As the broad market rally looks to have sputtered, and with the upcoming earnings season not expected to blow away estimates by any means, investors will be looking to bank profits from the early year run and move onto other plays that have the potential to reap both short and long term dividends. That means that some money will move into the more speculative sector, where individual stocks and stories have the potential to create the volatility needed for traders to trade and for the longer term investors to find adequate entry points to accumulate for the long term.
Below we'll take focus to some medical device and imaging agent plays that are still in the developmental phases, but could attract the interest of those investors who have banked profits during the DOW's record run this year, but now may realize that the 'easy money' gig is up as market conditions have somewhat deteriorated. Each comes with its own inherent risks often associated with the sector, including the potential for cash-raising events to stall rallies and/or the prospects of a failed trial or road bump in development, but each is also advancing novel and potentially next-generation technologies in huge, billion dollar markets.
Everyone was making money when the broad market was soaring, but now it may be time to go looking for the individual stories that can pay benefits down the road, hence the focus this week on the developmental sector...
This Week's Focus: Medical Devices
SanuWave Health Heads Into The New Week On An Upswing
Price followed volume for shares of SanuWave Health (OTCBB: SNWV) as they closed the day Friday up by thirty percent on volume of well over ten times the daily norm. With key milestones pending for the duration of the 2013 and with momentum building after last week's trading action, SanuWave could turn into one of the healthcare sector's better rebound stories of the year.
What is currently attracting investor interest - and what also likely contributed to the growing volume of the past month or so - is the imminent start of a Phase III trial testing SanuWave's 'shockwave therapy' device, dermaPACE, in treating the condition of diabetic foot ulcers. The FDA gave its green light to start the trial earlier in the year and the company expects to enroll its first patient within the current quarter. Although a previous trial of similar design failed to meet its endpoint, it did demonstrate overall efficacy for dermaPACE. An improved trial blueprint this time around - charted in conjunction with the FDA - has investors speculating that round two carries with it an improved chance for success, especially since the FDA has agreed to use data compiled in the earlier trial towards this trial's endpoint, too.
While the developmental healthcare sector is often filled with volatile trading based on pending catalysts and realized milestones, SanuWave shares may also be benefiting from a new found awareness of its target market. As diabetes cases soar at an alarming rate worldwide, the diabetic foot ulcer market is quickly approaching two billion dollars-plus annually. Given the success already demonstrated by dermaPACE, and also given the fact that the device is already approved for use in Europe and other international markets (as is its sister device orthoPACE), there is reason to believe that the upcoming trial catalysts in the United States could lift the SNWV market cap to more reasonable - although still speculative - levels. In fact, one Seeking Alpha contributor made a strong case last week that shares could be in for a triple as the market opportunity and potential of the technology is realized.
In conjunction with the new trial start, SanuWave has also initiated a new corporate strategy with the hiring of a new CEO, industry veteran Joseph Chiarelli . Key to this appointment is that Mr. Chiarelli's contract is based nearly exclusively on incentives, a heavy sign of his confidence in the technology and also an indication that the free-spending ways of his predecessor are finished. It's times for results.
Some investors may still be hesitant to jump in after the previous trial failed to garner an FDA approval, while others may consider the probabilities that the company may look to raise cash at some point in the near future, but interest is growing in the SanuWave story, if the month-long spike in trading volume is an indication. It's a highly volatile sector and trading in SNWV may be no different along the way as the momentum traders look to jump on board, but even after last week's significant spike, there is reason to believe that this company may still be trading at a relative discount, when compared to overall results, international approvals, and US market potential.
A hot one to watch this week, and potentially for the remainder of the year.
Sunshine Heart's Slowing Volume Could Mean Opportunity
Sunshine Heart (NASDAQ: SSH) is another medical device company worth watching this week, but maybe for opposite reasons those of SanuWave. Sunshine shares have declined off their recent highs and are once again approaching the lower end of a relative trading range that has been in place for multiple quarters now, since a booming run sent shares towards the twenty dollar mark at a point last year. A dropoff in trading volume has accompanied the slow retreat in share price, an indication that Sunshine may be in a lull between catalysts and milestones, but as pivotal trial sites in both the United States and Europe start enrolling patients over the coming months, Sunshine could again be thrust into the spotlight as investors digest the potential of the C-Pulse Heart Assist device to heavily infiltrate the Class III and ambulatory Class IV heart failure market. While full trial results are years away, there are a few reasons why investors are paying attention now.
For starters, C-Pulse would have relatively no competition on the market, if approved, because the device is implanted outside of a patient's bloodstream. That's not a note to ignore, as other heart-implant devices on the market - by Heartware International (NASDAQ: HTWR) and Thoratec (NASDAQ: THOR), for example - are implanted directly into the bloodstream, increasing the risk for blood contamination while also being considered a much more intrusive implant than one that does not touch the bloodstream. Another key benefit in relation to C-Pulse being implanted outside of the bloodstream is that it allows for other quality-of-life conveniences, too, such as the ability to be disconnected when necessary - for showering, for example.
Given the strong international trend that has the healthcare industry shifting to more cost-effective and less intrusive treatments and devices, C-Pulse has a good chance of making an immediate impact in the treatment of heart failure, assuming positive results - which have thus far revealed that C-Pulse may not only halt the progression of heart failure, but reverse it, too - continue through the pending trials.
Another factor that may contribute to investor satisfaction moving forward is that the company was able to significantly reduce its cash burn rate, as demonstrated by the most recent quarterly and annual report. Both full year and quarterly operating expenses were notably lower than during the previous year and quarter, respectively, and the company ended the year with a bit more than double the amount of cash on hand than it closed the previous year. In regards to funding of the trials and potential commercialization in Europe moving forward, Sunshine announced in January a stock purchase agreement with Aspire Capital Fund, LLC, where Aspire has agreed to purchase up to $25 million worth of SSH common over a period of two years, at intervals of Sunshine's choosing. Such an agreement could carry Sunshine well past the mid-way trial point, where any positive interim data could thrust the company into direct acquisition discussions. Previous financing agreements have hinted that there already exists significant partnership or buyout interest in regards to C-Pulse, and given the annual multi-billion dollar market of Class III heart failure, there is reason to believe that positive results - interim or actual - could attract a fair amount of attention.
With volume trading light over the past few trading sessions, and a potential broad-market dip about to be realized, Sunshine Heart is one to keep on the radar as a 'play the dips' accumulation type play - with eyes towards the upcoming trial catalysts.
FluoroPharma Positions Ahead Of Key Trial Catalysts
FluoroPharma Medical (OTCBB: FPMI), like Sunshine Heart above, has also seen its trading volume taper off of late, but also has key trials underway and could potentially provide a significant upgrade to the market standards for which its technology targets. This company has developed a pipeline positron emission tomography (PET) imaging agents for the efficient detection and assessment of various forms of coronary artery disease (CAD) and certain types of cancer. Both of its front-line products, CardioPET and BFPET - being tested as imaging agents for CAD and ischemic and infarcted tissue within the myocardium in chronic CAD patients, respectively - have already returned evidence of superior performance to the current standards, which has attracted the attention of Zacks. As the company moves its product candidates into the mid to late stages of Phase II, the most recent quarterly and full year reports also indicate that the company has managed to keep expenses at respectable and sustainable levels, a key factor when investors gauge a speculative investment moving forward.
As it stands now, FluoroPharma's market cap may not yet take into account the size of the technology's target market nor the current trends in the sector that could favor the more clear and concise imaging provided by CardioPET and BFPET. Heart disease, like diabetes - as mentioned above when discussing SanuWave - is growing at an alarming rate on a global scale. Cardiovascular disease remains the number one killer in the United States, while most of those with the disease either have - or will see their condition evolve into - CAD. Industry shifts have seen an increase in PET imaging agents being used in the identification and assessment of CAD and FluoroPharma looks to capitalize on that shift. Assuming the current trends continue, this could quickly become a billion dollar market opportunity for FPMI.
Results from the ongoing Phase II trials are expected to start releasing results during the second half of 2013, positioning FluoroPharma to become a potential short term catalyst play, even as the long term story plays out. To date, trial data and imaging quality is based on Phase I and early Phase II results, but if the positive results continue for the duration of the Phase II studies, then investors may be prepared to take this opportunity more seriously and less speculatively and enable shares to potentially approach the price target set by Zacks, which is still roughly triple the current levels.
Trends in the sector also favor FluoroPharma. As mentioned above, ballooning costs in the global healthcare industry have led to a dramatic shift towards early detection of common ailments, rather than just treatment. Treatment has been where the money is for big pharma and investors of the sector - since treating patients and not necessarily curing them keeps the revenue coming in - but governments and insurance companies have finally had enough and preventative medicine is currently where it's at. That shift enables the likes of FluoroPharma's technology, which has thus far proven superior to that already on the market, to grasp a quick foothold, if results continue and the technology is ultimately approved.
A boost in trading volume during the middle of 2013's first quarter failed to move the share price much, but it could be an indication that some investors are starting to take notice. By comparison, shares of SanuWave Health saw a similar boost in volume not too long ago, before settling down, only to then see the share price follow the volume last week. As the broad market rally looks to have sputtered, investors and traders alike will now go looking for individual stocks and stories that could pay potential short and long term dividends. With trial catalysts set to unfold during the coming quarters and with the company positioning to pounce on industry trends, FluoroPharma may be one to keep on the radar. Shares in this sector tend to run leading into trial results, and then potentially thereafter, too, if positive.
Other market conditions to monitor for the week:
Stocks head into the new week on a slight down tick, having drifted lower for the duration of the week prior. Friday's March jobs numbers disappointed as well, although the unemployment rate dropped to its lowest level in years, and investors will turn their attention to another earnings season that kicks off on Tuesday, with Alcoa (NYSE: AA) the first major player to report, as usual. Given the lost momentum of the early-year rally last week, the upcoming earnings season will be pivotal in assessing whether or not the market can maintain at least some of its gains. There were some early warning signs last quarter - most notably from Wal-Mart (NYSE: WMT) executives - that 2013 tax hikes and other factors may have cut into consumer spending enough to make a significant dent in expectations for this quarter's earnings, and any sign that such is true could spark a turn of momentum and send stocks south. This week's reports will be banking-heavy, but a couple of retailers - such as Pier 1 Imports (NYSE: PIR) and Bed, Bath and Beyond (NASDAQ: BBBY) - could provide an early look into consumer sentiment for the just-completed quarter. The banks, and Pier 1 to a lesser degree, will provide insight into the housing market.
Drastic market drops should not be expected, however, given the progress made with the global recovery over the past few quarters and the continued stimulus policies of the Fed, which are not likely to end anytime soon. On that note, it'll be a busy week for the Fed, too, as numerous speakers - including Chairman Ben Bernanke - are slated for comments during the coming days that should provide an indication of just how long the stimulus will last - after all, we know it can't last forever.
Budget talks are sure to steal some spotlight, too - more in regards to fiscal year 2014 than to the remainder of this year - but investors and citizens both have likely reached a point of saturation with Washington's monetary talk and are probably more likely to tune into an Astros- Marlins game than listen any more to bickering politicians.
It'll be a busy week ahead for sure, one that could make or break the early momentum for the quarter, but in the meantime there will be plenty of individual stocks and stories to keep an eye on, too...
Roundup: International stocks traded mixed to higher on Monday morning as the US markets shift heavily into earnings season. Indications are that the rally of 2013 may be fading quickly as politics and geopolitical events weigh on any potential upside, but as mentioned above, that does not entirely mean profits need to sit on the sidelines until a new wide-scale entry point is realized. Many lesser-known individual stocks and stories have hovered below the radar during the recent rally, and some of those plays could start attracting investor attention again. As described above, the developmental sector is one such area that trades independent of the markets and could benefit from post-rally profit taking, as some money is likely to flow into catalyst and milestone plays for the short term, while some stories may be intriguing enough to keep investors interested for the long term, too. With uncertainty surrounding the upcoming earnings season, since investors have caught onto the 'guide lower' game that was heavily played last quarter, we're likely to see an increase in overall volatility. Keep the trading fingers ready.
Disclosure: Long SNWV, SSH, FPMI.
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