Thursday, May 31, 2007

Dendreon Clears Path to Market

Dendreon (DNDN) announced today that it had met with the FDA and received clarification on what would allow Provenge for prostate cancer to be marketed. It is good news for patients and investors alike. Unless the statistics on the ongoing clinical trial come in differently than the two prior trials, Provenge should go to market some time in 2008.

Because Dendreon's stock is in limited supply and much of it is held by long-term investors (including me) it has been subjected to dramatic price swings this year. First investors were surprised when an FDA advisory panel recommended approval of Provenge. Then some bulls were surprised when instead of approving the therapy, the FDA issued an "approvable letter" requiring further data.

Then some analysts and investors treated the approvable letter as if it were a outright rejection.

Now Dendreon has a clear path to market. There is significant risk involved, the risk that survival benefits to patients won't be as clear in the current study, or that some serious adverse events (like patients dying of something other than the cancer) will show up.

However, the likely bet is that the current study will confirm the past studies and that the drug will be approved in 2008.

The real question now is, how much will Dendreon spend on trying its novel technology on other types of cancers? Will it get the same or better results that it got for prostate cancer?

Should investors base the future value of Dendreon (discounted for risk of failure for Provenge) on being a one-therapy company, or is it an industry in the making? As management said, they are likely to be first to market for active cellular immunotherapy for cancer. That could be huge, or it could flop for reasons that are not yet apparent.

Anyway, in my view investors should hold onto their stock. It may take a year or more to go to the next phase. There may be buying opportunities during that year, and there may even be short squeezes were even a confident long-term investor should sell off a bit to hedge the bet.

Dendreon corporate Web site
My Dendreon page
Summary of today's conference

Wednesday, May 30, 2007

Adobe's New Products Roll On

Adobe (ADBE) stock recently made it back up to its year-2000 highs. It is not a cheap stock; its PE ratio is about 47. But it is in an enviable position. It has virtually a monopoly in its chosen field of graphics development software for professionals.

Almost all professional graphics designers prefer Adobe Photoshop. While free and lower-cost photo-manipultion programs abound, they are used almost exclusively by amateurs. While any file format, such as Microsoft Word, can be posted in a web link, some how Adobe made the PDF/Acrobat file format the ubiquitous alternative to HTML pages. Now Flash is becoming the favorite for posting Web videos.

My regular web pages at are laid out in Dreamweaver, created by Macromedia but now a part of the Adobe empire. At the low end competitors, including Microsoft, basically have to give away programs to compete with Abobe. Once people get to a point where they are willing to pay for professional software, Adobe goes to the cash register.

I think Microsoft's Silverlight initiative is very intersting, but it is no immediate threat to Adobe.

This year Adobe is in a product renewal cycle. Professionals everywhere will groan as they are milked for their upgrade money, but they have learned through bitter experience they have no choice. They must pay for the upgrades or fall behind their peers.

Management, of course, is proud of itself and feels it is doing fine. The new products will be great and sell. To get last quarters results and insight from management you can read my summary of the March 20, 2007 analyst conference.

This week Adobe launched a public Beta of ColdFusion 8 Software. This is more esoteric than Photoshop. It allows software teams to build dynamic Web sites. It even supports sites requiring integration with Microsoft .NET products and enterprise Java.

A full Version 8 of Acrobat 3D was also released. This allows professional CAD/CAM designers to share designs, including over the Internet.

Creative Suite 3 has been introduced and will be the big money generator for most of 2007. Depending on which version you buy, it includes such products like Photoshop, Illustrator, Flash, Dreamweaver, or Acrobat.

With design for Internet, including Internet video, still being a growth area, Adobe's revenues and profits are almost certain to continue to grow over the next few years. That said, 2006 revenues were $2.58 billion. There was a bit of an end-of-year pause as some customers delayed purchases until the new products were released. And because of development costs, net income in 2006 was down from 2005. Expect it to be up again in 2007.

Adobe is not a bargain stock, but it is one that is highly likely to pay off in the long run. The company has $2.3 billion in cash in the bank, too. With low risk and high long-term potential, this is a good stock for certain types of portfolios.

I don't own the stock.

See also:

My Adobe (ADBE) page
Adobe corporate web site

Friday, May 25, 2007

Marvell: Hero or Zero?

Marvell Technology Group (MRVL) was a hero to its investors back between mid-2002 and late 2005, when it rose from under $5 per share to over $30. Those who bought in too late (including me) have been disappointed by its slump to near $15 per share. Is Marvell now a bargain, a hero merely stunned in battle, or is it wounded and heading for the trash bin of semiconductor history?

Marvell makes semiconductor chips and is noted for advanced chips integrating digital and analog functions. The chips go in switches, transceivers, power management, printer, and communications products. But above all they go into hard drive based data storage devices.

If you look at revenue on an annual basis you will see rapid growth from 2001 ($288 million) forward to 2005's $1670 million. In the latest quarter report, in the typically seasonally weak Q1 2008, revenues were $635 million, which puts Marvell at an annual run rate of $2.5 billion. What is not to like about that?

First of all, we can only guess what net profits, if any, Marvell has been pulling in. It is one of those stock-option accounting, can't tell you anything until it is done firms. Management did say that, yes, there was incorrect dating of options; the investigation is essentially complete; they hope to file restatements and late statements with the SEC as soon as possible.

The other big shoe that fell was in the data storage market. Western Digital and Toshiba each amount for over 10% of Marvell's revenue. Marvell's superior products now command about 65% of market share. Marvell's rapid growth, and rapid stock price appreciation, came from going from 0% to 65%. Going over 65% is not easy for two reasons: competing chip makers are doing everything they can to hold on, and the hard drive manufacturers want to have alternative sources available because competition keeps prices reasonable.

After that the biggest concern other than a recession or potential weakness in the overall semiconductor market is in the XScale/cellphone sector. In 2006 Marvell bought Intel's division that produced XScale microprocessors that are meant to be used in advanced (3G) cell phones and PDAs. As everyone knows the PDA market is basically over. Intel was losing money in the division and needed to focus on its battle with AMD. Marvell payed too much for this asset, I think, but its executives believe that by combining XScale with Marvell's analog expertise (never an Intel strong point), lowering manufacturing costs, and gaining market share, this division could be very profitable. It is possible, of course, but the competition for chips going into 3G cell phones is intense, with some formidable players like Motorola in the mix. Just getting this segment to break even will impress most analysts.

Much of Marvell's revenue growth these last 2 years has been by acquisitions, including the printer chip division, which Marvell reports is doing well. Storage growth is limited by growth of the storage market itself.

There are a couple of bright spots on the horizon, notably advanced video processing chips. But so far these are contributing insignificant revenues.

The real fear: when the veil comes off, when the restatement is made, earnings will suck due to costs associated with the XScale acquisition. These should be one time costs, but they will give a bad impression.

My take? Worth the risk at this price. Once the accounting disruption is in the rear-view mirror and the Intel acquisition is digested we'll see what Marvell is doing and where it is heading. Marvell has always been well-managed, so I think the earnings picture will be pretty healthy.

Would a U.S. recession matter to Marvell? Some, but it sells its chips into a global economy. With Germany and China booming, with India and Japan coming along, I don't see a global recession near-term.

Reminder: I own Marvell stock.

More information:

My Marvell page, with links to my summaries of analyst conferences
Marvell web site

Wednesday, May 23, 2007

Celgene in Hypergrowth

Celgene (CELG) is one of those stocks with a high trailing price-to-earnings ratio (P/E = 234, today according to NASDAQ) that seems to be able to continually justify its price. It is a member of the NASDAQ-100 and one of the stocks in the IBB (iShares Nasdaq Biotechnology Index Fund).

I don't own Celgene but I am sure thinking of buying it when my portfolio allows. If the P/E of 234 scares you, take a look at the much more reasonable forward-looking P/E of 37 (per NASDAQ), then take a look at the company.

Most of Celgene's revenue comes from just two drugs. In Q1 2007 Revlimid had sales of $146.2 million, up 18% sequentially and 351% from year-earlier.

Thalomid had Q1 sales of $106 million, down slightly from year-earlier. Why? Because it is now competing for patients with Revlimid.

Celgene also had Alkeran sales of $16 million while its Ritalin drug familty produced $19.8 million. None of these drugs are expected to grow sales rapidly.

Revlimid is the drug to watch. It is a in a new class of immuno-modulatory drugs. It is currently approved to treat specific types of pre-leukermia or MDS (myelodysplastic syndromes) and to treat patients who had a prior therapy and need another option for treating multiple myeloma. But expectations, both at Celgene and in the medical community, are very high for it to be approved for other indications such as CLL (chronic lymphocytic leukemia) and NHL (Non-Hodgkin lymphoma). There are over 70 trials of Revlimid that are underway or soon to be started for a variety of indications.

While Revlimid is the company's focus at present, it has other potential hits in its pipeline (See Celgene pipeline).

Still, there is a lot of risk involved in buying biotech and pharmaceutical company stock, even when drugs are producing good and growing income. This is amplified when a stock has a high price to earnings ratio.

Here are some helpful links for more research on Celgene:

Celgene Corporate web site
My Celgene page with links to summaries of analyst conferences
My biotechnology research page (under construction, but already useful)

Thursday, May 17, 2007

Napster: Laying Groundwork or Just Shoveling?

Napster (NAPS) reported March quarter results (its Q4 FY 2007) yesterday and held an analyst conference. As usual things were not quite as good as investors would hope, but management had a compelling story to tell about the future. You can get my full summary of the conference at

Napster's traction towards profitability has been slow and seen some setbacks. In 2006 management said they saw the future and it was music-enabled cell phones, but that was off in the distance. Last year's savior was allowing limited free song downloads at This would attract customers who could be up-converted to the full service with a monthly subscription ($9.95 if you just want to play music on a computer; $14.95 if you also want to load it to an MP3 player). In addition advertising revenues from the site would lead to a new era of profitability. Well, no one, not management, not analysts, mentioned the Web site ad revenues at this conference.

On the plus side Napster has been making some pretty big deals of late, mostly with cellular phone services and cell phone manufacturers. Japan's DoCoMo has already rolled out Napster service. AT&T is currently rolling out Napster service. Motorola [See my Motorola analyst conference summaries] has chosen Napster to provide music subscription service for its advanced music phones. Circuit City is also partnering with Napster. This is on top of Napster service becoming available in Great Britain, Germany and Japan back in 2006.

So why the gloomy stock price? Investors are treating Napster like a loser, not a potential winner. It isn't just that it is not 1999 this year. There are some very real concerns. Presumably you know about the intense competition with RealNetworks' Rapsody service, Yahoo's music service, and other subscription model providers, plus Apple's iTunes and a host of pay-per-song providers, plus just plain stealing digital music files.

The main disappointment right now is over the results from the AOL deal. AOL decided to allow Napster to be its music service provider, but sold its customers to Napster for $11.1 million. That amount, paid in the March quarter, made a big dent in Napster's cash and in net income for the quarter. Analysts expected that expense.

What they expected in return was a big boost in Napster revenues in the June quarter, of about $7 to $8 million. Instead Napster is guiding to a direct AOL boost of about $5 million. In direct response to more than one analyst's question about this, management said it is due to typical seasonality in the June quarter.

On the plus side Napster says its quarterly cash burn going forward should be $3.3 million or less. This is a dramatic improvement and it comes from the deals Napster has been making. They used to pay a lot for advertisement. Under the deals, the partner pays for advertisement and then Napster gives a bounty for each actual new subscriber.

So ladies and gentlemen, lay your bets. Napster has created an infrastructure capable of making it a major player. Potential rivals have been converted to willing partners. The only question is, will consumers decide to pay for the music subscription service on their high-end, music enabled cell phones? Even a half million subscribers in Japan would make Napster immensely profitable. The number of music enabled, Napster compatible phones with Napster promotions inside the boxes is expected to be in the hundreds of millions in the next few years.

On the whole I still think Napster is a risky stock. But the upside opportunity is very high. The downside risk, in the short run, is more stagnation, rather than imminent bankruptcy. With over $66 million in cash, and even using a pessimistic burn rate of $4 million per quarter, Napster has plenty of opportunity to find out if its strategy can be profitable.

I own Napster stock and use the music service.

Napster investor relations site
My Napster page

Monday, May 14, 2007

AMD Rumble with NVIDIA?

On May 10 NVIDIA (NVDA) reported its first quarter results and had an analysts conference. During it they commented on how well things have gone for the first part of the second quarter. An unexpected outcome was a comment on how well AMD (AMD) channel sales are going.

Today AMD promoted some new products that should help it compete with both Intel and NVIDIA and got a pretty good one-day rise in the price of its stock. Is the future suddenly rosier than investors thought after AMD reported disastrous Q1 results?

Until 2006 there were two major personal computer microprocessor rivals, AMD and Intel (INTC), and two major graphic microprocessor rivals, NVIDIA and ATI. In 2006 AMD bought ATI. But Intel was already a far larger company that AMD, and NVIDIA was considerably larger than ATI. To give some perspective, here are Q1 2007 revenues for the 3 companies:

Intel $8.9 billion
AMD (+ATI) $1.2 billion
NVIDIA $0.8 billion

So in Q1 NVIDIA, which grew 24% from year-earlier, was approaching AMD in size, which shrank revenues 7% from year earlier.

Once it shed its memory division, AMD was mainly a CPU play. OEMs who made AMD based computers bought motherboard chip sets and graphics processors from NVIDIA, ATI, and other suppliers. When AMD bought ATI it gained the ability to engineer chip sets and graphics chips to work will with its microprocessors, but it also made it into a rival of NVIDIA, where before they had been allies. But NVIDIA was already in the same situation versus Intel, which makes its own motherboard chip sets and makes embedded graphics chips, but not the high-end stand alone chips made by NVIDIA and ATI.

So now PC OEMs have some interesting choices. They can go all-Intel for the processor and motherboard, but still give clients the option of adding a graphics card or using an embedded NVIDIA graphics chip. Since the graphics interface is standardized the card can come from NVIDIA or AMD's ATI division. They can go all-AMD. Or they can mix and match. NVIDIA claims, and has clients who agree, that their motherboard chip sets are better than those made by AMD or Intel. If NVIDIA ever decided to make a Microsoft compatible-microprocessor they might dominate the entire field, but that would be a very expensive and risky undertaking. All three companies have some very smart engineers, but it looks to me like the NVIDIA guys have the edge.

In Q1 AMD reported that they had allocated processors to large companies like Dell and HP, but demand was soft there (they did not name a specific company; it may have been more than one). They failed to allocate processors into channel sales (smaller OEMs); by the time they knew they had channel demand and big OEM weakness, it was too late in the quarter to move processors in the right direction.

NVIDIA said they think AMD channel sales are doing better this quarter (which would make sense, if it was just an allocation issue). They think that because their sales of AMD compatible chip sets are up. While it is possible that just means OEMs are just changing chipset partners, most likely it means more PCs with AMD Athlon processors are being sold.

AMD's announcements today were going to come sooner or later, but sooner is better. NVIDIA last week boasted that in April it introduced the first graphics chips that can run DirectX 10; they claimed a huge lead. But he lead was not that big, given that today AMD started selling its Radion HD 2000 series of chip that also supports DirectX 10 and High Definition video play capability.

AMD's true-quad-core chips were demonstrated today, but it will be a while before you can get one. They will be available in server models (Barcellona) and desktop models (Phenom). Intel brought out a quad-core-ish thing in late 2006, but it had two dual-core chips on a socket together. The AMD product is integrated on a single piece of silicon and has integrated memory management, a feature Intel chips continue to lack and a reason Intel chips typically underperform in real world situations.

Except for the enthusiast market I don't see much immediate demand for the quad-core desktop chips. My 2006 vintage AMD Athlon 64 dual-core system runs Windows Vista 64-bit at blazing speeds, allowing me to do my work and play video or music simultaneously. That wonderful feature is a nice demo, but the reality is work and entertainment don't mix well for me. And 1 gigabit of memory has worked very well even when running multiple applications.

The kick for AMD will probably be in the server market where true-quad core with power management and virtualization will be a blessing for anyone running a data center.

Meanwhile, watch for amazing things from NVIDIA. Their graphics computing initiative is just a small sprout now, but I suspect it represents the future of computing.

I own AMD stock but not Intel or NVIDIA stock.

[See also my summaries of recent analyst conferences with Intel, AMD, and NVIDIA.]
[See also corporate web sites for Intel, AMD, and NVIDIA]

Friday, May 11, 2007

Dendreon: There and Back Again

Today you can buy Dendreon (DNDN) stock, with an FDA approvable letter for Provenge, for less than it sold for a couple of months ago when most analysts thought that an approvable letter was a very optimistic outcome; they expected outright rejection of the therapy. Why?

Dendreon stock volatility over the last 3 months is a great illustration of emotionalism, greed, fear, failing to do research, crowd pursuation, and the dangers of pricing by auction systems.

This morning when I went jogging there was a dead fox about a half-mile down the country road I live on. Unlike most road kill, its body was intact; it had died from a head wound. I had never seen a fox up close. It had a magnificent tail and fine grey fur. The mouth was open, and its teeth were terrifying even though it was dead. After some hesitation I picked it up by the tip of the tail and threw it to the side of the road, thinking of those Dendreon investors who tried to make a lot of alpha by dashing across a dangerous road at the last minute.

With hindsight we can all appear geniuses. I saw at least one blog, maybe two, that clearly, after the facts, claimed to have foresight that was not there. It is a temptation for an analyst.

Let's review the history and try not to read more likelihood for outcomes that was actually available before the dice were rolled. After all, a key component of biotechnology is understanding biostatistics, which sometimes go against ordinary, common sense.

Yesterday Dendreon's management held a conference for analysts (and open to anyone to listen to) which began to restore a feeling of rationality to the situation. If you read my summary of the conference you should pay close attention to management's statement and the Q&A portion [See summary]. What we have today is a drug therapy that is likely, but not guaranteed, to be approved as a therapy for prostate cancer, the second most common cancer in the U.S. It is how we got to this, combined with the relatively small number of shares of Dendreon stock outstanding, that led to the recent price gyrations, including the current buying opportunity.

Back in January of this year only Dendreon's management and a few brave cohorts thought there was any chance Provenge would be approved by the FDA given that the Phase III trials did not meet their pre-designated primary endpoints. They did something better: they significantly increased patient survival time. But the FDA is famous for being hard on those seeking drug approvals. So you could buy DNDN in the $4 per share range; it traded in very small volumes.

Dendreon's management said they were talking to the FDA and thought the Advisory Panel would recommend approval of Provenge. A few days before the panel's vote date, towards the end of March, the stock began to move, even though nothing had changed. Most of the stock is owned by long-term investors, and there are only 81.7 million shares outstanding.

The panel voted to recommend approval of Provenge. The stock started up. Momentum investors jumped in and the options market heated up. Those who expected a denial went short. Those who expected approval went long. Not too many people were betting on an approvable letter.

When the approvable letter came out all the short-term guys liquidated their longs and shorts. That process mostly ended this morning. So in a few short weeks the stock hit a high of $25.25 and a low of $4.95. This was driven by news that changed the probabilities of the real value of the company in the future, but exagerated by the auction system of pricing and leveraging provided by options.

Road kill? If no leverage was involved, the stupidest investor lost 80%. Sad, but it beats the returns on many Internet stocks bought in 1999.

Even with the approvable letter and the low price to future promise ration, Dendreon is a speculative, risky stock. Until Provenge is approved and is generating income, this stock should be held only as part of a portfolio created by people who have a good understanding of risks.

Please note that I have been a Dendreon investor since 2004.

See my Dendreon (DNDN) page
See Dendreon's web site

Thursday, May 10, 2007

Can Onyx Deliver?

Some biotechnology investors have done very well, as early owners of Genentech (DNA) and Amgen (AMGN) can verify. Other technology investors have done very poorly with companies that had promising drug candidates that failed to go all the way to FDA approval, or that were not able to successfully market drugs even when approved. Buying a basket of biotech stocks cuts your risk, but it also lessens your upside potential.

Onyx Pharmaceuticals (ONXX) is a company that can appear to be a victim of its own success or a potential big winner, depending on how you look at the tea leaves. It has a drug that is a pretty big hit, Nexavar for kidney cancer, that has global sales running at around $240 million in annual revenues. Yet it has consistently shown a loss, quarter after quarter, not just when the drug was under development, but even after over a year of sales.

Onyx is in a partnership with Bayer, which actually markets Nexavar. Both companies are continuing to do research and development on the drug. Both have SG&A expense. They total up their Nexavar expenses, subtract them from Nexavar revenues, and get a profit or loss. They split that profit or loss, which means they make a transfer between the two companies, depending on who spent what. Until Q1 2007 Onyx made transfers to Bayer under this deal.

So the good news from Q1 results (See my summary of the analyst conference) was that, finally, it worked out that Bayer made a payment to Onyx of $3 million. This is counted by Onyx as credit against expense rather than as income. But not all Onyx expenses are part of the agreement with Bayer. Given the other expenses, Onyx showed a net loss of $12.2 million.

It is also notable that the $3 million payment from Bayer does not mean Nexavar collaboration was profitable. Revenues were $61 million, but collaborative expenses were $70 million. It just happened that Onyx had more expenses than Bayer, resulting in the $3 million transfer.

There has been a great deal of disappointment that Onyx has been unable to make a profit on Nexavar for kidney cancer. But much of the Nexavar expense is not for kidney cancer, but to do R&D and prepare to market Nexavar for other types of cancer. Onyx expects Nexavar to be approved for liver cancer later this year. It is in clinical trials for lung and breast cancer that are reported to be pointing in the right direction.

So the company (and you if you own the stock; I don't at present) is betting that Nexavar will be approved for multiple cancer types. That is why Onyx's market capitalization today is near $1.3 billion.

But the risk is concentrated, too. There is not much of a pipeline aside from moving Nexavar to varying cancer types. Nexavar is a big bet, and like all patented drugs, the clock is ticking.

List of companies I follow
Onyx web site
My Onyx page
My Amgen page
My Genentech page

Wednesday, May 9, 2007

Dendreon Approvable Letter for Provenge

Prostate cancer patients received a setback yesterday when the FDA gave Dendreon (DNDN) an approvable letter for Provenge therapy rather than either approving or rejecting it outright. Investors who bought DNDN recently at prices that assumed approval had quite a setback too; short sellers had a heyday. But what you really want to know is, what about Dendreon's stock price today? Should it be zero? Or is this a buying opportunity?

For background on Dendreon, aside from the company web site, you can check out my two prior blogs on the subject, What Price Dendreon? [April 12, 2007] and Dendreon Odds Less Long [March 30, 2007], as well as my summaries of Dendreon analyst conferences.

On April 12th I said I believed Provenge had a 50% chance of outright approval, a 40% chance of getting an approvable letter, and a 10% chance of outright reject, AFTER the Advisory Committee recommended approval. So the approvable letter is not a great surprise to me, but as a shareholder I had hoped for full approval.

Given that the Advisory Committee did vote in favor of Provenge, and that the FDA granted an approvable letter, it looks to me like we are actually in better shape than when we were in a state of ignorance before the advisory vote. Provenge could be ultimately rejected, but the chances of that are small. The main cause for rejection would come from further clinical study giving worse results than we have seen so far. That happens; there is a degree of randomness in these things, mostly due to the shere complexity of human biology.

I hope Dendreon will publish the full text of the FDA letter. That would go far to help investors understand exactly where we are in this process.

But that is not the main problem for shareholders. The main problem confronting the company is financing further study. How much that will cost depends on whether a little more data is wanted or whether Dendreon will be required to redesign its planned Phase III study and then spend years carrying it out.

Dendreon had $121 million in cash and equivalents on December 31, 2006, so they can run for a while on that. If they need to bring in a partner or issue stock to raise money, the value of the current shares will be diluted.

I think today's price (in the $6.90 range) is low, but until I see that letter it is hard to tell. It is interesting to note that so far today over 109 million shares have changed hands; there are only 81.7 million shares outstanding. It is a good day to be buying. Once we know more about the approval letter and how Dendreon plans to manage it, it is likely the stock will be priced as one that has an approvable drug and a technology that can be used on many types of cancer. In other words, in the $10 to $12 per share range. But if the letter is harsh it is possible the stock could go even lower than today's price.

Monday, May 7, 2007

Biogen Idec (BIIB) and Tysabri

Biogen Idec (BIIB) is a successful biotechnology company. I do not own any of the stock, but I have been following it closely for a couple of years now. There are a lot of lessons to be learned from this company. Its web site is

Biogen Idec's Q1 results were reported on May 2, and of course they had an analysts' conference (which anyone can listen to). My summary of this analyst conference is a good place to start deepening your knowledge if you think you might be interested in this company. For quick stats on companies I have my online broker, but I often find the NASDAQ site,, to be quicker and easier to use.

Biogen reported $716 million in revenue for the quarter. That was up 16% from year earlier but only 1% sequentially, so asking if and why the stall in rapid growth took place should be your basic question. After all, NASDAQ gives Biogen a P/E ratio of 70 at today's price. That is fine if there is rapid profit growth, but a dizzying height from which to fall if profits flatten out. GAAP net income was up only 7% from year earlier, so expenses faster more than revenues.

So why the go-go PE ratio? The simplest answer is the BIIB is a biotechnology stock. The price is only a bit about past performance; it is mostly about future expectations.

So what does Biogen Idec peddle, such that its investors expect a rosy future? It sells three blockbuster drugs, Avonex (Q1 revenues $449 million), Rituxan (Q1 revenues $207 million), and Tysabri, with Q1 revenues of $30 million. It is important to note that global Tysabri sales were actually $48 million; Biogen Idec is in a partnership with Elan for this drug and only recognizes its own share as revenues.

Rituxan is used to treat non-Hodgkins B-cell lymphoma (cancer). Both Avonex and Tysabri are used to treat multiple sclerosis (MS). But in the strange (to laymen) world of the FDA, drug approvals are often very specific. Avonex is approved for both relapsing forms and monosymptomatic MS. Tysabri is approved as a monotherapy for relapsing forms.

So if you are going to invest in Biogen you might want to know the basics about Multiple Sclerosis. Good places to get basic information include the Wikipedia article on MS and the NINDS site. In the Wiki article the section on treatment mentions both Avonex and Tysabri, and a term that was much used at the analyst conference: PML, or progressive multifocal leukoencephalopathy.

Prior to the introduction of Tysabri, the viral disease PML was seen almost exclusively in immune deficiency patients, including AIDS patients.

The balancing act here is that MS is an auto-immune disease; keeping the immune system at bay can result in it not being able to do its normal job with infections. Tysabri now carries a warning that it may cause PML, which has slowed adoption. Biogen management believes that as physicians and patients understand the benefits of Tysabri and the risk of PML they will continue to adopt Tysabri. Patients apparently find Tysabri to be very beneficial.

So the slowdown in Biogen's growth can be attributed to the PML scare. But what about the future?

BIIB has a truly extensive pipeline of drug candidates. They have invested heavily in research, including clinical trials. While drug candidates more often than not bomb out because of safety issues or inability to prove effectiveness, in the case of Biogen they are highly likely to have some winners in the mix.

If you are an individual investor and are interested in biotechnology you can gain a considerable advantage by doing careful research. There are two basic strategies you can try. One is to wait until a small biotech company has its first FDA approval, then jump in. That results in substantial risk reduction, but it often means paying a high price and still having substantial risk. You can also bet on pipeline drugs that have not been approved. In that case keep in mind that if you look at the full spectrum from preclinical trials to final FDA approval, success is quite rare. Phase II trial results are usually the minimum data you need to be able to start accurately weighing risks against potential rewards.

Friday, May 4, 2007

Dot Hill: About to Turn the Corner?

I did pretty well in Dot Hill (HILL) stock once under circumstances quite similar to those existing now. So why am I hesitant to plunge back in?

At this moment's price of $3.81 per share Dot Hill has a market capitalization of $171.6 million. If you had $171.6 million, would you buy the whole company? You might want to look at my summary of yesterday's (May 3) analyst conference before making your decision.

On the one hand HILL had $96 million in cash at the end of Q1, a whopping 56% of market cap. And the guys and gals there aren't sitting on their butts: they had revenues of $53.4 million in the quarter, which is typically seasonally weak in the technology industry, and would make for an annual run rate of $213.6 million.

On the other hand net income for the quarter was negative $6.0 million. That is an annual run rate loss of $24 million a year. That could burn up the cash over time. Also revenues were down 10% sequentially and 9% from Q1 2006. If revenues continue to slide along with cash eventually what we will have is a penny stock.

So it is all about the future, and predicting the future is notoriously risky. Management believes Q2 revenues will range between $56 and $60 million, which is going in the right direction. Their Q1 guidance was lower than their results, so they don't appear to be purposefully deceiving investors.

But Q2 will still show a loss. Can they get to profitability? You need profitability to justify a market capitalization over your cash balance. Can they get to serious profitability, the kind where traders who buy the stock today are going to tell you what analytic geniuses they are a year from now?

If you have a lot of stocks in your portfolio you can just buy it because the risk is relatively low short term (due to the cash and current investor disdain for the company) and the rewards could be pretty good short term (if momentum investors get in), medium term (if Q2 or Q3 results are better than expected) or long term (if they start selling a lot of their product at profitable prices).

Let's look deeper: deeper into what Dot Hill does, and further into the past.

How can you sell over $200 million in widgets in a year and lose money? In Dot Hill's case they are a "leader" in SAN (Storage Area Network) equipment. They have a good reputation for quality: their major customer is Sun (SUNW), which accounted for 76% of Dot Hill revenue in Q1. There, indeed, is the rub. As you know, Sun has not done all that well since 2000. With only one client, itself under pricing pressure, and decreased volumes, HILL had little ability to price its products above cost.

According to management that is changing. A year ago Sun accounted for 88% of revenue. Dot Hill has signed up a number of new clients who are enthusiastic about its 2730 product. But beware. Non-Sun clients bought 12% of $58.7 million in revenues in Q1 2006, or $7 million of stuff. In Q1 2007 they bought 24% of $53.4 million, or $12.8 million. So non-Sun revenues, over an entire year, only increased by $5.8 million.

Management has two answers, and they are worth listening to. They have been building their products in the U.S.A. They are moving production to Asia; they process should be completed in Q3 2007. At that point, barring unexpected problems, decreased costs and firm sales prices should make the company profitable.

And to a certain extent they have been building the 2730 line to spec. In talking to some of their non-Sun OEM customers they are expecting much larger orders going forward, though the timing of that is up to the customers.

Again, why not take the plunge? Let's go deeper into history, to the time I made some money trading Dot Hill stock. It was mid-April in 2005; I bought the stock at an average price of $4.90 per share. Other traders had the same thinking. In February of 2006 I was able to sell for almost $8 per share (just got lucky in my timing), because the stock had gotten way ahead of any actual signs of a turn around.

If I had held my stock I would be well below water today.

So as I write this I don't know. I have very little cash in my portfolio at the moment. The odds are really quite good: it really does look like profitability is a couple of quarters away, just like in 2005, just like in 2006. And even if it is not, other traders might push up the stock price again; I just would have to bail out again at the right time.

If Dendreon (DNDN) hits the jackpot on May 15 I may sell some of it, and with more cash to work with, HILL will certainly be on my short list of stocks to look at.

Wednesday, May 2, 2007

Atmel (ATML) Gets Skinny

Atmel makes semiconductor chips, notably microcontrollers and microprocessors for embedded systems. These kinds of chips are used everywhere these days: consumer electronics including cell phones, automobiles, kitchen appliances, toys, industrial control systems all incorporate them. The demand for them has grown rapidly and is expected to continue to grow rapidly. But the 21st century has been difficult for Atmel investors so far.

There is new management at Atmel. Though they seem to be putting things to right, we don't even have clear hindsight because the company is still preparing an accounting restatement due to misdating of stock option compensation.

The new stategy is to get skinny. This isn't just a matter of propping up earnings by cutting costs and employee head count. The company has disposed of assets. It has taken a look at its many lines of semiconductor chips and has dropped some; it is looking at dropping some more. It wants to compete only in the profitable segments of the industry where it has a competitive advantage. When you are up against the likes of Microchip, Freescale, and Texas Instruments, to name just some top competitors, that sounds like a good idea.

In 1999 Atmel was a hot company for investors, a member of the Nasdaq 100, rocketing from just under $2 per share to over $30 per share in just over a year. In 2001 volatility was high but the general trend was downward as orders started shrinking with the economy. For a time in 2002 you could buy the stock for well under $2 per share. Quarter after quarter passed with net losses and profitability just two quarters away. You know the drill.

All through this Atmel produced some very good products that were popular with engineers designing all kinds of gizmos. They sold lots of chips. It really seemed like a management problem, and finally the old management was ousted in 2006.

Atmel reported first quarter 2007 results yesterday and had their analyst conference (See my summary). Like much of the semiconductor industry they saw a slump in the second half of 2006 that was due mainly to inventory corrections at end users, and partly due to weakness in demand in certain communications sectors. Q1 revenues of $391 million were down 4% sequentially and 2% from year earlier on a comparable basis. In 2006 they sold their Grenoble operation; the numbers discount that.

Not much was reported in accounting details but their cash position grew by $34.5 million to end at $478.7 million. That should be a sign that they had net income non-GAAP if not GAAP.

Another important piece of news was they announced the sale of their Irvine Texas wafer facility for $38 million. So they will have even more cash going forward. They will be outsourcing manufacturing when necessary; that model has worked well for several companies.

Market capitalization as I write this stands at $2.7 billion, so cash is around 17.5% of market cap. It is not a buy for cash hounds, but it is a nice amount that could be used to make acquisitions, pay dividends, or do a stock buy back. Management won't announce any plans for the cash until they are caught up with their accounting and SEC filings.

Atmel has four business segments, all contributing between 20 and 30% of revenues. Two have not done well lately: memory products and ASICs (application specific ICs). Two have done well: microcontrollers and automotive/RF (radio frequency).

Atmel has stopped developing certain new products such as mobile phone baseband, wireless LAN, VoIP, USB, and digital audio broadcast. They don't feel they can compete profitably in these areas (of course they will sell current lines until demand drops off). They are focusing on their microprocessor/microcontroller lines. Their AVR line of flash microcontrollers is seeing rapid demand growth.

At this point I see Atmel as a healthy company in a highly competive field. They are becoming smaller but more competitive. With energies focussed on profitable products they can rebuild the company and keep an eye out for new opportunities.

As to the stock price, I would like to see the SEC filings before making a call. I would like to see a couple of quarters, at least, of net income. And I would like to see if Q2 revenues meet guidance of up 1% to 4% sequentially.

You can also look at my Atmel page.

You can see a list of companies whose analyst conferences I summarize.

Tuesday, May 1, 2007

Microchip (MCHP) Keeps Chugging Along

I bought Microchip (MCHP) on a dip after long being aware of the company. At this moment it seems fairly priced at $40.22 per share, which gives it a past P/E ratio of 27 and a dividend yield of 2.7%. You don't too often see stocks with both dividend yields and PE ratios that high; it is a company worth examining.

You can get a lot of insight from my summaries of MCHP quarterly results reports and analyst conferences over the last year. Openicon has summaries of analyst conferences for many leading technology companies.

I first became aware of Microchip when I decided to do some self-education about microcontrollers (a big part of me wishes I had studied engineering rather than liberal arts). I bought something called a BASIC Stamp kit from Parallax. I had great fun making LEDs and even regular light bulbs blink on and off to simple computer programs I wrote. That same technology today is ubiquitous in electronic devices and appliances. They almost all have at least one microcontroller, which is a tiny computer-on-a-chip with circuits that can read data from sensors and control external circuits. The chip at the heart of the BASIC Stamp was made by Microchip. From hobbyist and professional magazines I learned its PIC series of microcontrollers were very popular. But the stock had a higher PE ratio than I liked, so I put it on the back burner.

There is a lot of competition in the microcontroller field, as well as in other areas where Microchip competes, like analog circuits. Atmel is an example; their quarterly results and analyst conference will be held later today (See my ATML page). Freescale, Texas Instruments, Phillips and many others make microcontrollers, DSPs, embedded microprocessors, and related devices. Competition can be ruinous; high PEs need serious justification.

In mid-to-late 2006 the semiconductor industry and its analysts were pretty gloomy. First revenues started coming in below prior guidance. It was an inventory correction, we were told. Final demand was not really that bad. But with economic outlooks for 2007 cautious, especially in the United States, no one wanted large inventories of either finished electronics products or the parts needed to make more. In addition computer software enabled inventories to be managed better, and in many cases middlemen were eliminated. The semiconductor chip makers themselves had ramped up inventory in 2005; suddenly they seemed to have too much in 2006.

Microchip was subjected to this adjustment along with other chip makers, though to a lesser degree. Microchip's revenues rose more slowly than usual in Q2 and Q3 of 2006. They fell sequentially (but were up 7% over year-earlier) in Q4. I asked whether this was a one-timer or a major trend. It did not look as if anyone was taking a noticable amount of market share from Microchip, and there is that nice dividend, so I held my shares.

Q1 revenues were up and guidance for Q2 is moderately strong. Hence the recent climb in stock price. More important, Microchip's designs have been adapted at a faster rate than their competitors. This was confirmed by recently released independent data showing the Microchip was number 1 in market share for 8-bit microcontrollers.

I like MCHP's management. They aren't afraid to say that they have good products, but they don't seem to be interested in hyping investors. You can see they are long term planners in the way they design and market chips. It is also visible in their cash management strategy. They generate a lot of cash. They prefer to return it to shareholders through dividends instead of stock buy-backs. Since their stock is not cheap, that makes sense. It favors longer-term investors who like steadily increasing dividends over short-termers who just want to cash out.