Genzyme falls through stop loss

A tight stop loss on Genzyme (GENZ) at 5% was triggered at the open as the company suffered broker down grades on yesterday's FDA news. The stock is currently down 6.5% at $51.7. 

Another strong day on Wall Street with jobless data

Dow Futures were recently up 59 points as the U.S. Labour Department reported that Americans filing for unemployment benefits fell 14,000 last week to 442,000 against expectations of 450,000 or so.  The FTSE 100 is currently up 48 points to 4,722.

New position in Genzyme on FDA problems

Contrarian Investor UK started a new position in biotech company, Genzyme Corp. (GENZ) after a 6% decline yesterday. The stock fell back after the U.S. FDA (Food and Drug Administration) took action at its Allston production plant to make sure products are made within the required specification, following a series of manufacturing problems dating back to 2008. The FDA will issue a consent decree, which means additional plant testing at extra cost until further notice and will affect its top two selling drugs, Gaucher's disease treatment Cerezyme and Fabry disease drug Fabrazyme. A consent decree may take several years to resolve. Genzyme said the likely consent decree would have a third party inspect and review the plant's operations for "an extended period" to ensure compliance but sales of products made there would not be interrupted. The move would require Genzyme to "make payments to the government and could incur other costs."

But the reason for the purchase is simple. In February, activist Carl Icahn, announced he had nominated four directors to Genzyme's board, including himself, for election at a May 20 shareholder meeting. Icahn Capital LP more than doubled its Genzyme stake to 4.8 million shares from 1.5 million shares during the fourth quarter of 2009. The FDA action may help Icahn gain control of the board and push for a sale of the business.

At $55 (52 week range $47-63), GENZ has market cap of close to $15 billion and a high historical p/e of 35. Analysts were expecting earnings of $2.88 for 2010 but this is certain to be revised down. Assuming earnings of $2.5 per share, this puts the company on a forward p/e of 22 which is not outrageous given Icahn's action to oust the board. Options traders were buying the June calls at $60 heavily last night, indicating that some investors are confident of a bounce back to over $60 in the next few weeks. Though competition is increasing for Genzyme's key drugs, it may be a good takeover candidate for a larger pharmaceutical company looking to establish a presence in the specialist medicine sector. Though the company may fall further, the downside from the FDA action should not be more or less priced in and therefore from a contrarian point of view this stock ticks the right boxes.

Reconfiguration of Falkland Islands oil holdings

With the rise back above £1 for Desire Petroleum (DES) I took the opportunity to de-risk the Falklands Islands portfolio. Unfortunately IG are not accepting controlled risk Contracts for Difference (CFD) trades on Desire which makes a "duster" on the Liz prospect risky for the portfolio. However, there are still accepting controlled risk trades on the other Falklands Oil drillers and therefore I have closed the Desire position and opened a new long positions in Falkland Oil and gas (FOGL) and Rockhopper (RKH) since the downside is protected to a 12.5% loss whilst allowing me unlimited upside "hanging on the coat tails" of a Desire positive update, should it occur. The gains in the other Falkland Islands drillers may be less marked than Desire but an unprotected trade feels foolhardy given the risks.

The RNS from Desire on the results of the Liz field drilling should be due very soon since we are nearly 30 days into drilling.

Prudential ups stake in GW Pharma

Prudential have increased their stake in GW Pharma (GWP) from around 10% to just over 12% in the last few days which adds reassurance to the buys put in place yesterday. It now looks increasingly likely that the steep drop yesterday was market maker manipulation, triggering stop losses for private investors to fill the large Pru order.  Certainly looking at the pattern of trades there was no evidence of large sells and the price was forced down to 113p at one point yesterday morning. GWP is now trading up 0.5p at 119p to buy.

U.S. market turns down on Euro fears

Although the FTSE 100 finished in marginally positive territory after the budget, the DOW Jones Industrials dropped 53 points to finish at 10, 836 as the Euro continued to fall heavily against the dollar.

The Euro was hurt by Fitch, the credit rating agency, which downgraded Portugal’s credit rating to AA- from AA, citing “significant budgetary underperformance in 2009” and “structural weaknesses” in its economy. German Chancellor, Angela Merkel, continues to resist pressure to offer economic aid to Greece as unsurprisngly a bail out would be politically unpopular. Germany is holding out against any deal until the Greek governnment has exhausted its options to borrow on the bond markets, or from the IMF (International Monetary Fund) and allow it to roll over its debt. The Eurozone continues to look a mess as there is no mechanism to devalue which would have been Greece's preferred option under the Drachma.

It was interesting to watch Jim Cramer's Mad Money TV show (CNBC) the night before last where he said the market was going much higher and the bears had been turned into cuddly koala bears.  Yet with all thus exuberance many risks exist for the global economy.  The first quarter earnings season in the U.S. is due to kick off in 3 weeks time and earnings will probably do well as firms continue to drive bottom line profits through cost cutting. However,  top line sales growth will be needed to continue the momentum in the second half of 2010.