slow economic growth. The bank is also planning to relocate its headquarters that are currently in London. Its board met last week to discuss whether it would be beneficial for the firm to shift its headquarters to Hong Kong. The shift is also in line with the objectives of bringing down costs. HSBC is expected to reveal the decision next week though the actual date of the announcement has not been set. There is also a chance that the bank will settle with Japan as its new headquarters.

These are not the first efforts that the bank has employed to reduce its expenditure. The investment banking division slashed pay to contractors by 10% in October. The bank has also announced that its mobile banking and internet banking services have recovered after recent cyber-attacks.

HSBC is just one of the major global banks that are employing cost-slashing measures to boost investor returns and profitability. More steps like these have been reported in recent years as banks aim to reach their annual costs and profitability targets. There has therefore been a lot of uncertainty in the banking industry especially for those working for these firms as they live in fear of finding themselves out of jobs.

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Barclays (NYSE:BCS) and Credit Suisse (NYSE:CS) to Settle on Charges Against Dark Pools

By
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oversold

Credit Suisse Group AG (NYSE:CS) and Barclays PLC (NYSE:BCS) have agreed to settle on charges brought against them for misleading investors into their dark pools, or securities exchanges where outside parties cannot view the size or content of the orders involved.

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The two companies have agreed to settle federal and state claims brought against them after they admitted to breaking the law. Both firms have received the largest fines in history for dark pool cases. The fine charged to Barclays amounts to $70 million while Credit Suisse was charged $60 million, divided between the State of New York and the SEC.

Credit Suisse will also be fined an additional $24.3 million charged for carrying out illegal sub-penny orders from its dark pool. In total, the two firms will pay a fine amounting to $154.3 million. Officials from both firms have not made any comments regarding the settlements. Allegations brought against the banks for their dark pools indicate that both companies had promised to protect investors from dangerous high-frequency trading strategies.

Dark pools are different from regular public trades because they hide orders from other traders until execution. This allows institutional investors to trade shares in large volumes with the market responding in their favor. According to the settlement agreements, Credit Suisse has the right to withhold the answer as to whether they accept or deny the charges brought against them. The bank’s spokesperson was happy to announce that the bank has resolved the differences with the New York Attorney General and the SEC.

A representative from Barclays also stated that the bank has successfully resolved the issues and can now get back to serving its customers. The New York Attorney General had filed the lawsuit against Barclays in 2004 over grounds of liquidity profiling that allowed exceptions in favor of high-speed traders. He also announced that the settlements mark a major success over fraudulent dark pool trading that started when his office first sued the bank.

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Aetna (NYSE:AET) Beats By $0.15, Reports Revenues In-Line

By
Carol Harper
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Aetna Inc (NYSE:AET)

Aetna Inc (NYSE:AET) reported a 38% jump in net income in the fourth quarter. Its operating earnings increased 11% driven by higher underwriting margins, as well as increased fees and other revenue in its Health Care division, partly offset by higher general and administrative costs. Its revenue advanced 2% in the fourth quarter as both earningsand revenue came in above analysts’ expectations.

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Gloomy Outlook For The Year 2016

Despite topping predictions last year, Aetna preferred to be cautious and offered a downbeat outlook for 2016. The company is looking to achieve operating earnings of a minimum of $7.75 a share. That was 31 cents a share lower than the Capital IQ consensus estimate of $8.06 a share. Chairman and CEO Mark Bertolini said that it was projecting its earnings for the current year based on last year’s performance and disciplined pricing and execution.

The company indicated that it was working closely with the Justice Department and State regulators in getting the final approval of its planned acquisition of Humana Inc (NYSE:HUM). Bertolini said that the company would continue to advance its integration readiness plans. For that purpose, Aetna has already gotten seven necessary State approvals. He was confident that the transaction would be closed in the second half of the year.

Operating Earnings Grow

Aetna reported net income of $320.8 million, up 38% from $232.0 million last year. Its earnings surged 40% to 91 cents a share from 65 cents a share. Its operating earnings increased 11% to $482.1 million from $434.0 million while operating earnings per share advanced 13% to $1.37 from $1.22 in the prior year quarter.

Aetna’s total revenue was $15.05 billion, up 2% from $14.77 billion in the previous year quarter. The company attributed it to the growth in its government business and higher health care premium yields due to underwriting margins growth. This was partly offset by losses of membership in its group commercial insured products.

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