Thursday, February 28, 2008

Biotechnology February: Genentech Avastin Decision

I'll read just about any biotechnology news that comes my way, but I pay the most attention to Amgen (AMGN), Anesiva (ANSV), Biogen-Idec (BIIB), Celgene (CELG), Genentech (DNA), Dendreon (DNDN), Gilead (GILD), and Onyx Pharmaceuticals (ONXX). I am gradually building a biotech portfolio and currently own Anesiva, Biogen-Idec, Celgene, Dendreon, and Gilead. I always take notes and post summaries of these companies' quarterly analyst conferences, which you can access through my analyst conference summary page.

For this blog I thought I'd try something a bit different today. Stock prices are mostly determined by an individual company's performance. Nevertheless, there is news that can impact an entire industry, like changes in how much national governments are willing to pay for drugs. There are also times when an event changes the competitive landscape, as when a notably better treatment is introduced for a disease.

This month we have some surprising news on the FDA drug approval front. "Accelerated" approval was granted to Genentech for "Avastin® (bevacizumab), in combination with paclitaxel chemotherapy, for the treatment of patients who have not received chemotherapy for their metastatic HER2-negative breast cancer." Lets just call it a breast cancer approval for now.

The reason this is not a run-of-the-mill approval is two-fold. First, the FDA advisory panel had recommended against the approval by a 5 to 4 vote back in December 2007. The data was deemed insufficient to establish a favorable risk/benefit analysis for the use of Avastin.

I don't have statistics on it, but the FDA has tended to have a higher bar than its advisory panels. So a vote to disallow a drug that was recommended by a panel would not be as big of a surprise. For instance, Dendreon's Provenge for prostate cancer was recommended by a panel but then denied pending further study ("given an approvable letter", is the lingo).

The FDA had already given Avastin for breast cancer an approvable letter back in August 2007 [See press release]. So this current round was a re-submission. And what probably made the difference was additional data from additional trials, and the possibility of getting good data from ongoing trails. data by the FDA will be required for the accelerated approval to be converted into a full approval. "As a part of our commitment to fully evaluate Avastin in breast cancer, Genentech will also submit data to the FDA from three additional randomized trials that are either ongoing or planned." And if the data is unconvincing, the FDA can pull the tentative, accelerated approval.

So all that is interesting, but the real news is that this decision appears to mark a change in FDA policy. A lowering of the bar for cancer drugs.

In the past the gold standard for treatments has been the extension of patients' lives. Or more coldly, increasing the time until death. Improving the quality of life is another plus. Any side effects are weighed against the benefits. Avastin for breast cancer does not appear to prolong patient's lives, nor does it provide for a better quality of life. Instead, Avastin was demonstrated to slow the growth of tumors. You might think that would cause patients to live longer, but in the case of Avastin any lengthening of life has not been shown to be statistically significant in the clinical trials.

There is an argument that if something shrinks or slows the growth of cancers, it has a place beside other therapies. Clearly the FDA bought that argument.

A lot of drugs will be reviewed to see if they might meet this new criteria. Until some are put forward, we won't know whether Avastin for metastatic HER2-negative breast cancer is an exception to the rule, or the new rule.

It is possible that the FDA is reacting to negative publicity on the Provenge decision. A lot of prostate cancer patients want to try Provenge and have been pressuring Congress to get that opportunity sooner rather than later.

It is not easy being the FDA. People want you to make the right decision all the time, but what is right is open to dispute. Drugs go on the market that later prove to have unforeseen side effects and everyone wants the FDA to tighten up on approvals. But desperate patients want to grasp at any hope provided to them by the drug companies. Given how complicated medical science is, even though I many disagree with the FDA on a particular decision, I think they are doing a good job overall.

Monday, February 25, 2008

Microsoft Silverlight Meets Adobe AIR

I've been watching the software wars since I was a child, which means when Bill Gates was a child, which means before Microsoft existed. The changes have been nothing less than astonishing. The next big thing, some people think, is applications that both sit on your desktop and run off the Web.

Before microcomputers everything ran on a central computer, first mainframes and then sometimes minicomputers. With the introduction of spreadsheets on microcomputers it became possible for ordinary people to become highly productive on a computer they controlled. In the late 1980's Microsoft emerged as king of the personal computer business application - spreadsheets for bookkeeping and analysis, databases for mailing lists, and word processing for letters and reports. At the same time Apple and Adobe came to dominate what might be called the creative side: graphics and sound, including publication layout.

At the same time networking PCs, both to each other and central computers became popular. In the mid 1990's the Internet went mainstream. Web page layout became a big deal. But open-source and standards-based protocols emerged as rivals to proprietary players like Adobe and Microsoft.

Today Adobe announced the general availability of its much-pre-announced AIR tools. The basic idea is to have applications that can run on your personal computer and also connect to Internet. It is not a new concept, but it is a new battleground. In some ways it is not really very different than Web services, which are available through standard Web browsers.

Aside from a swarm of open-source or Googled up small competitors, Adobe's big rival is still Microsoft, which introduced a similar Silverlight toolkit in 2007.

I think Microsoft has the main advantage here. It has had ASP and .NET technology for connecting PCs to servers, including Web servers, for years. The focus of ASP/.NET programmers has always been getting business data to end users. Of course you can also do that with Java and Linux, if you can get volunteers or can afford to pay that sort of brain power.

Adobe now has absorbed the old Macromedia products like Dreamweaver into its creative suites. Adobe has great technology. I use Dreamweaver to lay out my Web pages (though this blog is done within Google's blogging online service). When it comes to visual presentation, Adobe has a strong lead. So you are likely to see AIR backed by creative professionals, including advertising agencies.

What are the chances of merging Microsoft's business oriented back-end with Adobe's eye candy front ends? It is possible, but then you are dealing with two proprietary systems.

The real solution for us all would be high-end open source systems. But the money is not there. Open source mostly seems to work well when the real work is done by professionals at companies like Sun and Red Hat. So Linux is great if you are deploying a server farm, and it is a great way to share code, but commercial sites are going to continue to be built with expensive, professionally developed tools.

As in the past, Microsoft and Adobe will probably both come out winners. Microsoft's installed Windows/Office base, deep programming knowledge (Visual Studio), database expertise and ability to redeploy vast resources as necessary will keep it in the game. Adobe AIR builds on Flash and other great technologies and a general graphical advantage, plus a huge Acrobat installed base. I imagine most programmers and designers will stay in the camp they are in.

If you are an investor you can see my financial commentary on Adobe (ADBE) and Microsoft (MSFT) at:

My main Adobe page
My main Microsoft page

Wednesday, February 20, 2008

Onyx (ONXX) Nexavar Trial and Q4 results

Onyx had its analyst conference yesterday. In addition to going over results from the fourth quarter of 2007, management talked and answered questions about the stopping of the Phase 3 trial of Nexavar combined with chemotherapies for lung cancer patients. See my Onyx Pharmaceutical analyst conference summary for notes on what management said and the questions asked by analysts.

But what you really want to know is, following the plumetting of the stock price from about $46 to about $32 on following the announcement of the cancellation of the trial, is the stock now overvalued or undervalued?

At this moment's price of $31.16, market valuation is near $1.7 billion. What would you get if you bought the whole company.

Nexavar is marketed through a partnership agreement with Bayer. Total sales made by Bayer in Q4 were $125 million. After R&D and market deveopment costs, however, Onyx is only owed $4.4 million by Bayer. It seems trivial, but only recently has Bayer started owing Onyx money instead of the other way around. Onyx spent an additional $22 million on its own. It has a lot of cash, $470 million at the end of the quarter, and generated interest income of almost $6 million on that.

All told the net loss, including non-cash stock compensation for employees, was $11.7 million.

So subtracting the cash from the market valuation gives you about $1.2 billion, which is what the market says is today's value for potential future profits. But remember the market is not magic, it is made up of the trades of a bunch of fallible people.

The near term is easier to see than the long term. In 2008 many nations will begin allowing patients with liver cancer to take Nexavar. So sales will continue to ramp. Management thinks that for 2008 the company may be cash-flow positive. What that means is that non-GAAP net income may be positive, but that GAAP net income, which includes non-cash charges like stock options for employees, may not be.

So here's why the stock is hard to put a simple valuation on: you have to guess what other cancers besides renal and liver cancer will benefit from Nexavar. And it costs money to prove such matters. The FDA not only is very specific in its cancer approvals (it may approve a drug for one type of lung cancer, but not another), but it also may specify stages that a drug can be tried at. Primary drugs are used when the cancer is first discovered; secondary drugs when the primary drugs have failed.

There are over 200 clinical trials going on with Nexavar at this time. Not all of them are paid for by Onyx or Bayer. Some are being done by independent cancer researchers. They cover the gamut of Nexavar's promise: some are for primary use. Some for secondary. Some in combination with other drugs. Some alone. And it is being tried on a variety of types, notably breast cancers and lung cancers.

Given the complexity of the conditions we lump together under the word "cancer," it should not be surprising that Nexavar works better on some cancer types than others. Even for the approved types, kidney cancer and liver cancer, some patients respond better than others.

While the non-small cell lung cancer trial that had to be discontinued was one that doctors, patients, and investors all had great hope for, it is just one failure in a large array. It should not have had such a large effect on the stock price, in itself. Still, we should assign some possibility that it presages a pattern of failure.

But it does make you think about the cost of research compared to the potential profits if Onyx gets permission to market Nexavar for more than its current applications.

In the short run Onyx and Bayer would be more profitable to just stop doing research and instead sell into the improved markets. But a rational investor should favor ongoing research if it is strategic. Nexavar probably has a long run ahead of it. It is running through fog, but it has already proven itself for two cancer types.

So I think Onyx stock is undervalued. 2008 Nexavar sales should cover R&D costs. With so many trials underway, in 2009 or so we should be seeing some data that lets us know how extensible Nexavar's benefits will be.

I don't own Onyx Pharmaceuticals at this time. I do have a small portfolio of other biotechnology companies.

Keep diversified!

More data:

Onyx web site
My Onyx main page
My biotechnology research guide page

Friday, February 15, 2008

NVIDIA Q4 Glows; Disses ATI & AMD

NVIDIA (NVDA) posted soaring revenue and earnings gains for its 4th quarter of fiscal 2008 ending January 27, 2008. At the analyst conference on February 13, 2008, management told how this was done and predicted a bright future. For details see my NVIDIA analyst conference summary.

Revenues of $1.20 billion were up 7% sequentially from $1.12 billion and up 37% from $879 million year-earlier. Net income of $257.0 milion was up 9% sequentially from $235.7 million and up 57% from $163.5 million year-earlier. Q1 is expected to be down only slightly, instead of the usual seasonal dip.

Management declared this "the era of visual computing." I agree. NVIDIA has led the charge on ever-better graphics processing and presentation capabilities for personal computers. The chips (GPUs, graphics processing units) they sell today are marvellous, and the chips they promise for the future will be even more capable.

Even though everything reduces to 2 dimensions on your LCD screen, for games and other 3-D applications the math processing power needed to make realistic (detailed and fast-changing) scenes is only now beginning to come online. NVIDIAs GeForce 8800 GT GPU has a larger die size and more transistors than most CPU chips. Because of that there was some extra expense in Q4 trying to get good yields of this new top-of-the-line chip out of the fab.

NVIDIA management believes that for most people it now makes more sense to buy a medium or even low-end CPU and combine it with a high-end GPU in order to get maximum use from their computers. This would be especially true if you mainly use your computer for gaming or viewing videos. On the other hand the ability of programmers to find new uses for any extra CPU processing power is a well known trend that is not likely to break up. Right now programmers are behind the curve created by multiple core processors, but I expect new products in 2009 will bring that more into balance. Of course if you have a CPU that mainly just idles while waiting for you to type, even the CPU's of ten years ago are powerful enough. Still, the trend towards doing more computing on the GPU is a good one that will provide programmers with increased flexibility and power.

As to the competition, which is the ATI devision of AMD, NVIDIA management was not worried about them. On the one hand, to illustrate the new trend towards mid-range PCs with high-quality graphics, management picked the Gateway Effects 7020 desktop PC built with an AMD Phenom quad core CPU and an NVIDIA GeForce 8800 GPU.

On the other hand they thought ATI graphics chips are really competitive only in the low-end market, particularly in the low-end notebook computer market. Management went out of its way to dismiss the new X2 cards from ATI as not fast enough and occupying too much space in a computer. These cards have two HD 3870 graphics CPUs on a single card. NVIDIA favors the one-chip per card design, but hedged a bit by saying that they could produce a two-GPU per card competitor if the X2 design catches on. One analyst was surprised enough by this assertion to ask a follow up question and get the same dismissive answer. CNET reviewers, who I respect but sometimes disagree with, said the X2 outscore NVIDIA's GPUs on many games.

I am not a gamer, so I'll leave it to the pros to decide.

NVIDIA is a great technology company and its stock is cheap right now due solely to the liquidity squeeze and global economic uncertainty. I don't own the stock but have been very tempted to buy it lately.

Keep diversified.

See also my NVIDIA (NVDA) main page

Wednesday, February 13, 2008

Dot Hill Q4 2007

Dot Hill (symbol: HILL) will be releasing its Q4 2007 results and holding its analyst conference on March 16, 2008. You can look at past analyst conference summaries now and then at the March conference summary when it is posted at my Dot Hill main page.

In the meantime management has twice updated their guidance on Q4 results, so we have a pretty good idea what the main numbers will be (they are way better than guidance given in November). Revenue was near $51.5 million, and loss per share will be between $0.11 and $0.14. In Q4 2006 revenues were $59.4 million?

Is that anything to get excited about? This price per share hit a low of $2.12 in December; today it ended at $3.98 per share.

To the extent their is excitement, it is due to the long-term story line for Dot Hill. A few years back it was almost totally dependent on selling its data storage products for SANs to Sun. With Sun in a slump, it was not pretty. But the company had a lot of cash on its balance sheets. It went into cost-reduction mode and started looking for a more diversified customer base. But Sun bought a storage company and started using the acquired technology more and Hill's less. Dot Hill's growth in new customer orders was slower than its decline in Sun orders.

In Q3 2007 Dot Hill reported that 42% of revenue was now from non-Sun customers. Since then it has been announced that HP plans to use Dot Hill products more intensely. More new customers have signed up. And most of the new customers are just beginning to sell Hill products.

Hill had $90.2 million in cash at the end of Q3. We know Q4 sales bounced upwards. If sales go well in 2008 and costs are kept low, $4 a share will be conservative. On the other hand the data storage device arena is very competitive, so at any price Hill is a risk stock.

Disclaimer: keep in mind that I own Dot Hill stock.

Keep diversified.
Dot Hill press releases

Thursday, February 7, 2008

Rackable Systems (RACK)

Rackable Systems (RACK) reported record revenues for Q4 2007. It appears to have gotten through difficulties that began in 2006. In the meantime momentum investors have forgotten about it, so the stock appears to be a bargain even compared to other technology stocks that are undervalued in the current liquidity squeeze.

If you want all the salient details, including numbers, management comment, and analysts' questions, you should see my summary of the February 6, 2008 Rackable Analyst Conference. Here I'll analyze the data.

Rackable's sales seem to be consistently seasonal, with quarters ending in December generating considerably higher sales that the other 3 quarters. Revenues were $111.7 million, up 28% sequentially from $87.2 million and up 4.5% from $106.9 million year-earlier. I would not call that strong growth. But it is the third quarter of improving results.

As to earnings, I usually prefer to look at GAAP numbers, but this is a case where I think non-GAAP numbers are actually more accurate. With GAAP rules there was a $23.9 million expense for writing off goodwill acquired in the TerraScale acquisition. That acquisition did not end up generating the expected revenue and earnings, at least not yet. But the charge is non-cash.

Eliminating the goodwill impairment charge and the other usual non-cash charges and one-time matters and you get non-GAAP earnings per share of $0.18.

But that is not why I think the stock is cheap. The market capitalization (number of shares times price per share) of Rackable was $237.4 million when the market closed today.

Rackable reported that it had cash and equivalents at the end of the quarter at $198.1 million. In 2007 that increased $37.6 million.

Which means tht if you forget the money that earlier investors sank into getting the company started and buying TerraScale, in 2007 Rackable generated $1.27 per share in cash.

Today Rackable shares sold for $8.05. For that money you get $6.70 in cash plus (if 2008 is flat on this measure) $1.27 per year.

As attractive as that should be to value investors, the real story hear is Rackable's technology and customer base. Rackable specializes in computer server systems for Internet companies and data centers. Some of its biggest customers are Amazon, Microsoft, Facebook and Yahoo.

Rackable specializes in making vast arrays of servers easy to manage, low in power consumption, and low in space consumption.

In addition to its past client base, it is making good progress, partnering with Raytheon, in getting military and government contracts. It has also partnered to sell more of its systems outside the United States market.

Bookings ended the quarter strongly, so Q1 2008 could be less seasonally down than Q1 2007 was. Rackable's management guided to flat non-GAAP EPS in 2008 compared to 2007. But the reason for that is good: they are investing in a larger sales team and new, highly-competitive products.

Technology companies are usually subject to extreme competition. Rackable's competitors are mostly far larger companies: IBM, Sun, and HP. So any investment in Rackable stock should be considered risky.

I own Rackable stock, so you should look at the data carefully. I try to be objective, but even when I am objective my stock choices don't always work out.

See also:
My Rackable main page

And stay diversified!

Wednesday, February 6, 2008

Biogen-Idec Buy

This is just a note that I bought some shares of Biogen-Idec (BIIB) this morning after listening to the analyst conference for Q4 2007. This should not be a surprise to anyone who has been reading this column, given my past comments and the strong results for the quarter.

To learn more you can:

Read my summary of the February 6, 2008 Biogen-Idec analyst conference
Find more links to summaries and blogs at my Biogen-Idec main page
Read my blog, Choosing a Biotech Stock 3: Biogen Idec [September 14, 2007]

Today I am also going to be listening to analyst conferences of Akamai, Cisco, Napster and Rack, so it will be a busy day.

Keep diversified!

Monday, February 4, 2008

Celgene (CELG) Optimism

Celgene (CELG) is a high price-to-earnings (PE) stock; I usually don't buy such stocks. But I bought some CELG in June 2007. PEs are guidelines; usually rapidly growing companies have higher PEs than slower growing ones. In my judgement Celgene's future was so bright that I was willing to pay the PE price at the time to add it to my biotechnology portfolio.

Then Celgene announced the Pharmion acquisition [See Celgene (CELG) and Pharmion (PHRM)November 24, 2007]. That took the price down, but I held onto my stock, even though I have been burned (at least short-term) by a merger and an acquisition of late (AMD/ATI and Marvell's purchase of Intel's cell phone processor division). I also bailed out of Microsoft when it announced the Yahoo takeover plan.

Celgene's analyst conference for Q4 2007 restored my optimism about this stock. I don't think the stock price is cheap right now, and I'd like to see numbers a full quarter after the Pharmion merger is completed, but here are some reasons for optimism. [For a longer report see my summary of the January 31, 2008 Celgene analyst conference.]

Q4 revenues of $414.6 million were up 18% sequentially and up 51% from year-earlier. Earnings are growing far faster than revenues because we are in the sweet spot where development costs are behind us and revenues are soaring and operating costs are relatively flat.

The wonder drug behind this is Revlimid, with sales up 100% from year earlier. At $247 million for the quarter, it accounts for nearly 60% of Celgene's revenues.

This rapid upward sales trend is likely to continue for at least the next 3 years. In the short run the main reason is international expansion. Revlimid was first approved in the U.S. It is now approved in Europe, where it is being introduced nation by nation. Eventually it should be prescribed on a global basis. That's the short run, for those rare investors who believe 2 years is a short run. In the long run Revlimid is highly likely to be approved for treating patients with conditions other than multiple myeloma and MDS, its approved uses in the U.S. There are numerous clinical trials underway to get further approvals, with some very encouraging results.

For the truly long run Celgene has a pipeline of drug candidates with some promising early results.

Acquiring Pharmion has a hefty cost but it is notable that it already has substantial revenues ($67 million for Q3 2007) and an international sales team that will be able to help with Celgene's marketing efforts. Celgene management thinks this is a great combination; I hope they are right.

I consider Celgene a moderately risky biotech stock in my portfolio because I don't like to project upward lines too far out into the future. But if it stays on it upward trend line for earnings, it is going to be a very good earner for me going forward.

Keep diversified.

See also my main Celgene page

Friday, February 1, 2008

Microsoft Eyes Yahoo; I Sell My Microsoft Stock

A couple of years ago I bought some Microsoft (MSFT) stock because I thought it was undervalued. I do freelance technology and analysis work. Back then Microsoft was one of my customers and my analysis of the real competitive situation convinced me investors were wrong, yet again, that Microsoft was about to be destroyed by a rival. I have heard such talk since the early 1980's and so far all rivals have been left in the dust. Google is a standing man, but Google has not been around very long.

Yesterday I thought the stock was very undervalued given the recent earnings growth. But then Microsoft made what could play out to be the stupidest move in its history: a high-ball bid for Yahoo. There were rumors of this weeks ago, which may account for the Microsoft's low stock price leading up to the actual announcement.

I covered the Yahoo (YHOO) conference on Tuesday (See my Yahoo January 29, 2008 analyst conference summary). Yahoo is a good company and profitable, trying to deal with changing Internet culture and heavy competitive pressure from Google (GOOG). But its stock, by my valuation methodology, was overvalued on an absolute basis and especially when compared to the prices of other technology stocks during this liquidity sqeeze.

Now Microsoft proposes to buy Yahoo for even more than its already overvalued price. I think Microsoft would have been much better off just getting out there and competing with Yahoo and Google. Merge in Yahoo and its earnings will become stock valuation at Microsoft's relatively low PE ratio. Combined the two companies are worth less than if kept separate.

In addition, I don't see Microsoft infusing new vigor into Yahoo, or the other way around. Two heads are less than one, in this case.

So I sold me Microsoft stock today. There are better values in the market, both in technology stocks and in other segments. I still think Microsoft is a great company. For its most recent view of itself you can see my Microsoft (MSFT) analyst conference summary of January 24, 2008.

If I'm wrong, so be it. I don't see much reward, and I see a lot of risk, in this merger for Microsoft shareholders. But for Yahoo shareholders it is a great deal.

See also: