On February 18th, we told you why the Rayno Report was bullish on diagnostics. I guess we weren't bullish enough, as the life sciences and biotech markets have taken off in the last month, with many of the picks up big in less than a month. Here's just an example of what we saw in the last 20 days: Sequenom (SQNM): Up 50%. Holy cow! Why didn't we bet the ranch (cause the wife won't let us -- and we don't own a ranch). Genomic Health (GHDX): Up 9%. Not bad. Qiagen (QGEN): Up 5%. Okay, so not as impressive. SeraCare (SRLS): Up 0%. Okay, not impressive at all. IBB ETF (IBB): up 8%. A general biotech rally clearly took hold. What to do now? Well today, the risks in the biotech market were evident as Medivation (MDVN) crashed after releasing disappointing Phase III results for its Alzheimer drug, known as dimebon, saying that the drug was ineffective in treating cognitive decline or behavioral disorders. The stock plunged 67% to 13 on Wednesday. In a joint release Medivation and its partner Pfizer (PFE) said its two Phase III trials did not meet its co-primary or secondary efficacy endpoints compared to placebo. Our partner Raygent Associates, which has been following these developments, says: "Alzheimer Disease (AD) has proven to be one of the most difficult challenges for healthcare," with over 5 milliion individuals affected and estimated costs more than $600 billion. Drugs currently on the market have had minimal effectiveness. The bottom line: if you happened to wander into any of the biotech stocks, especially SQNM, in the last month, maybe it's time to book some of those large gains. But clearly biotech and diagnostics continue to be in bull mode and should be held in some amount in diversified portfolios.
It's time for an update on Cubist Pharmaceuticals (Nasdaq: CBST), a small, fast-growing drug stock we've been following here. Our technical and trading outlook has held to form (for once!), as we advocated picking up the shares in the mid-teens for a trade into the twenties. Yesterday the stock moved to new highs in 2010, hitting $21 bucks and change. This morning shares are off .20, but that's no big deal after a move of about $1.50 over two days. I still hold CBST and I'm not ready to sell it in case this rally gains momentum. The stock could easily trade into the upper 20s on a breakout above $22. To recap the Cubist story: The company grew 30% in 2009 and has a Return on Equity (ROE) of 60%. The general rule here at Rayno Report is we like growth stocks with an ROE that is higher than it's P/E. We started buying CBST with the P/E around 12. The valuation has expanded now giving CBST a P/E of 19. But given it's growth rate (30% in 2009, 160% over five years), that's still not too high. If the company lives up to its revenue growth plans in 2010, it can easly grow the valuation. So I'm hanging on to see what this company can deliver. Another item: CBST often comes up on the lists of potential acquisition candidates. Disclosure: Long CBST