Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and other devices. They have long dominated the HDD market, but have struggled in the smartphone market. In their second quarter of fiscal 2011 (Q2), ending July 30th, we probably saw an inflection point for smartphones based on Marvell chips. This space should be closely watched in Q3 and Q4.
Marvell's stock price is still at bargain levels, at about 10x non-GAAP trailing earnings. Partly this is due to macroeconomic fears affecting the entire market, but more particularly Marvell fell off a recent 52-week high of $21.89 on January 18 due to poor results in Q4 of 2010 and Q1 of 2011, when revenues fell to $802 million, which was down 6% y/y. A few weeks ago it hit $11.94; Friday it closed at $12.89.
That period of weakness was partly due to slower than expected sales of chips for hard drives (HDD) and networking, but most visibly was due to slow sales of chips for RIM's Blackberries. Given that Marvell execs have talked for years about conquering the smartphone market as they once conquered the HDD market, this led many analysts to conclude that Marvell was simply out of the race to provide CPUs for smartphones.
The smartphone chip market is certainly extremely competitive, perhaps the most competitive semiconductor segment today. Marvell has been competing in the U.S. against the likes of Qualcomm (leader in CDMA technology), nVIDIA, Texas Instruments, Samsung, and Apple, which makes its own ARM-based phone CPUs. They have spent years and vast sums of money on R&D, essentially subsiding smartphone chip development with profits from their HDD chips. In the U.S. smartphone market, except for being in a couple of BlackBerry designs and sometimes supplying non-CPU chips for phones (for Bluetooth and Wi-Fi), they have been an also-ran.
Meanwhile, Marvell produced the only one-chip solution for the Chinese communication standard called TD-SCDMA. China Mobile, the largest Chinese wireless company (600 million customers), invested vast sums to develop a TD-SCDMA network, now in place in most Chinese cities. Marvell has worked closely with Chinese companies on this project, bringing about 1000 engineers to the table. Also called OPhones, these smartphones run software on top of Android. Marvell is now referring to them as TD phones. The first generation of TD phones, released in 2010, were expensive and did not sell in large numbers. Essentially they tested the system.
Q2 2011 was when TD smartphones first shipped in sufficient numbers to be meaningful for Marvell investors. Over 20 models are available from manufacturers like ZTE, Motorola, Huawei, and Samsung. TD smartphone revenue roughly doubled in Q2, causing Marvell's wireless segment revenues to increase 18% in the quarter. For Q3 double digit revenue growth for TD smartphone chips is the expectation. Marvell is also sampling solutions for the LTE smartphone market in China. Again, expect fierce competition, but Marvell should win a share of Chinese LTE slots in 2012.
Meanwhile HDD revenue may be sluggish due to the slow PC growth rate, but it generates a lot of cash. Cash flow from operations in Q2 was $263 million. Free cash flow was $235 million. Cash and equivalents balance ended at $2.40 billion, up sequentially from $2.27 billion. Marvell repurchased $136 million, or 9 million shares, in the quarter and has authorized $1.5 billion for further repurchases.
The best cure for the low stock price, to my ears, was hearing that one use for cash could be starting to pay dividends. Compare Marvell's PE ratio to a semiconductor company like Microchip (MCHP) that does pay dividends, and you can see that semiconductor investors are more interested in dividends than they were a few years ago. However, it would be a big change for Marvell, so don't count on it.
Disclaimer: I am a long-term investor in Marvell stock
See also:
http://www.marvell.com/
My August 18, 2011 Marvell (MRVL) analyst call summary
My May 26, 2011 Marvell (MRVL) analyst call summary
My March 2011 Marvell (MRVL) analyst call summary
Keep diversified!
Sunday, August 28, 2011
Monday, August 22, 2011
SGI Sees Revenue Growth in 2012
Silicon Graphics International (SGI) sells data processing systems with a focus on technical computing. Their high-end systems are used to solve some of the toughest computational problems encountered by government and industry. They also provide datacenter equipment for cloud computing to companies like Amazon.
The new SGI is basically a combination of the old Rackable Systems, which specialized in datacenter server systems, and the old, bankrupt SGI, which specialized in high-performance science computing. I had my doubts when the two companies merged, but the new company turned out to be better at executing than either of the old companies.
The transformation of SGI is about technology, sales, and profit margins. In last Thursday's report on fiscal Q4 2011 (ending June 24) we saw record revenues for the typically slow Q4. Revenues were $195.5 million, up 36% sequentially from $143.7 million and up 92% from $101.6 million year-earlier. While GAAP net income was negative $12.1 million, non-GAAP net income was $3.9 million. Of course I would prefer to see GAAP net income in the black too. In this case the difference is largely due to non-cash operating expenses, restructuring, and software revenue recognition rules (because the computer systems have software bundled with the hardware). As a check on the merits of GAAP vs. non-GAAP, the cash balance was up $9.4 million in the quarter.
SGI is debt-free and had a cash and equivalents balance of $143 million at quarter's end. They can fund a strong R&D effort and could make acquisitions if needed.
The new Altix UV supercomputer line has no real direct competitors. It has a memory and processor model that make it very attractive to high-end technical users. Because of that profit margins are good. The rackable systems for server farms and cloud computing continue to offer innovative designs, but margins have been improved there as well.
The company is now truly international, which is important when your key products are supercomputers. Service revenue is also a key factor in the new, profitable business model.
In response to questions from analysts management went into some detail, and speculation, about technologies they are developing. They are working with Microsoft to expand the capabilities of SQL Server. They believe that for certain types of computing they will be able to deliver performance equivalent to Oracle's Exadata systems at about one-third of Oracle's current price. Considering how successful Exadata has been, both in terms of compute ability and revenue generation, that could be highly significant in 2012.
Analysts also speculated that with budgets thin, SGI might have difficulty selling its computers to government agencies. However, SGI has little or no exposure to state and local governments in the U.S. Federal agencies still seem eager to decrease their other costs by upgrading their compute capabilities. For industry, the total cost of the design process is decreased by buying more computational power.
While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.
For more details on quarter results, see my SGI Q4 fiscal 2011 analyst call summary.
Disclaimer: I am long SGI.
The usual risks apply, so keep diversified.
See also: http://www.sgi.com/
The new SGI is basically a combination of the old Rackable Systems, which specialized in datacenter server systems, and the old, bankrupt SGI, which specialized in high-performance science computing. I had my doubts when the two companies merged, but the new company turned out to be better at executing than either of the old companies.
The transformation of SGI is about technology, sales, and profit margins. In last Thursday's report on fiscal Q4 2011 (ending June 24) we saw record revenues for the typically slow Q4. Revenues were $195.5 million, up 36% sequentially from $143.7 million and up 92% from $101.6 million year-earlier. While GAAP net income was negative $12.1 million, non-GAAP net income was $3.9 million. Of course I would prefer to see GAAP net income in the black too. In this case the difference is largely due to non-cash operating expenses, restructuring, and software revenue recognition rules (because the computer systems have software bundled with the hardware). As a check on the merits of GAAP vs. non-GAAP, the cash balance was up $9.4 million in the quarter.
SGI is debt-free and had a cash and equivalents balance of $143 million at quarter's end. They can fund a strong R&D effort and could make acquisitions if needed.
The new Altix UV supercomputer line has no real direct competitors. It has a memory and processor model that make it very attractive to high-end technical users. Because of that profit margins are good. The rackable systems for server farms and cloud computing continue to offer innovative designs, but margins have been improved there as well.
The company is now truly international, which is important when your key products are supercomputers. Service revenue is also a key factor in the new, profitable business model.
In response to questions from analysts management went into some detail, and speculation, about technologies they are developing. They are working with Microsoft to expand the capabilities of SQL Server. They believe that for certain types of computing they will be able to deliver performance equivalent to Oracle's Exadata systems at about one-third of Oracle's current price. Considering how successful Exadata has been, both in terms of compute ability and revenue generation, that could be highly significant in 2012.
Analysts also speculated that with budgets thin, SGI might have difficulty selling its computers to government agencies. However, SGI has little or no exposure to state and local governments in the U.S. Federal agencies still seem eager to decrease their other costs by upgrading their compute capabilities. For industry, the total cost of the design process is decreased by buying more computational power.
While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.
For more details on quarter results, see my SGI Q4 fiscal 2011 analyst call summary.
Disclaimer: I am long SGI.
The usual risks apply, so keep diversified.
See also: http://www.sgi.com/
Wednesday, August 17, 2011
Onyx Pharmaceuticals Readies Carfilzomib
I learned about the Biotech Disappointment Curve from watching Onyx Pharmaceuticals. I started following Onyx (Nasdaq: ONXX) in 2005 and first bought stock in 2008. Often new biotechs run up large market capitalizations when they have their first positive Phase II or Phase III data in. After FDA approval, however, investors sometimes start looking at a company differently. They want to see market caps based on earnings, not on future expectations. We recently saw the down side of this curve again when Dendreon announced that its ramp of Provenge had slowed in Q2 [See Dendreon Provenge Demand Questioned].
In the case of Onyx, if you look at the stock price going back a decade, the stock in 2002 was under $7 per share. The 2003 ramp was impressive, with a peak of over $48 in April of 2004. Nexavar (sorafenib) data for advanced kidney cancer was positive, and in December of 2005 the FDA approved the therapy. Then came the show-me-the-money slump, as it takes a while for a sales force to actual get traction for a cancer therapy. At the bottom of the slump, in late 2006, you could buy the stock for under $11 per share. Then in 2007 there was another ramp when Nexavar was getting approved for liver cancer. From 2008 until present Onyx stock has mainly stayed in a broad range around $30 per share.
Another factor is that Nexavar is sold by Bayer. Onyx gets a share of the profits after Bayer's expenses. But in most quarters Onyx's own operating expenses have been sufficient to wipe out the receipts from Bayer.
Bayer and Onyx have been running Nexavar through a set of clinical trials that have shown it may be effective for other forms of cancer, and to strengthen its role in liver caner. If you subtract out the research and development (R&D) costs, in most quarters Onyx would have shown a profit. Onyx has started recruiting patients for Nexavar Phase III clinical trials for breast cancer and thyroid cancer, and has Phase II trials underway in colorectal and ovarian cancer.
Fortunately Onyx Pharmaceuticals has been able to maintain a high cash balance despite the losses, end Q2 2011 at $550 million.
Given the background of success with Nexavar, tempered with losses due to R&D spend, Carfilzomib is the key to Onyx's future value. Carfilzomib is a proteasome inhibitor that had positive data for relapsed and refractory multiple myeloma in a Phase IIb trial. In fact the data was good enough that it is being submitted to the FDA for approval. At the same time two Phase III trials have been initiated.
If carfilzomib is approved by the FDA, either based on current data or after Phase III results, the nature of Onyx's model will change. Again, there is likely to be a phase of investor euphoria followed by disappointment at the time needed to ramp a new cancer therapy. It should be possible, starting in 2013, to have a vigorous R&D program to continue expanding the use of Nexavar and carfilzomib without actually throwing the bottom line into the red. If profitability comes earlier, so much the better.
Even should carfilzomib and new indications for nexavar fail, Onyx could show profits by cutting back on R&D and because it has a long ramp ahead for Nexavar for liver cancer in Asia, where the majority of global liver cancer cases occur.
Today Onyx ended with a market capitalization of $2.1 billion, at $33.52 per share. I believe that there is always risk in biotechnology stocks from competition, the need for FDA and other national medical agency approvals, and from failure to execute. However, I am a long term investor in Onyx Pharmaceutical based on the potential of Nexavar and carfilzomib. I have no plans to sell or buy ONXX in the immediate future.
Keep Diversified!
See also my notes on the Q2 2011 Onyx Pharmaceuticals analyst call.
In the case of Onyx, if you look at the stock price going back a decade, the stock in 2002 was under $7 per share. The 2003 ramp was impressive, with a peak of over $48 in April of 2004. Nexavar (sorafenib) data for advanced kidney cancer was positive, and in December of 2005 the FDA approved the therapy. Then came the show-me-the-money slump, as it takes a while for a sales force to actual get traction for a cancer therapy. At the bottom of the slump, in late 2006, you could buy the stock for under $11 per share. Then in 2007 there was another ramp when Nexavar was getting approved for liver cancer. From 2008 until present Onyx stock has mainly stayed in a broad range around $30 per share.
Another factor is that Nexavar is sold by Bayer. Onyx gets a share of the profits after Bayer's expenses. But in most quarters Onyx's own operating expenses have been sufficient to wipe out the receipts from Bayer.
Bayer and Onyx have been running Nexavar through a set of clinical trials that have shown it may be effective for other forms of cancer, and to strengthen its role in liver caner. If you subtract out the research and development (R&D) costs, in most quarters Onyx would have shown a profit. Onyx has started recruiting patients for Nexavar Phase III clinical trials for breast cancer and thyroid cancer, and has Phase II trials underway in colorectal and ovarian cancer.
Fortunately Onyx Pharmaceuticals has been able to maintain a high cash balance despite the losses, end Q2 2011 at $550 million.
Given the background of success with Nexavar, tempered with losses due to R&D spend, Carfilzomib is the key to Onyx's future value. Carfilzomib is a proteasome inhibitor that had positive data for relapsed and refractory multiple myeloma in a Phase IIb trial. In fact the data was good enough that it is being submitted to the FDA for approval. At the same time two Phase III trials have been initiated.
If carfilzomib is approved by the FDA, either based on current data or after Phase III results, the nature of Onyx's model will change. Again, there is likely to be a phase of investor euphoria followed by disappointment at the time needed to ramp a new cancer therapy. It should be possible, starting in 2013, to have a vigorous R&D program to continue expanding the use of Nexavar and carfilzomib without actually throwing the bottom line into the red. If profitability comes earlier, so much the better.
Even should carfilzomib and new indications for nexavar fail, Onyx could show profits by cutting back on R&D and because it has a long ramp ahead for Nexavar for liver cancer in Asia, where the majority of global liver cancer cases occur.
Today Onyx ended with a market capitalization of $2.1 billion, at $33.52 per share. I believe that there is always risk in biotechnology stocks from competition, the need for FDA and other national medical agency approvals, and from failure to execute. However, I am a long term investor in Onyx Pharmaceutical based on the potential of Nexavar and carfilzomib. I have no plans to sell or buy ONXX in the immediate future.
Keep Diversified!
See also my notes on the Q2 2011 Onyx Pharmaceuticals analyst call.
Thursday, August 11, 2011
TTM Technologies (TTMI) Expands to Meet Demand
TTM Technologies (TTMI) makes PCBs (printed circuit boards) for the communications, industrial, medical, and consumer electronics industries. It is a U.S. corporation, but in 2010 bought a Chinese PCB manufacturer. The U.S. facilieis generally do small runs of PCBs for prototypes and specialized, low volume products. Chinese facilities largely do larger PCB runs for computer and communications equipment, cell phones including smartphones, and more recently tablet computers.
TTM is a value plus growth proposition, but let's start with the caveats. The Chinese segment, formerly Meadville, had borrowed substantial amounts of money to buy capital equipment to serve the rapidly expanding market. TTM took over those debts. As of the latest quarter reported, long term debt was $432.3 million. On the other hand the cash and equivalents balance was $235.9 million, giving net debt of about $196 million. Cash flow from operations was $67 million, but capital equipment is still being purchased to meet demand (and replace obsolete equipment). Capital expense was $44 million. So it will take some time to pay off the debt, which fortunately carries a low interest rate.
Given the debt, a serious slowdown in demand for PCBs would set back TTM, but with so much cash on hand they should be able to get through a slow period better than most businesses, including much of their PCB competitors.
On the positive side TTM has a great model within its industry. It is one of the largest players in the world. It also specializes in the very highest end PCB technologies, the ones needed to create ever-smaller, more powerful devices. This involves, for instance, drilling holes for component connections with lasers, from computer-generated designs. Increasingly prototypes will be engineered and tested in the U.S. When production runs are large, they can be done in China. Clients like this model, and TTM is likely to pick up more clients over time.
While there are a few big players at the global scale, much of the PCB competition in the U.S. consists of much smaller businesses that can't afford to buy the capital equipment necessary to make high tech PCBs. One notable competitor at the high end in the U.S. is DDi Corporation.
In the last year, one of little growth in the U.S. economy, TTM revenues for Q2 2011were $366.1 million, up 18% from $310.2 million in the year-earlier quarter. Non-GAAP EPS was $0.40 per share. When you analyse TTM be sure to note that revenues are somewhat seasonal.
Aside from the recent general stock market turmoil, TTM had a stock price drop based on a one-time non-cash charge of $48.1 million for obsolete equipment. Also, management honestly does not know what the effect of the current macroeconomic uncertainty will be on end demand. However, if demand slacks they can stop adding capital equipment, so they have plenty of a cash flow cushion in that scenario.
I have been observing TTM's management for years now. They appear to be honest, smart, and hard-working. I take notes on their analyst conference calls, which you can find at TTM Technologies analyst call summaries. If you go back to 2008 you can see how they managed their way through the last recession.
Keep diversified!
TTM is a value plus growth proposition, but let's start with the caveats. The Chinese segment, formerly Meadville, had borrowed substantial amounts of money to buy capital equipment to serve the rapidly expanding market. TTM took over those debts. As of the latest quarter reported, long term debt was $432.3 million. On the other hand the cash and equivalents balance was $235.9 million, giving net debt of about $196 million. Cash flow from operations was $67 million, but capital equipment is still being purchased to meet demand (and replace obsolete equipment). Capital expense was $44 million. So it will take some time to pay off the debt, which fortunately carries a low interest rate.
Given the debt, a serious slowdown in demand for PCBs would set back TTM, but with so much cash on hand they should be able to get through a slow period better than most businesses, including much of their PCB competitors.
On the positive side TTM has a great model within its industry. It is one of the largest players in the world. It also specializes in the very highest end PCB technologies, the ones needed to create ever-smaller, more powerful devices. This involves, for instance, drilling holes for component connections with lasers, from computer-generated designs. Increasingly prototypes will be engineered and tested in the U.S. When production runs are large, they can be done in China. Clients like this model, and TTM is likely to pick up more clients over time.
While there are a few big players at the global scale, much of the PCB competition in the U.S. consists of much smaller businesses that can't afford to buy the capital equipment necessary to make high tech PCBs. One notable competitor at the high end in the U.S. is DDi Corporation.
In the last year, one of little growth in the U.S. economy, TTM revenues for Q2 2011were $366.1 million, up 18% from $310.2 million in the year-earlier quarter. Non-GAAP EPS was $0.40 per share. When you analyse TTM be sure to note that revenues are somewhat seasonal.
Aside from the recent general stock market turmoil, TTM had a stock price drop based on a one-time non-cash charge of $48.1 million for obsolete equipment. Also, management honestly does not know what the effect of the current macroeconomic uncertainty will be on end demand. However, if demand slacks they can stop adding capital equipment, so they have plenty of a cash flow cushion in that scenario.
I have been observing TTM's management for years now. They appear to be honest, smart, and hard-working. I take notes on their analyst conference calls, which you can find at TTM Technologies analyst call summaries. If you go back to 2008 you can see how they managed their way through the last recession.
Keep diversified!
Tuesday, August 9, 2011
Dot Hill Continues Comeback
Dot Hill (nasdaq: HILL) is a botique designer and manufacturer of data storage equipment, most of which is resold by OEMs like HP, Lenovo, and Samsung. For background on the Dot Hill story see my Dot Hill Summary page, and for the latest results, see my Dot Hill Q2 2011 analyst conference call summary.
Dot Hill had a slightly better than expected Q2, with $53.2 million, up 12% versus comparable Q2 2010 revenues excluding NetApp. Dropping the NetApp relationship has proven to be a good idea, as new customers and improved margins have more than compensated. Non-GAAP net income was $0.4 million (EPS $0.01) compared to at EPS loss of $0.06 in Q2 2010.
Dot Hill's products are getting traction because they offer mid and high range enterprise storage features at relatively low prices. Margins are improving partly more Dot Hill storage management software is being sold along with the hardware.
Dot Hill has struggled to get on a solid footing, but now that it has done that, their are several interesting possibilities ahead. If any or all work out, revenues and profits should ramp materially. The data storage industry has been consolidating. One of Dot Hill's rivals was recently bought by NetApp, which means some OEM's now are being sourced by a competitor. Dot Hill has been in talks with multiple OEMs about switching. However, this is not news, as the situation was the same three months ago. There is no guarantee that Dot Hill will pick up one or more clients from this transition. However, if it does, that would go a long way to building new revenues and profits.
Dot Hill has a large number of patents related to storage technologies and has hired an outside contractor to investige monetizing them.
Finally, the storage management software is still a new opportunity. Feedback for customers should allow for enhancements and better bundling of with hardware. Software revenues have far higher margins than hardware revenues, so that could be quite a shot in the arm to profits.
Downside risks include the usual competition, unusual events, failure to execute, and overspending.
Dot Hill is certainly worth keeping an eye on if you are intested in the booming storage space [disclaimer: I own Dot Hill stock].
See also dothill.com
Keep Diversified!
Dot Hill had a slightly better than expected Q2, with $53.2 million, up 12% versus comparable Q2 2010 revenues excluding NetApp. Dropping the NetApp relationship has proven to be a good idea, as new customers and improved margins have more than compensated. Non-GAAP net income was $0.4 million (EPS $0.01) compared to at EPS loss of $0.06 in Q2 2010.
Dot Hill's products are getting traction because they offer mid and high range enterprise storage features at relatively low prices. Margins are improving partly more Dot Hill storage management software is being sold along with the hardware.
Dot Hill has struggled to get on a solid footing, but now that it has done that, their are several interesting possibilities ahead. If any or all work out, revenues and profits should ramp materially. The data storage industry has been consolidating. One of Dot Hill's rivals was recently bought by NetApp, which means some OEM's now are being sourced by a competitor. Dot Hill has been in talks with multiple OEMs about switching. However, this is not news, as the situation was the same three months ago. There is no guarantee that Dot Hill will pick up one or more clients from this transition. However, if it does, that would go a long way to building new revenues and profits.
Dot Hill has a large number of patents related to storage technologies and has hired an outside contractor to investige monetizing them.
Finally, the storage management software is still a new opportunity. Feedback for customers should allow for enhancements and better bundling of with hardware. Software revenues have far higher margins than hardware revenues, so that could be quite a shot in the arm to profits.
Downside risks include the usual competition, unusual events, failure to execute, and overspending.
Dot Hill is certainly worth keeping an eye on if you are intested in the booming storage space [disclaimer: I own Dot Hill stock].
See also dothill.com
Keep Diversified!
Monday, August 8, 2011
Dendreon Provenge Demand Questioned
The price of Dendreon stock plunged after hours on August 3, 2011 after the company announced that revenues from its new prostate cancer treatment Provenge would be considerably less than expected during the remainder of 2011.
Prior to the release of Q2 results and the Dendreon Q2 2011 analyst conference call the main concern about Dendreon had been its ability to bring Provenge capacity online [See Dendreon Ramps up Provenge Production, July 15, 2011]. Provenge is not a drug. It is a tweaking of the patient's own blood cells to generate an immune reaction to prostate cancer cells.
Dendreon management went over the situation with analysts both in their presentation and in the question and answer session. Clearly analysts were suspicious of Dendreon's explanation for the situation.
The issue (per management) was reimbursement. There had been earlier questions about whether private insurers and Medicare would pay the $90,000 or so Dendreon charges for Provenge. That question was settled by a July 30 government ruling that as long as the prescription was "on label," reimbursement would be made. Note that was after the the second quarter ended. Rather than resolve the issue, that positive development bifurcated to two new ones. One was doctor ignorance of the new situation, the other was cash flow issues.
The claim that doctors who treat prostate cancer remain ignorant of the availability of reimbursement for Provenge strained credulity. Even before the FDA approved the therapy investors money was spent at a mad rate, typically over $100 million a quarter, to prepare to manufacture, sell, and administer Provenge. It is hard to believe that Dendreon's pretty good sized sales force could not dial up a bunch of doctors and say, "Did you hear the good news? Medicare will reimburse for Provenge as long as it is used according to the label." I assume this massive muckup should not take too long to straighten out.
The cash flow problem arises because most doctors (urologists and oncologists, in this case) were not set up to handle a situation that turned out to have novel economics. Dendreon is no more expensive than most high-end cancer therapies. However, the entire process is done in about four weeks. Most chemotherapies and newer drug-based therapies take place over a longer period of time, so the payments are broken up over a period of months.
With Dendreon, the doctor's office has to pay $90,000 to Dendreon in one month, then wait maybe two months for Medicare reimbursement. An oncologist with ten patients meeting the criteria for Provenge (asymptomatic or minimally symptomatic metastatic hormone refractory prostate cancer) would have to front $900,000 to treat all ten patients immediately. So, no surprise with hind site, many decided to treat one or two patients, then wait for reimbursement for them before treating another patient or two.
Of course Dendreon has huge cash resources, so anticipating this problem might have been able to work something out, like giving 60 days credit. Sixty days, however, is enough time to through revenues into the next quarter, causing missed predictions of mounting revenue.
So the real question analysts and investors are asking is whether this is just a delay in the revenue ramp, or whether the cash flow issue is just a cover for less demand than has been assumed in the past.
Some of the demand-is-less than expected scenarios are credible; management says they are not seeing them so far. The main threat is competition. Because of the narrowness of the label, men are only in the Provenge treatment zone for a period of time. After that they progress to symptomatic cancer, and they are off label and ineligible for reimbursement. So if a doctor and patient choose another therapy, even if just for cash flow reasons, even if that therapy fails, then the patient will have progressed beyond the Provenge label.
How will it really work? Assuming the cash flow and reimbursement ignorance issues are resolved, it is a question of who has the better sales force. Provenge has some great selling points, mainly its low toxicity. But it is more complicated to administer. Management talked about making the logistics of it easier for clinics, so they are aware of that issue, too.
My guess is that Provenge will ramp and eventually meet earlier expectations. In the meantime, however, visibility will be poor for investors. Management lost a lot of trust in the recent fiasco. The stock price will stay low until we have a quarter where revenues prove demand.
Key to further growth of Dendreon is extension of the label. There is no scientific reason I know of that Dendreon should not be helpful both earlier and later in the progression of prostate cancer. In theory all men whose disease progresses pass through the current label, but catching them earlier should lead to more good outcomes, and hence give the therapy a lift against any competition. Also, of course, getting approved in Europe and the rest of the globe should lead to a major ramp in revenue.
You can see all of my notes on Dendreon as well as links to other important data at my Dendreon main page.
This is yet another real-world proof that in addition to known risks, their are potential unknown risks, so keep diversified!
See also: Provenge Press Releases
Prior to the release of Q2 results and the Dendreon Q2 2011 analyst conference call the main concern about Dendreon had been its ability to bring Provenge capacity online [See Dendreon Ramps up Provenge Production, July 15, 2011]. Provenge is not a drug. It is a tweaking of the patient's own blood cells to generate an immune reaction to prostate cancer cells.
Dendreon management went over the situation with analysts both in their presentation and in the question and answer session. Clearly analysts were suspicious of Dendreon's explanation for the situation.
The issue (per management) was reimbursement. There had been earlier questions about whether private insurers and Medicare would pay the $90,000 or so Dendreon charges for Provenge. That question was settled by a July 30 government ruling that as long as the prescription was "on label," reimbursement would be made. Note that was after the the second quarter ended. Rather than resolve the issue, that positive development bifurcated to two new ones. One was doctor ignorance of the new situation, the other was cash flow issues.
The claim that doctors who treat prostate cancer remain ignorant of the availability of reimbursement for Provenge strained credulity. Even before the FDA approved the therapy investors money was spent at a mad rate, typically over $100 million a quarter, to prepare to manufacture, sell, and administer Provenge. It is hard to believe that Dendreon's pretty good sized sales force could not dial up a bunch of doctors and say, "Did you hear the good news? Medicare will reimburse for Provenge as long as it is used according to the label." I assume this massive muckup should not take too long to straighten out.
The cash flow problem arises because most doctors (urologists and oncologists, in this case) were not set up to handle a situation that turned out to have novel economics. Dendreon is no more expensive than most high-end cancer therapies. However, the entire process is done in about four weeks. Most chemotherapies and newer drug-based therapies take place over a longer period of time, so the payments are broken up over a period of months.
With Dendreon, the doctor's office has to pay $90,000 to Dendreon in one month, then wait maybe two months for Medicare reimbursement. An oncologist with ten patients meeting the criteria for Provenge (asymptomatic or minimally symptomatic metastatic hormone refractory prostate cancer) would have to front $900,000 to treat all ten patients immediately. So, no surprise with hind site, many decided to treat one or two patients, then wait for reimbursement for them before treating another patient or two.
Of course Dendreon has huge cash resources, so anticipating this problem might have been able to work something out, like giving 60 days credit. Sixty days, however, is enough time to through revenues into the next quarter, causing missed predictions of mounting revenue.
So the real question analysts and investors are asking is whether this is just a delay in the revenue ramp, or whether the cash flow issue is just a cover for less demand than has been assumed in the past.
Some of the demand-is-less than expected scenarios are credible; management says they are not seeing them so far. The main threat is competition. Because of the narrowness of the label, men are only in the Provenge treatment zone for a period of time. After that they progress to symptomatic cancer, and they are off label and ineligible for reimbursement. So if a doctor and patient choose another therapy, even if just for cash flow reasons, even if that therapy fails, then the patient will have progressed beyond the Provenge label.
How will it really work? Assuming the cash flow and reimbursement ignorance issues are resolved, it is a question of who has the better sales force. Provenge has some great selling points, mainly its low toxicity. But it is more complicated to administer. Management talked about making the logistics of it easier for clinics, so they are aware of that issue, too.
My guess is that Provenge will ramp and eventually meet earlier expectations. In the meantime, however, visibility will be poor for investors. Management lost a lot of trust in the recent fiasco. The stock price will stay low until we have a quarter where revenues prove demand.
Key to further growth of Dendreon is extension of the label. There is no scientific reason I know of that Dendreon should not be helpful both earlier and later in the progression of prostate cancer. In theory all men whose disease progresses pass through the current label, but catching them earlier should lead to more good outcomes, and hence give the therapy a lift against any competition. Also, of course, getting approved in Europe and the rest of the globe should lead to a major ramp in revenue.
You can see all of my notes on Dendreon as well as links to other important data at my Dendreon main page.
This is yet another real-world proof that in addition to known risks, their are potential unknown risks, so keep diversified!
See also: Provenge Press Releases
Thursday, August 4, 2011
Dendreon, Hansen Medical, Onyx Conference Calls
Yesterday I posted summaries for three analyst conferences reporting Q2 results. The most dramatic result was the swoon in Dendreon's stock price. It is a busy day, so all I can do right now is provide links to my summaries:
Dendreon (DNDN) Q2 2011 analyst conference call summary
Onyx Pharmaceutical (ONXX) Q2 2011 analyst conference call summary
Hansen Medical (HNSN) Q2 2011 analyst conference call summary
Dendreon (DNDN) Q2 2011 analyst conference call summary
Onyx Pharmaceutical (ONXX) Q2 2011 analyst conference call summary
Hansen Medical (HNSN) Q2 2011 analyst conference call summary
Tuesday, August 2, 2011
Plenty of Stimulus
I do not like the details of the debt ceiling deal signed into law by President Barack Obama today. I'll mention my reasons later. What I want to point out to investors and decision makers is that there is still plentiful stimulus in the new economic plan. Let's call it the new Two Year Plan.
The federal government, for the remainder of 2011 and 2012, is still going to create a lot of debt, which strangely is the same as creating a lot of money. Tax revenues will still be less than expenditures by over 2 trillion dollars in the next two years, unless the economy starts growing a lot faster.
Note that the Federal Reserve is keeping the interest rates it charges member banks near zero. That, in a normal recession, would be very stimulating in and of itself.
So why is the economy not growing faster?
People want simple, one variable solutions [we need more government spending, or we need less government spending, or deregulation, or ...] but in fact we are looking at a complex, multiple-variable problem.
If all those variables could be wrapped into one, I would say they relate to lack of confidence. There are many indicators of lack of confidence. One is the historically low price-to-earnings ratio in the stock market versus the historically low interest rates in the bond market. It is pretty easy to make 2 to 10 times as much return on your capital (or savings, if you prefer to think like a consumer) in the stock market today as in the bond market. Take fear out of the equation and funds would flow from bonds to stocks. Stocks would go up, and interest paid on bonds would climb as well. All investors would feel wealthier (except maybe those who were heavily in long-term bonds), and would spend more freely. That would help revive the consumer segment of the economy.
But that is easier said than done. The bond holders are the same people, in their tens of millions, who sold their stocks in 2008, at the bottom of the market, and effectively traded them for bonds. They are a fearful lot, easily stampeded.
We see a lack of confidence in bank lending practices. We see it in deferred purchasing of houses. The demand for housing is huge; interest rates and house prices are both low. But fear holds people pack.
The fear is not irrational, it is simply not analyzed. Bad things happened to a lot of people starting in 2007. Everyone who has a job today knows someone, maybe many people, who lost their jobs, homes, and even families. Almost everyone wants to minimize risk, even if that means substantially diminishing long-term opportunities (like buying houses and stocks cheap).
Sadly, the business men and women of America are hiding with the frightened steers rather than boldly leading us out of the recession. Every CEO wants the other CEOs to hire first, increasing demand, so that it will be safer to hire. Some even continue to lay off employees when they are running profitable companies, like Cisco's John Chambers, because they are not able to inspire investors with visions of future profits. Once a proud leader, John has become a harried, frightened little rabbit of a CEO.
U.S. executives, and their political mouth pieces, complain about taxes and regulations and high labor costs in the U.S. What, business was supposed to be easy? I agree that there are unnecessary regulations, but they are not what is stopping business expansion. Second rate CEOs are stopping business expansion. We still have some hard-charging leaders who can build up businesses (look at the biotechnology sector), but most contemporary CEO's are too effete to get their hands dirty doing real work.
The fact is the business climate in the U.S. and internationally is quite good now. Is anyone besides me embarrassed that a bunch of Communists in China are kicking our collective, free-market behinds? Do we want to have to admit that all our post-World War II free-market individualist posturing was not based on our outstanding individual capabilities, but on the fact that in World War II all of our competitors factories were bombed out of commission? China, at the end of World War II, had an economy they would have been ashamed of in the Middle Ages. They did not get to where they are now by slacking and refusing to deal with challenges.
What don't I like about the debt ceiling deal? I don't like the bloated military and homeland security budget, which we simply cannot afford. But mainly I don't like the fact that they could have come to the exact same decision a month ago. Congress and President Obama, Republicans and Tea Party and Democrats, basically killed economic expansion in the month of July.
The President, Congress, and other national leaders need to focus on restoring confidence. We need to reassure people that have jobs that they will keep them, and those that are looking that their search will end soon. We need for people to feel they can buy a home or replace some old appliance. We need to show the old American can-do business spirit of innovation. We also need to cooperate with each other to find solutions. We need to expand the pie, not fight over the crumbs.
There is plenty of stimulus. There is plenty of money being created. It needs to go into productive uses, not into the federal bond market.
The federal government, for the remainder of 2011 and 2012, is still going to create a lot of debt, which strangely is the same as creating a lot of money. Tax revenues will still be less than expenditures by over 2 trillion dollars in the next two years, unless the economy starts growing a lot faster.
Note that the Federal Reserve is keeping the interest rates it charges member banks near zero. That, in a normal recession, would be very stimulating in and of itself.
So why is the economy not growing faster?
People want simple, one variable solutions [we need more government spending, or we need less government spending, or deregulation, or ...] but in fact we are looking at a complex, multiple-variable problem.
If all those variables could be wrapped into one, I would say they relate to lack of confidence. There are many indicators of lack of confidence. One is the historically low price-to-earnings ratio in the stock market versus the historically low interest rates in the bond market. It is pretty easy to make 2 to 10 times as much return on your capital (or savings, if you prefer to think like a consumer) in the stock market today as in the bond market. Take fear out of the equation and funds would flow from bonds to stocks. Stocks would go up, and interest paid on bonds would climb as well. All investors would feel wealthier (except maybe those who were heavily in long-term bonds), and would spend more freely. That would help revive the consumer segment of the economy.
But that is easier said than done. The bond holders are the same people, in their tens of millions, who sold their stocks in 2008, at the bottom of the market, and effectively traded them for bonds. They are a fearful lot, easily stampeded.
We see a lack of confidence in bank lending practices. We see it in deferred purchasing of houses. The demand for housing is huge; interest rates and house prices are both low. But fear holds people pack.
The fear is not irrational, it is simply not analyzed. Bad things happened to a lot of people starting in 2007. Everyone who has a job today knows someone, maybe many people, who lost their jobs, homes, and even families. Almost everyone wants to minimize risk, even if that means substantially diminishing long-term opportunities (like buying houses and stocks cheap).
Sadly, the business men and women of America are hiding with the frightened steers rather than boldly leading us out of the recession. Every CEO wants the other CEOs to hire first, increasing demand, so that it will be safer to hire. Some even continue to lay off employees when they are running profitable companies, like Cisco's John Chambers, because they are not able to inspire investors with visions of future profits. Once a proud leader, John has become a harried, frightened little rabbit of a CEO.
U.S. executives, and their political mouth pieces, complain about taxes and regulations and high labor costs in the U.S. What, business was supposed to be easy? I agree that there are unnecessary regulations, but they are not what is stopping business expansion. Second rate CEOs are stopping business expansion. We still have some hard-charging leaders who can build up businesses (look at the biotechnology sector), but most contemporary CEO's are too effete to get their hands dirty doing real work.
The fact is the business climate in the U.S. and internationally is quite good now. Is anyone besides me embarrassed that a bunch of Communists in China are kicking our collective, free-market behinds? Do we want to have to admit that all our post-World War II free-market individualist posturing was not based on our outstanding individual capabilities, but on the fact that in World War II all of our competitors factories were bombed out of commission? China, at the end of World War II, had an economy they would have been ashamed of in the Middle Ages. They did not get to where they are now by slacking and refusing to deal with challenges.
What don't I like about the debt ceiling deal? I don't like the bloated military and homeland security budget, which we simply cannot afford. But mainly I don't like the fact that they could have come to the exact same decision a month ago. Congress and President Obama, Republicans and Tea Party and Democrats, basically killed economic expansion in the month of July.
The President, Congress, and other national leaders need to focus on restoring confidence. We need to reassure people that have jobs that they will keep them, and those that are looking that their search will end soon. We need for people to feel they can buy a home or replace some old appliance. We need to show the old American can-do business spirit of innovation. We also need to cooperate with each other to find solutions. We need to expand the pie, not fight over the crumbs.
There is plenty of stimulus. There is plenty of money being created. It needs to go into productive uses, not into the federal bond market.
Celgene Pipeline Value
My nomination for most undervalued stock in the biotechnology segment: Celgene (CELG). Celgene provides a double dose of growth potential: further growth of its currently approved therapies and a rich pipeline with some therapies closing in on FDA approval and commercialization.
Consider Celgene's Q2 earnings reported last week. Revenue was $1.18 billion, up 4% sequentially from $1.13 billion, and up 38% from $852.7 million in the year-earlier quarter. GAAP Net income was $279.2 million, up 9% sequentially from $255.6 million and up 80% from $155.4 million year-earlier. GAAP EPS (earnings per share) were $0.59, up 9% sequentially from $0.54 and up 79% from $0.33 year-earlier. Non-GAAP EPS was $0.89 per share.
Most of this rapid growth was based on a single therapy, Revlimid for multiple myeloma (MM) and myelodysplastic syndromes (MDS). The rate of growth fluctuates, but expansion is largely international now, with Russia, China and Brazil still ahead. In addition various clinical trials have indicated Revlimid will be beneficial in other types of cancer. Revlimid is in Phase III trials for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphoma) and prostate cancer.
Based on that alone, one might expect Celgene's stock price to be 30 to 50 times earnings per share. As I write you can buy Celgene for $58.12 per share. Even using the lower, GAAP number ($0.59 x 4 quarters = $2.36 per year), the PE ratio right now is under 25 times earnings. Non-GAAP EPS ($0.89 x 4 = $3.56) reads out at a 16.3 ratio.
But Revlimid, and other already-approved therapies Vidaza, Abraxane, and Thalomid, are just part of the story. Thalomid is ancient and has declining revenues, but Abraxane for breast cancer is ramping. Abraxane is also in clinical trials for treating lung, pancreatic, bladder, skin, and ovarian cancers. Vidaza for multiple myeloma grew revenues 23% y/y, and has a lot of room to grow with global launches.
Earlier in the pipeline Celgene displays depth-of-field. Of course most pre-clinical drugs don't make it through all the clinical phases and FDA approval; there will be some losers. Celgene's pipeline is so broad and important you could write a book about it.
In Oncology/Hematology we have pomalidomide in Phase III trials for myelofibrosis and nearing the end of Phase II for multiple myeloma. There is Amrubicin, in Phase III for small cell lung cancer. In Phase II we also have ACE-011 for CIA and ABI-008 for prostate cancer. In Phase I we have Tork Inhibitor and ABI-009, both for solid tumors. There are two additional pre-clinical ABI variants for solid tumors.
In inflammation and immunology we have Apremilast in Phase III and JNK CC-930, CC-11050 and PDA-001, as well as more Apremilast indications, in Phase II.
Beyond that Celgene lists over a dozen agents in discovery and pre-clinical phases.
Of course, what will affect Celgene's stock price soonest are the late stage candidates. The first big movers is likely to be expanding the label for Revlimid to first-line (initial) treatment of multiple myeloma. The second would be Abraxane for non-small cell lung cancer, with FDA submission in second half of 2011 and a decision likely in the first half of 2012.
In general it is a very good time to invest in biotechnology, even given the known risks. Gilead, Celgene, and Biogen Idec are cash cows that also have unrealized value in their pipelines. Small, risky biotechs aren't commanding the high premiums they used to, which is good because many of their drug candidates don't work out. With the larger biotechs when a drug candidate fails, it is disappointing and the stock can lose some momentum, but cash flow can be used to buy and develop more candidates, or buy back stock, or even (hopefully some time soon) start paying out a dividend, which is the true gold standard for value-conscious investors.
See also www.celgene.com
Keep diversified!
Consider Celgene's Q2 earnings reported last week. Revenue was $1.18 billion, up 4% sequentially from $1.13 billion, and up 38% from $852.7 million in the year-earlier quarter. GAAP Net income was $279.2 million, up 9% sequentially from $255.6 million and up 80% from $155.4 million year-earlier. GAAP EPS (earnings per share) were $0.59, up 9% sequentially from $0.54 and up 79% from $0.33 year-earlier. Non-GAAP EPS was $0.89 per share.
Most of this rapid growth was based on a single therapy, Revlimid for multiple myeloma (MM) and myelodysplastic syndromes (MDS). The rate of growth fluctuates, but expansion is largely international now, with Russia, China and Brazil still ahead. In addition various clinical trials have indicated Revlimid will be beneficial in other types of cancer. Revlimid is in Phase III trials for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphoma) and prostate cancer.
Based on that alone, one might expect Celgene's stock price to be 30 to 50 times earnings per share. As I write you can buy Celgene for $58.12 per share. Even using the lower, GAAP number ($0.59 x 4 quarters = $2.36 per year), the PE ratio right now is under 25 times earnings. Non-GAAP EPS ($0.89 x 4 = $3.56) reads out at a 16.3 ratio.
But Revlimid, and other already-approved therapies Vidaza, Abraxane, and Thalomid, are just part of the story. Thalomid is ancient and has declining revenues, but Abraxane for breast cancer is ramping. Abraxane is also in clinical trials for treating lung, pancreatic, bladder, skin, and ovarian cancers. Vidaza for multiple myeloma grew revenues 23% y/y, and has a lot of room to grow with global launches.
Earlier in the pipeline Celgene displays depth-of-field. Of course most pre-clinical drugs don't make it through all the clinical phases and FDA approval; there will be some losers. Celgene's pipeline is so broad and important you could write a book about it.
In Oncology/Hematology we have pomalidomide in Phase III trials for myelofibrosis and nearing the end of Phase II for multiple myeloma. There is Amrubicin, in Phase III for small cell lung cancer. In Phase II we also have ACE-011 for CIA and ABI-008 for prostate cancer. In Phase I we have Tork Inhibitor and ABI-009, both for solid tumors. There are two additional pre-clinical ABI variants for solid tumors.
In inflammation and immunology we have Apremilast in Phase III and JNK CC-930, CC-11050 and PDA-001, as well as more Apremilast indications, in Phase II.
Beyond that Celgene lists over a dozen agents in discovery and pre-clinical phases.
Of course, what will affect Celgene's stock price soonest are the late stage candidates. The first big movers is likely to be expanding the label for Revlimid to first-line (initial) treatment of multiple myeloma. The second would be Abraxane for non-small cell lung cancer, with FDA submission in second half of 2011 and a decision likely in the first half of 2012.
In general it is a very good time to invest in biotechnology, even given the known risks. Gilead, Celgene, and Biogen Idec are cash cows that also have unrealized value in their pipelines. Small, risky biotechs aren't commanding the high premiums they used to, which is good because many of their drug candidates don't work out. With the larger biotechs when a drug candidate fails, it is disappointing and the stock can lose some momentum, but cash flow can be used to buy and develop more candidates, or buy back stock, or even (hopefully some time soon) start paying out a dividend, which is the true gold standard for value-conscious investors.
See also www.celgene.com
Keep diversified!
Monday, August 1, 2011
Akamai in Value Range Again
Akamai (AKAM), the internet content acceleration company, has been showing downward momentum since a peak at . It plunged after its Q2 earnings announcement on Wednesay. So why did I add to my Akamai position today?
Akamai has always been a good company. Its stock price, however, has been subjected to fits of mania and depression practically since its IPO in 1999, during the peak of the Bubble. When the recession hit in 2008 all the air went out and I was able to buy Akamai at bargain basement rates [$17.56/share]. Then the excitement returned, pushing Akamai up to valuations that just did not make sense considering where most other technology stock prices were. It was at $54 per share in December of 2010. I had sold part of my stake [at $44.80, nowhere near perfect, but not bad] by then. You might argue that I should have sold it all, but I tend to be as cautious selling stocks as I am buying them.
What is going on? Akamai has been growing revenues and profits. The question is, how fast can we expect growth to be in the future. Wednesday management said that Internet traffic this spring did not grow as fast as they expected, so they don't want to project as much growth for the rest of 2011 as they had in the past. [See my notes on the Akamai Q2 conference call for numbers and details]
I think the downward momentum has gone too far. That does not mean the stock price can't go lower, but it means I believe buying the stock at today's price is a good long-term investment. It might even be a good short term investment.
There are good, growing, well-managed technology stocks out there that have cheaper valuations (by P/E, etc.) than Akamai, but then I own several of them too. Akamai brings diversification to my portfolio. I believe I understand what Akamai does, how it makes it money, and what the competition is [See my extensive Akamai writings].
Internet traffic will continue to grow, and it will continue to become more complicated. Companies that depend on the internet need help with content delivery acceleration, with serving the fractured mobile device market, and with security. Akamai has managed to stay ahead of the competition for over a decade now. A slow quarter for internet traffic growth does not signal the end of Akamai. To me it signals a buying opportunity.
Do your research, think for yourself, and keep diversified!
See also Akamai Investor page
Akamai has always been a good company. Its stock price, however, has been subjected to fits of mania and depression practically since its IPO in 1999, during the peak of the Bubble. When the recession hit in 2008 all the air went out and I was able to buy Akamai at bargain basement rates [$17.56/share]. Then the excitement returned, pushing Akamai up to valuations that just did not make sense considering where most other technology stock prices were. It was at $54 per share in December of 2010. I had sold part of my stake [at $44.80, nowhere near perfect, but not bad] by then. You might argue that I should have sold it all, but I tend to be as cautious selling stocks as I am buying them.
What is going on? Akamai has been growing revenues and profits. The question is, how fast can we expect growth to be in the future. Wednesday management said that Internet traffic this spring did not grow as fast as they expected, so they don't want to project as much growth for the rest of 2011 as they had in the past. [See my notes on the Akamai Q2 conference call for numbers and details]
I think the downward momentum has gone too far. That does not mean the stock price can't go lower, but it means I believe buying the stock at today's price is a good long-term investment. It might even be a good short term investment.
There are good, growing, well-managed technology stocks out there that have cheaper valuations (by P/E, etc.) than Akamai, but then I own several of them too. Akamai brings diversification to my portfolio. I believe I understand what Akamai does, how it makes it money, and what the competition is [See my extensive Akamai writings].
Internet traffic will continue to grow, and it will continue to become more complicated. Companies that depend on the internet need help with content delivery acceleration, with serving the fractured mobile device market, and with security. Akamai has managed to stay ahead of the competition for over a decade now. A slow quarter for internet traffic growth does not signal the end of Akamai. To me it signals a buying opportunity.
Do your research, think for yourself, and keep diversified!
See also Akamai Investor page
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