Bulls On Parade: Is Nanosphere's Bull Run Over?

| About: Nanosphere, Inc. (NSPH)

Shares of Nanosphere, Inc. (NASDAQ:NSPH) have been moving upwards at breakneck speed over the last 30 days. Specifically, NSPH is now up 54.9% in only a month's time, fueled largely by strong sales of its Verigene microbial cartridges and newly signed distribution agreements (see below). With such a rapid climb that has actually accelerated in recent trading sessions (i.e., NSPH climbed 12.4% last Friday alone), investors seriously need to consider whether it is time to take profits, or let this stock ride for the long term. Investors looking to play NSPH's strong momentum also need to consider how much room this stock has left to run. So in this article, I give an overview of NSPH, as well as its potential to continue its bull run going forward.

Nanosphere is an Illinois-based company that develops, manufactures and markets an advanced molecular diagnostics platform called the Verigene System. The system allows low cost, precise sensitive genomic and protein testing on a single, easy to use platform for a wide diversity of microbial and viral pathogens. The system works via a series of test cartridges that have the ability to detect specific pathogens. The current list of FDA approved test cartridges includes but is not limited to:

Influenza (A/B)



Flu A - H3

Flu A - H1

Staphylococcus spp.

Listeria spp.

Clostridum difficile

The problem that physicians face when treating patients presenting symptoms of a microbial or viral infection is that many pathogens can elicit a broad spectrum of symptoms, none of which uniquely characterizes a specific pathogen. Moreover, the current plethora of diagnostic tests (e.g., bacterial cultures, PCR, etc) often take up to 72hrs to yield results, which greatly hinders physicians in their ability to enact a clinically guided course of treatment. The clinical advantage of the Verigene System over traditional diagnostic tests is twofold. Firstly, it is highly automated, reducing the potential for human error, and secondly, it generally yields results within 24hrs.

Even so, the real issue that investors must consider going forward is how the Affordable Care Act will affect the ability of hospitals to purchase new toys such as the Verigene System. Simply put, fancy new tests must have some clear benefit in terms of reducing health care costs in order to be reimbursable under Obamacare. The good news for investors is that the Verigene definitely meets this criterion. As noted by another Seeking Alpha author, the system reduces health care costs in three ways:

  • An average of a 25.4-hour reduction in time to optimal antibiotic therapy
  • A 6.2 day reduction in length of stay, and $21,387 reduction in cost/patient
  • Outcome reduced mortality reduction in intensive care rates from 47.8% to 9.5%

According to the company's recent 10-Q, quarterly revenue increased 82% to $2.4M on the back of strong sales for its microbial test cartridges, and the gross profit margin for all sales came in at a healthy 37%. Going forward, administrative and R&D expenses are still the main concerns for NSPH investors, which topped $9 M in the first quarter of 2013. Simply put, the company is still far from being cash flow positive, and NSPH doesn't expect to be so in the next 12 months. As such, the company is going to more than likely have to rely on debt and equity financings to remain liquid until it either (A) decreases R&D expenses or (B) increases sales of Verigene test cartridges. The recent distribution announcement with Hitachi in Japan may go a long way towards helping NSPH become cash positive. Even so, NSPH management is pushing hard for a number of new FDA approved test cartridges in the coming year, so expenses should remain high for the foreseeable future.

On the technical side, NSPH is in deeply overbought territory with a RSI of 86 and trading 50% higher than its 200 day SMA. Although four different analysts have rated NSPH a "strong buy" recently with an average price target of $4.40, I think the fundamentals and technicals clearly suggest the stock is ready for a major pullback after its monumental bull run over the last thirty days. I therefore look for NSPH to pull back to the $3.80 range as traders begin to take profits, and the stock finds a home in the high $3s during a period of consolidation. At that point, I believe NSPH does begin to look attractive as a long term buy and hold, given that the system shouldn't face major challenges in regards to the Affordable Health Care Act. In sum, NSPH looks to be at the tail end of its current bull run, and investors looking to get in for the long term are best served by waiting for the eventual pull back. Traders may want to consider going short or simply moving onto greener pastures.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.