Three healthcare stocks shine while two fizzle to cap the first month of 2019’s investor lottery. Who’s a rational bet and who’s a pure gamble.

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The healthcare stock market’s recent success is largely dependent on the fact that, as the global population increases and more people need access to healthcare, companies in the space are prepared to rise to the challenge and go all in.

With the advent of new medical technologies and approaches to treating patients suffering from a myriad of diseases, news surrounding innovative companies putting their science and clinical skills to the test has worked to attract droves of investors looking to the healthcare sector for solid returns.

Let’s take a look at last week’s top winners and their counterparts–the distinctly downtrodden–and what their outlook is going forward.

1) Fortress Biotech Inc. (Nasdaq:FBIO) led advancing issues, soaring 133% over the week to $2.47. The NYC-based biopharmaceutical company dedicated to acquiring, developing and commercializing novel pharmaceutical and biotechnology products, announced that its unit Caelum Biosciences Inc. signed a strategic agreement with Alexion Pharmaceuticals Inc. to advance the development of CAEL-101 for light chain (AL) amyloidosis. CAEL-101 is a first-in-class amyloid fibril targeted therapy designed to improve organ function by reducing or eliminating amyloid deposits in patients with AL amyloidosis. AL amyloidosis is a rare systemic disorder that causes misfolded immunoglobulin light chain protein to build up in and around tissues, resulting in progressive and widespread organ damage, most commonly the heart and kidneys.

Under the terms of the agreement, Alexion will acquire a minority equity interest in Caelum and an exclusive option to acquire the remaining equity in the company based on Phase 2 data for pre-negotiated economics. Alexion will make payments to Caelum totaling up to $60 million.

Steve’s Take:

Fortress Bio isn’t exactly what the name conjures up, you know, mighty castle on a mountain top that’s impregnable. Especially with a market cap of just $140M. That places it squarely in the bottom half of the microcap crowd. But for the lone analyst who covers the name, the Average 12-month Price Target (APT) is $11.00. The spread to the APT is a whopping 345%.  

The Barchart Technical Opinion rating is an 88% Buy (STRONG BUY) with a Strengthening short-term outlook on maintaining the current direction. Longer term, the trend strength is Maximum. Long-term indicators mostly agree with the trend. On the downside, the market is approaching overbought territory, so watch out for a trend reversal.

Hard to ignore the eye-popping spread to APT. And the link up with large-cap Alexion, who’s followed by 17 analysts, sends a message of validation for Fortress’s science.

I see this name as a solid Buy.

2) Elsewhere, Zynerba Pharmaceuticals Inc. (Nasdaq:ZYNE) rocketed 54% to $5.79 after Marketbeat Ratings reported the Devon, PA-based company has been assigned a consensus recommendation of “Buy” from the eight analysts that are covering it. The average 12-month price objective among analysts that have covered the stock in the last year is $21.13–a monstrous spread of 365%. Zynerba Pharmaceuticals operates as a clinical stage specialty pharmaceutical focused on developing and commercializing pharmaceutically-produced transdermal cannabinoid treatments for rare or near-rare neuropsychiatric disorders.

The company’s product candidates include ZYN002, which completed Phase 2 clinical trial for pediatric and adolescent patients with fragile X syndrome, pediatric and adolescent patients with developmental and epileptic encephalopathies, and adult patients with refractory epileptic focal seizures; and ZYN001 that is in Phase 1 clinical trial to treat Tourette syndrome.

Steve’s Take:

It was the week of the microcap with Zynerba in the bottom half of the group at $102M. But the analysts who cover it have it at a Buy rating. As mentioned above, the spread to the ATP is a numbing 365%.

Flipping to the Barchart Technical Opinion, the rating is a 72% Buy with a Strongest short-term outlook on maintaining the current direction. Longer term, the trend strength is Maximum. Long term indicators mostly agree with the trend. The market is approaching overbought territory. Despite the huge spread to the APT of analysts, being in overbought territory doesn’t augur well for a short-term continuation of price appreciation.

I see this name as a solid Hold until the profit takers have moved in and calmed the stampede.

3) And Avalon GloboCare Inc. (Nasdaq:AVCO) rose 28% to $5.42 after gathering investor attention from something rarely seen in its stock: namely, activity. After idling in penny-stock territory for the last few months, both trading volume and share price spiked on January 22. It fell nearly as fast in trading on the next day. There was no company-specific news behind the upward surge. However, with the previous lack of activity and scant information from the financial statements, some analysts said investors should remain on the sidelines.

Freehold, NJ-based Avalon GloboCare provides biotech development and healthcare services. Through telemedicine, rehab and cell platforms they offer healthcare facility management, as well as strategic advisory and outsourcing services in healthcare. Its network encompasses over 100 hospitals and other facilities in both the US and China. Peers such as HCA Healthcare, Universal Health Services and Teladoc Health offer similar services.

Steve’s Take:

Pivoting for a short side-trip to the small-cap camp, Avalon weighs in at $388.6M. Its 52-week trading range is $0.98 to $13.50. The spread to the 52-week high is 258%. Now there’s some scary volatility for you. Its 1-year return is 163%; whew, what a thrill ride for all its investors, depending on your buy-sell timing.

The Barchart Technical Opinion rating is a 64% Buy with a Weakening short-term outlook on maintaining the current direction. Longer term, the trend strength is Average. Long-term indicators fully support a continuation of the trend.

Despite the Buy signal from Barchart, due to the previous lack of Avalon’s general activity and scarce information from the financial statements, I’m with those who suggest investors should remain on the sidelines for now.

4) But AC Immune SA (Nasdaq:ACIU), a clinical-stage biopharma focused on neurodegenerative diseases, plunged 63% to $3.98 after the company announced that two important Phase 3 trials are being discontinued. Lausanne, Switzerland-based AC Immune’s collaboration partner Roche Holdings AG said it is discontinuing the CREAD 1 and CREAD 2 studies.

These Phase 3 trials were testing AC Immune’s drug crenezumab as a potential treatment for Alzheimer’s disease. The decision to stop the trial was made after an interim analysis by a third party showed that crenezumab was unlikely to meet the study’s primary endpoint. AC Immune’s CEO, Andrea Pfeifer, stated that she remains “optimistic” about the drug’s future as the company awaits the outcomes of its Colombian API study.

Crenezumab is AC Immune’s most advanced pipeline compound, so this clinical update deals a body blow to the buy argument for owning AC Immune’s stock. Thankfully, AC Immune also has a number of other compounds in various stages of development, so crenezumab isn’t the company’s only potential winners.

Steve’s Take:

Stepping back into microcap land, AC Immune is in the top quarter of the group at $2264M. The analysts who cover it rate it a consensus Buy with an APT of $15.7. The spread to the highest PT is 352%, while the spread to the APT. The spread to the lowest PT is a comforting 176%.

Looking at the Barchart Technical Opinion, we find a 64% Sell rating (STRONG SELL) with a Weakening short-term outlook on maintaining the current direction. Longer term, the trend strength is Maximum. Long-term indicators mostly agree with the trend. The market is in highly oversold territory. Beware of a trend reversal.

Any way I look at the situation right now, this crushing clinical news represents a giant step backward for the name. I don’t regard this enormous drop in share price to signal a buying opportunity.

5) And Aquestive Therapeutics Inc. (Nasdaq:AQST) slumped 24% to $6.04 after the FDA rejected a new drug application (NDA) from its licensee Sunovion Pharmaceuticals Inc. for its experimental drug to treat symptoms of Parkinson’s disease.

Upon review of the application, the FDA decided it is unable to approve the NDA for apomorphine sublingual film (APL-130277) in its present form. The agency requested additional information and analyses, but no new clinical studies. The drug’s rejection prompted Keith Kendall, CEO of Warren, NJ-based Aquestive, to weigh the value of its intellectual property license with Sunovion.

“While APL-130277 is not an Aquestive pipeline program, it remains indicative of the future value in our intellectual property license with Sunovion. We will continue to proactively engage in opportunities to monetize all of our passive assets,” Kendall said.

For its part, the management at Sunovion said it is still looking to win approval from US regulators for APL-130277. The med, which consists of apomorphine and a dopamine agonist, is being developed for the management of so-called “OFF” episodes associated with Parkinson’s.

Steve’s Take:

Zacks’ proprietary data indicate that Aquestive Therapeutics is currently rated as a Zacks Rank 3 (out of 5) and it expects an “in-line return” from shares relative to the market in the next few months. In addition, Aquestive has a VGM Score of D. (VGM derives from “V” for Value, “G” for Growth and “M” for Momentum, which combines the weighted average of Zack’s individual Style Scores into one score.)

The Barchart Technical Opinion rating is a 96% Sell (STRONG SELL) with a Strongest short-term outlook on maintaining the current direction. Longer term, the trend strength is Strong. Long-term indicators fully support a continuation of the trend.

The market is approaching oversold territory. Be watchful for a trend reversal.

Zacks valuation metrics show that Aquestive Therapeutics may be overvalued. Its Value Score of D indicates it would be a bad pick for value investors. The financial health and growth prospects of Aquestive demonstrate its likelihood to underperform the market. It currently has a Growth Score of F, and we all know that’s not a good sign.

Hope springs eternal with some companies’ determination to persist with efforts to gain FDA approval, even after a sound punch in the stomach. I say wait until this name shows some signs of eventual success with further FDA discussions before giving it another look.

(Steve’s opinions are not a recommendation to buy or sell a security. Your decision whether or not to make a purchase should be based on your own due diligence and not on any representation he makes to you.)

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