Health care stocks that drop rapidly can provide investors with compelling entry points, especially when the fall is due to an overreaction to a material event. With this theme in mind, here is my take on the three biggest laggards in the sector last week.
The roller coaster ride continues at Intercept
Intercept Pharmaceuticals (NASDAQ: ICPT ) heads the list of laggards with its 34% drop last week, following its monstrous 545% gain the week before. Intercept's story begins with its experimental drug obeticholic acid for nonalcoholic steathohepatitis, or NASH. As most health care investors know by now, Intercept's drug worked so well in a mid-stage trial that investigators stopped the trial early because it's unethical to continue giving patients an inferior placebo. Because NASH has no effective treatments, and the potential market is believed to be in the multi-billions, Intercept's share price literally quadrupled in a day.
Since announcing these unexpectedly strong results, however, Intercept's management has thrown a bit of cold water on investor enthusiasm. First off, the company reported that its drug increases bad cholesterol levels, which will require further investigation. Second, Intercept's CEO Mark Pruzanski stated at the recent J.P. Morgan Healthcare Conference that Intercept may need the help of a bigger partner to bring the drug to market.
Put simply, you should expect continued volatility in Intercept's share price until these two critical issues are resolved. That said, Intercept's drug has such amazing potential as an unprecedented type of treatment for NASH that it wouldn't surprise me if the company is already being eyed by larger pharma companies.
Chinese investigation drops Usana Health
USANA Health Sciences (NYSE: USNA ) skidded 17% last week after Chinese regulators announced that they are investigating personal-care companies on the grounds that they could be pyramid schemes. The issue at hand is whether or not multilevel marketers like Usana, Herbalife, and Nu Skin are than pyramid schemes masquerading as legitimate businesses. So far, some European courts have ruled that multilevel marketers are not pyramid schemes, but the ruling party in China has long held a dubious view of direct selling companies like Usana.
What's the big deal? The reason this news has been so harmful to multilevel marketers is because China is the fastest-growing market for these types of companies.Turning to Usana in particular, revenue from Chinamade up roughly 40% of the company's net profits last year.
So, a ban would erase a major portion of Usana's business. In short, my take is that it's better to stay away from multilevel marketers until this regulatory issue in China is resolved.
Corcept falls on downgrade
Corcept Therapeutics (NASDAQ: CORT ) fell more than 14% for the week after the company's shares were downgraded from "Buy" to "Hold" by Stifel Nicolaus . The downgrade is based on slower than expected sales for Corcept's Cushing's Syndrome drug Korlym, coupled with the stock's 72% rise over the past year.
What's my view? Personally, I view this downgrade as long overdue. With annual Korlym sales expected to come in at less than $10 million, research costs increasing, and shares trading at about five times cash on hand, you might want to find more compelling growth stories in the health care sector than this one. I believe Corcept's shares are going to struggle until the company is able to expand Korlym's label.
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