The Medicines Company Soars Amid Acquisition Whispers

Biotech firm The Medicines Company (MDCO) rocketed to a fresh all-time high (ATH) Tuesday after Bloomberg reported that Novartis AG (NVS) was looking to acquire the company. The Swiss drugmaker is undergoing due diligence on The Medicines Company ahead of a potential purchase, with other potential suitors showing interest, people familiar with the matter allege, per the Bloomberg story.

The takeover whispers came just one day after The Medicines Company announced that its cholesterol-lowering drug Inclisiran had achieved encouraging results in several Phase 3 studies. The firm plans to file a marketing application with the Food and Drug Administration (FDA) before the end of the year and then submit the drug to European regulators in early 2020. If a deal were to materialize, the medicine would complement other therapies Novartis offers such as its heart failure drug Entresto.

The company's stock has advanced over 300% so far this year and now has a market capitalization of $5.60 billion as of Nov. 21, making any potential acquisition expensive and adding to a string of multi-billion-dollar pharma deals in 2019.

Technical Outlook for The Medicines Company

Since bottoming out in late December 2018, the company's share price has trended sharply higher, apart from a 20% retracement during July and August. After starting this month with a minor pullback to the 50-day simple moving average (SMA), the stock has launched higher, driven by the positive news/rumors discussed above. Price jumped 12.8% Monday and followed those stellar gains with a surge of almost 20% Tuesday on the highest trading volume since March 2017.

Traders who expect follow-through buying could take profits by using a trailing candlestick exit. For instance, exit trades when price closes beneath the previous day's low. Start by placing an initial stop order below yesterday's low at $66.49. Alternatively, traders could wait for a pullback entry near the $58.50 breakout level and trail a stop under each successive higher swing low. This exit strategy requires setting the first stop under the November swing low at $49.16.

Those who want to trade The Medicines Company but would like to diversify their risk should consider these two exchange-traded funds (ETFs) that provide a modest level of exposure to the drugmaker. Below, we review the metrics of each fund and analyze the charts. 

Invesco S&P SmallCap Health Care ETF (PSCH)

Created in 2010, the Invesco S&P SmallCap Health Care ETF (PSCH) has an investment mandate to provide similar returns to the S&P SmallCap 600 Capped Health Care Index. The benchmark comprises companies offering healthcare-related products, facilities, and services. About 75% of stocks in the fund's portfolio have a market cap of less than $2.7 billion. The Medicines Company ranks among one of the ETF's larger allocations with a weighting of 5.36%. Traders should consider using limit orders to combat the fund's 0.22% average spread and sporadic trading volumes. PSCH controls net assets of $452.33 million, charges a reasonable 0.29% management fee, and has gained 13.64% year to date (YTD) as of Nov. 21, 2019. The fund has returned nearly 5% over the past three months.

PSCH shares oscillated within a broad wedge between late February and October. The acquisition rumors acted as the catalyst for a breakout above the pattern's top trendline in Tuesday's trading session – a move that may result if further momentum-based buying in the coming days. Those who decide to go long should bank profits on a run to key overhead resistance at $130. Protect trading capital by placing stop orders either underneath yesterday's low at $120.85 or below the breakout point at $120.

Virtus LifeSci Biotech Products ETF (BBP)

Virtus LifeSci Biotech Products ETF (BBP) seeks to track the performance of the LifeSci Biotechnology Products Index. The $26.51 million smart beta fund only selects companies that have attained FDA approval for their leading drug. The Medicines Company carries a fund weighting of 4.80%. Other notable allocations include ACADIA Pharmaceuticals Inc. (ACAD) at 4.65% and Seattle Genetics, Inc. (SGEN) at 4.15%. Dollar volume liquidity averages around $80,000 most days on a typical spread of nine cents. A 0.79% expense ratio isn't cheap but won't overly affect swing trading holding periods of five days to several weeks. BBP has added 17.39% so far this year as of Nov. 21, 2019.

The ETF's share price broke above the top trendline of a six-month falling wedge pattern in late October and has since continued to march higher. Price gapped above the 200-day SMA Tuesday, indicating that the bulls may want to test a triple top that formed earlier in the year. Traders looking to play the possible 12% upside should set a profit target near the triple top at $46 and manage risk by placing a stop-loss order underneath the Nov. 18 low at $39.62, which is below both the 200-day SMA and psychological round number at $40.