Friday, October 23, 2009

Celgene Third Quarter 2009 Results and Analyst Conference

This is just to let you know that I have posted my Celgene (CELG) Third Quarter 2009 analyst conference summary.

Celgene is doing well marketing its current drugs Revlimid, Thalomid and Vidaza. Since Revlimid and Vidaza are still in their global launch period, revenues are almost certain to continue to ramp. Celgene also has a variety of therapies in various stages of development. While some may not make it to market, there are enough good candidates to make it likely growth will continue well into the coming decade.

See also and my main Celgene page with links to summaries of prior analyst conferences.

Wednesday, October 21, 2009

Intuitive Surgical Third Quarter Analyst Conference

Intuitive Surgical (ISRG) held its third quarter analyst conference yesterday, October 20, 2009. While Intuitive is actually doing well, especially when you consider the depressed economy, it is not doing as well as investors had hoped. Any stock with a high Price to Earnings (P/E) ration such as Intuitive has is vulnerable to these sorts of let downs.

Revenues were $280.1 million, up 8% sequentially from $260 million, and up 19% from $236 million in the year-earlier quarter. Net income was $64.5 million, up 3% sequentially from $62.4 million, and up 12% from $57.6 million year-earlier. For more details on third quarter results see my Intuitive Surgical Analyst Conference Summary for October 20, 2009.

Those numbers would make ISRG a growth company; for a recession they are stellar. Yet I don't own any Intuitive Surgical stock, and hesitate to buy it at today's price. It is true that if the economy recovers and doctors continue to adopt robotic surgery techniques at a rapid pace, today's stock price can be easily justified by future expectations. But the late debacle should warn us to be careful about assigning high P/Es to stocks.

If you want to criticize Intuitive, you would point to the number of its da Vinci Surgical systems sold in the quarter. At 86, that is down from the 91 sold in Q3 2008. The new generation of systems are pricier, and a good bit of revenue, more than half now, comes from servicing the installed base and supplying instruments and accessories for surgeries performed. So 86 is not a disaster. But recall that Q3 2008 was a time when wiser heads were already starting to be careful with their capital spending. It was not a boom quarter.

Among doctors there is still a great deal of excitment about Intuitive Surgical, the da Vinci systems, and robotic surgery in general. On the other hand, I expect competition in this field to ramp up in the next few years.

Intuitive Surgical may be a bit overpriced, but it is a good stock to buy on dips. However, always be wary of stock prices that are based on investor enthusiasm rather than profits and reasonable expectations of future profits. Even after today's stock drop Nasdaq (which uses non-GAAP measures) is reporting Intuitive's P/E ratio at 48 trailing, 40 forward. That is flying pretty high in this stock market.

So ...

Keep diversified!

Gilead Sciences Reports Third Quarter 2009

Gilead Sciences (GILD) reported stellar revenues and profits for it third quarter 2009, featuring revenues up 30% from the year-earlier quarter and GAAP EPS up 38% from last year. See my Gilead analyst conference summary for October 20, 2009 for details.

So why did the stock price fall today, and why does it have such a low price to earnings ratio? I own the stock because I think it is one of those rare value plus growth stocks. There are some factors in this quarter's revenues that may be non-recurring. Notably, because of the swine flu scare royalties from Tamiflu (sold by Roche) were $113.5 million. When the flu season is over those revenues are likely to dive back towards normal. This also has a heavy effect on net income and earnings per share because royalties don't entail costs. The drugs that Gilead does sell are expensive to manufacturer.

But I think the main reason investors shy away from Gilead is that its focus is on anti-viral drugs, particularly HIV (AIDS) drugs.

There is every reason to expect that HIV drugs will continue to be a rapidly growing global market, and medical concensus is that Gilead's Atripla is the best drug available.

In addition Gilead makes drugs for Hepatitis and is moving into the cardiovascular field, where its Ranexa for chronic angina already racked up $49 million in revenues for the quarter.

Normally, I would expect a company like Gilead to have a price-to-earnings ratio of at least 25 to 1; in a bull market more like 50 to 1. According to the Nasdaq web site (which uses non-GAAP measures), today Gilead's P/E ratio (trailing) is 17.39 and forward looking P/E is 15.6.

It may not matter, in the long run, that some investors see Gilead as a yucky HIV stock. Gilead is generating cash. Part of it gets used for acquiring companies or rights to therapies. But management announced yesterday that $1 billion will be used for share buy backs.

What I would like to see, instead of or in addition to share buy backs, is dividends. The company is large enough and stable enough to pay dividends, which are the gold standard of investing. You can't argue much with dividends.

As with any company, there are risks in buying Gilead Sciences stock, notably competition to introduce new therapies that may drive down the value of old therapies, and the expiration of patent rights.

So keep diversified!

Sunday, October 18, 2009


AMD announced its third quarter 2009 results and fourth quarter guidance at its analyst conference on Thursday, October 15, 2009. On a GAAP basis, AMD lost $128 million in the third quarter. While that improves on a $330 million loss in Q2, and on $134 million loss in the year-earlier quarter when revenues were higher, no one could claim it is a good number for stockholders.

On the other hand AMD announced $214 million adjusted EBITDA. That is Earnings before Interest, Taxes, Depreciation, and Amortization.

I know investors who keep a very close eye on EBITDA and prefer it as a measure to GAAP or even non-GAAP net income. A better way to look at it is it is a real number, and it has meaning if you understand it and its relation to the current stock price and future expectations.

In AMD's case, they announced that all non-GAAP measures (EBITDA is not a GAAP measure) reported are for the AMD Product Company. This is the main part of AMD that designs and sells microprocessors, graphics processors, and other semiconductor parts. The other part of the company own the fabs, the factories that make those parts, which has been largely spun off. AMD still owns part of that, which is now called GLOBALFOUNDRIES. At present GLOBALFOUNDRIES has only one customer, AMD, but it is talks to expand its client list.

The AMD Product Company, if it were a separate entity, would have been profitable, barely, on a non-GAAP basis, with net income of $2 million. GAAP, they showed a loss, because non-GAAP net income excludes certain one-time or non-cash expenses (and sometimes income).

The biggest single difference between EBITDA and non-GAAP earnings is interest, in this case costing $110 million. The rest is depreciation and amortization of $96 million, and a mixture of smaller items.

Depreciation and amortization refer to cash that was already spent in the past, usually on capital equipment or acquisitions, that is written off gradually as an expense due to IRS rules.

Interest, however, is a real expense, and in AMD's case is caused by over $5 billion it owes from acquiring ATI. The ATI purchase is beginning to pay off with traction in graphics and the planned introduction in 2010 of combined microprocessor-graphics chips, but the money owed and the interest is quite real. The interest payments won't go away until the principle is paid down, and it can't be paid down without cash profits.

Knock $110 in interest off the $214 EBITDA, and you have $104 million in what you could argue was some kind of profits for the quarter.

Q3 is usually a strong season for AMD, compared to Q1s and Q2s. But the economy should recover in 2010. If Intel does not start another price war — not likely given that they are under a great deal of scrutiny for their illegal and unethical past behavior — it is not unreasonable to project $104 million out another three quarters.

With a big rounding that is $400 million a year in earnings of a sort. A moderately bullish analyst might argue that a market capitalization of $8 billion is justified by those earnings. To get to an $8 billion market cap, the price of AMD's stock would need to hit $11.50 per share.

That sounds very bullish, and given the competition, it might be. But it might also be the case that in 2010 AMD is going to take a lot of market share from both Intel and NVIDIA, and it might even be market share with good margins. In which case this little calculation exercise will seem conservative in retrospect.

In conclusion, both the risks and opportunities for AMD investors are great. It is not a stock for the faint of heart.

So keep diversified!

See also AMD: The Dream Renewed [May 18, 2009] in which I describe the situation based on the AMD v. Intel lawsuit. And of course my AMD analyst conference summary for October 15, 2009

Disclaimer: I own some AMD stock.

Monday, October 12, 2009

Onyx Pharmaceuticals Acquiring Proteolix

Today Onyx Pharmaceuticals (ONXX) announced it is buying Proteolix in a structured deal that includes a $276 million cash payment (at closing) and potentially $575 million in payments based on clinical developments and regulatory approvals. It is a pretty sweet deal for both biotechnology companies.

Onyx is acquiring a great deal of risk in that Carfilzomib may not do well enough in Phase III trials to get regulatory approval for marketing. But Onyx is acquiring even more opportunity since if Carfilzomib is as successful as the Phase II trials indicate, the revenue stream should eventually pay for the deal many times over. On the whole Onyx is reducing its risk by acquiring a late-stage drug development company with a specialty adjacent to, but well-differentiated from, Onyx's own blockbuster Nexavar for kidney and liver cancers.

Carfilzomib is a pretty good bet. It is a proteasome inhibitor. A healthy person would not want to take proteasome inhibitors, since proteasomes are a key element of cells that break up and recycle damaged and over-abundant proteins. When proteasomes don't do their jobs, damaged proteins can build up in a cell, causing disease including cell death. However, cancer cells tend to be over-dependent on proteasomes because they have acquired a variety of mutations that create damaged proteins (which is how they became cancer cells). So a proteasome inhibitor can kill cancer cells without causing too much damage to healthy cells, particularly if they are somehow selectively targeted at cancer cells. There is already an approved proteasome inhibitor, Velcade. Carfilzomib represents a new generation inhibitor designed to be more selective than Velcade.

Phase II studies have shown Carfilzomib to be compellingly effective for multiple myeloma (MM), which is a type of hematological malignancy.

However, investors should be aware that the good results in the MM were for a trial involving only 46 patients. There are currently five ongoing Phase I or II trials; one has 155 patients and should be a far more compelling indicator if the results are statistically significant.

In theory Carfilzomib should work with cancers other than MM. This is a good example of how drug development works: you want to pick a roadmap that will get a drug its initial approval from the FDA based on its safety and efficacy. If that is achieved, then you can go back and try to expand the label for the drug to other indications. This is what Onyx has already succeeded in doing with Nexavar, which began as a kidney (renal) cancer drug, has been expanded to liver cancer, and looks like it may eventually be extended to breast cancer as well. As with carfilzomib, new drugs are typically brought in as second line therapies when established therapies have failed. If they can show better safety and efficacy than the standard of care, they may eventually be approved as a first line therapy.

The earliest we might see an FDA approval for Carfilzomib would be 2011. So in the meantime Onyx's expenses will go up. This acquisition is a play for long-term value, which fits into Onyx's past style.

In 2010 Onyx, in partnership with Bayer, expects Nexavar revenues to exceed $1 billion for the first time. Onyx splits expenses, and profits, evenly with Bayer. For the second quarter of 2009 global revenues were $201 million. Onyx ended up with GAAP net income of $9.4 million and non-GAAP net income of $15.3 million. Net income should grow much faster than revenues even with the increased expenses from the Proteolix acquisition. For details of Onyx's second quarter results, see my Onyx Q2 2009 analyst conference summary.

In summary, the Proteolix acquisition is a good bet, but involves significant risks. Onyx is not yet a stock for investors looking for safety. It does have a great deal of long-range appreciation potential.

So keep diversified!

Thursday, October 8, 2009

I Buy Petsmart (PETM)

Today I bought some Petsmart stock (PETM). This is well outside my fields of expertise, technology and biotechnology. It is the only stock I own outside these fields. But don't take this as a recommendation. I am looking for some diversification and I owned Petsmart in the past, so I did not need to to a lot of research to get up to speed on the company. I am not going to post analyst conference summaries on the stock to my web site, as I do with the technology companies I own or follow.

I originally bought Petsmart on August 5, 2005 at $25.76 per share. I sold it March 21, 2007, for $31.87 per share. Today I bought share for $22.31 per share. Petsmart currently pays a dividend of $0.10 per quarter or $0.40 per year. That works out to a 1.8% dividend at my buy price. According to NASDAQ, it has a trailing P/E ratio of 14.1, or earnings of 7% at my buy price.

Petsmart is a well-run company that has done pretty nicely during the recession compared to other retailers. Also, my wife and I got a puppy, Hugo, last year and I have watched how much of our normally tight-fisted household budget goes to pamper this pet.

The main risks I see for Petsmart are not unusual. There is competition in the pet supplies space, as in every other retail space. There is the danger of a double-dip recession. Also, Petsmart management already gave guidance for Q3 that is not fantastic.

But the main probability sequence is a retail sales recovery in 2010, so I expect to see a gradual upward trend in PETM revenues and then net income; hopefully even in dividends.

Keep diversified!