Tuesday, September 30, 2008

AMD Shanghai Opterons Could Restore Profitability

Microprocessor and graphics processor chip maker AMD let slip that its new Shanghai version of the Opteron processor is actually ahead of schedule for production. Samples are available now for testing and it may begin appearing on servers as early as Q4 of this year.

AMD was doing well in its efforts to become a true rival to Intel until the Barcelona version of Opteron ran into problems. It came out over a year late. It had some merits: the four core version had all four cores on a single chip. Intel's four-core Xeon server processor actually was two two-core chips packaged together, which resulted in a variety of performance issues.

The Shanghai Opterons will also have four cores, but they will be on a 45nm process enabling them to have larger internal memories (caches) and other acclerators that were not present in the Barcelona versions, which were done with a 65nm process.

In looking at Q3 2008 results, which will be released October 16, we will be seeing the results of revenues from the current generation of Opteron processors. This generation has its merits, and may have sold well into energy conscious server customers. But if there is a surpise bump it will be from the recently reinvigorated ATI graphics unit, which came out with highly acclaimed products that may have sold very well in Q3. Notebook CPU and graphics chips, which were once a weakness for AMD, also should be showing a strengthening trend.

So if Q3 was better than expected, and Shanghai starts shipping in Q4, and the economy does not melt down, AMD investors will have something to cheer about for the first time since 2005. Given the almost vanishingly low current market capitalization for AMD, that might generate quite a pop.

Then again, I am a long-term investor in AMD, so this analysis could just be wishful thinking.

For more data see my AMD page and www.amd.com

For the technical news article on Shanghai see AMD says new 'Shanghai' chip is ready to go by Brooke Crothers at CNET.

Its always best to ...

Keep diversified!

Monday, September 29, 2008

Republican Politicians Crash Wall Street

In an amazing display of stupidity, Republicans in the House of Representatives purposefully sabotaged the American economy in a vote that took place a few minutes ago.

With the stock markets crashing, there are no remaining stores of value in the U.S. economy. It is truly amazing: companies that are highly profitable can be bought for a pittance today. But by making certain that the credit markets remain frozen, by playing political chicken in order to (they think) save their sorry seats in the November elections, those Representatives (and there were Democrats who voted against the plan as well) have probably insured that business and consumer spending will now go into a rapid decline. That should make once-profitable companies unprofitable. At this point I am buying only stocks in companies that have large cash reserves.

Instead of a reasonable fix and a mild recession, the most likely scenario is now a Depression, probably on a world-wide scale, possibly worse than the Great Depression.

If you don't bailout the boat, you sink, and everyone goes down, not just those too lazy to lend a hend with the bailout.

Of course I am hoping that some other plan to avert a depression is quickly brought forward. A depression not only takes an economic toll, it brings up the possibility that people will start following mean or crazy (or mean and crazy) political systems. Like fascism or totalitarian communism. Or some system that we can't even forsee.

Thursday, September 25, 2008

Red Hat (RHT) Opportunities, Dangers

Red Hat is doing well navigating its dangers and opportunities.

Yesterday Red Hat (RHT) released their numbers and held the analyst conference for their fiscal 2nd quarter 2009, which ended August 31, 2008. Revenue was $164.4 million, up 5% from $156.6 million in Q1 and up 29% from $127.3 million year-earlier.

For more financial details, management comments, and answers to questions posed by analysts, just go to my Summary of the Red Hat September 24, 2008 Analyst Conference.

Red Hat is now the best known, and largest in terms of revenues, open source software company. Its two best known products are Red Hat Enterprise Linux and JBoss middleware (which helps Java software applications run and interconnect with clients).

In one sense Red Hat is still a small company. Proprietary software companies like Oracle and Microsoft have quarterly revenues in the multiple billions of dollars, dwarfing Red Hat revenues.

There are really only two major operating systems fighting for market share, Linux and Microsoft Windows [caveat: there are also Sun Solaris and Apple OSX, but they are closely related to Linux]. There is only one Microsoft, but there are many Linux vendors, so Red Hat has to fight for its share of the Linux market, which is smaller to begin with.

Linux is open source, which means you can get it for free and run it without a license. That may not seem like much of a business model. The Linux companies Like Red Hat make their money from offering support for their clients. There just aren't enough Linux experts to go around, and it makes sense to centralize certain tasks. Most corporations that use Red Hat say they are getting a bargain when they get reliable, tested solutions from Red Hat and pay for support. Support includes upgrades and security and bug fixes and the ability to get a question answered by experts.

Microsoft has the advantage of being able to spread out its research and development costs over a large number of installed systems. Red Hat and other Linux companies in effect spread out their development costs by sharing code innovations, and by getting free inovations from clients and independent Linux coders.

Companies that make money from technical support now offer Linux support that competes with Red Hat. This includes hardware vendors like HP and IBM, as well as software vendors like Oracle. The Oracle case is particularly interesting. Oracle claims that it provides its customers with a duplicate of Red Hat Enterprise Linux for free, and then charges for support. Two years ago when this was announced Wall Street thought Red Hat was doomed.

In fact, Oracle had endorsed the Red Hat product. You can bet that Oracle software runs well on Red Hat Linux. And while Oracle has great products, it has angered plenty of competitors and clients over the years. Corporations may not want the convenience of having a single software vendor when it comes with a price tag that may be jerked up, leaving them no alternative but to pay. Red Hat, especially now that it provides an enterprise version of JBoss Java middleware, provides a highly reliable alternative to being married to Oracle (or IBM, or HP).

The use of open source software is growing rapidly, especially for server operating systems, datacenters, and Internet computing. Red Hat continues to capture a significant share of this growth.

Sometimes computer giants simply crush smaller companies that they cannot buy by underpricing them. But underpricing Red Hat to capture its smallish market share would mean a major devalutation for Microsoft or Oracle. Red Hat has $1.4 billion in cash, a tremendous amount of money considering their overall size. Its clients appear to be very loyal.

It may take another year to completely get JBoss revenues rolling in. If I were Red Hat, my next acquisition would undercut one of the main selling points of Microsoft, Oracle, IBM and Sun. I would buy an open source, database system and make it enterprise-ready. Given the stiff pricing of Oracle and Microsoft database software, I am sure many businesses around the world would appreciate that.

I own some Red Hat stock. All technology companies are subject to competition and should be treated as risky (even when they have great potential). So ...

Keep diversified

More data:

My Red Hat analyst conferences page

Saturday, September 20, 2008

Aztreonam Lysine decision by FDA, Research Note.

On September 16, 2008 Gilead (GILD) issued a press release stating the FDA review of "aztreonam lysine for inhalation, an investigational therapy in development for people with cystic fibrosis who have Pseudomonas aeruginosa (P. aeruginosa)," had been completed and the FDA said it "cannot approve the application in its current form and an additional clinical study will be required." See the press release FDA Complete Response Letter for Aztreonam Lysine.

This came as a bit of a surprise. All prior indications from Gilead were that the drug was safe and effective. Aztreonam Lysine was not expected to be a blockbuster because there just are not that many cystic fibrosis patients with P. Aeruginosa infections at any one time, although the number is by no means trivial. Other antibiotics are already available for this condition. The main reason to add Aztreonam as a treatment is the propensity of bacteria to develop immunity to antibiotic agents.

Financially it is not that big of a deal to Gilead, which is growing its HIV and Hepatitis franchise revenues at a rapid clip [See Gilead Should Rise on Penetration, Viread]. Still, money was spent on research, and approval would have meant an additional revenue stream. I am writing this blog because I was appalled by the poor coverage by the mainstream financial press. Also, mainstream articles almost never include links to more detailed data (because that might lessen ad revenue). I own Gilead stock, so I want to know, and see no reason not to share.

Progressing from the present, towards the past ...

On June 13th of this year, Gilead announced that a Phase III follow-up study showed Aztreonam to be safe when administered to cystic fibrosis patients [See Interim 12-Month Phase III Study Results for Aztreonam Lysine for Inhalation in Patients With Cystic Fibrosis]. This study, which was open-label [not double-blind], was done mainly to give a larger safety database for the drug. Patients showed improved respiratory symptoms and no evidence that the drug was unsafe. This was the third Phase III study.

On November 16, 2007, Gilead announced it had submitted its New Drug Application (NDA) to the FDA [See Gilead Submits New Drug Application to U.S. FDA for Aztreonam Lysine for Inhalation for Cystic Fibrosis]. Gilead said "The NDA is supported by data from two Phase III clinical studies (AIR-CF1 and AIR-CF2) and interim data from an ongoing open-label extension study (AIR-CF3) of patients who participated in AIR-CF1 or AIR-CF2. " Further "Data from AIR-CF1 demonstrated improvement in respiratory symptoms for people with cystic fibrosis," data from CF2 showed the therapy delayed the time needed before IV antibiotics needed to be started, and both studies showed the therapy increased patient respiratory functions. Common adverse reactions were listed, and said to be similar to those from placebos. In other words, there was every reason to get approval for the drug, and no reason for it to be rejected.

Going further back, on October 4, 2007, [See Gilead Announces Detailed Results of Phase III Study of Aztreonam Lysine for Inhalation in Patients With Cystic Fibrosis] details of the CF1 study were given. Again, it seems pretty good. The patient improvement is measurable, the p value is low (meaning it is highly likely the results would hold up if the trial were repeated, or done with more patients), hospitalization rates for treated patients were lower, and side effects were in line with those from placebos.

This was consistent with the May 29, 2007 press release "Gilead Announces Achievement of Primary Efficacy Endpoint in Second Phase III Study of Aztreonam Lysine for Inhalation in Patients With Cystic Fibrosis " Reaching the primary endpoint(s) for a clinical study, if the safety profile is good, is usually the main criteria for approving a drug.

You can go further back, but there does not seem to be any negative data on Aztreonam.

Probably the FDA just wants more data. The number of patients studied is not that large. On the other hand, the number of cystic fibrosis patients in the U.S. is typically around 30,000, and the number with Pseudomonas aeruginosa at any given time must be considerably smaller.

Gilead should tell the investment community exactly what the FDA said in rejecting the application. I don't see how keeping that secret can aid competitors. But it can aid us all in evaluating the value of Gilead as a company.

In biotechnology there is always the risk that a promising therapy will fail to be approved, and that established therapies may turn out to have risks that were not uncovered in clinical trials. I think Gilead is vastly undervalued by the market, but given the unknowns it is always best to ...

Keep diversified!

See also my Summaries of Gilead Analyst Conferences

Sunday, September 14, 2008

Dendreon Provenge Prostate Cancer Results Due Soon

October 2008 may bring the epic saga of Dendreon's immunotherapy for prostate cancer, Provenge, to an end. Or it might open up a bright new era in the fight against cancer.

For a full recap of the epic so far, see my Dendreon Provenge page.

This is a time of fear and greed for investors. Although technically the expected October announcement (but don't be too surprised if there are further delays) is for interim results of the FDA-mandated trials of Provenge, Dendreon has gone to great lengths to insure that the interim results will be a solid basis for acceptance by the FDA, which means they are also a solid basis for rejection by the FDA. The band where it makes sense to wait for the final results (which might not be available until 2010) is probably quite narrow. If Dendreon does not have passing interim results, in my estimate their intellectual property, and their stock value, is nearly worthless. On the other hand, passing results means they own among the world's most valuable biotechnology intellectual property. They will be able to ramp up Provenge sales quickly and also ramp up studies of their immunotherapy methods for a variety of other cancers.

One thing that many investors don't understand, and that even professional analysts and scientists forget, is just how much of a dice roll these kinds of study results amount to. We tend to think of science based on the physics paradigm, where frictionless, idealized masses follow trajectories fixed by known momentum and outside forces. But clinical therapy trials (Provenge is not a drug, but an activation system for the immune system) seldom give black and white answers. A percentage of patients responds; a percentage of patients have adverse reactions; a percentage of patients do not respond. Whether the response rate compared to the adverse reaction rate makes a therapy worthwhile of FDA approval is the whole game.

You have two separate sources of randomness at work in such trials. One is the mathematical randomness. This is of the sort that gives you those plus-or-minus 3% footnotes in political poles. In theory the larger the number of subjects, the smaller the likely randomness of the final result. Polling 500 people or testing 500 patients does not give us as much confidence in our results as polling 2000 people or testing 2000 patients.

In effect, when FDA did not approve Provenge on its first submission, but saying Provenge could be approvable with more data, the FDA was saying that the original sample size was not big enough. On the other hand, if the results for the patients had been better, the sample size would have been big enough.

The other kind of randomness is the innate randomness of biological systems. Patients are not all alike. They differ not only in age, sex, and degree of illness, but in general health, in specific DNA makeup, and in all sorts of microscopic manners. In particular 500 patients may be believed to have the same type of cancer (prostate, in our case), but those cancers may differ in ways that are significant but not understood.

I once saw a combined study of over a dozen clinical trials. In theory each trial was looking at the same drug for the same disease. Yet in some of the trials the drug appeared to be a failure, in some it appeared to be a success, and in some results were marginal. Aggregated the data showed the drug was valuable, but if one of the failed tests was all a company had to show to the FDA, there would be no approval.

So the risk, both upside and downside, for Dendreon investors is hard to quantify. No one can really do more than estimate how much real world variation could affect the Provenge trial.

Management says that if Provenge simply does as well as it did in earlier trials, the FDA will approve it. I don't doubt that (though the FDA does not have to keep such a promise). What I know is that random fluctuations can be significant in clinical trials, even in large scale ones. So I don't seen good results as guaranteed. Balancing that, results could also be better than expected, which would go a long way to helping market the drug.

Provenge is very safe, so it has almost no down side risk. I believe any benefit it shows for men with prostate cancer should earn it approval. But I am not sitting on the FDA; that committee may think differently.

I own Dendreon stock. But in biotechnology stocks it is always best to ...

Keep diversified!

More data:

Dendreon August 12, 2008 Analyst Conference summary

Wednesday, September 10, 2008

Gilead Should Rise on Penetration, Viread

Many company's stocks are undervalued in the current liquidity sqeeze. Gilead (GILD) is a good example of a growth company that is also a value stock right now. It last reported financial results for Q2 2008 [See my Gilead (GILD) Q2 2008 Analyst Conference Summary] with revenues of $1.28 billion, up 22% from Q2 2007. Operating cash flow was $426 million, demonstrating how profitable the business is.

Gilead is a pharmaceutical company selling six drugs with revenues of over $20 million per quarter. It is mainly known for its drugs for HIV: Truvada, Atripla, and Viread, which had revenues of $516 million, $355 million, and $150 million in the quarter respectively. Hepsera for chronic hepatitis B generated $90 million in income.

Since those results the FDA approved Viread for the treatment of chronic hepatitis B [see Gilead Viread press release]. Since Gilead has an established global sales force, the revenue ramp up should be relatively quick. While Viread will be competing with Hepsera, chronic hepatitis B has a very large untreated global patient population, so revenue from both therapies should grow.

There is no sign of a slowdown in the HIV franchise drugs either. The newest drug, Atripla, had a 67% revenue increase from year-earlier.

So why does Gilead have a relatively low PE ratio of 26 (and 20 forward looking) according to the Nasdaq Gilead summary page? There is no good reason except for the lack of liquidity in the financial markets. Other great companies have even lower PE ratios. Fear has driven investors to low-yield paper such as U.S. Treasuries.

Add to this basic picture Gilead's pipeline of potential new drugs, including Elvitegravir for HIV and some candidates for treating Hepatitis C.

I own Gilead stock. All stocks carry a variety of risks for investors.

So keep diversified!

More data:


Sunday, September 7, 2008

Celgene to Grow Rapidly

Celgene (CELG) is a pharmaceutical company, usually seen as a biotechnology company, known for selling Revlimid, a derivative of thalidomide for the treatment of multiple myeloma. Earlier this year Celgene completed the acquisition of Pharmion, which sold thalidomide in Europe for the treatment of multiple myeloma. Celgene also markets Alkeran, which has been used to treat multiple myeloma since 1962, and Vidiza for MDS (myelodisplastic syndrome). It no longer markets Focalin and Ritalin, having sold the rights to Novartis.

Celgene has a very high price to earnings ratio, listed at almost 50 at the close of trade Friday, September 5, 2008. Very few companies have PE's like that in this market. But Celgene's Q2 revenues were up 34% from Q1 and up 64% from year-earlier. Part of that increase was due to the acquisition of Pharmion, but Pharmion itself was growing revenue rapidly before it was acquired.

The excitement is due partly to continuing good clinical results both for currently approved drugs in new (or at least varying) indications and for Celgene's extensive pipeline. Before getting carried away, keep in mind the usual risks for drug companies. The discovery of previously unknown side effect (or adverse reaction) can cause a drug to be pulled from the market or restricted in its use. Even approved drugs will not sell well if insurance companies refuse to reimburse for them. And anything in the pipeline can fail to become profitable due to a failure in the market or expenses exceeding revenues, or competitive pressures.

Ambrucin is leading the list for new future profit generation at Celgene. According to Celgene, "Ambrucin has demonstrated substantial clinical efficacy in the treatment of small cell lung cancer. Amrubicin is a potent topoisomerase II inhibitor and is being studied as a single agent and in combination with anti-cancer therapies for a variety of solid tumors, including lung cancer." Ambrucin was given Fast Track status by the FDA last week. While many experimental drugs get Fast Track status, Ambrucin is already being used to treat lung cancer in Japan, so marketing it in the United States should happen relatively soon.

On August 21, 2008, Celgene announced "VIDAZA (azacitidine) received expanded U.S. Food and Drug Administration (FDA) approval to reflect new overall survival achieved in the AZA-001 survival study of patients with higher-risk myelodysplastic syndromes (MDS). This expanded indication supplements the 2004 FDA authorization of VIDAZA as the first therapy approved in the U.S." Vidaza is also being launched in Europe, which should add substantially to Celgene revenues once it ramps up.

Revlimid has shown good results in trials for CLL (Chronic Lymphocytic Leukemia) and NHL (non-Hodgkin Lymphoma), but approval from the FDA probably won't be possible until late 2009 or 2010.

All of this is on top of the continued expansion of Revlimid for multiple myeloma into more national markets, in particular into Asia.

Revenue growth tends to come in spurts in companies introducing new drugs because each nation has to approve the drug and then approve national health care reimbursement. So you can't just draw a straight line from a prior quarter or a prior year's quarter and say how fast revenues will grow. Stock prices tend to overreact to accelerations and decelerations.

So Celgene is probably best for investors with a good long investment horizon.

I own some Celgene stock.

Keep in mind that there is always risk (as Fannie Mae and Freddie Mac investors just learned), so keep diversified!

More data:

My Celgene page
Summary of Q2 2008 Celgene Analyst Conference

Monday, September 1, 2008

Biogen Idec: Will it Recover?

Biogen Idec has a remarkably low PE (price to earnings) ratio of 15.9 (per Nasdaq BIIB summary page, which uses non-GAAP numbers) for a biotechnology stock. The reason is simple: it was announced on July 31, 2008, that two patients taking Tysabri for Multiple Sclerosis (MS) had developed PML (progressive multifocal leukoencephalopathy). In 2005 Tysabri had been taken off the market after it was associated with 3 previous cases of PML. It was allowed back on the market in 2006 with a warning about PML in its label.

Tysabri accounted for $147 million out of $993 million total Q2 2008 revenues for Biogen Idec [See my summary of Biogen Idec Q2 2008 analyst conference]. In addition, it had the fastest growing revenues, up 210% from year earlier.

In a market where there are thousands of undervalued stocks to choose from, it is easy to understand a rapid exit from a stock based on any bad news, especially if the extent of the damage is unknown. But did that leave the stock fairly priced?

What is the downside from the new PML cases? First, more PML cases were expected when Tysabri was re-introducted to the market. No PML at all would have been the surprise. There is a warning about PML on the Tysabri label, and a monitoring program in place to catch PML early if it occurs. Which is exactly what happened. However, if there are a lot more PML cases, this still could cause the FDA to take the drug off the market.

Why has the FDA even allowed Tysabri to continue? Because it is remarkably effective in treating MS compared to other available treatments. Many patients and doctors feel this increased effectiveness makes it worth the risk of PML.

So far, the risk of PML, while undeniable, is minimal. There are currently about 30,000 Tysabri patients, and 2 got PML, and both have been improving since they were diagnosed (PML can cause death).

Biogen continues to work with the FDA to make the drug label clear. Without a doubt some doctors and patients will decide the benefits are not worth the known risks. However, that is against a backdrop of rapid switching to Tysabri from less effective therapies.

With Rituxan for NHL (non-Hodgkin Lymphoma) and Avonex for MS both producing more revenue for Biogen than Tysabri does, and with the stock price so low, I think the risk for investors is not particularly great. Avonex revenue grew 14% y/y, and Rituxan grew 21%. While the removal of Tysabri from the market cannot be entirely discounted, that is a risk that has to be weighed against the likelihood that Tysabri will remain on the market, and that Biogen's revenues and profits will continue to grow rapidly with or without Tysabri.

Take into account BIIB's pipeline of drugs in clinical trials, and you have a company that is likely to be much more valuable a few years from now than it is today.

I own Biogen Idec stock and, as a long-term investor, see no reason to sell it. Like all biotech stocks, there is risk involved in this investment.

So keep diversified!