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Illumina, GW Pharmaceuticals, Paycom, Zscaler and Square highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research

For Immediate Release

Chicago, IL – July 24, 2019 – Zacks Equity Research GW Pharmaceuticals GWPH as the Bull of the Day, Illumina ILMN as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Paycom Software, Inc. PAYC, Zscaler, Inc. ZS and Square SQ.

Here is a synopsis of all five stocks:

Bull of the Day:

GW Pharmaceuticalsis the $5 billion biotechnology company with the first FDA-approved cannabis-derived drug. Epidiolex was created and tested starting four years ago for the treatment of two rare forms of childhood epilepsy and launched commercially in November.

I last wrote of GW Pharma as the Bull of the Day on March 4 after they released initial-launch sales numbers for Epidiolex. The company surprised investors and analysts with the launch which achieved $4.7 million in Epidiolex sales just for November and December, far surpassing the consensus of $2.5 million even with the holidays. 

Fast-forward to May 6 and Q1 results, and the first full quarter of Epidiolex sales also crushed expectations with revenues of $33.5 million vs the $20M consensus. Other key metrics in the press release...

·         Over 7,600 patients have received Epidiolex prescriptions since launch

·         Over 1,900 physicians have generated dispensed prescriptions since launch

·         Pharmacy distribution network now includes over 145 distribution points

·         Approximately 75 percent of 900 patients in expanded access program and open label extension now transitioned to commercial product. Remaining patients expected to transition by end of Q2.

GW Pharma also relayed data on rapid and encouraging payer coverage, including over 90 percent of all U.S. lives now covered – 65 percent of which have either Prior Authorization (PA) to indication or less restrictive.

The insurance reimbursement factor is extremely important as doctors may choose Epidiolex for their patients but payers may not have fit cannabinoid medicines into their approved protocols yet. After all, GW's Epidiolex was the first so it's completely new territory for all healthcare players. We'll come back to these issues again.

A Cannabis Drug Success 20 Years in the Making

GW Pharma was founded in the UK in 1998 by two physicians, Geoffrey Guy and Brian Whittle. Their mission right from the start was to research and develop cannabinoid medicines, with particular emphasis on ailments of the central nervous system (CNS).

In 2010 they achieved approval in the UK for the first cannabinoid treatment for Multiple Sclerosis. This long track record of success gave US regulators confidence in the science and R&D of GW.

When the FDA approved Epidiolex in June of 2018 for Dravet syndrome, they called it an "important scientific advance." And this paved the way for the US Drug Enforcement Agency (DEA) to move the drug to the safest level in the controlled substance classification system.

This is important because marijuana itself remains a Schedule I drug which means it is classified as having little medicinal value and could be dangerous and/or addictive.

With 3.4 million U.S. patients with epilepsy, including approximately 470,000 children, Dravet syndrome and Lennox-Gastaut syndrome represent two of the most difficult-to-treat epilepsy syndromes.

And Epidiolex, after making a believer out of the FDA and patients in 4 years of clinical trials, is on a mission to educate doctors and families world-wide. Consequently, the first approved cannabinoid medicine is seeing sales estimates rise rapidly as other CNS health indications could be served by the GW pipeline. Some investment bank analysts see sales as high as $750 million for the company in 2020.

That would represent a 5000% revenue ramp in just 2 years from 2018's $15 million and means the GW pipeline could be poised for "blockbuster" status, or potentially worth at least $1 billion in annual sales.

While Epidiolex will be the main sail in this ascent to blockbuster status, the GW pipeline is still very important in terms of innovation. In May, the company also announced positive Phase 3 data in tuberous sclerosis complex (TSC) and GW plans to submit an NDA (New Drug Application) this year. 

Analyst Reaction to the Q1 Sales Surprise

Based on the rapid acceleration in Epidiolex sales, investment bank equity analysts were busy revising their forecasts higher in May. Here are some notable examples...

SVB Leerink moved 2019 sales estimates from $133M to $205M and 2020 projections went from $369M to $403M. They also raised their price target on the stock from $185 to $198.

Oppenheimer analysts moved 2019 revenues from $161M to $233M and 2020 vaulted $200 million to $444M. The bank raised their PT to $234.

Piper Jaffray boosted their 2019 sales view from $170M to $304M, but revised down their 2020 outlook from $498M to $476.6M. Their PT went from $185 to $210.

And the biggest GW bull on the Street, Stifel Nicolaus, jumped their 2019 sales estimate from $136.5M to $250M and their 2020 forecast from $497M to $761.5M. The analysts moved their PT up from $191 to $227. They see Epidiolex growing into a $1.5 to $2 billion drug.

While there remain concerns about prescription and payer trends, such as off-label use, new patient starts, and compliance rates, there is some encouraging intel that can guide investors until we hear from the company again on August 6.

Stifel analysts do quarterly surveys of about 30 epileptologists to get data on these trends. Earlier this month, the bank shared that nearly 1/3 of usage is already coming outside of Dravet/LGS, which means that physicians are able to prescribe off-label for their adult patients. Of the 678 Epidiolex-treated patients from the recent survey, 181 are adults. 

Of concern was that some physicians conveyed that reimbursement pushback has been significant but the Stifel analysts concluded that "Overall our survey projects substantial growth during the next 6-12 months that we think should drive shares higher; nearer term we think 2Q will be very good, well above consensus."

The CBD Free-for-All

There are over 100 cannabinoid compounds in the marijuana plant that could be used for medicinal research. In a sense, GW Pharma could be seen as an important trail blazer with its successful approval and launch of Epidiolex. 

In two investor presentations I did for Zacks followers before the GW February report, I emphasized this "trail blazer" role and also the significance of insurance companies as key partners in the patient-physician-payer alliance.

While there are over 20 FDA-approved epilepsy drugs on the market, even the ones for orphan conditions like Dravet and Lennox-Gastaut syndromes, the two that Epidiolex can treat, don't work for every family.

So for patients and physicians to have the flexibility from payers to try the new cannabinoid treatments is a tremendous opportunity for all, including GW.

The other larger issue I've raised is that these stakeholders don't want to look for medical solutions in the wild west of CBD products now available on the internet without a prescription. For young children with specific diseases, there is "no supplement" for the tested and regulated efficacy, safety, and quality of a doctor-prescribed dosage.

To wit, when Justin Gover, the CEO of GW Pharmaceuticals, was on CNBC's Mad Money after the company's February report he explained to host Jim Cramer that "Epidiolex is different from other CBD options."

"We do real science and produce medicines with safety and efficacy... Epidiolex is not marijuana, it is CBD approved by the FDA. We're only reporting two months of sales, so some caution is warranted... we're at the beginning of the journey with Epidiolex and looking at other uses for it."

I have been telling long-term healthcare investors for two quarters now that this is a stock to buy on every dip toward $150. This will be an investment to accumulate on pullbacks as the science and the sales have proven worthy of a blockbuster trajectory.

Disclosure: I own GWPH shares for the Zacks Healthcare Innovators portfolio.

Bear of the Day:

Illuminais the $45 billion leading developer of life science tools and integrated systems for large-scale analysis of genetic function and variation. Their technology is responsible for generating more than 90% of the world’s sequencing data.

Serving customers in the research, clinical and applied markets, their products are used for applications in the life sciences, oncology, reproductive health, and agriculture. 

You may have experienced Illumina technology if you ever ordered a DNA testing kit from a company like 23andMe or Ancestry.

A Shift in the Diagnosis

In May, ILMN was a Zacks #2 Rank because analysts were raising estimates after another beat-and-raise quarter and I was telling investors to keep buying shares under $310 because I believed strongly they were headed back to $350. 

Long from $288 in my Healthcare Innovators portfolio, thankfully we took our profits up there in June as I saw limited upside with the average Wall Street price target near $360.

Then on the evening of July 11, Illumina pre-announced disappointing Q2 revenues and forward guidance. From Bloomberg...

Illumina reports preliminary Q2 revenue $835M, consensus $888.18M

Illumina lowers FY19 revenue view to up 6% from up 13%-14%, consensus $3.77B

"We are obviously disappointed with our second quarter financial results. Our preliminary analysis suggests that these challenges are transitory and do not reflect a macro change to the fundamentals of our business," said Francis deSouza, president and CEO. "Despite our shortfall this quarter, we remain as enthusiastic about the long-term growth prospects for our markets as we have ever been, and are committed to setting the industry's bar for consistency and execution in the dynamic and rapidly growing world of genomics."

This negative surprise took shares down 16% the next day on heavy volume of 8.5 million shares.

Most analysts quickly revised their estimate models and stock price targets lower in response, with the average Wall Street PT now below $320.

3 Growth-Focused Tech Stocks for Investors to Buy in July

All three major U.S. indexes surged to new highs to start the second half of 2019. Mega-cap technology powers from Amazon to Facebook once again helped drive more than their fair share of overall growth. This trend continues what has proven to be a solid investment strategy: find tech companies set to expand and you will likely land outsized returns.  

For years, many of Wall Street’s most high-performing growth stocks have emerged from the technology sector. Despite some volatility, strong earnings and impressive sales remain the story for many companies in the technology sector.

With that said, let’s pair the proven Zacks Rank with our Style Scores system. This system includes a “Growth” category that helps us find tech stocks poised for solid growth. Investors should note that our Growth category values earnings and sales growth, as well as improvements to a company’s financial statements, including strong cash flows and solid return on equity.

Now it’s time to check out three tech stocks that came through our screen today that growth investors might want to consider as the second-quarter earnings season ramps up.

1. Paycom Software, Inc.

Paycom is a cloud-based human capital management software firm that boasts it is “one HR and payroll solution for managing employees from recruitment to retirement.” Shares of PAYC have skyrocketed 90% so far this year, which destroys the S&P 500’s 17% climb and its industry’s 22% jump. Paycom’s recent climb is part of a much larger run that has seen PAYC stock soar almost directly up for over five years. The Oklahoma City-based firm posted stronger-than-projected Q1 2019 results and that helped it raise its 2019 guidance.  

Our current Zacks Consensus Estimates call for the firm’s adjusted Q2 earnings—which are due out Tuesday, July 30—to climb over 20% to hit $0.71 per share, on the back of 27.3% revenue growth. Meanwhile, Paycom’s full-year fiscal 2019 EPS figure is projected to pop roughly 24%, with sales up 27% to $719.87 million.

PAYC’s valuation metrics shouldn’t really be taken into consideration at the moment as it has proven itself to be a stellar growth stock. Paycom is currently a Zacks Rank #2 (Buy) that sports “B” grades for Growth and Momentum in our Style Scores system, and could be poised to expand as more companies digitalize many of their back-end office operations.

2. Zscaler, Inc.

Zscaler is a cloud security firm that offers two main services: Zscaler Internet Access and Zscaler Private Access. The San Jose, California-headquarter firm helps its customers use a single platform to “enforce business and security policy” across apps, services, the public cloud, corporate data centers, and more. The former tech unicorn went public in March 2018 and ZS stock has surged 154% since then to crush its industry’s 20% average climb. Shares of Zscaler are also up 114% in 2019 and currently rest right below their all-time high of $85.50 a share.

Zscaler saw its Q3 fiscal 2019 revenue, which it reported at the end of May, soar 61% year-over-year. The company also expanded its cloud capacity during the period and opened three new data centers in Beijing, Stockholm, and Atlanta. Plus, the company that currently boasts a market cap of $10.527 billion acquired browser-based access technology firm Appsulate.

Looking ahead, the company’s full-year revenue is projected to jump over 56% to $297.53 million, with its adjusted EPS figure expected to climb from a loss of -$0.13 a share in the year-ago period to +$0.17. Zscaler has seen its longer-term earnings estimate revision activity trend heavily upward recently and its fiscal 2020 revenue is projected to climb 32% higher than our 2019 projection. ZS stock is a Zacks Rank #2 (Buy) at the moment that rocks an “A” grade for Growth.

3. Square

Square has transformed over the last decade from a credit card processor for the mobile age into a complete financial services firm. The company’s offerings now include everything from business loans and peer-to-peer payment platforms to debit cards and more. Square has also, very critically, become more attractive to larger businesses as part of the broader fintech revolution.

Shares of Square are up 40% in 2019, despite a downturn from early March to the start of June. With this in mind, SQ stock still has plenty of room to climb before it reaches its 52-week highs, unlike the other two stocks on this list. Square closed regular trading Tuesday at $78.86 a share, down roughly 20% off its September 2018 highs.

SQ’s adjusted second-quarter earnings (due out on August 1) are projected to climb over 23% from the prior-year period on 36% higher revenue that would see it hit $1.11 billion. Square’s full-year EPS figure is expected to soar 60% to reach $0.75 per share on 36% revenue expansion—that would see its reach $4.47 billion. Peeking further ahead, Square’s fiscal 2020 revenue is expected to jump over 28% higher than our current-year estimate to reach $5.74 billion, with its 2020 earnings projected to jump 45% above our 2020 estimate. Square, like its peers, is a Zacks Rank #2 (Buy) right now that holds a “B” grade for Growth.  

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