Friday, October 29, 2010

Akamai Q3 2010 Analyst Conference Call

Akamai (AKAM), which provides accelerated Internet services to enterprises, showed some of its promise in Q3. Akamai's trailing P/E is still pretty pricy by my standards, but then I bought AKAM back during the recession when its PE was much more reasonable.

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

Wednesday, October 27, 2010

Biogen Idec (BIIB) Deals with JCV

Biogen Idec (BIIB) reported Q3 numbers and held its analyst conference call Tuesday, October 26, 2010. Despite some headwinds revenues rose 5% from Q3 2009. A lot of the value in Biogen lies in the future, in the big, fat Biogen therapy pipeline.

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.

See also:

Q3 2010 Biogen Idec analyst call summary including questions from analysts
Biogen Idec Hemophilia Therapies
Gilenya, Biogen Idec, and MS

Keep diversified!

Sunday, October 24, 2010

Gilead Sciences Rebuilds Optimism for Pipeline

Biotechnology leader Gilead Sciences (GILD) had a good bounce after it reported third quarter earnings on Tuesday, October 19th. Earlier in the year the stock price had slumped on concerns about expiring Gilead patents. HIV therapy Viread, Hepatitis B treatment Hepsera, and Tamiflu for flu all have patents expiring this decade. Was the stock boost because of good sales in the quarter, a renewed stock buy back plan, or because analysts' concerns about replacement income sources for expiring patents were allayed?

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


2010 2012


2014 2011 (with SPC to 2016)


2015 2015


2016 2008


2016 2016


2017 2017


2017 2018


2019 2019




2021 2016


2021 2018


2021 2018


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

AMD, national debt, analyst conference calls update

No, there is no connection between microprocessor design company AMD and the national debt.

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

Cantel Medical (CMN) Growth Plans

Cantel Medical is one of the few companies with a focus exclusively on infection control. Last year it had a banner fiscal Q4, ending July 31, 2009, because the H1N1 flu scare created a run on its line of disposable face masks. Despite that, Cantel management reported revenue and earnings growth for its latest Q4 ending July 31, 2010 at its analyst conference call yesterday.

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.

More data:

Cantel Medical Corporation

Wednesday, October 6, 2010

Marvell Rumors: Hard Drives, RIM PlayBook

If you own a hard drive, odds are better than even that it has a Marvell Technology Group chip running it. In fact Marvell is a key supplier of many semiconductor devices that go into cell phones, wireless and hardwired networking equipment, and printers.

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.

More data:

Marvell site

My Marvell Technology (MRVL) page

Marvell fiscal Q2 2010 results release

Monday, October 4, 2010

The Cost of Anything is Everything

Money was the first universal standard of value. While even today there is not yet a universal unit of money, the art of trading the coins of different nations at some fair exchange rate is well recorded in some of mankind's earliest documents.

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.