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Halozyme Therapeutics (HALO) has both a compelling technical picture and a fundamental profile. Looking at the chart, HALO saw shares gap below major support at $14 at the start the year. This level served as prior support since late October of 2015, and the freefall to $7 was due to lowered revenue guidance from the company.
However, HALO traded to a high of $12.05 on Friday. Continued closes above $12 would be bullish for a run at $12.50-$13 over the near term. Rising support is at $11.75-$11.50 and the 100-day moving average.
The fundamental picture is interesting, as the company is now expected to lose $1 a share for 2016. There are nine analysts that cover HALO, and their estimates range from a loss of $0.65 to a loss of $1.14 a share for the year. However, I’m not sure if these analysts have updated their homework.
The short story on Halozyme Therapeutics is that it has two promising drugs. One is focused on breast cancer, with Phase 1 trials possibly beginning this year or next. Halozyme’s second drug targets pancreatic cancer, and it is currently in a Phase 3 trial.
In mid-January, Halozyme Therapeutics said that revenues for 2016 would likely come in between $110-$125 million. Estimates by the suits-and-ties had revenue topping $130 million. This was the main reason that major support at $14 cracked, and shares folded like a cheap lawn chair to below $7 by early February. I have waited patiently for three months for a recovery in HALO, and it finally looks like one has materialized.
The reason I’m questioning the estimates from the slick-talking pros is that Halozyme actually reported a better-than-expected quarter in late February. It announced a profit of $0.03 a share versus estimates for a loss of $0.08. Revenue also came in north of $52 million. The forecast had called for revenue of $42 million, which underestimated the quarterly numbers by 25%.
The important point I want to make, which I’m not sure the analysts noticed in the fine print, is that the company’s revenue forecast excluded payments from any global collaboration and licensing agreements that might be signed this year.
In 2015, Halozyme recorded $48 million in upfront payments from its partnerships that were not included in the 2015 guidance issued at the beginning of last year. The company currently has an agreement with AbbVie Inc (NYSE:ABBV) and another with Eli Lilly and Co (NYSE:LLY), which was inked in December.
The current market cap for Halozyme is at $1.5 billion, which makes it ripe as a takeover target. A 50% premium to the current price would equate to a $2.25 billion market cap and a value for the stock of $17-$18. Of course, this is speculation on my part, but bigger companies usually like buying smaller companies with rising revenue and cutting-edge technology.
The one thing I do appreciate from Wall Street analysts are their price targets. Let’s start with the most recent ones I could find and work backwards.
On Feb. 1, one brokerage firm initiated coverage of the stock with a “Buy” rating and $10 price target. Shares were north of $8 at the time. This was a nice, conservative call for a 25% return on the stock when it was near its lows. This has clearly been exceeded, but the analyst has not issued an update that I’m aware of.
In late January, with shares north of $9, UBS lowered its price target on HALO from $28 to $22, but it kept its “Buy” rating in place. At the time, UBS issued the price downgrade due to weakness in the biotech sector. With shares sinking south of $7, this was a good call by UBS, but there has been no follow-up despite the tremendous rebound in the stock.
In early December of 2015, Wells Fargo started coverage of HALO with an “Outperform” rating and a price target range of $30-$34.
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In November of 2015, with HALO just under $16, an analyst from Citi issued coverage of the stock with a “Buy” rating and a $25 price target.
And, finally, in late September of 2015, Barclay’s was bullish on HALO with an “Overweight” rating and a price target of $27. Shares were above $18 at the time.
Needless to say, after spending many long hours doing both the fundamental and technical analysis on HALO, I have high hopes for the stock and an options trade on it.
Buy to open the HALO May 13 calls (HALO160520C00013000) at current levels.
My exit target for the HALO calls is in the $1.20-$1.80 range. I have a Stop Limit to exit if the calls trade down to $0.65.
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