Wednesday, December 29, 2010
Still, while Red Hat is a great company, its price-to-earnings ratio is much higher than many other good, rapidly growing technology companies. So at this price it is for momentum players and those who can wait a few years to see its profits catch up to the expectations. I don't own any Red Had stock presently, but did when it had a lower P/E ratio.
Red Hat specializes in Linux for the enterprise and related technologies.
Tuesday, December 14, 2010
Carfilzomib for multiple myeloma data seems to be excellent. Carfilzomib could become the drug of choice for MM patients. Revenues could begin in late 2011, but would more likely be a 2012 story (they already got a large milestone payment from Ono Pharmaceutical in Japan).
In addition to extending Nexavar (Sorafenib) for liver cancer, there are three main targets for Nexavar: breast, lung, and thyroid cancer.
The breast cancer results seemed somewhat marginal to me. With the right subtype target, they should be able to get results good enough for FDA approval, but it is not a sure thing. A big Phase III trial is about to get underway, which will give everyone a much better view.
The lung cancer results seemed fairly solid, again with the best chance of success being based on subtype identification. I would give Nexavar a better-than-average chance of approval based on data available so far.
The best data appeared to be for thyroid cancer. Here we have a good combination of a lack of any good therapy availability to date and the method of action of Nexavar working out well for the most common type of thyroid cancer. I would bet this indication will be approved.
In the short run, the biggest impact on the stock would come from the approval of reimbursement for Nexavar for liver cancer in South Korea. Liver cancer is far more common in Asia than in the U.S. or Europe (over 10 times as common), so the bulk of the global profits will eventually come from Japan, Korea, and China. China has approved prescribing Nexavar, but not reimbursement for the costs. The Korean approval won't take effect until January 1, so it won't effect Q4 2010 revenues.
My overal impression is that the Onyx stock I own is now very underpriced, but that is based on future trial results, FDA approvals, and marketing successes, so making stock purchases on that assumption involves pretty much risk.
Onyx stock (ONXX) ended the day up $1.04 or 3.1%, at $34.54.
See also Onyx Pharmaceuticals site
Saturday, December 11, 2010
That is mainly due to a plunge from some of the data presented at the American Hematological Society (ASH) meeting last weekend. Celgene is trying to show that Revlimid should be used both earlier in the treatment of multiple myeloma and myelodysplastic syndromes (before or coincidental with other therapies) and for a longer duration. Right now "REVLIMID or lenalidomide in combination with dexamethasone is indicated for the treatment of multiple myeloma or MM patients who have received at least one prior therapy." What Celgene wants is Revlimid to be prescribed to new MM patients, without trying any other therapy first.
The data presented in that regard was very positive. See, for instance, Analysis of Revlimid Phase III Study Reports a Significant Improvement in Survival for del(5Q) Myelodysplastic Syndromes and Phase III Study Evaluating Revlimid in Patients with High-Risk Smoldering Multiple Myeloma Reported Statistically Significant Reduction in Risk of Disease Progression. There were many more reports on Celgene products at ASH.
The plunge was due to some data suggesting that patients taking Revlimid for long periods of time had an increased risk for secondary cancers compared to patients taking placebos. This is certainly something to look at; if the increased secondary malignancies are actually caused by Revlimid, rather than a statistical fluctuation (so far the numbers are small), then that would have to be weighted negatively. But Revlimid is not a diet drug, where a few deaths would be weighed against limited benefits. Death is still par for the course with untreated blood cancer patients, and even with treatment. The survival data on patients in the trials has consistently shown that Revlimid prolongs life, and that would include an adverse events, including the development of other cancers.
Mark Shoenebaum, the former Bear Stearns analyst who wrote pointed out the negative data, also pointed out that the results may have been skewed by not looking for secondary tumors in patients whose myeloma progressed, so that Revlimid patients, who had longer times before their myeloma progressed, were not actually compared to a like set of patients.
Celgene stock fell rather dramatically on December 6 (from $60.59 on the prior close to $55.64) as a result of the "news." What this mainly shows is the danger of pricing by auction markets. No one knows if the news is even true, or how significant it is. Buyers disappear, so even normal selling can tank a stock.
Celgene is already trading at a very reasonable forward price to earnings multiple of 22. Most likely Revlimid will be approved for use as a first-line treatment in 2011. In addition, Celgene has an extensive, high-quality pipeline. So my guess is that in a few months the December 6 drop will just look like background noise on the stock charts.
My Celgene Analyst Conference Call summary for Q3 2011
Tuesday, December 7, 2010
Repeated news about working with Ono Pharmaceutical of Japan for Carfilzomib for multiple myeloma. It is in a class of drugs known as proteasome inhibitors. It causes cell death by preventing protein degradation, essentially poisoning the cell with its own products. The hope is that it kills cancer cells with minimal harm to other cell types.
A Phase II trial of Carfilzomib (003a1) has been completed and data was presented at ASH. This was for refractory multiple myeloma, in other words for patients who have received other therapies, but then had the disease progress. Median survival expectation for such patients is currently about 9 months. Study had over 200 patients, endpoint was overall response wait, adjudicated by an independent monitoring committee. Median patient time from diagnosis was 5.4 years. Most patients had pre-existing peripheral neuropathy. Typically had had 5 prior lines of therapy (different drugs). In other words, a very sick, very previously treated group. Overall response rate was 24%, with another 10% with minimal response. Duration of response was 8.3 months, including minimal response patients. Number and type of prior therapies did not seem to influence responses. Median overall survival was 15.5 months. Adverse events were modest for this type of therapy. Conclusion is that Carfilzomib has a robust benefit for this patient population.
004 study of Carfilzomib was a non-randomized 125 patient open label trial also with refractory multiple myeloma, in two dose cohorts. Dexamethasone was administered at beginning of trial. Median age was mid-sixties, about 3.5 years of prior therapy, typically 2 prior lines of therapy, including stem cell transplants in 73 percent. Overall response rate for cohort 1 was 41% cohort 2 was 53%. Responses were relatively fast. Time to progression 8.3 for cohort 1, with cohort 2 median time to progression has not been reached. Typical modest adverse events. Showed a very impressive overall response rate with good tolerance over extended periods of time.
In the trial of therapy naive newly-diagnosed multiple myeloma patients with Carfilzomib plus two current best approved treatments (CRD), with relatively healthy (compared to the two trials above) patients in stage 2 or 3, median age was 59. Neutropenia was surprisingly low and mild, and neuropathy was minimal. 55% complete response rate, one of the best we have seen. 22% had no detectible disease. Nearly 100% had some response. Showed the regimen did not adversely affect stem cell collection. No patient has progressed, and all survived. Concludes regimen is "highly active, demonstrating rapid responses in newly diagnosed myeloma." Consensus of myeloma experts is the results compare favorably to best current therapies.
In refractory patients, many had recieved a different proteosome inhibitor therapy, notably Velcade (Bortezomib). So the response that shows differentiation from other such therapies. In patients who are refractory, the medical community considers minimal response to be significant, but it would not be significant in first-time myeloma patients.
Analysts questioned the characterization of the sickness of patients compared to Velcade trials; the doctors explained why, if anything, the patients were sicker. Patients were able to stay on therapy longer because of the tolerance patients had for it. Doctors insisted "this is the best drug in the myeloma space."
Onyx Pharmaceuticals site
My Onyx Pharmaceuticals main page
Tuesday, November 30, 2010
Think about the season of spring. I know that can be difficult as we enter winter in the northern hemisphere, but it is just a metaphor anyway. So think, perhaps, of last spring. It does not come on all at once, despite being driven by the steady progression of the sun to longer days. There are cycles of cold and warmth.
We may speak of winter returning, but we know as the weeks pass the snow and ice will melt and we will get more frequent warm spells. We even change our definition of warmth. In late winter a warm day may include a night time freeze. In late spring a warm day may miss freezing by 20 degrees.
Development of spring into summer is uneven across geographies. Once state may be having a late winter storm while another has a summer-like day.
So too it is with macroeconomics. We have been through a fairly severe global recession, but it is already summer in China and India. Within the American economy one sector may advance while another remains flat or even declines a bit. In particular in 2010 we saw reduced government spending, but despite that the economy did not collapse. The economy warmed up a fair amount in 2010 despite dire predictions of catastrophe in Europe and a double dip in the U.S. And despite a still-weak housing construction sector.
There are all sorts of signs that the economy is in recovery. That may not be any consolation to those frozen in an unemployed or even homeless status, but it important for investors to see the overall picture accurately. A lot of people panicked and lost a lot of their savings in 2008 when they sold stocks at the bottom of the market. If they had held on, they would be in far better shape now.
Another economic winter will come, to be sure, but we have not even hit late spring yet, much less summer. The way to prepare for winter is to lay aside your winter supplies during the summer, rather than acting as if summer will never end.
2011 should be a good year for the American economy. That does not mean it will be a good year for every single person, or for every business, or every business sector. But hopefully we have, collectively, learned something about the wise use of credit and the need to produce real goods and services in a global economy. Bidding up the prices of things that already exist, be they Beanie Babies or houses, is not a real economic advance.
Stocks can be bid up too high too, but that was not the problem during the latest bubble. Stock prices should reflect the earnings potential of the companies involved. The more profitable companies are, the higher their stock prices should be. The main danger is getting talked into investing in companies that are not profitable, or are obviously going to become unprofitable as the economy changes.
Spring is in the air. Wise investors can hear the birds singing and the wheat and corn sprouting in the fields. If you don't sow, you can't harvest. People who are 100% in bonds should be seriously thinking of rebalancing their portfolios to include stocks again. The value of low interest bonds tends to melt away during the hot days of summer. Better to own CDs at a credit union than bonds once interest rates start rising. And beware the current line of bull about investing in foreign stock funds. Many nations have even less regulation and transparency that the United States. A good rule for investing is don't do it if you don't know what you are doing. There is plenty of risk involved even when you know what you are doing.
See also: Virtuous Economic Cycle Components [September 15, 2010]
Monday, November 29, 2010
At its November 11, 2010 analyst conference call and report on its third quarter (Q3, ending October 31, 2010), Tegra was touted as a replacement for lost chip set revenue and more. Note revenue were down 7% y/y to $843.9 million in a period when most semiconductor companies ramped revenues by double digits.
Note also that Tegra has been around for a number of years. What we have been promised in 2010 is a new, improved Tegra, with an improved software stack make the new devices using it something device makers feel can compete with the iPad. This has resulted in a least a half-year delay in releasing product; the products are largely a 2011 story. Management believes that touch-based systems are going to wipe out older systems, and that Tegra will make NVIDIA a serious player in the field.
Maybe, but I am not the only analyst who is a bit skeptical, and with good reason. Tegra 2 might be improved enough to be a revolutionary epicenter in 2011, but it might get lost in the forest of competing platforms. Essentially Tegra combines an ARM CPU with a GeForce GPU, in much the same way that AMD's Fusion chips combine an 8086-based CPU with a Radeon GPU. ARM is a low-power architecture that is being widely used to address the mobile device market.
The problem for NVIDIA is that lots of companies are selling ARM-based processors for mobile devices. Apple designed its own. NVIDIA's advantage would be its graphics technology, but it is not yet clear how much of an advantage they really have. Many companies are using graphics chips, or integrating graphics architecture onto a chip, that was designed, like ARM, to be low-power from the ground up.
The history of Tegra is not one of blazing success. Microsoft Zune and KIN were flops. Maybe the 2011 devices will be better than Apple, but will they sell? They won't be competing with just iPads and iPhones, but with a wide variety of devices. Note too that some of NVIDIA's competitors have huge advantages in the mobile market derived by expertise in areas like Wi-Fi and cell phone modem chips.
For device makers there are a number of competing strategies to choose from. Do you want to start with the best graphics, or perhaps the best cell phone 4G technology? Or if devices become largely indistinguishable, maybe the low price supplier is the key to success.
I have owned NVIDIA stock in the past, but right now I think there are better bargains to be had. If Tegra ramps as rapidly as management would like, then sure, today's stock price looks nice. But I believe this is a wait and see situation. The new Tegra devices may come on the market as early as Q1 2011, but I want to see how they sell through. One popular device could make Tegra viable again, but only Apple seems to be able to guarantee the popularity of its own devices. Once you step outside of Apple, what I mostly see is ruinous competition.
My NVIDIA analyst call summary for Q3 2010
Sunday, November 28, 2010
There is expected to be a dip in Q4 revenues due to the record shipments of Q3, but sequential growth is expected to resume in Q1 2011.
The GAAP numbers tell the story beautifully, even taking into account revenue increases from the SST acquisition earlier this year. Revenues were $382.3 million, up 19% sequentially from $320.8 million and up 69% from $226.7 million year-earlier. Net income was $103.1 million, up 15% sequentially from $89.6 million and up 132% from $44.5 million year-earlier. EPS (earnings per share) were $0.54, up 13% sequentially from $0.48 and up 125% from $0.24 year-earlier.
As I explained in Microchip Expands Markets, the microcontroller market can be expected to grow for years as microcontrollers are inserted into increasing numbers of appliances (including automobiles) and as the number of appliances expands in nations like China, India, Indonesia, Brazil and developing nations.
Microchip dominates the microcontroller market largely because its multitude of chip variations allow engineers to get the design job done at minimal cost and, if they like, with minimal power consumption. The SST acquisition added a number of key technologies and device types. Microchip sold some SST lines and discontinued others, but announced during its analyst conference call (11/04/2010) that SST Superflash memory and RF lines, which had been listed as discontinued in the prior quarter, had proven to be unexpectedly profitable and now have been un-discontinued.
Orders slowed in September, which would be a negative indicator for Q4 revenues. But after a 20% jump from Q2, I am not worried about a leveling off or slight drop in Q4. I think a lot of equipment makers are being cautious, not sure of consumer sentiment in the U.S. or what's going on with debt issues in Europe. My take is the end demand is actually growing, though we are also seeing more seasonality than last year. With a good consumer season underway in the U.S. and growth still strong in Asia, I don't think Europe will be that much of an issue.
The Q4 dividend of 34.4 cents per share will be payable on December 2, 2010 to stockholders of record back on November 18, 2010. The Q1 dividend of 34.5 cents per share will be paid on December 27, 2010 to shareholders of record on December 13, 2010.
Microchip is a great company for customers, employees, and shareholders, but there are always a variety of risks to consider with any technology company. So ... Keep Diversified!
My Microchip analyst call Q3 2010 summary
Wednesday, November 24, 2010
GAAP net income was negative $11.2 million, up sequentially from negative $27.6 million and up from negative $17.6 million year-earlier. EPS (earnings per share) was negative $0.37, improving sequentially from negative $0.91 and from negative $0.60 year-earlier.
That is modest revenue growth coming off a recession plagued 2009, and well short of hitting a profitable level. Things look better on a non-GAAP basis: Non-GAAP revenue was $130.3 million, up 6% y/y from $122.7 million. Net income negative $1.8 million. Non-GAAP EPS was negative $0.06, improved from negative $0.09 year-earlier. EBIDTA characterized as "positive." But probably not very positive, or they would have given us a number.
Is the new SGI, a combination of Rackable with the old bankrupt SGI, another loser company, unable to keep pace with competitors that can invest more in R&D and can reinvest profits? Maybe not. Maybe management is moving forward at a deliberate pace that really will get the company to break-even in 2011 and profits in 2012. Since the stock price makes the case for the loser scenario (market capitalization end of today was $241 million, about half annual revenues), here I'm going to look at the possible upside.
Q3 was the first full quarter of shipment for Altix UV, SGI's supercomputer offering, and 49 of these systems shipped in the quarter. Silicon Graphics International ships many products besides Altix UV, including racked server systems for datacenters and cloud computing. But I suspect most of the ramp from Q2 to Q3 was from Altix UV.
Service revenue was a healthy 30% of total revenues. Service revenue is usually a steadier stream than hardware revenues when you are selling in chunks as big as SGI does.
Most important of all, SGI reported they entered fiscal Q2 with a strong backlog. There were also large shipments late in the quarter, resulting in a larger accounts receivable than usual, at $96 million.
Altix UV sells mainly to government entities, including research laboratories and universities. But it also can be used for tasks like biotechnology and analysis of oil and gas exploration data. It gives a lot of computing power to these institutions at a very reasonable price. How much demand is out there for 2011, however, is difficult to predict. If the current quarter results come in strong, I would see that as an indicator that calendar 2011 will be a good year.
SGI says that margins on Altix UV are good, partly because of the software stacks that go with the hardware. Margins were a big concern both at the old Rackable and old SGI. I believe that prices on all products should be set to give healthy margins. If competition or lack of demand makes that impossible for particular products, then those product lines should be dropped.
So I'll hold onto my SGI stock and see what the results are for the current quarter. I'd actually like to see more spent on R&D, but only after the company is solidly in the black on a GAAP basis.
See also: Silicon Graphics International web site.
My SGI analyst conference call summaries page
Tuesday, November 23, 2010
Over the last decade in particular graphics processing has increased in importance for the vast majority of computer users. People watch and even edit video on a regular basis. 3D virtual realities, including games, are a common part the computer experience. Even business applications are increasingly visual and three dimensiona. Starting with Windows Vista, computers needed improved graphic computation just to allow the operating system to present all of its graphic features.
If there is one thing consumers (including business buyers) need to know about computer graphics, it is that DX 11, introduced with Windows 7 in 2009, is the graphics standard for today's applications. DX 11 is short for DirectX 11, which Microsoft designed to handle multimedia, including video and 3D graphics. The prior generation, DirectX 10, was introduced in 2006. While a powerful advance in that era, it is now seriously out of date. While many applications still use DX 10, most new software introduced in 2011 will run best with DX 11. When DX 11 is not available, they will default to the lower graphics standards of DX 10 or earlier.
When a computer runs a DX 11 game or application by substituting DX 10, it loses graphic details that enhance the visual experience.
Sandy Bridge cannot run DX 11. If you buy a computer with an Intel Sandy Bridge processor, you will have two choices. Sub-optimal graphics, or buying an add-in graphics card from AMD or NVIDIA. AMD's Brazos chips (and all their Fusion chips to be introduced in 2011), on the other hand, do run DX 11. If you think about the computer replacement cycle, this is a remarkable difference. Intel computers bought in 2011 can be expected to remain in use for 2 to 4 years. By the end of that cycle they will be running a decade-old graphics standard.
Intel is going to spend a hefty amount of money trying to convince people that Sandy Bridge based computers have graphics on par with AMD Brazos based computers. I've seen some of how that will work already. One online technology reviewer in England used a factually correct article that first appeared at Anandtech to argue that Sandy Bridge is about as good, possibly better, than AMD offerings. He used the following graphic to support his argument [see also the full Sandy Bridge Preview at Anandtech]:
What you see hear is that a desktop Sandy Bridge Core i5 (the top bar) shows a good improvement on Intel's earlier integrated graphics attempts. It is also significantly better, for this particular game, than a AMD Radeon 5450 card. That is great, but it is not a valid comparison for people buying new computers in 2010. The Radeon 5450 card, as you can see from the chart, could do remarkable things for an older Intel CPU with integrated graphics. But it is a card you can now get, retail, for $33.99 [See HD 5450 at TigerDirect]. It supports DX 11. It is the very bottom of the AMD discrete graphics line.
Fair enough, though, Sandy Bridge has the graphics equivalance of the cheapest, slowest discrete video cards made with AMD graphics chips, except it can't do DX 11. Brazos has, as its graphics engine, the equivalent of either a Radeon HD 6250 or 6310, depending on the exact chip used, but those don't correspond to any discrete chips released by AMD. However, graphics capabilities of the Brazos APU are only slightly less than for the 5450.
The Brazos chips, draws just 9 watts of power in the C versions with 6250s, or 18 watts in the E versions with 6310s. The Intel Core i5 2400 draws 95 watts (according to Anandtech). In fact [See Sandy Bridge Preview] they list no Sandy Bridge CPU that draws less than 65 watts.
In other words, in order to make Intel integrated graphics look better than AMD APU graphics, you need to take an expensive, power-sucking chip designed for desktop computers and compare it to a relatively inexpensive, power-sipping chip designed for netbooks and notebooks. And the Intel based desktop computer won't do DX 11.
The way it works out, AMD is releasing its Fusion (combined CPU/GPU) notebook & netbook chips in January. Intel is releasing its desktop chips with integrated graphics January. So direct mobile to mobile and desktop to desktop comparisons are not available yet.
AMD will be releasing more powerful Bulldozer chips designed for desktops later in 2011. They will support DX 11. Intel uses Atom for its netbooks; expect no DX 11 support there.
DX 11 adoption is well underway. Games tend to adopt a new graphics standard most quickly, but only when new games are introduced. See a list of games with DX 11 support. Note that Windows 7 itself supports DX 11. Expect new versions of most major application programs coming out in 2011 and 2012 to support DX 11.
What consumers need to know is that Intel based computers are essentially defective as they come off the assembly lines unless (1) you just do simple tasks like e-mail that are not graphics intensive or (2) they include a discrete graphics card from AMD or NVIDIA.
Who will tell them that? Not Intel. And Intel's advertising budget is such that you can expect a lot of obfuscation in media outlets, including technology magazines and web sites dependent on Intel for much of their advertising revenue. Intel also pays many large retail chains to promote its products over AMD products (by paying for ads).
If anyone is going to get the truth out, it is the millions of ordinary tech people who help everyone else with their buying decisions year-in and year-out. If they can get the typical buyer to ask the typical seller, "Does it do DX 11?" then AMD is going to pick up a lot of market share in 2011. On the other hand, if they stick to the "Intel is the premium brand," line, AMD will continue to have a hard time getting its message heard.
The payoff from that strategy was seen in the Onyx report on Q3 2010, which included a $59.2 million payment from Ono Pharmaceutical of Japan for the rights to develop and sell Carfilzomib in Japan. Carfilzomib was acquired with Proteolix. Its first indication is for multiple myeloma. It is in a class of drugs known as proteasome inhibitors. It causes cell death by preventing protein degradation, essentially poisoning the cell with its own products. The hope is that it kills cancer cells with minimal harm to other cell types.
A Phase II trial of Carfilzomib has been completed, with full data to be reported at the ASH (American Society of Hematology) meeting beginning December 7th. This trial data may support FDA approval; it has to be very good data to get approval from a phase II trial, because of the small number of patients enrolled. A full Phase III trial is also already being enrolled.
The payment from Ono is not indicative of regular quarterly revenues. Most revenue in 2011 will be from Nexavar sales through Bayer. This means net income may be positive or negative on a quarterly basis. So expect volatility in the stock price. Good news on Carfilzomib will drive the stock higher; there should be a floor under bad news because of Nexavar sales.
Nexavar itself is being tested for further indications: adjuvant liver and kidney cancers; non-small cell lung cancer; thyroid, breast, and ovarian cancer. These trials are mostly in Phase II or early in Phase III.
Onyx currently has 6 additional compounds in preclinical or in clinical trials. In biotechnology it is a good idea to have a wide pipeline, because most promising therapies bomb out at some point. Having six compounds in addition to Nexavar and Carfilzomib is reasonable for a company with Onyx's resources.
Onyx Pharmaceuticals is also sitting on a good pile of cash, $588 million. That is a good cushion for the dicey game of drug development and sales.
On the negative end, while liver cancer sales for Nexavar are still ramping as it gains approval in more countries, kidney cancer sales are about flat, due to increased competition.
I think the chances of Onyx fizzling are reasonably low, and the upside potential is very good. The price ($29.65 as I write) strikes me as still not taking into account its full future profit making potential if Carfilzomib is approved, but it isn't in the bargain basement the way it was earlier this year (52 week low $19.54).
Onyx Pharmaceuticals site
My Onyx Pharmaceuticals main page
Friday, November 19, 2010
I have gotten terribly behind, this is hardly a log at all of late ...
Here are links to my summaries of recent Q3 analyst conference calls. Lots of interesting stuff, but I am unlikely to do separate commentary on all of them.
Dot Hill Q3 2010 Analyst Conference Call Summary. First quarter with non-GAAP profits in some time, appears to be on a good projectory with new storage products.
Dendreon Q3 2010 Analyst Conference Call Summary. About as expected, ramped up Provenge sales to the max until they get facility expansion permission.
Onyx Pharmaceuticals Q3 2010 Analyst Conference Call Summary. An exceptional quarter due to a large upfront payment from Japan.
SGI Q3 2010 Analyst Conference Call Summary. Still in the red, but new supercomputer sales are ramping rapidly.
Microchip Q3 2010 Analyst Conference Call Summary. Excellent revenues and profits.
NVIDIA Q3 2010 Analyst Conference Call Summary. Promises of Tegra revenues from future products.
Applied Materials Q3 2010 Analyst Conference Call Summary. Excellent quarter, demand for semiconductor manufacturing equipment remains strong, even the solar division was in the black.
Marvell is way up today after great results reported yesterday. If you think this was a good quarter, wait until revenues for chips for the new smartphones in China kick in next year. See Marvell Q3 2010 Analyst Call Summary.
Thursday, November 11, 2010
In short, government spending is a big part of Cisco's pie, and government spending, especially by American states that have balanced-budget provisions, was weak. A second area of weakness was sales of set top boxes to cable companies.
For a more detailed report try my Cisco fiscal Q1 2011 analyst conference call summary.
I don't own Cisco stock.
Up today is NVIDIA. But I have other conferences to cover for clients, so I may not be posting my NVDA conference call summary (Q3 fiscal 2011) until late tonight or even Friday. But you can bookmark the page and return to it later.
For a complete list of technology stocks I cover for the public, see analyst conference call list.
Tuesday, November 9, 2010
Emphasizing what a groundbreaking point has been reached, CEO Dirk Meyer held up a typical sized CPU and then a mid-range GPU card, which was about the size of a small paperback book. Then he held up the APU that will have the equivalent CPU and GPU computing power. It was smaller than the CPU chip, about the size of a postage stamp. I know that the GPU card contains not only a GPU chip but memory, a fan, and connections for video output, so the comparison was a bit of an exageration. But it is a sort of computing grail achievement that goes beyond mere size comparisons.
Of course, knowing AMD has been working for years to achieve this feat, much larger rival Intel has announced that it will also have an integrated cpu/gpu product release for 2011. AMD executives mocked it, as well they might. We know it is an inferior product. It supports a graphics standard called DX10, which is now four years old. AMD supports DX11. It is true that most older software and games can't take advantage of DX11.
But many games already can, and most graphics software updates are moving to DX11. So Intel will be making an offering that can't cope with new games or software. When you buy a new computer, it is often because you want to take advantage of new software. Intel will be leaving consumers in the lurch.
Nevertheless, Intel is the Goliath, and AMD's previous attempts to take on the giant have had mixed results. Intel's profits are usually higher than AMD's revenues, and Intel spends way more on R&D than AMD. A few years ago Intel was so far behind in graphics, it is remarkable that they are maybe only 2 years behind now.
Intel will heavily outspend AMD in marketing, and will omit to tell consumers that its chips can't run DX11. So for AMD to take a lot of market share in 2011, it has to get its story out. In my experience retailers are more interested in Intel advertising subsidies than in making sure consumers make an informed choice between computers based on AMD and Intel. I would hope that tech "geniuses" would tell show off their stuff by telling the public to choose AMD if they want good graphics and video capabilities. But it seems that a lot of technology mavens are employed by Intel and Apple.
If the word does get out that Intel cpu/gpu combination chips are not good enough, AMD's ability to take market share could become capacity constrained. Intel has a huge production capability to match its market share; AMD's capacity can only be expanded so much in the short run.
Still, even a 10% increase in revenues for AMD in 2011, with maybe a 1% increase in market share, would be a boon for AMD.
Watch this space closely. The actual computers will start being available to the public in January, traditionally a slow period for computer sales. Public acceptance of the new AMD products, or resistance to Intel advertising, should be knowable by March or so, and act as a predictor for the remainder of the year.
For investors a key element will be margins. AMD believes that with the new processors (and server chips introduced in 2010) it can improve its non-GAAP gross margin from about 40% for 2010 to about 44% to 48% in 2011. If that turns out to be true (if Intel does not start a price war), then earnings will rise nicely and AMD will be in an even better position to compete with Intel in 2012.
Dirk Meyer showed an HP thin light notebook running gaming level graphics using the new APU chips. He claimed it could run 8 to 10 hours on one battery charge, and would cost less than $600. I want one, and it would work a lot better for me than a smaller form factor tablet computer. This ability to reduce power consumption is being introduced across the range of new AMD products in 2011: for netbooks, notebooks, desktops, and servers. That is good news.
Sunday, November 7, 2010
Why the sudden excitement? On Thursday TTM announced third quarter (Q3) results and held its analyst conference call. Essentially TTM's acquisition of Meadville, a Hong Kong based PCB manufacturer with facilities in mainland China, turned out to be a smart move. This was the first full quarter after the Meadville acquisition, so you can begin to see why TTM has set itself on track to be a global powerhouse in the coming decade.
But why was the stock price low to begin with? It is not that TTM had been doing badly, though it had its setbacks during the late recession. The background is that the PCB industry in the U.S. has been shrinking for over a decade, even as global PCB demand rose. Manufacturing moved to other nations, most notably China. This was especially true for volume production, like consumer items that have runs of 100,000 units or more.
To keep itself profitable TTM, and some competitors like DDi (DDIC) has specialized in making boards in smaller batches, and in particular when newer technologies are required. Small batches can be prototypes for larger production runs, or can be for industrial or medical instruments where only a few, or a few hundred, boards are needed. TTM provides a level of expertise in designing and manufacturing boards for the new, micro-sized electronic components that few PCB companies in the world can match. They are able to charge for that expertise and maintain a good profit margin. Even in the first quarter of 2009, TTM squeezed out a profit on lower revenues.
Meadville does do large scale PCB manufacturing in China, but mostly at the high end, for instance for Apple products. So their profit margins were also good. For years TTM looked to acquire an Asian PCB manufacturing so they could help their customers on large production runs. In theory the new model is: prototype the PCB in American facilities of TTM, then do large runs in TTM's China facilities.
However, so far mostly we are just seeing that Meadville was a well-run, profitable business, that TTM paid a fair price for it, and that the resulting combination is about as profitable as it looked like it would be.
For Q3 2010, revenues were $357.8 million, up 15% sequentially from $310.2 million and up 157% from $139.1 million in the year-earlier quarter. GAAOP net income was $32.1 million, up by a factor of 4.8 sequentially from $6.7 million and up from negative $4.9 million year-earlier. Resulting in GAAP EPS (earnings per share) of $0.36, up 6x sequentially from $0.06 and up from negative $0.11 year-earlier.
If you use $0.35/share as the new run rate, TTM is generating $1.40 in earnings per year. So even at Friday's closing price the rate of return is very attractive.
One thing to watch, however, is debt. Meadville had acquired a lot of debt in expanding its facilities, and now TTM has taken on that debt. Interest rates are favorable and plenty of cash is being generated to pay off the debt over time, but it is still a negative.
For more detail you can read my Q3 2010 TTM Technologies (TTMI) analyst call summary
And of course the TTM web page.
Tuesday, November 2, 2010
Dot Hill (HILL)
Onyx Pharmaceuticals (ONXX)
Silicon Graphics International (SGI)
Hansen Medical (HNSN)
I have linked the above to the pages where I will post my analyst call summaries. But it will take me a while to do them all, maybe even overflowing to Thursday morning.
With Dot Hill, I'll be looking to see how the new data storage products are selling, also hoping they make it into the black on a non-GAAP basis. For Dendreon we'll see the first full quarter of Provenge sales. With Onyx I'll be watching for revenues and profitability. SGI is not expected to be in the black, but with their new Altix UV supercomputers having their first full quarter, I can always hope. For Hansen Medical, I know they are making progress with extending their robotic catheter technology, but how many robot systems did they ship in Q3?
Monday, November 1, 2010
Revenue was $910 million, up 7% sequentially from $852.7 million and up 31% from $695.1 in the year-earlier quarter.
GAAP Net income was $281.2 million, up 81% sequentially from $155.4 and up 30% from $216.8 million year-earlier. That equates to EPS (earnings per share) of $0.60, up 82% sequentially from $0.33 and up 30% from $0.46 year-earlier.
Revlimid, used to treat MDS (myelodysplastic syndrome) and multiple myeloma, saw revenues increase 44% from Q3 2009. Vidaza, also used to treat MDS, had revenue up 37% y/y. Thalidomid and ritalin revenues continued to decline.
What is exciting about Celgene, besides its stock price being very reasonable in this risk-averse environment, is that Revlimid and Vidaza are both likely to be approved by the FDA (and international equivalents) for more indications. Throw in known sales of Abraxane for breast cancer, obtained from the recent purchase of Abraxis Bioscience, with good Phase III data for non-small cell lung cancer and Phase II data for other cancers. Otherwise in oncology (cancer) besides Revlimid there is Amrubicin, Tork Inhibitor, ACE-011, and a whole series of ABI compounds. In hematology there are istodax and pomalidomide.
In Immunology Celgene has apremilast, JNK-930, CC-11050, pomalidomide, and PDA-001.
There are also a 15 compounds that have not made it to Phase I trials yet.
To see diseases targetted and how far each therapy is along in the clinical process, see the Celgene product pipeline.
Celgene, at the close today at $61.90, was selling at 23 times trailing non-GAAP earnings. That is very cautious investing, typical of the climate we are in today. Of course many compounds never get FDA approval, and so their R&D dollars go down the drain. There will be some of that with Celgene. With the very solid Revlimid and Vidaza profits, Celgene has undertaken an expensive but well-targetted research and development effort. In the biotechnology industry you can't stand still: you need to keep discovering better medicines. Celgene is doing just that, and that is what, as a long-term investor, I like to see.
My Celgene Analyst Conference Call summary for Q3 2011
Friday, October 29, 2010
GAAP Revenue was $253.6 million, up 3% sequentially from $245.3 million and up 21% from $206.5 million in the year-earlier quarter. GAAP Net income was $39.7 million, up 4% sequentially from $38.1 million and up 21% from $32.7 million year-earlier. GAAP EPS (earnings per share) were $0.21, up 5% sequentially from $0.20 and up 17% from $0.18 year-earlier.
Using GAAP numbers, Akamai's PE as I write (stock price $51.60) is 63, using annualized Q3 earnings. NASDAQ is listing non-GAAP PE as 35 trailing (last 4 quarters) or 32 forward looking (predicted next 4 quarters). That is pricey compared to semiconductor growth stocks like Marvell (MRVL - trailing PE 13) and Microchip (MCHP - trailing PE 20), which I also own.
I like GAAP numbers for conservative investing, but it is true that for Akamai you might want to look at Q3 cash from operations of $118 million or EBITDA at $114 million.
Why the excitement over Akamai? In theory it could ramp profits faster than revenues, and with Internet usage continuing to vastly outpace economic growth, profits could grow rapidly. However, the promise of rapid profit growth eluded Akamai in 2009 and in 2010 until Q3.
Negative opinions of Akamai mainly come from over regard for competitors. For as long as I can remember, competitors were going to take significant business from Akamai in the next couple of years. A couple of years pass, and if anything Akamai has gained market share. Akamai seems to know how to maintain its market advantage without blowing too much money on R&D.
I would not buy Akamai at this price, but then I already own a reasonable amount. There is certainly an argument that this price will look cheap in a couple of years, maybe even by mid 2011. For a much more detailed look, see my Akamai Analyst Call Q3 2010 summary.
See also www.akamai.com
Wednesday, October 27, 2010
Biogen Idec is my favorite type of stock: a growth and value proposition, with just enough danger to keep me on my toes and keep the risk-adverse (apparently just about everyone right now) away. I own Biogen stock.
Right now Biogen has three big money makers: Avonex, Tysabri, and Rituxan. Avonex and Tysabri are both for multiple sclerosis (MS). In total they generated $847 million in revenue in the quarter. They face twin dangers: the JC virus (JCV), which causes PML, and newer therapies, most notably Gilenya. Can Biogen continue to grow profits while waiting for its future therapies to bear fruit? If so, it is vastly undervalued, because it has a trailing P/E ratio today of about 13. Seen as a growth stock it should climb not just because of climbing earnings per share (EPS), but because the P/E ratio should climb to closer to 25 to 30.
A cure for JCV is not on the horizon, but for its MS patients, what Biogen needs is to be able to screen for the presense of the virus. Tysabri sales have been impacted by JCV, which is usually harmless unless the immune system is compromised. Since MS is a disease in which the immune system attacks the nervous system, cures for it involve suppressing the immune system. In (very approximately) about 1 in 1000 patients receiving Tysabri, JCV gets out of control, which can lead to PML and death. After withdrawing Tysabri from the market when this was originally discovered, it is now back on the market and patients must be monitored for symptoms of PML.
Trials have now showed that about half of MS patients do not harbor JCV, so they should be able to take Tysabri with minimal danger. As to the half that do harbor JCV, it would appear that they now have a 2 in 1000 chance of developing PML. Given how effective Tysabri is for MS, the likely scenario is that after the FDA approves Biogen's screening test for JCV, they will lose some JCV positive patients, but gain a lot more JCV negative patients. That could happen in 2011, but timing is up to the FDA and its equivalent international bodies.
The other threat is oral MS therapies, which are far more convenient for patients and doctors than the current infused therapies like Avonex and Tysabri. The first approved is Gilenya. Biogen claims data shows Tysabri is more effective than Gilenya, so the new drug will go mostly to patients with early, mild MS. But you never no what will happen in the marketplace. Biogen management did not say so, but sadly in the marketplace physicians can charge more for infusions than they can for writing prescriptions for oral therapies.
What I think is going to happen is that Gilenya will cut into the MS pie, but Avonex and Tysabri will continue to be widely prescribed. Patients often rotate therapies, changing them as their disease progresses. Also note that Avonex and Tysabri are still being introduced in many nations, so international sales increases should more than make up for any erosion in the U.S. market.
So for the next few years Biogen's cash from operations, $420 million in Q3 alone, is reasonably assured. Not every therapy in the Biogen pipeline will win FDA approval or become a blockbuster. But so many therapies are in the pipeline that already have good Phase I or Phase II data, I am reasonably confident that in 5 years Biogen will be a much larger company. Risks there are, as I have indicated; don't ignore them, spread them out.
Q3 2010 Biogen Idec analyst call summary including questions from analysts
Biogen Idec Hemophilia Therapies
Gilenya, Biogen Idec, and MS
Sunday, October 24, 2010
Hepsera revenues in the latest quarter were $47.5 million, which is a nice chunk of money, but only 2.4% of the $1.94 billion in total revenues for the quarter. Tamiflu revenues (in the form of royalties from ) expand and contract with the flu season and perceptions of flu virulance; in Q3 they were $34.5 million, or 1.8% of total revenue.
Viread, though, is a much bigger deal. Quarter revenues for straight, one-pill Viread prescriptions were $184.3 million, or 9.5% of total revenue. In addition, Viread is one of three ingredients in Atripla, which brought in $605.3 million. It is also one of the two ingredients in Truvada, which brought in $669 million. So keeping in mind that all patents expire eventually, and every pharmaceutical and biotechnology company has these issues, I will focus on Viread.
Viread is the tradename of Tenofovir, a reverse transcriptase inhibitor, one of several classes of HIV drugs. Viread was approved by the FDA on October 26, 2001, so it has only been available to patients for 9 years. Since 2008 it has also been approved for treatment of chronic Hepatitis B. In the U.S. its patent expires in, but overseas patent laws and expiration dates vary on a per-country basis. Here is a table of Gilead's patent expirations from its 10-K filed with the SEC on March 1, 2010:
U.S. Patent Expiration
European Patent Expiration
|2014||2011 (with SPC to 2016)|
|2021||2021 (applciation pending)|
Note that Viread patent expiration is seven years away, Truvada and Atripla are 11 years away in the U.S.
It should be noted that the most significant rival for anti-viral products, a joint venture of GlaxoSmithKline and Pfizer, had its patent of Epivir (lamivudine) expired in May 2010. Generic competitors not only hurt Glaxo/Pfizer, but could hurt Gilead's sales. Generics, however, have tended to be used in poorer countries and in earlier stages of HIV infection; they just are not as effective as the newer drugs.
While HIV and hepatitis drugs have greatly improved over the past 30 years, they remain far from perfect. HIV is prone to mutation. Cocktails of drugs are more effective than single drugs, but effects vary by the mix of HIV strains in patients.
Gilead's Atripla is the current status symbol of the war on HIV. Revenues for Q3 grew 23% year over year. Nevertheless, Gilead is trying a number of combinations (including newer drugs with components whose patents will expire beyond 2021), with good results in clinical trials so far. The most promising is the Quad regimen of elvitegravir, cobicistat, tenofovir and emtricitabine, which has completed a Phase II trial; it could complete a Phase III trial by the end of 2011.
Gilead spent $230 million for research and development in Q3. It ended with a cash balance of $5 billion. It is in a good position to acquire further drug candidates or even entire companies that it thinks could add to profits down the road.
Expiring patents should be taken into account, but the first important expiration for Gilead is in 2017. The existence of generics seldom means sales of trademarked drugs drop to zero. It can still use Viread as an ingredient in its combination therapies even after that. New therapies will be ramping revenues well before 2017.
Given that Gilead's non-GAAP trailing Price to Earnings ratio ended Friday at 10.7, for returns of 9.3% per year, I think the stock is a big old buy at this price, especially for investors who are beginning to see the down side of being 100% in low-interest bonds.
The ongoing stock buy-back is just a bonus for shareholders. It keeps pushing up the returns per share of the remaining stock.
For a detailed report on Q3 results see my Gilead Sciences Analyst Conference Call Q3 2010 summary.
But as always, keep diversified!
Sunday, October 17, 2010
This is just to let you know I posted my summary of the AMD Q3 analyst conference call. AMD's profit margin was better than expected, but the real question is how their new processors will do in 2011.
Also, in my more general interest blog, I posted a very serious essay that should be of interest to investors, economists, and policy makers: Save America, Sell Alaska.
Coming up this week: Intuitive Surgical (ISRG) and Gilead Sciences (GILD) report Q3 2001 results on Tuesday after the market closes. As usual I'll be posting summaries of the analyst conference calls. For a list of the companies I cover and the dates they hold their conferences see my Openicon Analyst Conferences Covered page.
Thursday, October 14, 2010
Revenue was $69.8 million, up 5% sequentially from $66.6 million in Q3, and up 4.5% from $66.8 million year-earlier. Net income was $4.6 million, up 7% sequentially from $4.3 million in Q3, and up 7% from $4.3 million year-earlier. EPS (earnings per share) were $0.27, up 8% sequentially from $0.25 in Q3, and up 4% from $0.26 year-earlier.
Gains in its endoscopy sterilization business and in water purification led to the record revenue. Disposables and services were off y/y because of the mask issue. The dialysis segment was also down, but this was due to purposefully dropping certain low margin items, resulting in a better profit margin.
In good news for American workers, the recently announced acquisition of the American water sterilization business of Gambro means that jobs will be moved to the U.S. from Sweden and be integrated with Cantel's manufacturing operations in the United States. The year prior to the acquisition this business generated revenues of $14 million. It will be added to Cantel's Mar Cor Purification subsidiary.
Disinfection and sterilization are major trends in the U.S. healthcare market. The increasing number of seniors, the problem of disease transmitted in hospitals, and the globalization of infections are all pushing volume and the need for quality improvement in these markets.
Cantel has increased its mask manufacturing capacity to be better able to cope with the next airborne infection epidemic.
Following the Gambro deal, Cantel has about $23 million in cash but $33 million in debt. Cash generation in Q4 was $11.6 million. Cantel has arranged for credit for further acquisitions. As long as they don't overpay for the acquisitions, with interest rates low this is a good expansion strategy.
Internal development is also robust. R&D expense in the quarter was $1.4 million, but the plan is to increase R&D. Revenues from new products could begin in 2011 and ramp in 2012. Compared to biotechnology companies, where R&D spend is much heavier and the risk of failure is high, this is a great model.
I see Cantel Medical as a company with excellent management and, at today's prices anyway, a good value for buyers. If you can buy now with a long term (minimum 1 year) investment view, you have a fairly safe outlook with likely healthy gains in revenues and profits. Of course there are the usual risks: failure of the FDA to approve an innovation and competition from other companies.
My own strategy is to accumulate Cantel over time, depending on its value relative to other opportunities. I have watched Cantel Medical (CMN) since 2008 and first bought stock in December of 2009. I have listened to a couple of prior analyst conference calls, and posted a summary for the Cantel Medical Q4 2010 call.
Cantel Medical Corporation
Wednesday, October 6, 2010
When Marvell's stock price began to slump yesterday (it closed Monday at $17.21, closed Tuesday at $16.89, down almost 2%), on a day the rest of the market was booming upward, I figured it was because of concerns about the hard disk drive (HDD) business. Reports from the field are that notebook sales are off, as 2 million consumers a month buy iPad tablets instead of refreshing their older notebooks. Less notebook computers means less hard drives, and PC sales in general have not been robust so far this year.
But no, a rumor was floating around, apparently originating with a noted Wall Street analyst, Ashok Kumar of Rodman & Renshaw, that RIM had dumped MRVL for TI for its processor for the PlayBook tablet computer. The rumor made some sense but had some obvious problems too. All stories I found on the net had the same origin, but many managed to deviate from the original, one even calling the RIM PlayBook the BlackPad (RIM is best known for its BlackBerry devices).
Executives of listed corporations are not supposed to give individual analysts market moving news. They are supposed to give all analysts and investors any market-moving news at the same time, usually by a press release or a public conference call. But analysts do all kinds of things to try to figure out what is going to happen before it is announced. I know I do. When I heard the RIM PlayBook announced, I looked to see who made the processor. No answer, but it was an ARM-based processor. As a Marvell investor I hoped my company would have a win, and many other commentators thought that was a good guess.
But RIM and their partners kept the design a secret, so in fact no one should have assumed Marvell won design-in. There are lots of uber-competent ARM-based processor makers to choose from.
So far there has been no confirmation from Marvell, RIM, or TI of the story. Which means it may not be true. Analysts like to have sources in or near companies. We like to ask questions to one company that will give us insight into the financial future of other companies. TI may very well have a design win at RIM, but it may not have ever been a socket Marvell had already won.
Let's look at the rumor as stated. The PlayBook release has been delayed; that much is known true. That would mean there are development problems. Kumar is alleged to have said the QNX OS for the device had problems, and the Marvell Armada chip for the device had bugs.
Let's see, Marvell chips work fine on BlackBerry phones already, and they work fine on Android phones. So was this a new, as yet untested chip that was buggy? Or was it just hard to integrate with the new QNX OS system? That is a classic engineering problem, with the software guys blaming hardware, and the hardware guys blaming software. If there was a Marvell chip screw up, was it really the chip, or was the incompetence on the RIM team? And why would a TI chip, also based on the same ARM design, work right off with QNX? Is it easier to fix known, discovered bugs, or to start over with a new chip? Usually, it is easier to fix the known bugs. And usually you don't change the processor, because that would require a lot more work than changing the OS to work around the processor's capabilities.
One way a possibly partly true, but obviously flawed, rumor can happen is through the third party. TI guy says to a friend, we got a RIM contract! Friend digs deeper, just a purely tech conversation, and speculation is RIM had some problem with QNX, and Marvell was the team to beat. By the time Friend, who is a regular supplier of tech information, talks to Kumar, the story makes sense, but may not be factually based. Kumar tries to verify the story, but if RIM, TI, or MRVL tells him, they are violating confidentiality contracts and SEC rules, so they don't comment. Kumar goes with his story. If he's right, he's a genius. If he is wrong, the squirrels will forget it soon enough.
At some point an official announcement may be made. Other than that, I'll have to wait until one of my friends gets a PlayBook and pops it open to see what chips are inside.
My Marvell Technology (MRVL) page
Marvell fiscal Q2 2010 results release
Monday, October 4, 2010
Economics got its modern thrust largely from Adam Smith's Wealth of Nations, published in 1776, and still probably the best single book on econmics ever written. Carl Marx shocked the political and economic world with his mid-18th century Labor Theory of Value in which he noted that all productive economic activity involved human labor. If one allowed that all human time spent in productive work was of roughly equal value (or took into account qualitative differences in individual efforts, and used the average as a standard hour of labor), one could see that anything from a bushel of corn to a railway locomotive could be seen to have embodied in it some number of hours of human labor.
The labor theory of value is interesting, but has had limited use. More recently there have been numerous descriptions of how economic activity can be measured in terms other than money. One of the most commonly cited lately is energy. How much energy is used to cool a house, grow a head of lettuce, serve up a Facebook page? Popular press articles act as if these quantities are simple to calculate. But they are not.
Taking one example, measuring the energy required to cool one house on one hot summer day seems easy enough. You just put a meter on the outlet leading to the air conditioner. But what about the cost of the air conditioner? Why, its money cost should be depreciated over the life of the machine, and the energy costs of producing the machine accounted for in a similar manner. And what of the house itself? Should we depreciate the insulation? The roof? The cost of the foundation, or the power lines, or the road to the house?
I say, why bother with all that. If energy really is the secret currency of our time, it should show up more or less accurately in all pricing. The price of something corresponds pretty well to the energy that went into the something. A Prius actually wastes a lot more energy than a Ford Focus, because the initial price shows how much more energy was needed to produce the Prius. Better gas economy over the lifetime of the car won't compensate for the intial energy cost differential.
The cost of air conditioning in dollars, and depreciating the cost of the air conditioner itself, captures energy units used almost as well as more detailed systems.
There are many items besides energy that go into everything. Research and development expense is an interesting universal. Look around you: everything has been improved by research and development. Gas motors and electric motors, the bread from the wheat produced by scientific farming, the special machines of bread baking factories. Even when inventions are ancient, like paper making, smelting metal, and cloth production, R&D has been at work making improvements in what we actually use or how it is produced. Generally speaking, modern goods are created with less labor and more capital investment, thus upending much of the thinking that went into the labor theory of value.
The almost total interconnectedness of almost all things used by today's humans has become the fundamental reality of this era. Almost anything can be used to measure the cost of all other things, if you want to. Tantalum metal for capacitors, which are used in communications and information processing, which are used in all production and distribution of goods. Corn itself, which is used to grow new human beings as well as food animals. Nitrogen-based fertiliser, without which everything, and I mean everything, would collapse in two years. Water. Coffee. Antibiotics. Plastic. Education. Even Law, medical services, or accounting.
In this column I mainly write about individual technology companies and their prospects for future growth. We have seen in the recent global economic downturn how financial prospects are interwoven, and how good people and companies can be hurt when bad practices (predatory lending and credit bubbles, for instance) undermine the rest of the production system.
It would do well to keep in mind that the cost of anything is everything. If I buy a new car (I am at that point), it seems to be a discrete thing, bought in a discrete transaction. But any new car contains parts made by hundreds of companies. The employees who make the car and its parts consume goods made by hundreds of companies. The engineers who designed the car based their efforts on hundreds of years of earlier science, technology and engineering. The option of buying a car would not be available to me if it were not for a complex global network of people and things.
The system of production also produces negative side effects that society is slow to deal with. Air and water polution, crime of many sorts, even war. Everything we buy, and every service we consume, could be measured in terms of these negative valuations as well.
The cost of anything, of any particular thing, is everything. That is just the nature of society. We can make individual adjustments to the mix. That is what humans do when we make the choices in our lives.
Thursday, September 30, 2010
Hemophilia (alt spelling: haemophilia), the chronic inability of the blood to clot, is a rare, but no extremely rare, disease: under 20,000 people have it in the United States. It is typically caused by a defect in one of two blood clotting proteins: coagulation factor VIII in hemophilia A or factor IX in hemophilia B.
Managing hemophilia usually involves infusing the clotting factor into the blood. This can be done when there is an incident that would cause bleeding, or it can be done on a regular basis as a prophylactic. Over time most U.S. patients have moved towards prophylactic use of either natural or recombinant factors. However, the clotting factors have a lifetime of only a few days in the blood. So for hemophilia A, the most common type, infusions are typically done three times a week or every other day. For hemophilia B, two to three times a week is typical.
A variety of pharmaceutical and biotechnology players have sought to extend the life of coagulation factors in the blood. Biogen appears to be on track to be the first company to deliver such a therapy. The initial development was done by Syntonix, which Biogen acquired in 2007. The long-acting factors were created by fusing a recombinant factor of each type with Fc antibody fragments. The rFactor binds to cells that line the blood vessels, but can be re-released back into circulation without being degraded.
Long Acting rFactor IX for hemophilia B is has started a Phase 3 trial after having been shown to be safe and effective in Phase 2. As always, Phase 3 trials involve far more patients than Phase 2 trials, so issues can arise that are unforeseen. That said, given that other Fc-fusion therapies have been safe and recombinant factors are safe, the prospects are pretty good.
Long Acting rFactor VIII for hemophilia A, the more common type, has completed a Phase 2 trial. While the data has not been released, it is good enough that management is preparing for a Phase 3 trial.
If the Phase III trials are successful, it is likely patients can be treated just once a week or so. That would be a tremendous benefit to patients who must being infused as babies and continue the process for their entire lives. It would likely encourage more patients to use therapy prophylacticly.
Current therapy is rather expensive (see hemophilia financial issues), another reason some patients do not dose regularly. I don't know how Biogen will initially price their version, but costs could be reduced in the long run because of the less frequent dosing needed.
For investors, gaining FDA approval for long-acting hemophilia therapy would be an obvious plus and might help overcome doubts due to possible upcoming MS competition from Novartis's Gilenya (fingolimod).
my Biogen Idec Medical Analyst Conference Call summaries
Biogen Idec Hemophilia site
Wednesday, September 29, 2010
Hansen has been selling its Sensei robots, but in low volume. The price does cover their direct production costs, but it has not covered administrative overhead or ongoing research and development costs. As a result, Hansen ran through its cash from its 2006 IPO and then had to sell more stock. Dilution is one factor that has hurt the stock price. But mainly in 2008 investors became risk-adverse. It seems unlikely in the current climate that anyone is going to bid as if HNSN is the next ISRG until it starts selling more robots and shows a profit. That would be in 2011 at the earliest.
The technology is great, but currently is mainly used for electrophysiology, which is measuring the nerve impulses in malfunctioning hearts. The next step would be using the catheter to "ablate" or kill some nervous tissue to fix atrial fibrillation. The treatment was approved in Europe this July, with commercial shipments due in Q4 2010. It is not yet approved by the FDA for use in the U.S. [see FDA Conditional IDE Approval for Evaluating Sensei X Robotic Catheter System for Treatment of Atrial Fibrillation, 5/12/10]
I believe there is a lot of value to be unlocked in Hansen, but to get there will require at least three steps. Hospitals need to be sold more Sensei systems for electrophysiology, and doctors need to use those that are installed more (the catheter part of the robot is used only once). Then treating atrial fibrillation has to become common (same robot, different catheter), which should mean more systems sold.
A much bigger market for the robots, and one requiring another specialized catheter, is vascular surgery. Experiments are being done for this application, but it may take years to get it to market.
Bigger medical technology companies are very interested in Hansen's technology. It has partnerships with St. Jude Medical, GE Healthcare, and Philips Healthcare, which are all coordinating their imaging technologies with Hansen Sensei robots.
Until sales pick up Hansen will continue to show quarterly losses and run through its cash. It conceivably could need to sell more stock to support its R&D efforts. So anyone buying the stock now should be prepared to be patient (unless there is a merger offer). The usual risks apply: another company could create a better catheter robot, the FDA or European agency might cause further delays or refuse to approve new applications for the robot, or hospitals could decide the advantages of the robots are not worth the capital investment needed.
I think it is a good bet, particularly at this price. While trading is liquid on a daily basis, Q3 results (not due until early November) could have a big impact. Hansen shipped only 3 robots in Q2, down from 7 in Q1. If it gets back up to 7 or higher, that would be a good sign. If it is under 4 again, that means profits are far, far away.
So keep diversified!
See also my Hansen Medical Analyst Conference Call summaries
Monday, September 27, 2010
Some pundits think Oracle may buy AMD. That makes no sense to me. Oracle may be in the market for a chip stock, but the idea would be to improve their datacenter hardware offerings, which are now based largely on Sun's old proprietary processors. AMD would bring a lot of baggage with it. The only attractive things about AMD would be its engineering teams, which are first-class, and its low price. Its market capitalization was just $4.73 billion end of today, and its non-GAAP P/E is 4.56, about as low as you can get.
Buying AMD would put Oracle in the desktop and notebook chip business, which are low-margin businesses. Oracle hates low margin business. They shut down a good part of Sun when they acquired it because margins were not high enough to please them. What Oracle needs is a smaller chip company with skills storage and networking chips as well as data processing. Marvell would be a good acquisition, but I doubt very much Marvell Technology would allow itself to be acquired. An even smaller company would make more sense.
Back to AMD, it is most likely that the stock price bounce had to do with short covering. Lots of people like to short AMD, which is the perennial loser in its competition with Intel. Intel had lowered its third quarter guidance weeks ago. In general the PC industry was known to be having a relatively slow Q3. I think the problem for the shorts was that AMD's problems were already built into the stock price. In fact, the new guidance could have been a lot worse. Then there are the Fusion products that will begin shipping in Q4 and ramp in Q1 2011. No short wants to be around to see what happens then.
When AMD's price rose after the announcements, the shorts had nowhere to go. They had to cover their bad bets. Momentum players jumped in too, taking advantage of the distress of the shorts.
AMD's new guidance is revenue for Q3 "in the range of down one to four percent as compared to revenue of $1.65 billion for the quarter ended June 26, 2010." What investors should be looking for when AMD actually reports Q3 numbers on October 14 is margins. Did they at least get good prices for the CPUs and GPUs they sold? After that, look at guidance for the release of Fusion APUs. All evidence is that they will be widely and happily adopted by OEMs that want to offer consumers better graphics capabilities than Intel can provide.
See also: Can AMD Ignite Fusion? [June 7, 2010]
AMD Q3 guidance given at Q2 analyst conference [July 15, 2010]
Note: I currently own AMD and Marvell stock, but not Intel or Oracle.
Wednesday, September 22, 2010
Biogen Idec stock has sold at depressed prices for several years now, despite the company's high level of profitability. The long-term, main reason for this is that Tysabri (natalizumab), which is the most effective MS drug ever developed, has the unfortunate effect of allowing a virus that is resident (and normally harmless) in many people's brains to become active, causing progressive multifocal leukoencephalopathy (PML), which can be fatal. All Tysabri patients are now monitored for symptoms of PML, but there is no doubt that many doctors and patients have refused the drug because of the side effect.
The problem with Tysabri, and with MS drugs in general, is that the cure involves suppressing the immune system. Therapies less effective than Tysabri are not as good at suppressing the immune system; Biogen's Avonex is an example. Other partially effective treatments for MS include corticosteroids, interferons (Avonex is one), Copaxone (which requires once-a-day injection), and Novantrone (which has harmful side-effects on the heart, and is somewhat of a last resort).
Gilenya acts by keeping lymphocytes in lymph nodes, so that they do not attack the central nervous system in MS. But that means that, like all immune system suppressors, it is likely to occasionally prevent the immune system from doing its job of controlling infections. It seems to have a side effect of inducing basal-cell carcinomas as well as opportunistic infections. "Cases of serious eye problems (macular edema) have occurred in patients taking the drug and an ophthalmologic evaluation is recommended." In trials it reduces relapses of MS by over 50%, which is a good number, but not as effective as Tysabri's.
So what Gilenya has going for it is that it can be administered orally. Tysabri is given by infusion, a less convenient method to be sure.
Meanwhile Biogen Idec has an oral MS medication, BG-12, in Phase III trials. Data should be out in 2011. BG-12 Phase II data was reported in terms of decreasing lesions caused by MS, also stating that relapse rates decreased, and frequency of infection was low. It should be noted, however, that short-term studies have typically underestimated the effects of long-term immune system repression on infection rates and mortality.
Since BG-12 has a novel mechanism of action, which "defends against oxidative-stress induced neuronal death, protects the blood-brain barrier, and supports maintenance of myelin integrity," if it has good phase III results and is approved by the FDA, there will be reason for prescribing it apart from its oral administration.
For investors, in short today's reaction to the FDA approval of Gilenya is overblown. Biogen sells at a very attractive P/E. Biogen Idec's strong pipeline of potential therapies promise to expand its overall market share over time.
At this point, however, I would suggest that given its profitability, Biogen Idec should pay a dividend. I own Biogen (BIIB) stock and believe paying a dividend would compensate for the low P/E ratio while waiting to see if I am right that revenues and profits will indeed continue to ramp nicely in 2011 and 2012.
See also my Biogen Idec Analyst Conference Call summaries.
William P. Meyers
Tuesday, September 21, 2010
The economy (whether defined as the United States or as global) has an astonishing number of variables at play at any given moment. The decision makers at the Federal Reserve have considerable experience in the banking sector, but typically have little experience in manufacturing or, for instance, in the black market economy (which is mainly services performed by individuals who do not report their income to the government). Their collective record for steering the economy in the past two decades is dreadful; if they were drivers, they would have had their licenses taken away.
The history of the United States, and other nations, is replete with instances of false booms based on excessive credit and speculation. Real economic growth does require a degree of credit, but it is mainly based on savings and profits that are then redirected to new growth opportunities. Americans are now saving, which is good. They should save considerably more, but in aggregate won't be able to until employment returns to "normal" levels. Judging from price-to-earnings (P/E) ratios, American businesses are generating profits and mostly don't need much in the way of credit to keep up a modest pace of expansion.
Today's Federal Reserve statement (September 21, 2010) gives the impression that the economy is still growing, but at a slower pace than earlier in the year. Of course. Aside from the inventory restocking bounce that always follows a recession, we had a lot of reluctance to anticipate growing demand because of the "double dip" howling of the wolfpack. But there was no double dip, not even during the Euro freeze.
Growth is growth, and it will speed up and slow down from month to month and sector to sector. What the Federal Reserve won't admit is that its zero-interest rate policy is not doing much more for the economy than, say, a 2% interest rate policy would do. It is helping the banks (recall that the Fed does not represent the people, but is all too much like a bank collusion mechanism), but they aren't lending much. When they do lend, it is often on credit cards at ridiculously high interest rates. Which at least encourage consumers to save rather than spend.
The fed could easily start raising interest rates now, showing some confidence, and normalising the situation. At 0.25% today, maybe 0.5% after the holidays, working towards whatever is appropriate by the end of 2011, probably at least 2%. If the recovery is slower than I expect, rates should still go up gradually to at least 1.5%, which is very, very accomodative.
The Federal Reserve can't make a recovery. That will be built by the people themselves, as it always has been. There is a lot of work that needs doing, notably repairing millions of homes that have been damaged by thieves and neglect during the past 3 years. Schools are overcrowded due to teacher layoffs. American services and manufacturing are becoming more competitive with China because of rapidly increasing wages in China. This does require capital as well as person-power; the banks could play a part.
We know what the banks will do. When it stops raining, they will start handing out their supply of umbrellas.
Today's Federal Reserve decision to leave interest rates near 0% may be politically popular, and popular with Wall Street banks, but it is not a responsible decision given the data available.