Wednesday, June 24, 2009

Dendreon, The Glory and the Dream

A moment ago Dendreon's (DNDN) had a stock price of $24.70 and a market capitalization of $2.85 billion. At this moment Dendreon does not have a product approved for sale by the FDA. I would never buy such a company. Yet I own the stock, which I bought years ago when almost every other biotechnology analyst thought Dendreon's Provenge (sipuleucel-T) therapy would be summarilly rejected by the FDA.

At my Dendreon analyst conferences page you can find all of my past articles about the positives and negatives of DNDN's prospects. Before the latest data came in I recommended it only as a stock for risk-takers who know how to hedge risk. I have not written anything new since the latest data was announced. Good data has lowered the risk while increasing the stock price, which increases potential down side if something goes wrong. So a different class of investors are probably buying it recently.

Here, as implied by the title, I want to look at the best-case scenario, where in a few years investors might wish they had gotten in when the market cap was only in the low billions. In this scenario we go beyond the approval of Provenge for late-state metastatic, androgen-independent prostate cancer by the FDA some time in 2010. I believe approval by the FDA has already been fully-factored into the current price, at least by conservative, rational investors.

Provenge is an immunotherapy. There is no reason to think that its use cannot be extended to any prostate cancer that has antigen presenting cells (APCs) that can be activated with PAP (prostatic acid phosphatase). Or some similar method of stimulating a T cell response against prostate cancer cells, which is what Provenge does.

So while selling Provenge after FDA approval, the short term strategy for Dendreon is most likely to conduct more clinical trials that, if successful, will allow label extensions. Given Provenge's safety profile so far, and its ease-of-use (it requires just 3 infusions), it may become a blockbuster if it proves effective with earlier stages of prostate cancer.

Meanwhile, there is the pipeline Dendreon has already established. This includes Lapuleucel-T for breast, ovarian, and colon cancer. CEA for breast, lung, and colon cancer. And CA-9 for kidney, colon and cervical cancer. All three are immunotherapies, and only Lauleucel-T has started clinical trials. CEA and CA-9 are joined by Trp-p8 in being preclinical (lab/animal testing stage). The later is a small-molecule prostate therapy. I suppose they know a lot about prostate cancer now, and wanted a small-molecule as a hedge against the limitations of immunotherapy.

Developing a pipeline is a very long term process. It will probably take years to get any of the drugs already in the pipeline through FDA approval, and that is assuming the data is good. Figure 5 years for another approval, maybe 3 years under the most accelerated scenario. I know; most investors can't think that long term.

But look at the best case scenario ten years out. Dendreon could, by then, have brought out immunotherapies for all the major cancer types.

And therein lies the glory and the dream. Given the complexity of the human body, the immune system, and cancers, it is highly unlikely that immunotherapy will replace other cancer therapies. But given its safety (if it proves to be safe long-term), there is no reason not to try it on any and every cancer patient.

Just a hint of that scenario breaths life into Dendreon's stock price. We are talking truly big money. Others will accelerate their immunotherapy efforts, but Dendreon has a lead and will be generating revenues from Provenge that can be used to bring new immunotherapies to market.

What Dendreon owns is not just Provenge. It owns, and has protected with patents, a new type of technology. If the technology really works, Dendreon is not just a company. It is an industry in the making.

Keep diversified!

Tuesday, June 9, 2009

The Oil Price Oscillator

Most Americans have noticed gasoline prices have been jacked up for the summer driving season. Those who read the financial pages know there is a glut of oil and gasoline available. If the corporations that set pricing keep prices up, and demand remains low, the glut will still be there in September.

But if there is an economic recovery, either in the U.S. or globally, the current glut will work down to normal levels and then to shortages. Prices will get jacked up further at the pump. And that, in turn, should moderate any economic upswing. It might even bring consumer consumption of everything but gasoline crashing back down.

It is very possible that we are in a period of oil prices being the primary oscillator for the economy. That is, when oil prices are up, the economy will slow, stall, and then decline. Oil prices will then fall by a greater percentage than the economy as a whole. Which only allows the economy to repeat the cycle.

This is a limits-to-growth scenario. It assumes the economy can only grow so much without more oil as an input, because the price of oil determines how much of the economic pie is left for everything else.

Over time, oil prices should become less of a controlling factor. We have already seen some of this. The shift from low mile-per-gallon SUVs to smaller cars and hybrids is just one example of how the shift could take place in the long run.

Some economists and analysts will get out their spread sheets and try to make numeric predictions about exactly how oil and gasoline prices will affect the economy in the short run. When dealing with something as complex as the economy, using a rule of thumb is more honest than pretending you can predict with finer granularity. There are too many other factors affecting the macroeconomy, ranging from how the Federal Reserve sets interest rates to billions of one time decisions by individuals that are small in themselves but in aggregate create macroeconomic trends.

Friday, June 5, 2009

Microchip Looks for Market Share

Microchip (MCHP) specializes in microcontrollers and related semiconductor integrated circuits (ICs). Microcontrollers typically integrate a computer and memory with the ability to output control signals and receive input signals. They are truly ubiquitous in our era. Almost every machine made, from household thermostats to cell phones and automobiles, contains one or more microcontrollers.

There is plenty of competition for microcontroller sales. Because they go into such a large variety of machines, many designs are possible and the market is still fragmented. However, Microchip has the largest market share in the largest market segment, 8-bit microcontrollers. There are also 16-bit and 32-bit microcontrollers, which tend to incorporate more powerful computers (a 16 bit data path is twice as wide as an 8-bit path).

Microchip has thousands of firms that buy its chips and incorporate them into products for end markets like telecommunication, industrial equipment, and consumer items. Because of this, when end market demand is broadly down, there is no way for Microchip to avoid slump in its sales.

If you take a historical view of Microchip, however, you see a corporate culture that drives success. Over time, on the whole, Microchip tends to gain market share. It does this by focusing on customer needs.

So how is Microchip doing right now, and how will the future play out? The results for the fourth quarter of fiscal 2009, or the first calendar quarter of 2009, looked pretty grim at first glance. Revenues of $173.3 million were down 10% from the previous quarter and down 33% from the year-earlier quarter. Net income on a GAAP basis fell to $23 million, down from $73 million in the December quarter and from $77 million in the year-earlier quarter.

One point to notice: even at these low levels of production, Microchip turned a profit. And they continued to pay a remarkably high dividend. Microchip has consistently returned profits to shareholders through dividends. There may be scenarios where they would have to cut the dividend, but cash flow is covering most of the dividend payments even now. They also have a cash balance of $1.4 billion.

They say, and it appears to be true, that they are making money in this market even as most of their competitors are losing money. In a way it might be better for Microchip, in the long run, if the recession is long and deep enough to force some consolidation in microcontrollers.

Microchip will be dependent on an uptick in overall global consumption to start back towards previous record revenues and profits. But in the meantime they are winning plenty of placement in customers new products, as well as bringing out new products themselves. Notable is their touch-sense input business, which has grown through both an acquisition and internal development.

Dismal as the quarter was, the end of the quarter showed something of an uptick. They even cancelled a scheduled shutdown of their Thailand plant to deal with the resumption in demand. A notable source of demand is in the Chinese telecommunications market.

Buy Microchip at the current price, $21.67 per share, and you get a dividend of 6.13%. That is hard to beat.

I own Microchip stock.

Keep diversified!

More data:
My Microchip Analyst Conference Summary page

Wednesday, June 3, 2009

Cisco Systems Joins Dow Industrial Average

Cisco is becoming part of the Dow Jones Industrial Average. As far as I know it is remaining in the NASDAQ 100 for a time as well. The NASDAQ 100 is my favorite hunting grounds for new investments. Cisco's promotion to the DOW illustrates why.

I have been posting summaries of Cisco's analyst conferences since November of 2006. Now I'm going to stop. It is not that Cisco has become a poor investment. I expect Cisco to continue to be a technology leader, and a growth stock, for the foreseeable future. But I can only cover a limited number of stocks. Cisco is very well covered by the news media and other analysts, and as a DOW stock will receive even more attention. I watched it because it gave insight into Internet connectivity trends. I also often considered buying the stock, but it never became enough of a bargain for me, compared to the stocks I bought.

Note that Cisco is entering the Dow at one of the worst moments in its history. In the most recently reported quarter, revenues were $8.2 billion, down 10% sequentially from $9.1 billion and down 17% from $9.8 billion year-earlier. Net income was $1.3 billion, down 13% sequentially from $1.5 billion, and down 24% from $1.8 billion year-earlier. EPS (earnings per share) were $0.23, down 12% sequentially from $0.26, and down 21% from $0.29 year-earlier.

Yet that is not bad compared to most of the technology industry. Given the state of the economy, it is remarkable that Cisco is selling that much equipment. It is mostly capital equipment, which tends to stall during downturns.

In early 2008, we now know with hindsight, Cisco's management was overly optimistic. They thought their broad array of products, global reach, and tendency to rapid growth would mean a recession would just cut into their growth rate. They did not admit to revenue declines until they actually occurred. That said my impression is that management is very honest with investors. They just underestimated the severity of the crisis that was building. I did that too.

As of last report, the demand for Cisco products was stabilizing. Given the need to bringing high speed broadband Internet to more of the world, and the increased use of the Internet for video, I think Cisco's prospects are bright.

There is not much left of the old industrial economy in the DOW. But I think there is still hope for manufacturing in the United States, if Americans get back to working hard and being satisfied with global pay levels. U.S. executives are even more overpaid than their European and Asian counterparts. According to standard market economic theories, that has to change, or American manufacturing will continue to fail.