Inovio (INO) is a micro-cap biotechnology company that is developing innovative vaccines and delivery systems. It has a market capitalization, today, of $71 million and the stock price closed at $0.51. (versus 52wk High/Low $0.90/$0.37; volatility is high)
Inovio's vaccines are aimed at difficult to treat viruses that typically exist in multiple strains. This means a specific traditional vaccine has to be developed to protect people from each strain. That takes times, and a new strain can emerge and infect a global population faster than a traditional vaccine can be developed. Inovio's SynCon vaccines are believed to provide cross-protection against multiple strains.
Results have been coming in on a regular basis from trials. In September Inovio announced an open-label Phase I study of its universal H1N1 influenza vaccine provoked immune responses "against some of the most prevalent strains of H1N! influenza from the past 100 years."
One veterinary subsidiary of Inovio reported its improved LifeTide DNA plasmid therapy for pigs to produces more piglets per litter, with higher birth weights, and at a lower dosage than the original version. A separate subsidiary in New Zealand received regulatory permission to market the therapy in October.
Also in October results from a VGX-3100 vaccine trial for HPV (human papillomavirus) showed 100% of 18 patients in the trial showed antigen-specific antibody response, while 78% showed T-cell responses. A phase II trial now underway will determine if the immune responses are able to reverse disease progression to cervical cancer.
In pre-clinical trials Inovio demonstrated that its electroporation technique for introducing its vaccines to skin using minimal invasion "induces robust cellular and humoral immune responses."
November was a busy month. First Inovio Hepatitis B (HPV) vaccine demonstrated the potential to clear HBV from the liver in mice in a pre-clinical trial. Another preclinical study showed T-cell immune response in Cytomegalovirus (CMV).
On December 6th positive Phase II interim results were reported in the leukemia trial. This could lead to treating CML (chronic myelogenous leukemia) with a vaccine. The results are from just 8 patients, with 14 patients currently enrolled and a total of 31 to be studied in the full trial. In addition to showing the vaccine to be safe. Patients received six does of two DNA vaccines at four week intervals. Tests showed T cells and leukemia antibodies were generated. Note, however, no data was released as to whether the patients responded to the therapy by delays in progression or the other usual indicators. In addition to CML, some of the patients to be enrolled will be suffering from AML (acute myeloid leukemia, a more common variety than CML).
Most recently, on December 10th interim Phase I results for H1N1 flu vaccine given to elderly patients were announced. 50 patients were in the trial, with two sets of 20 receiving the vaccine on differing schedules and 10 control subjects who received the traditional seasonal flu vaccine. Immune responses registered at 40% for the Inovio vaccine, double the rate of 20% responding to the traditional vaccine. It was previously known that elderly patients tend to not gain immunity from standard flu vaccines.
What is innovative about Inovio vaccines? They are DNA vaccines. Traditional vaccines consist of weakened or dead viruses or their protein coatings. DNA vaccines need to be inserted into cells (instead of into the bloodstream), but once there can trigger both antibody and T-cell immune responses. To insert the vaccines into cells Inovio uses an electroporation device it developed and has successfully tested. Inovio, in fact, resulted from the merger of a vaccine company and an electroporation developer.
It is important to note that all of the new data is from early-stage trials. To receive FDA approval for commercial sales of a therapy typically two successful Phase III trials are required. Inovio Pharmaceuticals is a developmental stage company with all the risks and uncertainties inherent in that status.
In addition to the recent news, Inovio has a Hepatitis C vaccine in a Phase II trial, and an HIV vaccine in Phase I. It has more cancer vaccine candidates: prostate in preclinical, and a breast/lung/prostate cancer trial in Phase I.
Despite the risk of failure common to all new biotechnology, I believe Inovio is more likely than not to be worth far more in a few years than it is now. Inovio has many shots on goal. Only one vaccine would need to be approved by the FDA to make Inovio a highly-valuable company.
Another risk for investors is that Inovio is likely to need to raise cash to complete its program of demonstrating the effectiveness of its vaccines, and to commercialize them. However, as of the end of Q3, Inovio had $15 million in cash, and some of the trials are being conducted, or paid for, by partners.
Disclaimer: I am long INO. I will not trade INO for 7 days following the publication of this article.
Keep diversified! You should also take a good close look at inovio.com and SEC documents before risking your capital.
Monday, December 17, 2012
Wednesday, December 5, 2012
Dot Hill Hopes for 2013
Dot Hill (HILL) stock has been one of the worst performers in my portfolio lately. It is trading today at $0.88 per share, versus a 52 week high of $1.65 and 52 week low of $0.72. I have been invested in HILL for years, but more so than for most of my portfolio it has been a stock I have traded in, rather than just holding.
Dot Hill is a specialty data storage (SAN) solution equipment manufacturer, with many companies rebranding and selling its products, and HP as its by-far single largest customer. Looking at the past few years, management has continually indicated that prosperity (solid profits) is just around the corner, 2 or 3 quarters out, but the profits never have materialized. Hence credibility is low, and so is the stock price.
But maybe this time for sure. HILL is rolling out new products and has a number of new customers, some announced and some yet to be announced. The recent numbers look bad, however, because each customer requires some customization of the stock product. This increases R&D expense, which can only be recaptured in later years if product sales ramp and if gross and operating margins allow for it.
How could 2013 be different than 2012? Let's use Q3 2012 as a baseline. Revenues were $48.2 million, up 1% sequentially from $47.8 million, and up slightly from $48.1 million in the year-earlier quarter. GAAP net income was negative $3.0 million, improved sequentially from negative $5.0 million, and much improved from negative $12.2 million year-earlier. GAAP EPS (earnings per share) was negative $0.05, up sequentially from negative $0.09, and also up from negative $0.22 year-earlier.
Market capitalization is about $49 million, despite cash holding of $40 million, with just $2 million in debt, at the end of Q3.
Two new storage systems are sampling in Q4, the 4000 series and 5000 series. These newer systems will allow Dot Hill to serve a broader section of the market. Currently Hill's systems are used mainly for small businesses and the value end of the enterprise market.
The AssuredSAN 4000 series works with 8Gb Fibre Channel and 6Gb SAS (serial attached storage), the same as the 3000 series, but has optimized features adding extra speed for video streaming and broadcast, HPC (high performance computing), and post-production work.
The AssuredSAN Pro 5000 series works with 8 Gb Fibre Channel or 10 GbiSCSI and adds automated tiered storage software, thin provisioning, SSD acceleraton and other high-end features.
An important aspect of both new products should be improved margins, coinciding with the mid-market end use. Both build on top of the successful AssuredSAN 3000 series, which is a leader in the low-end market. The new 4000 and 5000 series are meant to be both feature and price competitive, so there is reason to hope for strong sales as 2013 progresses.
While there is a fear of investing in the hard disk drive (HDD) market right now, it is important to note that Dot Hill products are used in corporate datacenters and for cloud computing and big data. The use of smartphones and tablets is causing the need for rapid storage build out for the Internet, and the move to video is creating huge data storage demand.
Can Hill and its partners compete successfully in this market? Based on the past five years of experience, the answer would be just barely. But Hill was a train wreck when it got dumped by its biggest (then) client, Sun Microsystems. It has remained standing while a number of competitors were absorbed into larger companies. While it competes with EMC, it has an alliance with HP and a large number of smaller OEMs and value-added retailers. Dependence on HP has decreased. Autodesk is among the list of important new customers. Feedback on the new products has been very positive.
Right now HILL is more of a bottom-fishing play than anything else. To see the stock back at the $4 to $5 range management will have to deliver both improved revenues and improved margins. The possibility of achieving that makes it is a stock that is worth watching in 2013.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
Dot Hill is a specialty data storage (SAN) solution equipment manufacturer, with many companies rebranding and selling its products, and HP as its by-far single largest customer. Looking at the past few years, management has continually indicated that prosperity (solid profits) is just around the corner, 2 or 3 quarters out, but the profits never have materialized. Hence credibility is low, and so is the stock price.
But maybe this time for sure. HILL is rolling out new products and has a number of new customers, some announced and some yet to be announced. The recent numbers look bad, however, because each customer requires some customization of the stock product. This increases R&D expense, which can only be recaptured in later years if product sales ramp and if gross and operating margins allow for it.
How could 2013 be different than 2012? Let's use Q3 2012 as a baseline. Revenues were $48.2 million, up 1% sequentially from $47.8 million, and up slightly from $48.1 million in the year-earlier quarter. GAAP net income was negative $3.0 million, improved sequentially from negative $5.0 million, and much improved from negative $12.2 million year-earlier. GAAP EPS (earnings per share) was negative $0.05, up sequentially from negative $0.09, and also up from negative $0.22 year-earlier.
Market capitalization is about $49 million, despite cash holding of $40 million, with just $2 million in debt, at the end of Q3.
Two new storage systems are sampling in Q4, the 4000 series and 5000 series. These newer systems will allow Dot Hill to serve a broader section of the market. Currently Hill's systems are used mainly for small businesses and the value end of the enterprise market.
The AssuredSAN 4000 series works with 8Gb Fibre Channel and 6Gb SAS (serial attached storage), the same as the 3000 series, but has optimized features adding extra speed for video streaming and broadcast, HPC (high performance computing), and post-production work.
The AssuredSAN Pro 5000 series works with 8 Gb Fibre Channel or 10 GbiSCSI and adds automated tiered storage software, thin provisioning, SSD acceleraton and other high-end features.
An important aspect of both new products should be improved margins, coinciding with the mid-market end use. Both build on top of the successful AssuredSAN 3000 series, which is a leader in the low-end market. The new 4000 and 5000 series are meant to be both feature and price competitive, so there is reason to hope for strong sales as 2013 progresses.
While there is a fear of investing in the hard disk drive (HDD) market right now, it is important to note that Dot Hill products are used in corporate datacenters and for cloud computing and big data. The use of smartphones and tablets is causing the need for rapid storage build out for the Internet, and the move to video is creating huge data storage demand.
Can Hill and its partners compete successfully in this market? Based on the past five years of experience, the answer would be just barely. But Hill was a train wreck when it got dumped by its biggest (then) client, Sun Microsystems. It has remained standing while a number of competitors were absorbed into larger companies. While it competes with EMC, it has an alliance with HP and a large number of smaller OEMs and value-added retailers. Dependence on HP has decreased. Autodesk is among the list of important new customers. Feedback on the new products has been very positive.
Right now HILL is more of a bottom-fishing play than anything else. To see the stock back at the $4 to $5 range management will have to deliver both improved revenues and improved margins. The possibility of achieving that makes it is a stock that is worth watching in 2013.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
Monday, December 3, 2012
Gilead Sciences Pipeline Value
Gilead Sciences (GILD), has had a good year so far. On January 3, 2012 it opened at $41.46. Today it closed at 74.61, fairly near its 52-week high of $76.28. So up 84% this year. I used to write about Gilead more often during the years 2007 to 2011, arguing that it was undervalued. After finally getting a solid run up, is it time to bail out, hold, or buy more?
The forward-looking story is now largely about curing Hepatitis C, but first the latest backward-looking numbers.
In Q3 revenue was $2.43 billion, up 1% sequentially from $2.41 billion and up 14% from $2.12 billion in the year-earlier quarter. GAAP net income was $675.5 million, down 5% sequentially from $711.6 million, and down 9% from $741.1 million year-earlier. GAAP earnings per share (EPS) were $0.85, down 7% sequentially from $0.91 and down 10% from $0.95 year-earlier. Non-GAAP net income was $788.9 million, up 3% sequentially $767.3 million, and down 1% from $795.2 million year-earlier.
Profits did not keep pace with revenue growth because of costs from the Pharmasset acquisition from earlier in the year and a significant increase in R&D expense. Gilead is currently rolling out its newest HIV drugs like Stribild, which is helping revenue, but the R&D is not so much for HIV. The new R&D research is focused on hepatitis and oncology.
Why the emphasis on hep c? While Gilead Sciences has branched out into treatments for cardiovascular diseases, its primary expertise in in anti-viral drugs, particularly for HIV infections. Because of the effectiveness of its single-tablet, multi-drug combinations, Gilead dominates that market. Gilead also markets Viread for Hepatitis B. The past generation of Hepatitis C therapies have limited effectiveness, have a number of side effects, and cannot be administered orally.
Before the Pharmasset acquisition Gilead had four hepatitis drugs in phase II trials, and three in phase I, and said they would likely be made into a successful combination therapy. Pharmasset added Phase III candidate PSI-7977 (now Sofosbuvir), Phase II candidate Mericitabine, and Phase II candidate PSI-938, all for hep C. Pharmasset also brought candidates for HIV and hepatitis B treatment.
The latest set of results is for Sofosbuvir. The Phase 3 POSITRON study showed a response rate of 78% for hepatitis C (HCV) genotypes 2 and 3 when Sofosbuvir was combined with Ribavirin. It is notable that this is an all-oral regimen which does not include the using old standard, interferon. In tracking HCV note that a drug combination that works well with a particular genotype may not work with others. After 12 weeks of therapy and then an addition twelve weeks to see if the virus returned, HCV was not detected in 78% of patients. For those who are keeping track, Sofosbuvir used to be GS-7977.
Better still were the results from Sofosbuvir combined with GS-5885 and Ribavirin for genotype 1 HCV patients. Following 12 weeks of therapy and then 4 weeks without therapy, the response rate was 100%. Used with just ribavirin, Sofosbuvir had mixed results ranging from 84% for genotype 1 patients with no prior treatment down to only 10% response for genotype 1 patients who had not responded to prior treatments. For genotype 2 and 3 mixes, the range of responses was 60% to 68%.
Note that 100% cure rate is not necessary for FDA approval. As long as a combination can be found that does well with previously-untreated patients or that helps patients who were not helped by current therapies that include interferon, with about a 40% cure rate, the drugs could fulfill an unmet medical need.
At the same time it is a race, since other companies are also trying to break into the all-oral hepatitis market. It is a huge market. An estimated 150 million people world-wide have chronic hepatitis C, with the U.S. figure likely somewhere between 3 and 6 million (many people have undiagnosed HCV). For a less positive spin on the overall competition in hepatitis, I try Lessons from the Liver Meeting at Seeking Alpha.
Using the standard trailing 12-month ratio, Gilead's current P/E is 23.3. That is up quite a bit from earlier in the year. Conservative investors may want to wait until Gilead has actual FDA approval for a hepatitis C before extrapolating their chickens. As usual, the problem is by that time the stock may be priced even higher.
I don't think the current market has even priced in the true future value of Gilead's current drugs, much less the potential of a Sofosbuvir cocktail. In my particular case I feel comfortable with looking to the continued appreciation of my current holdings. I might still buy if the hep C data keeps getting better without a corresponding rise in the stock price. I have portfolio rules that restrict any stock to a maximum percentage of the entire portfolio, and could be forced to sell some if the stock rises too rapidly in price, though that seems unlikely at present.
Even with a great growth potential Gilead has, there are the usual risks from competition, macroeconomics, failure to receive FDA approval, etc.
Keep Diversified!
Disclaimer: I am a long-term investor in Gilead Sciences. I will not trade in the stock for a week from today.
See also:
my Gilead Sciences Q3 2012 analyst call summary
www.gilead.com
The forward-looking story is now largely about curing Hepatitis C, but first the latest backward-looking numbers.
In Q3 revenue was $2.43 billion, up 1% sequentially from $2.41 billion and up 14% from $2.12 billion in the year-earlier quarter. GAAP net income was $675.5 million, down 5% sequentially from $711.6 million, and down 9% from $741.1 million year-earlier. GAAP earnings per share (EPS) were $0.85, down 7% sequentially from $0.91 and down 10% from $0.95 year-earlier. Non-GAAP net income was $788.9 million, up 3% sequentially $767.3 million, and down 1% from $795.2 million year-earlier.
Profits did not keep pace with revenue growth because of costs from the Pharmasset acquisition from earlier in the year and a significant increase in R&D expense. Gilead is currently rolling out its newest HIV drugs like Stribild, which is helping revenue, but the R&D is not so much for HIV. The new R&D research is focused on hepatitis and oncology.
Why the emphasis on hep c? While Gilead Sciences has branched out into treatments for cardiovascular diseases, its primary expertise in in anti-viral drugs, particularly for HIV infections. Because of the effectiveness of its single-tablet, multi-drug combinations, Gilead dominates that market. Gilead also markets Viread for Hepatitis B. The past generation of Hepatitis C therapies have limited effectiveness, have a number of side effects, and cannot be administered orally.
Before the Pharmasset acquisition Gilead had four hepatitis drugs in phase II trials, and three in phase I, and said they would likely be made into a successful combination therapy. Pharmasset added Phase III candidate PSI-7977 (now Sofosbuvir), Phase II candidate Mericitabine, and Phase II candidate PSI-938, all for hep C. Pharmasset also brought candidates for HIV and hepatitis B treatment.
The latest set of results is for Sofosbuvir. The Phase 3 POSITRON study showed a response rate of 78% for hepatitis C (HCV) genotypes 2 and 3 when Sofosbuvir was combined with Ribavirin. It is notable that this is an all-oral regimen which does not include the using old standard, interferon. In tracking HCV note that a drug combination that works well with a particular genotype may not work with others. After 12 weeks of therapy and then an addition twelve weeks to see if the virus returned, HCV was not detected in 78% of patients. For those who are keeping track, Sofosbuvir used to be GS-7977.
Better still were the results from Sofosbuvir combined with GS-5885 and Ribavirin for genotype 1 HCV patients. Following 12 weeks of therapy and then 4 weeks without therapy, the response rate was 100%. Used with just ribavirin, Sofosbuvir had mixed results ranging from 84% for genotype 1 patients with no prior treatment down to only 10% response for genotype 1 patients who had not responded to prior treatments. For genotype 2 and 3 mixes, the range of responses was 60% to 68%.
Note that 100% cure rate is not necessary for FDA approval. As long as a combination can be found that does well with previously-untreated patients or that helps patients who were not helped by current therapies that include interferon, with about a 40% cure rate, the drugs could fulfill an unmet medical need.
At the same time it is a race, since other companies are also trying to break into the all-oral hepatitis market. It is a huge market. An estimated 150 million people world-wide have chronic hepatitis C, with the U.S. figure likely somewhere between 3 and 6 million (many people have undiagnosed HCV). For a less positive spin on the overall competition in hepatitis, I try Lessons from the Liver Meeting at Seeking Alpha.
Using the standard trailing 12-month ratio, Gilead's current P/E is 23.3. That is up quite a bit from earlier in the year. Conservative investors may want to wait until Gilead has actual FDA approval for a hepatitis C before extrapolating their chickens. As usual, the problem is by that time the stock may be priced even higher.
I don't think the current market has even priced in the true future value of Gilead's current drugs, much less the potential of a Sofosbuvir cocktail. In my particular case I feel comfortable with looking to the continued appreciation of my current holdings. I might still buy if the hep C data keeps getting better without a corresponding rise in the stock price. I have portfolio rules that restrict any stock to a maximum percentage of the entire portfolio, and could be forced to sell some if the stock rises too rapidly in price, though that seems unlikely at present.
Even with a great growth potential Gilead has, there are the usual risks from competition, macroeconomics, failure to receive FDA approval, etc.
Keep Diversified!
Disclaimer: I am a long-term investor in Gilead Sciences. I will not trade in the stock for a week from today.
See also:
my Gilead Sciences Q3 2012 analyst call summary
www.gilead.com
Friday, November 23, 2012
Dendreon on the Ropes
Back on April 29, 2010, Dendreon announced that Provenge had been approved by the FDA. That day DNDN opened at $40.09 and closed at $54.58. On March 6, 2009, it had opened at $2.77 per share. Today DNDN closed at $4.45. Was FDA approval really that meaningless?
Recent Q3 sales results for Provenge were down sequentially from Q2, which is not reassuring, although not as bad as some of the anti-Dendreon crowd had predicted.
Dendreon still has a couple of shots at getting off the ropes and becoming a valuable company, but a further drop in Provenge sales, or even stasis, could lead to bankruptcy. Investors have mostly erred on the side of safety, and abandoned hope. This means there is more upside than downside at today's price, but the downside risk is still considerable.
Provenge is an immunotherapy that is approved by the FDA for asymptomatic or minimally symptomatic metastatic castrate resistant (hormone refractory) prostate cancer. Like most cancer therapies it is not a cure, but has demonstrated statistically significant benefits in survival times for patients. Unlike many cancer therapies, it has relatively minimal side effects.
Dendreon's past management made a number of strategic mistakes, but that is only knowable in retrospect. When Provenge should have first been approved by the FDA (in my opinion), competing new drugs were a couple of years from potential approval. By the time Provenge was finally approved, competitors were on the verge of approval. Management's primary concern was building out the facilities needed to produce Provenge (treating patients white blood cells to recognize cancer antigens) as rapidly as possible, which was a capital intensive prospect.
It isn't that management thought Provenge would sell itself; they also had a sales force prepared to sell Provenge. However (and Provenge is by no means the only therapy this has happened to in the last few years) there were doubts raised in the medical community about the value of Provenge. More importantly, doctors are used to handing out pills or hooking up patients to IV's, and Provenge instead required taking white blood cells out of patients, shipping them to processing facilities, and then shipping them back to the doctors for re-infusion into patients. Provenge built three facilities in different areas of America so that the logistics would work out.
Provenge revenue was first reported for Q2 2010, $2.8 million for a partial quarter. Revenue then jumped in Q3 2010 to $20.1 million. After that there was a ramp that was slower than original guidance by Dendreon management, which finally peaked at $82.0 million in Q1 of 2012.
Q2 2012 revenue declined to $80.0 million, and Q3 revenue was $78.0 million. Management claims there is still considerable unmet demand for Provenge and revenue can be ramped to at least $100 million per quarter. To reduce costs employees have been laid off and one of the three manufacturing facilities has been closed. Management believe $100 million per quarter is cash flow break even.
Since debt ($554 million) exceed cash ($445 million), a few more quarters of revenue under $100 million could cause Dendreon to seek bankruptcy protection, wiping out shareholder value. The debt is in the form of convertible notes due in 2014 and 2016.
However, there are several positives going for Dendreon, which could increase revenue in both the short and the long run. Because it is an immunotherapy, there is an argument that Dendreon should be the first therapy tried once a patient arrives within its FDA label. Right now that does not yet appear to be the consensus within the set of physicians who are potential prescribers. Thus the future value of Dendreon stock currently highly dependent on the educational capabilities of the Provenge sales force and leading physicians who are advocates for the therapy.
There is potential expansion of the label, with clinical studies underway that could provide the factual basis for this. Even that is another double-edged sword. If studies fail to find statistically significant benefits for patients outside the current label, that might weaken physician interest for patients inside the label. If the studies are positive the expansion of the addressable patient base should easily take Dendreon past the $100 million per quarter line.
Finally, there is Europe. If you already own Dendreon stock, this is certainly worth waiting for. There should be an EMA decision around mid-2013. But it is not a sure bet. The EMA is not obliged to follow the FDA, although it typically does. The European health care system has shown more price-sensitivity than America, which could stall adoption or reduce margins. Finally, another capital-intense facility would need to be built. Maybe they can move the machines from the closed U.S. facility to Europe if approval is granted.
Dendreon is one of the most interesting stock stories in the past five years. It peaked at $55.43 on May 3, 2010, as brokers who worked with analysts had dismissed it a year earlier hyped it as the hot new stock. On March 6, 2009, it had opened at $2.77 per share. That was some ride. It was a great illustration of how auction pricing systems can get wildly out of touch with reality.
The way I look at it, there are three ways for Dendreon investors to win: if sales start ramping again in the U.S. within the current label; if the label is expanded in the U.S.; and if Provenge is approved in Europe. That is not bad odds, but the downside is potentially losing the entire investment. Market cap ended today at $687 million, which normally would assume profits can run something like $15 million per quarter in the foreseeable future. Since the future is not foreseeable, buying or selling DNDN at today's price comes down to how much risk investors are willing to take on.
Disclaimer: I am long Dendreon. I won't trade DNDN for 1 week following the publication of this article. I buy and sell Dendreon depending on my assessment of its statistically likely true value in comparison to its price.
Recent Q3 sales results for Provenge were down sequentially from Q2, which is not reassuring, although not as bad as some of the anti-Dendreon crowd had predicted.
Dendreon still has a couple of shots at getting off the ropes and becoming a valuable company, but a further drop in Provenge sales, or even stasis, could lead to bankruptcy. Investors have mostly erred on the side of safety, and abandoned hope. This means there is more upside than downside at today's price, but the downside risk is still considerable.
Provenge is an immunotherapy that is approved by the FDA for asymptomatic or minimally symptomatic metastatic castrate resistant (hormone refractory) prostate cancer. Like most cancer therapies it is not a cure, but has demonstrated statistically significant benefits in survival times for patients. Unlike many cancer therapies, it has relatively minimal side effects.
Dendreon's past management made a number of strategic mistakes, but that is only knowable in retrospect. When Provenge should have first been approved by the FDA (in my opinion), competing new drugs were a couple of years from potential approval. By the time Provenge was finally approved, competitors were on the verge of approval. Management's primary concern was building out the facilities needed to produce Provenge (treating patients white blood cells to recognize cancer antigens) as rapidly as possible, which was a capital intensive prospect.
It isn't that management thought Provenge would sell itself; they also had a sales force prepared to sell Provenge. However (and Provenge is by no means the only therapy this has happened to in the last few years) there were doubts raised in the medical community about the value of Provenge. More importantly, doctors are used to handing out pills or hooking up patients to IV's, and Provenge instead required taking white blood cells out of patients, shipping them to processing facilities, and then shipping them back to the doctors for re-infusion into patients. Provenge built three facilities in different areas of America so that the logistics would work out.
Provenge revenue was first reported for Q2 2010, $2.8 million for a partial quarter. Revenue then jumped in Q3 2010 to $20.1 million. After that there was a ramp that was slower than original guidance by Dendreon management, which finally peaked at $82.0 million in Q1 of 2012.
Q2 2012 revenue declined to $80.0 million, and Q3 revenue was $78.0 million. Management claims there is still considerable unmet demand for Provenge and revenue can be ramped to at least $100 million per quarter. To reduce costs employees have been laid off and one of the three manufacturing facilities has been closed. Management believe $100 million per quarter is cash flow break even.
Since debt ($554 million) exceed cash ($445 million), a few more quarters of revenue under $100 million could cause Dendreon to seek bankruptcy protection, wiping out shareholder value. The debt is in the form of convertible notes due in 2014 and 2016.
However, there are several positives going for Dendreon, which could increase revenue in both the short and the long run. Because it is an immunotherapy, there is an argument that Dendreon should be the first therapy tried once a patient arrives within its FDA label. Right now that does not yet appear to be the consensus within the set of physicians who are potential prescribers. Thus the future value of Dendreon stock currently highly dependent on the educational capabilities of the Provenge sales force and leading physicians who are advocates for the therapy.
There is potential expansion of the label, with clinical studies underway that could provide the factual basis for this. Even that is another double-edged sword. If studies fail to find statistically significant benefits for patients outside the current label, that might weaken physician interest for patients inside the label. If the studies are positive the expansion of the addressable patient base should easily take Dendreon past the $100 million per quarter line.
Finally, there is Europe. If you already own Dendreon stock, this is certainly worth waiting for. There should be an EMA decision around mid-2013. But it is not a sure bet. The EMA is not obliged to follow the FDA, although it typically does. The European health care system has shown more price-sensitivity than America, which could stall adoption or reduce margins. Finally, another capital-intense facility would need to be built. Maybe they can move the machines from the closed U.S. facility to Europe if approval is granted.
Dendreon is one of the most interesting stock stories in the past five years. It peaked at $55.43 on May 3, 2010, as brokers who worked with analysts had dismissed it a year earlier hyped it as the hot new stock. On March 6, 2009, it had opened at $2.77 per share. That was some ride. It was a great illustration of how auction pricing systems can get wildly out of touch with reality.
The way I look at it, there are three ways for Dendreon investors to win: if sales start ramping again in the U.S. within the current label; if the label is expanded in the U.S.; and if Provenge is approved in Europe. That is not bad odds, but the downside is potentially losing the entire investment. Market cap ended today at $687 million, which normally would assume profits can run something like $15 million per quarter in the foreseeable future. Since the future is not foreseeable, buying or selling DNDN at today's price comes down to how much risk investors are willing to take on.
Disclaimer: I am long Dendreon. I won't trade DNDN for 1 week following the publication of this article. I buy and sell Dendreon depending on my assessment of its statistically likely true value in comparison to its price.
Monday, November 5, 2012
Cantel Medical Acquisitions Fuel Earnings Growth
Cantel Medical (CMN) specializes in disinfection equipment for dental offices and medical centers. Its products range from face masks to complex endoscope sterilization machines. Today it closed at $26.31, up $0.40. Cantel's 52 week high was $28.97 on September 25th. Is Cantel's run up over? Should it be bought or held for its long-run potential?
Cantel has grown both organically and through acquisitions. Acquisitions are often not a plus for investors. In Cantel's case, however, the acquisitions have gone very well. The acquired companies were bought as reasonable prices. Cantel has been able to increase margins at the acquired companies, partly by using its existing sales forces to ramp sales. The process has left Cantel with some debt, but it is at low interest rates and there is a clear path to paying it off.
In fiscal Q4 ending July 31st Cantel Medical revenue was $98.7 million, up 2% sequentially from $97.2 million and up 15% from $86.0 million year-earlier. Net income was $9.6 million, up 17% sequentially from $8.2 million and up 104% from $4.7 million year-earlier. EPS (earnings per share) were $0.35, up 17% sequentially from $0.30 and up 94% from $0.18 year-earlier.
Last Friday a new acquisition was announced. It resembles earlier acquisitions: small enough to digest easily, complementing an existing business, and with a very fair price to earnings ratio. SPSmedical Supply Corporation does sterility assurance and monitoring, so it fits well with Cantel's Crosstex division. Cantel paid $32 million. EBITDA for the last year was $4.3 million, so it cost less than 8 time EBITDA. There will be some acquisition costs in the December quarter, including $3.5 million capital expense to buy the facility SPSmedical works out of. But in the March 2013 quarter it should add roughly $1 million to profits.
Cantel ended fiscal Q4 with $30 million in cash and $60 million in debt. After this transaction net debt should be around $65.5 million. Since cash flow from operations was $17.7 million in the quarter and should continue to rise in 2013, net debt should be approaching zero in 2014 unless more acquisitions are made or there is significant capital expense during 2013.
I have been watching Cantel Medical since early 2010. I was originally attracted to the infection control story, which I knew had become a serious problem in hospitals. Infection control spending has ramped considerably these last few years, but much remains to be done. Cantel has competitors in each of its areas of expertise, but it also tends to be a leader. It is a remarkably well run business with a frugal management that seems to be committed to working to build long-term value for shareholders.
Cantel is not exactly a cheap stock, with a P/E of 23.1 at today's price. The P/E has been justified by the quality of management and earnings, but there is no guarantee it will remain at the current level. Cantel pays a small dividend, with a yield well under 1%, which is fine for me as I am looking for long-term returns and feel cash should be used to pay off debt and to expand further.
Note that Cantel was affected by the recession, and its revenues are not immune to macroeconomic factors. It also has had some spikes in revenue during infectious disease scares, so it can be a bit lumpy from quarter to quarter and, to a lesser extent, year to year.
Cantel is suitable to conservative long-term investors at today's price.
Disclaimer: I own Cantel Medical. I will not make trades in CMN for one week following publication of this article.
Keep diversified!
Cantel has grown both organically and through acquisitions. Acquisitions are often not a plus for investors. In Cantel's case, however, the acquisitions have gone very well. The acquired companies were bought as reasonable prices. Cantel has been able to increase margins at the acquired companies, partly by using its existing sales forces to ramp sales. The process has left Cantel with some debt, but it is at low interest rates and there is a clear path to paying it off.
In fiscal Q4 ending July 31st Cantel Medical revenue was $98.7 million, up 2% sequentially from $97.2 million and up 15% from $86.0 million year-earlier. Net income was $9.6 million, up 17% sequentially from $8.2 million and up 104% from $4.7 million year-earlier. EPS (earnings per share) were $0.35, up 17% sequentially from $0.30 and up 94% from $0.18 year-earlier.
Last Friday a new acquisition was announced. It resembles earlier acquisitions: small enough to digest easily, complementing an existing business, and with a very fair price to earnings ratio. SPSmedical Supply Corporation does sterility assurance and monitoring, so it fits well with Cantel's Crosstex division. Cantel paid $32 million. EBITDA for the last year was $4.3 million, so it cost less than 8 time EBITDA. There will be some acquisition costs in the December quarter, including $3.5 million capital expense to buy the facility SPSmedical works out of. But in the March 2013 quarter it should add roughly $1 million to profits.
Cantel ended fiscal Q4 with $30 million in cash and $60 million in debt. After this transaction net debt should be around $65.5 million. Since cash flow from operations was $17.7 million in the quarter and should continue to rise in 2013, net debt should be approaching zero in 2014 unless more acquisitions are made or there is significant capital expense during 2013.
I have been watching Cantel Medical since early 2010. I was originally attracted to the infection control story, which I knew had become a serious problem in hospitals. Infection control spending has ramped considerably these last few years, but much remains to be done. Cantel has competitors in each of its areas of expertise, but it also tends to be a leader. It is a remarkably well run business with a frugal management that seems to be committed to working to build long-term value for shareholders.
Cantel is not exactly a cheap stock, with a P/E of 23.1 at today's price. The P/E has been justified by the quality of management and earnings, but there is no guarantee it will remain at the current level. Cantel pays a small dividend, with a yield well under 1%, which is fine for me as I am looking for long-term returns and feel cash should be used to pay off debt and to expand further.
Note that Cantel was affected by the recession, and its revenues are not immune to macroeconomic factors. It also has had some spikes in revenue during infectious disease scares, so it can be a bit lumpy from quarter to quarter and, to a lesser extent, year to year.
Cantel is suitable to conservative long-term investors at today's price.
Disclaimer: I own Cantel Medical. I will not make trades in CMN for one week following publication of this article.
Keep diversified!
I Buy Adept Technology (ADEP)
Just a brief note that I bought a small initial position in Adept Technologies, symbol ADEP. You can read my prior assessment at Adept Technology First Look.
This is a very long term investment for me. I have no reason to think Adept is going to go up in price in the near future. There will be an Adept Technology conference call on November 8, this Thursday. I will take notes on it and post them. See my Adept Technology Analyst Conferences page for a link.
I decided to go ahead with the ADEP purchase because I believe there is a future in robotics and that Adept is addressing a significant unmet need. Adept has grown both by acquisitions and by organic growth and appears to be well-managed. Needless to say, that does not guarantee success.
So keep diversified!
This is a very long term investment for me. I have no reason to think Adept is going to go up in price in the near future. There will be an Adept Technology conference call on November 8, this Thursday. I will take notes on it and post them. See my Adept Technology Analyst Conferences page for a link.
I decided to go ahead with the ADEP purchase because I believe there is a future in robotics and that Adept is addressing a significant unmet need. Adept has grown both by acquisitions and by organic growth and appears to be well-managed. Needless to say, that does not guarantee success.
So keep diversified!
Monday, October 29, 2012
Marvell (MRVL) Wins Microsoft Surface RT Wi-Fi slot
Marvell Technology Group (MRVL) won a slot in the Microsoft Surface tablet computer. According to Anandtech (Inside Microsoft's Surface RT Tablet, October 16, 2012), the WiFi chip on the tablet is Marvell's. NVIDIA won the main prize with its Tegra 3 ARM-based processing chip. Atmel also had chips in the design.
We don't know how many of the WiFi chips Marvell shipped to Microsoft in the summer quarter (Marvell's fiscal Q3 2013 ending October 27, 2012), but it was not enough to balance the damage in the hard disk drive (HDD) controller chip business. Marvell dominates HDD controller chips, but the problem is that the largest single use of HDDs in in PCs. It was a terrible quarter for PC sales, and little HDD makers Seagate and Western Digital could do about it.
Marvell had guided revenues to $800 to $850 million. The update issued on October 18 put revenues at $765 to $785 million. At the midpoint there is a $25 million miss on the low end of prior guidance. Just about all of that came from the HDD segment. Marvell also makes chips for smartphones, for networking (ranging from WiFi to high-end datacenter Ethernet), for Google TV and similar appliances, and for video processing in HD TVs. It is moving into new areas like LED controllers.
The fourth quarter is a big question mark. A lot depends on the global outlooks of OEMs. If they are pessimistic they may further shrink inventories. If holiday sales go well, they may have to expand inventories, giving chip manufacturers like Marvell a boost.
While there is a lot of uncertainty about Q4 and about 2013, Marvell is well set to manage their way through it and eventually expand into new businesses, as they have in the past. Even at the current level of revenue Marvell is a cash cow. At the current stock price, $7.755 at the close Friday, you are buying $0.75 in trailing 12-month earnings and dividends of $3.1% per year, plus a cash balance of $2.13 billion, or $3.82 per share. In the latest quarter cash flow from operations was $0.34 per share. It looks to me like the market over-reacted to the revenue miss. At this price Marvell stock is well worth the risk, in my opinion. But then I started accumulating Marvell stock years ago.
Marvell is large enough and diverse enough that if only moderate numbers of Microsoft Surface tablets get sold, that probably won't have a significant impact on Marvell revenue or profit. Then again, the Windows Surface is a really hot device, and may sell in more than moderate numbers. It is on my wish list.
Disclaimer: I am long Marvell and Seagate. I will make no position changes in them for a week after this article is published. I do not have a position in Microsoft, Western Digital or NVIDIA and also will not initiate one for a week. Also, I occasionally do freelance work for Microsoft.
We don't know how many of the WiFi chips Marvell shipped to Microsoft in the summer quarter (Marvell's fiscal Q3 2013 ending October 27, 2012), but it was not enough to balance the damage in the hard disk drive (HDD) controller chip business. Marvell dominates HDD controller chips, but the problem is that the largest single use of HDDs in in PCs. It was a terrible quarter for PC sales, and little HDD makers Seagate and Western Digital could do about it.
Marvell had guided revenues to $800 to $850 million. The update issued on October 18 put revenues at $765 to $785 million. At the midpoint there is a $25 million miss on the low end of prior guidance. Just about all of that came from the HDD segment. Marvell also makes chips for smartphones, for networking (ranging from WiFi to high-end datacenter Ethernet), for Google TV and similar appliances, and for video processing in HD TVs. It is moving into new areas like LED controllers.
The fourth quarter is a big question mark. A lot depends on the global outlooks of OEMs. If they are pessimistic they may further shrink inventories. If holiday sales go well, they may have to expand inventories, giving chip manufacturers like Marvell a boost.
While there is a lot of uncertainty about Q4 and about 2013, Marvell is well set to manage their way through it and eventually expand into new businesses, as they have in the past. Even at the current level of revenue Marvell is a cash cow. At the current stock price, $7.755 at the close Friday, you are buying $0.75 in trailing 12-month earnings and dividends of $3.1% per year, plus a cash balance of $2.13 billion, or $3.82 per share. In the latest quarter cash flow from operations was $0.34 per share. It looks to me like the market over-reacted to the revenue miss. At this price Marvell stock is well worth the risk, in my opinion. But then I started accumulating Marvell stock years ago.
Marvell is large enough and diverse enough that if only moderate numbers of Microsoft Surface tablets get sold, that probably won't have a significant impact on Marvell revenue or profit. Then again, the Windows Surface is a really hot device, and may sell in more than moderate numbers. It is on my wish list.
Disclaimer: I am long Marvell and Seagate. I will make no position changes in them for a week after this article is published. I do not have a position in Microsoft, Western Digital or NVIDIA and also will not initiate one for a week. Also, I occasionally do freelance work for Microsoft.
Wednesday, October 24, 2012
Can Design Wins Save AMD?
AMD got crushed in Q3, following a disappointing Q2. Yet at the Q1 analyst conference AMD execs were optimistic (See AMD Guides to Strong 2012, April 19, 2012).
Right now AMD stock is trading not just near 52-week lows, but near lifetime lows. At $2.07 per share AMD has a market capitalization of $1.5 billion. Is AMD now a matter for bankruptcy courts, where stockholders will get wiped out and even bondholders get pennies on the dollar? Or is there still hope for investors?
I could pick only one cause for optimism at the recent Analyst Call. It is not the restructuring plan, which will cut costs but will also probably cut R&D and sales muscle. It is alleged design wins.
Note that as bad as the quarter was (revenue of $1.27 billion, down 10% sequentially from $1.41 billion and down 25% from $1.69 billion in the year-earlier quarter), AMD is still a large company, with annual revenues of perhaps $5 billion. Its market cap, again, is $1.5 billion. If it could make those revenues profitable its market cap should trend back up towards $5 billion.
So design wins could matter, if they either increase revenues at good margins, or replace poor-margin revenue with good margins. Margins have always been a problem for AMD because rival Intel has always been able to set good margins and leave the dregs for AMD, even when AMD has brought out products that, in certain niches, were superior.
For months rumors have circulated that AMD had won spots in some of the major forthcoming game consoles: Sony, Microsoft Xbox, and Nintendo. Rumors vary: in the most optimistic, AMD wins all three.
All CEO Rory Read would say was that AMD already has confidential high-volume design wins in place. He would not even specify if these were game console wins as opposed to tablets or just Windows 8 notebook computers.
Certainly AMD's combined CPU and GPU chips, or APUs, fit well with any graphics-intensive, low cost system design. The current generation of game consoles is ancient and are expected to be refreshed in 2013.
But as experienced tech investors know, while design wins are a necessity, they are no guarantee of commercial success. Not all products sell. Gaming consoles have to compete against everything from smartphone games to Google TV to HTPCs. We also don't know how well Windows 8 tablets that don't use ARM-based processors will sell. We don't know if Windows 8 will help or hamper computer sales (I like Windows 8 a lot, but then I can be pretty geeky. Disclaimer: I just finished a freelance subscontracting job for Microsoft).
So the good news is that you can buy AMD stock for a song right now, and it will probably survive the year 2013, and might even thrive if the console and tablet manufacturers are not able to bargain margins down too much.
I am keeping AMD to a very small percentage of my portfolio, but opportunistically accumulating more stock. The safe thing to do is to keep away from AMD unless you already own it.
I will also repeat what everyone knows: AMD's IP is worth more than its market capitalization. Korean or Chinese companies would probably be willing to pay at least $3 billion for the graphics division alone, but AMD management thinks it can do better on its own.
Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published. I do not own Microsoft, Sony, ARM, Intel or Ninendo stock.
See also my AMD Q3 2012 analyst call summary;
www.amd.com
Right now AMD stock is trading not just near 52-week lows, but near lifetime lows. At $2.07 per share AMD has a market capitalization of $1.5 billion. Is AMD now a matter for bankruptcy courts, where stockholders will get wiped out and even bondholders get pennies on the dollar? Or is there still hope for investors?
I could pick only one cause for optimism at the recent Analyst Call. It is not the restructuring plan, which will cut costs but will also probably cut R&D and sales muscle. It is alleged design wins.
Note that as bad as the quarter was (revenue of $1.27 billion, down 10% sequentially from $1.41 billion and down 25% from $1.69 billion in the year-earlier quarter), AMD is still a large company, with annual revenues of perhaps $5 billion. Its market cap, again, is $1.5 billion. If it could make those revenues profitable its market cap should trend back up towards $5 billion.
So design wins could matter, if they either increase revenues at good margins, or replace poor-margin revenue with good margins. Margins have always been a problem for AMD because rival Intel has always been able to set good margins and leave the dregs for AMD, even when AMD has brought out products that, in certain niches, were superior.
For months rumors have circulated that AMD had won spots in some of the major forthcoming game consoles: Sony, Microsoft Xbox, and Nintendo. Rumors vary: in the most optimistic, AMD wins all three.
All CEO Rory Read would say was that AMD already has confidential high-volume design wins in place. He would not even specify if these were game console wins as opposed to tablets or just Windows 8 notebook computers.
Certainly AMD's combined CPU and GPU chips, or APUs, fit well with any graphics-intensive, low cost system design. The current generation of game consoles is ancient and are expected to be refreshed in 2013.
But as experienced tech investors know, while design wins are a necessity, they are no guarantee of commercial success. Not all products sell. Gaming consoles have to compete against everything from smartphone games to Google TV to HTPCs. We also don't know how well Windows 8 tablets that don't use ARM-based processors will sell. We don't know if Windows 8 will help or hamper computer sales (I like Windows 8 a lot, but then I can be pretty geeky. Disclaimer: I just finished a freelance subscontracting job for Microsoft).
So the good news is that you can buy AMD stock for a song right now, and it will probably survive the year 2013, and might even thrive if the console and tablet manufacturers are not able to bargain margins down too much.
I am keeping AMD to a very small percentage of my portfolio, but opportunistically accumulating more stock. The safe thing to do is to keep away from AMD unless you already own it.
I will also repeat what everyone knows: AMD's IP is worth more than its market capitalization. Korean or Chinese companies would probably be willing to pay at least $3 billion for the graphics division alone, but AMD management thinks it can do better on its own.
Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published. I do not own Microsoft, Sony, ARM, Intel or Ninendo stock.
See also my AMD Q3 2012 analyst call summary;
www.amd.com
Friday, October 12, 2012
Another Bad Day for AMD
AMD is plunging to new multi-year lows today. Egg on my face, I added to my position recently, so I just managed to add to my losses.
With all the bad news in the PC industry I did not expect AMD to make its previous guidance, which was for an essentially sequentially flat Q3, when Q3 is typically the strongest quarter of the season.
Preliminary Q3 results were released today, with revenue down 10% sequentially and a $100 million inventory write off. Ouch. Considerably worse than I anticipated.
Can AMD survive? It is a fair question. I still like AMDs graphics and graphics-integrated APUs (advanced processing units). I still think that desktop PCs with big screens can do a lot of things that mobile devices can't do. I am looking to buy a larger screen and an APU-based computer myself, and I think having massive parallel processing on the CPU (graphics really is parallel processing) is going to open some new doors. I am waiting for Windows 8 to be released so I don't have to install Windows 7 and then upgrade (I'll also be installing Linux since I increasingly use opensource software that runs better on it).
Intel is well set up financially to survive a slump in PC demand, but then they own their own fabs. AMD is fabless, so they just tell their foundries they want to produce less chips. Obviously in Q3 they both produced too many chips and also could not sell some of their older chips, implying they produced too many chips as far back as Q4 2011.
Might as well hold onto my AMD stock and see what happens, at this price. I often take riskier stock positions than I would advise for conservative investors. I've done really well with ONXX and FNHC lately, so the AMD decline won't hurt me that much.
Disclaimer: I am long AMD.
With all the bad news in the PC industry I did not expect AMD to make its previous guidance, which was for an essentially sequentially flat Q3, when Q3 is typically the strongest quarter of the season.
Preliminary Q3 results were released today, with revenue down 10% sequentially and a $100 million inventory write off. Ouch. Considerably worse than I anticipated.
Can AMD survive? It is a fair question. I still like AMDs graphics and graphics-integrated APUs (advanced processing units). I still think that desktop PCs with big screens can do a lot of things that mobile devices can't do. I am looking to buy a larger screen and an APU-based computer myself, and I think having massive parallel processing on the CPU (graphics really is parallel processing) is going to open some new doors. I am waiting for Windows 8 to be released so I don't have to install Windows 7 and then upgrade (I'll also be installing Linux since I increasingly use opensource software that runs better on it).
Intel is well set up financially to survive a slump in PC demand, but then they own their own fabs. AMD is fabless, so they just tell their foundries they want to produce less chips. Obviously in Q3 they both produced too many chips and also could not sell some of their older chips, implying they produced too many chips as far back as Q4 2011.
Might as well hold onto my AMD stock and see what happens, at this price. I often take riskier stock positions than I would advise for conservative investors. I've done really well with ONXX and FNHC lately, so the AMD decline won't hurt me that much.
Disclaimer: I am long AMD.
Tuesday, September 25, 2012
Buying AMD Today
This is just a note to my readers that I added to my AMD position on August 31 and again earlier today. AMD is at or near multi-year lows.
I believe the situation is not as dire as the shorts think. Even mediocre Q3 results, which are scheduled to be reported on October 18, could force the shorts out and the stock price up. AMD is executing well, with new GPUs about to be announced and with desktop Trinity APUs due for release on October 2.
The pros and cons of AMD have been raked over by myself [See my AMD analysis page] and many others. A good summary of the buy arguments for AMD is CFO Resignation Irrelevant, Buy AMD by Ashraf Eassa, with lots of comments reminding us of the cons of buying AMD even at this super-low price.
Disclaimer: I own AMD stock. I don't trade in volumes large enough to affect the stock price, so I am not putting any time restrictions on my trading activities due to this article.
I believe the situation is not as dire as the shorts think. Even mediocre Q3 results, which are scheduled to be reported on October 18, could force the shorts out and the stock price up. AMD is executing well, with new GPUs about to be announced and with desktop Trinity APUs due for release on October 2.
The pros and cons of AMD have been raked over by myself [See my AMD analysis page] and many others. A good summary of the buy arguments for AMD is CFO Resignation Irrelevant, Buy AMD by Ashraf Eassa, with lots of comments reminding us of the cons of buying AMD even at this super-low price.
Disclaimer: I own AMD stock. I don't trade in volumes large enough to affect the stock price, so I am not putting any time restrictions on my trading activities due to this article.
Thursday, September 20, 2012
Can SGI Improve Supercomputer Margins?
Silicon Graphics International (SGI) makes supercomputers. Its clients include government agencies, financial firms, the pharmaceutical industry, Web farms including cloud services, and an increasing number of business verticals. Just before I last wrote about SGI in February it had run into profitability issues [See SGI Challenged by Analysts]. SGI's stock price was at had declined rapidly from near $15.00 per share to under $10.00. Today SGI closed at $9.37. The 52 week low hit $5.02 on May 21st this year. Is SGI ramping its sales and margins, or is the price increase just a dead cat bounce?
SGI is on a fiscal year, but I'll refer to calendar quarters. For the December 2011 quarter revenues were $195.2 million, non-GAAP net income was just $1.3 million.
The March quarter, which is typically sequentially and seasonally lower in the supercomputer business, saw revenues of $199.4 million, with non-GAAP net income of $3.7 million. June quarter revenue was a dismal $179.5 million, with non-GAAP net income of negative $3 million.
So anyone long in the stock has a case to prove.
Market capitalization ended today at $303 million. Even at $180 million per quarter revenue is running $720 million per year. While higher revenues might be good, the real problem this last year has been margins.
Management has noted that their invoicing process for some computer systems had been SNAFU. As a result, they lost money on those individual systems. Sales people were making deals with insufficient supervision, resulting in great steals for the customers, but no profits for the firm. That practice should have ended by now, but because of the size of SGI deals and the lengthy delivery and revenue recognition processes for supercomputers, there will still be some of that low-margin revenue in the September quarter and maybe as late as the March 2013 quarter. In the June quarter SGI rejected several deals in that quarter because of insufficient margins.
Of course rejecting low-margin deals leads to lower revenues, unless the customers are not as price-sensitive as they pretend to be.
Generally, the business background situation is a cause for optimism. The increases in spending on cloud computing, scientific computing, security computing, and high-performance computing (HPC) have been steady and are likely to accelerate in the past few years.
The new SGI UV 2 supercomputer has received good reviews. SGI does not usually break out revenue by type of computer sold, though that would be helpful to the investment community.
The last guidance issued for the September quarter was for revenue between $180 and $195 million and non-GAAP net income in the vicinity of negative $6 million. The quarter is not over, and the macroeconomy has not been helpful.
I should point out that the old Rackable Systems, which bought the bankrupt old SGI to become the current SGI, also had the same margin issues. Management changes from time to time and new management always says they understand the issue and will deliver better margins in the future. Buying SGI stock right now is a bet that the current CEO, Jorge L. Titinger, who joined SGI on February 27, 2012, can break what seems to be an entrenched corporate culture of great engineering combined with disdain for a need to consistently generate solid profits.
The problem may, in part, be competition, in addition to the sad corporate culture. SGI competes with Dell, Cray, IBM, HP, Appro, Oracle and Fujitsu, among others.
Disclaimer: I am long SGI. I will not make any changes in my position for the next week.
Keep diversified!
SGI is on a fiscal year, but I'll refer to calendar quarters. For the December 2011 quarter revenues were $195.2 million, non-GAAP net income was just $1.3 million.
The March quarter, which is typically sequentially and seasonally lower in the supercomputer business, saw revenues of $199.4 million, with non-GAAP net income of $3.7 million. June quarter revenue was a dismal $179.5 million, with non-GAAP net income of negative $3 million.
So anyone long in the stock has a case to prove.
Market capitalization ended today at $303 million. Even at $180 million per quarter revenue is running $720 million per year. While higher revenues might be good, the real problem this last year has been margins.
Management has noted that their invoicing process for some computer systems had been SNAFU. As a result, they lost money on those individual systems. Sales people were making deals with insufficient supervision, resulting in great steals for the customers, but no profits for the firm. That practice should have ended by now, but because of the size of SGI deals and the lengthy delivery and revenue recognition processes for supercomputers, there will still be some of that low-margin revenue in the September quarter and maybe as late as the March 2013 quarter. In the June quarter SGI rejected several deals in that quarter because of insufficient margins.
Of course rejecting low-margin deals leads to lower revenues, unless the customers are not as price-sensitive as they pretend to be.
Generally, the business background situation is a cause for optimism. The increases in spending on cloud computing, scientific computing, security computing, and high-performance computing (HPC) have been steady and are likely to accelerate in the past few years.
The new SGI UV 2 supercomputer has received good reviews. SGI does not usually break out revenue by type of computer sold, though that would be helpful to the investment community.
The last guidance issued for the September quarter was for revenue between $180 and $195 million and non-GAAP net income in the vicinity of negative $6 million. The quarter is not over, and the macroeconomy has not been helpful.
I should point out that the old Rackable Systems, which bought the bankrupt old SGI to become the current SGI, also had the same margin issues. Management changes from time to time and new management always says they understand the issue and will deliver better margins in the future. Buying SGI stock right now is a bet that the current CEO, Jorge L. Titinger, who joined SGI on February 27, 2012, can break what seems to be an entrenched corporate culture of great engineering combined with disdain for a need to consistently generate solid profits.
The problem may, in part, be competition, in addition to the sad corporate culture. SGI competes with Dell, Cray, IBM, HP, Appro, Oracle and Fujitsu, among others.
Disclaimer: I am long SGI. I will not make any changes in my position for the next week.
Keep diversified!
Monday, September 10, 2012
Microchip (MCHP) Pays Dividends
Microchip (MCHP) is one of the largest global manufacturers of microcontrollers, which are semiconductor chips incorporating computers and capabilities to receive data from sensors and send control signals to motors or other external parts. For investors the company is noted for its relatively high dividend and its ability to generate profits even during down cycles.
Today Microchip stock closed at $34.14, against a 52 week high of $38.87 and low of $30.07. At that price MCHP market capitalization is $6.6 billion, and the dividend yield is 4.05%.
Last week Steve Sanghi, the CEO, reported that after a sequentially up calendar Q1 and Q2, the business environment weakened towards the end of Q2, with Europe particularly slow. The situation has not improved, so Microchip is now guiding revenues to be about flat in Q3 compared to Q2, excluding the increased revenue from the recent SMSC acquisition. [Note calendar Q2 was fiscal Q1]
The SMSC acquisition closed August 2, at a value of $946 million. For fiscal 2012 SMSC had sales of $412 million and a non-GAAP operating margin of 12%. It will fit well with Microchip's product line, as SMSC is a specialist in smart mixed signal connectivity. Its revenues are 43% from microcontrollers and 57% analog products. These are used for automotive entertainment, wireless audio, and USB and Ethernet. Sanghi believes Microchip will be able to increase gross and operating margins of the acquisition closer to its own, high-marin model.
Microchip sells to a very diverse set of customers, including manufacturers of automobiles, household appliances, and medical and industrial equipment. Microchip also has an advanced touch screen set of solutions.
SMSC will provide a boost about 3 cents per share in the first partial quarter, then 6 to 7 cents in the first full quarter, fiscal Q3.
Steve pointed out that when Microchip bought SST it had not made a profit in five years, but has had good margins once integrated. He sees SMSC as a much less difficult business to integrate and profit from.
There is plenty of competition for microcontroller chips, but Microchip now has over 7% of the market, compared to under 2% in 1994, with the market share climb being pretty steady. In 2011 Microchip was the 4th largest player in the market after Renesas, Freescale, and TI. It is second in the 8-bit segment to Renesas, which moved ahead only when it absorbed NEC.
For fiscal Q2 2013, ending September 30, 2012, revenues are now expected between $12 and $430 million and non-GAAP EPS is expected between $0.50 and $0.52.
Given the high dividend, relatively low volatility of the stock price, and further opportunity for growth, Microchip remains a good core technology investment for long term investors. The main risk I see is macroeconomic.
Disclaimer: I have been long MCHP since 2006. I will not trade in the stock for at least one week from today.
See also: Microchip.com investors page; my Microchip fiscal Q1 call notes
Today Microchip stock closed at $34.14, against a 52 week high of $38.87 and low of $30.07. At that price MCHP market capitalization is $6.6 billion, and the dividend yield is 4.05%.
Last week Steve Sanghi, the CEO, reported that after a sequentially up calendar Q1 and Q2, the business environment weakened towards the end of Q2, with Europe particularly slow. The situation has not improved, so Microchip is now guiding revenues to be about flat in Q3 compared to Q2, excluding the increased revenue from the recent SMSC acquisition. [Note calendar Q2 was fiscal Q1]
The SMSC acquisition closed August 2, at a value of $946 million. For fiscal 2012 SMSC had sales of $412 million and a non-GAAP operating margin of 12%. It will fit well with Microchip's product line, as SMSC is a specialist in smart mixed signal connectivity. Its revenues are 43% from microcontrollers and 57% analog products. These are used for automotive entertainment, wireless audio, and USB and Ethernet. Sanghi believes Microchip will be able to increase gross and operating margins of the acquisition closer to its own, high-marin model.
Microchip sells to a very diverse set of customers, including manufacturers of automobiles, household appliances, and medical and industrial equipment. Microchip also has an advanced touch screen set of solutions.
SMSC will provide a boost about 3 cents per share in the first partial quarter, then 6 to 7 cents in the first full quarter, fiscal Q3.
Steve pointed out that when Microchip bought SST it had not made a profit in five years, but has had good margins once integrated. He sees SMSC as a much less difficult business to integrate and profit from.
There is plenty of competition for microcontroller chips, but Microchip now has over 7% of the market, compared to under 2% in 1994, with the market share climb being pretty steady. In 2011 Microchip was the 4th largest player in the market after Renesas, Freescale, and TI. It is second in the 8-bit segment to Renesas, which moved ahead only when it absorbed NEC.
For fiscal Q2 2013, ending September 30, 2012, revenues are now expected between $12 and $430 million and non-GAAP EPS is expected between $0.50 and $0.52.
Given the high dividend, relatively low volatility of the stock price, and further opportunity for growth, Microchip remains a good core technology investment for long term investors. The main risk I see is macroeconomic.
Disclaimer: I have been long MCHP since 2006. I will not trade in the stock for at least one week from today.
See also: Microchip.com investors page; my Microchip fiscal Q1 call notes
Thursday, September 6, 2012
Celgene Benefits from Psoriatic Arthritis Trial Data
Celgene (CELG) stock closed up $3.53 or 5% today to $74.49. This was not just from the general enthusiasm for the ECB plans to save the Euro, although a week Euro has been hurting Celgene's revenues and earnings as Europe is its second largest market after the United States. CELG's 52 week high was $80.42 on April 4 and the 52 week low was $56.79 on September 6, 2011.
When I last wrote about Celgene, on April 27, I said: "Celgene (CELG), a biopharmaceutical company therapy company, provides a double dose of growth potential: further revenue growth with its currently approved therapies and a rich pipeline with some therapies closing in on FDA approval and commercialization." See the whole article at Disappointed by Celgene's Q1?
Today Celgene announced that Phase III results from three studies. I believe those results were strong enough that Apremilast is likely to be approved for the treatment of psoriatic arthritis. Of course we won't know for sure until the final FDA vote, and even the actual submission to the FDA will not be made until Q1 2013. Apremilast is an inflammation modulator that could be usefull in other diseases caused by inflammation.
Given that Q2 numbers, reported back in late July, were pretty solid, I think that the focus will shift again to the potential value of Celgene's pipeline. Revenue was $1.37 billion, up 8% sequentially from $1.27 million and up 16% from $1.18 billion year-earlier. GAAP net income was $367.4 million, down 8% sequentially from $401.5 million but up 32% from $279.2 million year-earlier. EPS (earnings per share) were $0.82, down 9% sequentially from $0.90, but up 39% from $0.59 year-earlier.
Celgene raised its full year guidance for non-GAAP EPS to $4.80 to $4.85, up $0.05 from prior guidance.
Celgene has many therapies in its pipeline, from pre-clinical through Phases I, II, and III, but I can only cover a few specific examples that are likely to greatly increase the value of Celgene in the 2012 to 2015 timeframe. I'll focus on Abraxane and Pomalidomide, since I already covered the Apremilast news.
Abraxane is an improved formulation based on paclitaxel, which is already approved in the U.S. and Europe for breast cancer. It competes with generic paclitaxel. Revenues in Q1 were $104 million. It gave good data in trials for non-small cell lung cancer (NSCLC), and now has an application pending with the FDA, with decision due in October. In addition two Phase III trials are now fully enrolled with patients. One, in combination with gemcitabine is for pancreatic cancer, the other is for metastatic melanoma (skin cancer). Approval by the FDA would greatly increase the use of, and revenue from, Abraxane.
Pomalidomide data for relapsed and refractory multiple myeloma has been submitted to the FDA for marketing approval. It is also in a Phase III trial for myelofibrosis. Again, approval in either indication could eventually generate hundreds of millions in revenue.
Against the healthy growth in revenue from older therapies and the potential for new approvals, the current trailing price to earnings (P/E) ratio of 21.6 seems to fail to capture the train of future profits that appears to be coming down the track.
I don't see any substantial short-term down side risk for Celgene, other than normal market fluctuations. I see a number of new therapies that could be approved. If even one is approved the company would become significantly more valuable. If a number of them are approved there are going to be some really big numbers floating around for Celgene by 2015.
Keep diversified!
See also my notes on the Celgene Q2 2012 analyst call
Disclaimer: I am long (own stock in) Celgene. I will not buy or sell Celgene for at least one week after this is published.
When I last wrote about Celgene, on April 27, I said: "Celgene (CELG), a biopharmaceutical company therapy company, provides a double dose of growth potential: further revenue growth with its currently approved therapies and a rich pipeline with some therapies closing in on FDA approval and commercialization." See the whole article at Disappointed by Celgene's Q1?
Today Celgene announced that Phase III results from three studies. I believe those results were strong enough that Apremilast is likely to be approved for the treatment of psoriatic arthritis. Of course we won't know for sure until the final FDA vote, and even the actual submission to the FDA will not be made until Q1 2013. Apremilast is an inflammation modulator that could be usefull in other diseases caused by inflammation.
Given that Q2 numbers, reported back in late July, were pretty solid, I think that the focus will shift again to the potential value of Celgene's pipeline. Revenue was $1.37 billion, up 8% sequentially from $1.27 million and up 16% from $1.18 billion year-earlier. GAAP net income was $367.4 million, down 8% sequentially from $401.5 million but up 32% from $279.2 million year-earlier. EPS (earnings per share) were $0.82, down 9% sequentially from $0.90, but up 39% from $0.59 year-earlier.
Celgene raised its full year guidance for non-GAAP EPS to $4.80 to $4.85, up $0.05 from prior guidance.
Celgene has many therapies in its pipeline, from pre-clinical through Phases I, II, and III, but I can only cover a few specific examples that are likely to greatly increase the value of Celgene in the 2012 to 2015 timeframe. I'll focus on Abraxane and Pomalidomide, since I already covered the Apremilast news.
Abraxane is an improved formulation based on paclitaxel, which is already approved in the U.S. and Europe for breast cancer. It competes with generic paclitaxel. Revenues in Q1 were $104 million. It gave good data in trials for non-small cell lung cancer (NSCLC), and now has an application pending with the FDA, with decision due in October. In addition two Phase III trials are now fully enrolled with patients. One, in combination with gemcitabine is for pancreatic cancer, the other is for metastatic melanoma (skin cancer). Approval by the FDA would greatly increase the use of, and revenue from, Abraxane.
Pomalidomide data for relapsed and refractory multiple myeloma has been submitted to the FDA for marketing approval. It is also in a Phase III trial for myelofibrosis. Again, approval in either indication could eventually generate hundreds of millions in revenue.
Against the healthy growth in revenue from older therapies and the potential for new approvals, the current trailing price to earnings (P/E) ratio of 21.6 seems to fail to capture the train of future profits that appears to be coming down the track.
I don't see any substantial short-term down side risk for Celgene, other than normal market fluctuations. I see a number of new therapies that could be approved. If even one is approved the company would become significantly more valuable. If a number of them are approved there are going to be some really big numbers floating around for Celgene by 2015.
Keep diversified!
See also my notes on the Celgene Q2 2012 analyst call
Disclaimer: I am long (own stock in) Celgene. I will not buy or sell Celgene for at least one week after this is published.
Tuesday, September 4, 2012
Hansen Medical Runs Aground in Q2
Hansen Medical Inc. (HNSN) manufactures catheter based medical robots. Its stock price is in a major slump right now, opening today at $1.48, versus a fifty-two week high of $4.46 on September 20, 2011 and near its 52 week low of $1.42. Is this a buying opportunity, or a stock to be avoided even at this price?
For several years Hansen has marketed its Sensei robot for electrophysiology procedures, which measures electrical activity inside the heart. Meanwhile it has developed its robotic catheter technology for use in vascular (blood vessel) surgery. Last year its Magellan vascular robotic catheter system was approved in Europe. Late in Q2 this year the FDA granted approval for commercial sales in the U.S. Given that Magellan is believed to have an addressable market roughly ten times the size of Sensei, you might think the bulls would be running with the anticipation of future profits.
Financial results for Q2 2011, reported on August 8, are the reason for the slump. I don't think anyone expected HNSN to get to profitability, since there was no time to sell Magellan robots in the U.S. in the quarter. But sales were the worst in company history. Only one Robotic Catheter System was shipped, a Sensei, but two had recognized revenue, including the one that was shipped and one shipped in a prior quarter. Revenue was $3.5 million, down 26% sequentially from $4.7 million and down 34% from $5.3 million in the year-earlier quarter.
Net income was negative $11.5 million, up sequentially from negative $11.8 million, but down from negative $8.8 million year-earlier. EPS (earnings per share) were negative $0.19, up sequentially from negative $0.20, but down from negative $0.16 year-earlier.
Management claimed that talks are underway with hospitals in the U.S. and Europe, with multiple quotes out. While understanding that these are expensive robots that have to go through a lengthy review process before hospitals buy them, you have to ask what happened in the past that the old Sensei system sales dropped to just one in the quarter.
The Sensei systems that are already installed are being used, as indicated by 637 known EP procedures performed with them in the quarter. To try to compensate for the dismal sales results, Hansen brought into the analyst conference call Professor Cheshire of St. Mary's in London, the first hospital to treat patients with the Magellan Robotic System. He spoke on his team's collective experience in peripheral vascular, aortic, and other vascular cases. They discovered a number of useful robotic catheter techniques as they progressed from simple to more complex cases. They can now treat difficult cases. The had prior experience with the De Vinci surgical robot made by Intuitive Surgical. Cheshire believes robotics differentiates St. Mary's from competitors. Studies there showed the advantages of the Magellan system and other minimally invasive techniques. The robot is bringing patients in already.
So you are making a bet buying the stock even at this price. Are the negotiations for sales of Sensei and Magellan going to come through, and are they going to grow long-term? If your crystal ball says yes, you should scoop up all the Hansen Medical stock you can afford.
I don't have a crystal ball and I already own Hansen stock. I believe the technology developed by the company would have a great deal of value for other medical device players. So there is some low point of market capitalization that should trigger that kind of event. Market capitalization today is just $90 million. If I had that kind of money, and could buy all the stock without bidding up the price, I would do it. Then I would assess the sales pipeline. Ff I did not like it I would try to sell the business or the intellectual property to St. Jude (STJ), Intuitive Surgical, or a similar player.
Given that stocks are priced by auction, we may not be at the bottom, but I don't see a scenario where the stock is worth less than it is today if management is willing to break up or sell the company. If there really is a sales pipeline and we start seeing substantial increases in revenue in Q3 and Q4, then Q2 will seem like just a glitch and I'll be using Hansen in the future as an example of how short-sighted investors can be. And kicking myself for not buying more.
Hansen had a cash balance of $29.4 million at the end of Q2. If they don't ramp sales quickly they are either going to have to dilute the stock or borrow more money, neither of which is a pretty scenario.
Hansen Medical is not a stock for conservative investors. It has astonishing potential, long term, but it is also a long way from financing itself through profits. It should only be bought by investors who know how to manage risk.
Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post. I have no position in ISRG or STJ.
Keep diversified!
See also:
Q2 2011 Hansen Medical Analyst Call Summary
Hansen Medical main page
my other Hansen Medical articles and conference summaries
For several years Hansen has marketed its Sensei robot for electrophysiology procedures, which measures electrical activity inside the heart. Meanwhile it has developed its robotic catheter technology for use in vascular (blood vessel) surgery. Last year its Magellan vascular robotic catheter system was approved in Europe. Late in Q2 this year the FDA granted approval for commercial sales in the U.S. Given that Magellan is believed to have an addressable market roughly ten times the size of Sensei, you might think the bulls would be running with the anticipation of future profits.
Financial results for Q2 2011, reported on August 8, are the reason for the slump. I don't think anyone expected HNSN to get to profitability, since there was no time to sell Magellan robots in the U.S. in the quarter. But sales were the worst in company history. Only one Robotic Catheter System was shipped, a Sensei, but two had recognized revenue, including the one that was shipped and one shipped in a prior quarter. Revenue was $3.5 million, down 26% sequentially from $4.7 million and down 34% from $5.3 million in the year-earlier quarter.
Net income was negative $11.5 million, up sequentially from negative $11.8 million, but down from negative $8.8 million year-earlier. EPS (earnings per share) were negative $0.19, up sequentially from negative $0.20, but down from negative $0.16 year-earlier.
Management claimed that talks are underway with hospitals in the U.S. and Europe, with multiple quotes out. While understanding that these are expensive robots that have to go through a lengthy review process before hospitals buy them, you have to ask what happened in the past that the old Sensei system sales dropped to just one in the quarter.
The Sensei systems that are already installed are being used, as indicated by 637 known EP procedures performed with them in the quarter. To try to compensate for the dismal sales results, Hansen brought into the analyst conference call Professor Cheshire of St. Mary's in London, the first hospital to treat patients with the Magellan Robotic System. He spoke on his team's collective experience in peripheral vascular, aortic, and other vascular cases. They discovered a number of useful robotic catheter techniques as they progressed from simple to more complex cases. They can now treat difficult cases. The had prior experience with the De Vinci surgical robot made by Intuitive Surgical. Cheshire believes robotics differentiates St. Mary's from competitors. Studies there showed the advantages of the Magellan system and other minimally invasive techniques. The robot is bringing patients in already.
So you are making a bet buying the stock even at this price. Are the negotiations for sales of Sensei and Magellan going to come through, and are they going to grow long-term? If your crystal ball says yes, you should scoop up all the Hansen Medical stock you can afford.
I don't have a crystal ball and I already own Hansen stock. I believe the technology developed by the company would have a great deal of value for other medical device players. So there is some low point of market capitalization that should trigger that kind of event. Market capitalization today is just $90 million. If I had that kind of money, and could buy all the stock without bidding up the price, I would do it. Then I would assess the sales pipeline. Ff I did not like it I would try to sell the business or the intellectual property to St. Jude (STJ), Intuitive Surgical, or a similar player.
Given that stocks are priced by auction, we may not be at the bottom, but I don't see a scenario where the stock is worth less than it is today if management is willing to break up or sell the company. If there really is a sales pipeline and we start seeing substantial increases in revenue in Q3 and Q4, then Q2 will seem like just a glitch and I'll be using Hansen in the future as an example of how short-sighted investors can be. And kicking myself for not buying more.
Hansen had a cash balance of $29.4 million at the end of Q2. If they don't ramp sales quickly they are either going to have to dilute the stock or borrow more money, neither of which is a pretty scenario.
Hansen Medical is not a stock for conservative investors. It has astonishing potential, long term, but it is also a long way from financing itself through profits. It should only be bought by investors who know how to manage risk.
Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post. I have no position in ISRG or STJ.
Keep diversified!
See also:
Q2 2011 Hansen Medical Analyst Call Summary
Hansen Medical main page
my other Hansen Medical articles and conference summaries
Thursday, August 30, 2012
Adept Technology (ADEP) Initial Look
Adept Technology is a Pleasanton, California based maker of robotic machines for materials handling. I was mentioned in a New York Times article recently, which I read because of my interest in robots and artificial intelligence. I decided to take a look at the company as a potential investment. Yesterday Adept (ADEP) released its June quarter (fiscal Q4) results, and I listened to the analyst conference. You can read my notes at: Adept Technology fiscal Q4 2012 notes.
The first thing that individual investors should note is the Adept has a small market capitalization and is not yet profitable. Revenue in the quarter was substantial, however, at $17 million. Net income was negative $360,000, which is within sight of break-even. However bright the future of robotics and Adept might be, it needs to be treated as a risky stock. The stock price ran up after the Times article, and is falling today along with most of the market. Right now it is at $4.30, which would give it a market capitalization of $45.3 million.
I certainly don't consider a young technology company with an annual revenue run rate approaching $70 million to be overpriced when the market cap is $45.3 million and it is running near break-even.
Judging mainly from the conference, Adept makes three basic types of robots, all of which are based on artificial intelligence applied to video, as well as the usual need to manipulate the robots themselves. It mainstay is robots used in the manufacture of hard disk drives.
It has also introduced robots for handling semiconductor wafers, and has a first client for these mobile robots in Singapore.
A third line is designed to rapidly pack agricultural products in plastic clamshell packaging, and there is a California company that is the first customer and proving ground for this product.
It is tempting to plunge in and buy an initial stake of ADEP, but I am going to follow my usual path of being patient and doing more research. There are many robotics companies already, and while there are a lot of applications that could benefit from robots, it is important to understand the competition. Also, I need to read the more recent SEC filings, which I have not done yet.
I already own stock in a medical robotics company, Hansen Medical, and in a manufacturer of microcontrollers used in robotics, Microchip.
I should mention that Adept raised $3 million in the quarter through a new stock issue, and has less than $9 million in cash on hand. In addition to stock dilution through stock-based compensation, there could be a need to raise more cash.
Going forward, I would hope to see better margins on the newer robot lines. If they are valuable to customers, they should be valuable enough to price at a point where there are profit margins for Adept. Otherwise they are just having fun with robots and are not an investment-grade company.
My initial impression of Adept Technologies is very positive overall. At the same time there are a lot of alternatives for my (or your) investment cash. If I do start buying Adept I probably will report that only after the fact. Often I follow stocks for years without ever buying in.
Disclaimer: I have no relationship to ADEP and currently do not own stock. I may buy ADEP at any point without prior notice
See also: http://www.adept.com/
The first thing that individual investors should note is the Adept has a small market capitalization and is not yet profitable. Revenue in the quarter was substantial, however, at $17 million. Net income was negative $360,000, which is within sight of break-even. However bright the future of robotics and Adept might be, it needs to be treated as a risky stock. The stock price ran up after the Times article, and is falling today along with most of the market. Right now it is at $4.30, which would give it a market capitalization of $45.3 million.
I certainly don't consider a young technology company with an annual revenue run rate approaching $70 million to be overpriced when the market cap is $45.3 million and it is running near break-even.
Judging mainly from the conference, Adept makes three basic types of robots, all of which are based on artificial intelligence applied to video, as well as the usual need to manipulate the robots themselves. It mainstay is robots used in the manufacture of hard disk drives.
It has also introduced robots for handling semiconductor wafers, and has a first client for these mobile robots in Singapore.
A third line is designed to rapidly pack agricultural products in plastic clamshell packaging, and there is a California company that is the first customer and proving ground for this product.
It is tempting to plunge in and buy an initial stake of ADEP, but I am going to follow my usual path of being patient and doing more research. There are many robotics companies already, and while there are a lot of applications that could benefit from robots, it is important to understand the competition. Also, I need to read the more recent SEC filings, which I have not done yet.
I already own stock in a medical robotics company, Hansen Medical, and in a manufacturer of microcontrollers used in robotics, Microchip.
I should mention that Adept raised $3 million in the quarter through a new stock issue, and has less than $9 million in cash on hand. In addition to stock dilution through stock-based compensation, there could be a need to raise more cash.
Going forward, I would hope to see better margins on the newer robot lines. If they are valuable to customers, they should be valuable enough to price at a point where there are profit margins for Adept. Otherwise they are just having fun with robots and are not an investment-grade company.
My initial impression of Adept Technologies is very positive overall. At the same time there are a lot of alternatives for my (or your) investment cash. If I do start buying Adept I probably will report that only after the fact. Often I follow stocks for years without ever buying in.
Disclaimer: I have no relationship to ADEP and currently do not own stock. I may buy ADEP at any point without prior notice
See also: http://www.adept.com/
Tuesday, August 28, 2012
Applied Materials Q3: Trend or Dip?
Applied Materials (AMAT), the semiconductor capital equipment maker, reported worse than expected revenue and earnings for fiscal Q3 when it reported on August 15, 2012. Contrast my story about Applied's Q1, where I said results came in better than expected because "a couple of large foundries placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones."
What are investors to make of such quarterly fluctuations? Is AMAT in trouble, or is was Q3 just a small bump in the road?
Capital equipment of any kind can be very cyclical and sensitive to changes in ultimate product demand. If end-market demand is not increasing factories (in this case foundries) don't need to add more equipment to keep up with demand. In semiconductors this is somewhat mitigated by the constant shrinking of transistor sizes, but that also comes in cycles, with Intel typically doing the first shrink and everyone else catching up later depending on their specific product needs, usually new product introductions.
The numbers tell the overall story of Q3 (which ended July 29). Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter. GAAP Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier. GAAP EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.
Note that profits were substantial even at this level of revenue. This may not be the very bottom of the current cycle, but it is probably pretty close.
Foundries were cautious ordering in the quarter, prefering to risk not being able to produce enough chips in Q4 if demand is greater than expected. The same seems to be true throughout the semiconductor industry lately, with everyone trying to keep inventories low in case demand in Europe or China sinks further.
Management reported that much of the equipment is being sold to manufacture chips for mobile devices, but as device sales are seasonal, semiconductor fab equipment sales are starting to show more annual seasonality than in the past. The industry is moving to 28 nm based mobile devices, so even without global demand expansion 28 nm capacity has to be added (at 28 nm smartphone makers can get more computing capacity while extending battery life).
Applied Materials is also suffering from its display equipment segment, as display factories have plenty of capacity. However, new technologies will likely be introduced in 2013. Similarly its solar equipment sales were minimal as factories in China are able to meet short term demand for solar cells. Prices have dropped enough that demand should gradually pick up the slack caused by overproduction, despite new U.S. punitive tariffs. In addition, there has been talk of Applied selling its solar division. That makes no sense to me, it would make more sense to at least hold onto it until demand returns, when it would fetch a considerably better price.
One strong point for Applied during demand dips is its services division. Old equipment needs maintenance. Services revenue was $579 million, up 5% in the quarter.
Of course if the global economy melts down even bonds and gold will be worthless, but the most likely scenario for Applied Materials is for stronger growth in late 2012 and into 2013. This will be driven by returning demand for display and solar manufacturing equipment, as well as the more complicated (and expensive) equipment lines needed to manufacturer semiconductor chips and 28 nm and below.
AMAT has a number of competitors, but loss of market share has not been an issue. Applied spent $209 million on research and development in the quarter and has a healthy pipeline of new and future products.
For more details about Q3 results, including questions by analysts, see my Applied Materials Q3 2012 Analyst Call notes.
If you are a long-term investor in Applied Materials you can still do what I do, taking advantage of the mistakes of short-termers. We know revenue of from sales of expensive pieces of capital equipment will be cyclic. In the long run the cycles don't matter to much, only the long-term trend and dividends. On down legs the stock tends to be underpriced, and at least in bull markets on the upward portion of cycles the stock may get overpriced. Buy low, sell high. There are always people doing the opposite who will be happy to trade with you.
AMAT stock ended yesterday at , giving it a market capitalization near $14.3 billion. Its 52 week low was $9.70 on October 4, 2011, and its 52 week high was $13.94 on February 17. It pays $0.09 per quarter in dividends, making its yield today 3.1%.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
See also the Applied Materials web site.
And keep diversified!
What are investors to make of such quarterly fluctuations? Is AMAT in trouble, or is was Q3 just a small bump in the road?
Capital equipment of any kind can be very cyclical and sensitive to changes in ultimate product demand. If end-market demand is not increasing factories (in this case foundries) don't need to add more equipment to keep up with demand. In semiconductors this is somewhat mitigated by the constant shrinking of transistor sizes, but that also comes in cycles, with Intel typically doing the first shrink and everyone else catching up later depending on their specific product needs, usually new product introductions.
The numbers tell the overall story of Q3 (which ended July 29). Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter. GAAP Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier. GAAP EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.
Note that profits were substantial even at this level of revenue. This may not be the very bottom of the current cycle, but it is probably pretty close.
Foundries were cautious ordering in the quarter, prefering to risk not being able to produce enough chips in Q4 if demand is greater than expected. The same seems to be true throughout the semiconductor industry lately, with everyone trying to keep inventories low in case demand in Europe or China sinks further.
Management reported that much of the equipment is being sold to manufacture chips for mobile devices, but as device sales are seasonal, semiconductor fab equipment sales are starting to show more annual seasonality than in the past. The industry is moving to 28 nm based mobile devices, so even without global demand expansion 28 nm capacity has to be added (at 28 nm smartphone makers can get more computing capacity while extending battery life).
Applied Materials is also suffering from its display equipment segment, as display factories have plenty of capacity. However, new technologies will likely be introduced in 2013. Similarly its solar equipment sales were minimal as factories in China are able to meet short term demand for solar cells. Prices have dropped enough that demand should gradually pick up the slack caused by overproduction, despite new U.S. punitive tariffs. In addition, there has been talk of Applied selling its solar division. That makes no sense to me, it would make more sense to at least hold onto it until demand returns, when it would fetch a considerably better price.
One strong point for Applied during demand dips is its services division. Old equipment needs maintenance. Services revenue was $579 million, up 5% in the quarter.
Of course if the global economy melts down even bonds and gold will be worthless, but the most likely scenario for Applied Materials is for stronger growth in late 2012 and into 2013. This will be driven by returning demand for display and solar manufacturing equipment, as well as the more complicated (and expensive) equipment lines needed to manufacturer semiconductor chips and 28 nm and below.
AMAT has a number of competitors, but loss of market share has not been an issue. Applied spent $209 million on research and development in the quarter and has a healthy pipeline of new and future products.
For more details about Q3 results, including questions by analysts, see my Applied Materials Q3 2012 Analyst Call notes.
If you are a long-term investor in Applied Materials you can still do what I do, taking advantage of the mistakes of short-termers. We know revenue of from sales of expensive pieces of capital equipment will be cyclic. In the long run the cycles don't matter to much, only the long-term trend and dividends. On down legs the stock tends to be underpriced, and at least in bull markets on the upward portion of cycles the stock may get overpriced. Buy low, sell high. There are always people doing the opposite who will be happy to trade with you.
AMAT stock ended yesterday at , giving it a market capitalization near $14.3 billion. Its 52 week low was $9.70 on October 4, 2011, and its 52 week high was $13.94 on February 17. It pays $0.09 per quarter in dividends, making its yield today 3.1%.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
See also the Applied Materials web site.
And keep diversified!
Saturday, August 25, 2012
Akamai Price Justified?
Akamai (AKAM) has made and lost investors and speculators vast sums of money over the years, going back to the original Internet bubble of the late 1990s. Yesterday the stock closed at $37.10, giving it a market capitalization near $6.58 billion. It had a trailing Price to Earnings (P/E) ratio just over 35 (per NASDAQ), considerably higher than most technology stocks currently. That indicates either that investors expect substantial profit growth in the future, or that speculators have bought into momentum and are ready to get out quickly if the momentum turns. Or both.
Akamai's core technology accelerates the delivery of Web pages and media. This is critical to e-commerce sites, where people may go elsewhere or fail to make a purchase if a page downloads slowly. It is also crucial to video and audio playing without stuttering. Building on that, Akamai offers its enterprise partners other key Internet cloud technologies, notably security.
Look at the quarter results and analyst conference of July 25 and you will see that Revenue was $331.3 million, up 4% sequentially from $319.4 million and up 20% from $277.0 million year-earlier. But GAAP net income was $44.2 million, down 8% from $47.9 million year-earlier. GAAP EPS (earnings per share) were $0.24, were down 4% from $0.25 year-earlier.
So GAAP profits did not climb y/y the way you would expect a company with a P/E of 35. Akamai reported non-GAAP "normalized net income" of $78 million or $0.43 per share, up 3% sequentially and 23% y/y. EBITDA was $143 million, flat sequentially and up 13% from year-earlier. Cash flow from operations was $150 million. $67 million was spent in the quarter to repurchase stock. Capital expenditures were $56 million.
Clearly Akamai bulls are looking at revenue growth and cash flow growth, rather than GAAP numbers. Akamai has a rather high non-cash stock-based compensation expense, $25.6 million in the quarter, and depreciation and amortization, $50.1 million in the quarter. That accounts for most of the difference between the grim GAAP profit lack of growth and the outstanding non-GAAP growth rates.
Revenues and profits depend primarily on the dynamics between Internet data growth and drops in pricing. According the Akamai, pricing drops are not primarily due to competition, although Akamai has competitors who are forced to compete on price. Rather Akamai drops prices on a regular basis to encourage data growth. In the long run this helps its customers and yet grows Akamai profits. There is no sign that the amount of data sent over the Internet will stall anytime soon as the use of mobile devices and video expand. There is also an ongoing expansion of the customer base to lower-income users around the world.
Guidance for Q3 is for increased income and a slight contraction in non-GAAP EPS. Internet traffic is seasonal, with lows during summers, but a lot of people used the Internet to watch the Olympics. The better guide to Akamai performance is growth over periods of a year or longer.
For most investors AKAM has probably reached the point where the high P/E is getting hard to justify, given the other choices in the market. I originally bought AKAM during a slump when it was clearly undervalued, and because of its volatility I have traded in and out more than I like (I am a buy and hold guy). Given Internet trends, and Akamai's move into security and other cloud services, I think over the longer run Akamai will become considerably more profitable, but there is some P/E height at which I would dump the stock. Then again, if the P/E dropped below 25, I would be a buyer again.
Since I've made a deal out of P/E ratios as buy and sell signals, I should note that you can get different P/Es by looking at GAAP vs. non-GAAP and different time spans. As a check, note the non-GAAP EPS for Q2 was $0.43. A year's EPS at that rate would be $1.72. Divide into $37.10 and you get a P/E of 21.6. Which is a much safer sounding number than NASDAQ's trailing P/E calculation of 35. On the other hand the GAAP current P/E would be $37.10 / 4 x $0.24, or 38.6, which sounds much more pricey. You might want to think deeply about Akamai's reasons for reporting non-GAAP numbers before you trade this stock.
Disclaimer: I am long AKAM and won't trade in it for 5 days after this article is originally published.
Akamai's core technology accelerates the delivery of Web pages and media. This is critical to e-commerce sites, where people may go elsewhere or fail to make a purchase if a page downloads slowly. It is also crucial to video and audio playing without stuttering. Building on that, Akamai offers its enterprise partners other key Internet cloud technologies, notably security.
Look at the quarter results and analyst conference of July 25 and you will see that Revenue was $331.3 million, up 4% sequentially from $319.4 million and up 20% from $277.0 million year-earlier. But GAAP net income was $44.2 million, down 8% from $47.9 million year-earlier. GAAP EPS (earnings per share) were $0.24, were down 4% from $0.25 year-earlier.
So GAAP profits did not climb y/y the way you would expect a company with a P/E of 35. Akamai reported non-GAAP "normalized net income" of $78 million or $0.43 per share, up 3% sequentially and 23% y/y. EBITDA was $143 million, flat sequentially and up 13% from year-earlier. Cash flow from operations was $150 million. $67 million was spent in the quarter to repurchase stock. Capital expenditures were $56 million.
Clearly Akamai bulls are looking at revenue growth and cash flow growth, rather than GAAP numbers. Akamai has a rather high non-cash stock-based compensation expense, $25.6 million in the quarter, and depreciation and amortization, $50.1 million in the quarter. That accounts for most of the difference between the grim GAAP profit lack of growth and the outstanding non-GAAP growth rates.
Revenues and profits depend primarily on the dynamics between Internet data growth and drops in pricing. According the Akamai, pricing drops are not primarily due to competition, although Akamai has competitors who are forced to compete on price. Rather Akamai drops prices on a regular basis to encourage data growth. In the long run this helps its customers and yet grows Akamai profits. There is no sign that the amount of data sent over the Internet will stall anytime soon as the use of mobile devices and video expand. There is also an ongoing expansion of the customer base to lower-income users around the world.
Guidance for Q3 is for increased income and a slight contraction in non-GAAP EPS. Internet traffic is seasonal, with lows during summers, but a lot of people used the Internet to watch the Olympics. The better guide to Akamai performance is growth over periods of a year or longer.
For most investors AKAM has probably reached the point where the high P/E is getting hard to justify, given the other choices in the market. I originally bought AKAM during a slump when it was clearly undervalued, and because of its volatility I have traded in and out more than I like (I am a buy and hold guy). Given Internet trends, and Akamai's move into security and other cloud services, I think over the longer run Akamai will become considerably more profitable, but there is some P/E height at which I would dump the stock. Then again, if the P/E dropped below 25, I would be a buyer again.
Since I've made a deal out of P/E ratios as buy and sell signals, I should note that you can get different P/Es by looking at GAAP vs. non-GAAP and different time spans. As a check, note the non-GAAP EPS for Q2 was $0.43. A year's EPS at that rate would be $1.72. Divide into $37.10 and you get a P/E of 21.6. Which is a much safer sounding number than NASDAQ's trailing P/E calculation of 35. On the other hand the GAAP current P/E would be $37.10 / 4 x $0.24, or 38.6, which sounds much more pricey. You might want to think deeply about Akamai's reasons for reporting non-GAAP numbers before you trade this stock.
Disclaimer: I am long AKAM and won't trade in it for 5 days after this article is originally published.
Wednesday, August 22, 2012
TTM Technologies Prepares for Future Mobile Device Demand
Almost every electronic device made contains at least one printed circuit board, or PCB. The leading U.S.-based manufacturer of PCBs is TTM Technologies (TTMI). Post the acquisition of a Hong Kong based PCB manufacturer, TTM is able to serve its customers with quick-turnaround, small quantity prototyping in the U.S. and low-cost mass production in China. Its five largest clients by revenue in Q2 were, in alphabetical order, Apple, Cisco, Ericson, Huawei, and IBM.
Revenues were disappointing in Q2 at $327.4 million, up 9% sequentially from $300.5 million but down 11% from $366.1 million in the year-earlier quarter. The y/y drop reflected a slowdown in the telecommunications sector. This was also reflected in Juniper and ZTE dropping out of the top-five customer list, though they remain major customers.
As one of the world's largest manufacturers of PCBs, TTM has trouble escaping fluctuations in global demand. Despite that, the industry is consolidating as smaller players, particularly in the U.S., are unable to make the capital investments necessary to create PCBs with ever-denser component layouts. In particular smartphones and tablet computers are built on PCBs with multiple layers and high-density interconnections (HDI). In 2011 and this year TTM has been investing significant cash in upgrading its Chinese factories to be able to handle more HDI work.
TTM management is expecting a surge in smartphone and tablet production for Q3 and Q4. Exactly how much of a surge depends on end consumer demand, particularly in Europe, the U.S., and China.
Even at Q2 levels of revenue TTM generated profits and cash. Non-GAAP net income was $13.6 million, down sequentially from $18.8 million and down from $32.9 million year-earlier. EPS was $0.17. EBITDA was $42.3 million, and cash flow from operations was $39 million. Capital expenditures in the quarter were $33 million.
Cash and equivalents balance ended at $248.5 million. TTM has $299.9 million net debt, reflecting the cost of acquiring and upgrading the Chinese factories.
During the quarter revenue from Chinese operations was $195.6 million, while U.S. factories generated $132.3 million.
I like TTMI partly because it is an unglamorous yet essential part of the electronics industry. While there is certainly competition in the PCB industry both in the U.S. and globally, TTMI has a strategic advantage thought it leading edge PCB manufacturing capabilities and volume production capabilities. Smartphone turnover at the consumer level is far quicker that most prior electronic devices, guaranteeing demand for HDI PCBS for the foreseeable future. I don't care who the smartphone, e-book reader, or tablet winners are, as long as they get their PCBs from TTMI.
I see TTMI finishing most of its capital buildout this year. In 2013 it should turn into a cash cow, capable of quickly paying down debt and returning cash to shareholders.
TTMI closed today at $10.20, up 1.39%. It has a 52-week high of $13.75 and low of $8.55. The trailing P/E is 15.94.
Disclaimer: I am long TTMI. I will not trade in the stock for 1 week after this is first published.
The usual risks and uncertainties apply, so keep diversified!
Revenues were disappointing in Q2 at $327.4 million, up 9% sequentially from $300.5 million but down 11% from $366.1 million in the year-earlier quarter. The y/y drop reflected a slowdown in the telecommunications sector. This was also reflected in Juniper and ZTE dropping out of the top-five customer list, though they remain major customers.
As one of the world's largest manufacturers of PCBs, TTM has trouble escaping fluctuations in global demand. Despite that, the industry is consolidating as smaller players, particularly in the U.S., are unable to make the capital investments necessary to create PCBs with ever-denser component layouts. In particular smartphones and tablet computers are built on PCBs with multiple layers and high-density interconnections (HDI). In 2011 and this year TTM has been investing significant cash in upgrading its Chinese factories to be able to handle more HDI work.
TTM management is expecting a surge in smartphone and tablet production for Q3 and Q4. Exactly how much of a surge depends on end consumer demand, particularly in Europe, the U.S., and China.
Even at Q2 levels of revenue TTM generated profits and cash. Non-GAAP net income was $13.6 million, down sequentially from $18.8 million and down from $32.9 million year-earlier. EPS was $0.17. EBITDA was $42.3 million, and cash flow from operations was $39 million. Capital expenditures in the quarter were $33 million.
Cash and equivalents balance ended at $248.5 million. TTM has $299.9 million net debt, reflecting the cost of acquiring and upgrading the Chinese factories.
During the quarter revenue from Chinese operations was $195.6 million, while U.S. factories generated $132.3 million.
I like TTMI partly because it is an unglamorous yet essential part of the electronics industry. While there is certainly competition in the PCB industry both in the U.S. and globally, TTMI has a strategic advantage thought it leading edge PCB manufacturing capabilities and volume production capabilities. Smartphone turnover at the consumer level is far quicker that most prior electronic devices, guaranteeing demand for HDI PCBS for the foreseeable future. I don't care who the smartphone, e-book reader, or tablet winners are, as long as they get their PCBs from TTMI.
I see TTMI finishing most of its capital buildout this year. In 2013 it should turn into a cash cow, capable of quickly paying down debt and returning cash to shareholders.
TTMI closed today at $10.20, up 1.39%. It has a 52-week high of $13.75 and low of $8.55. The trailing P/E is 15.94.
Disclaimer: I am long TTMI. I will not trade in the stock for 1 week after this is first published.
The usual risks and uncertainties apply, so keep diversified!
Friday, August 17, 2012
Dendreon Provenge Sales Wobbling
Reporting on Q2, Dendreon managed to pull a skunk out of a hat. I said in my last Dendreon column, Dendreon's Boring Q1 Results, that "Failure to gain approval in Europe, or continue to ramp sales up past the $125 million per quarter level, would tank this stock further."
Q2 revenues from Provenge for metastatic non-symptomatic prostate cancer were $80.0 million, down 2% sequentially from $82.0 million, but up 66% from $48.2 million in the year-earlier quarter.
Investors were not appeased by management's plan to close down it New Jersey manufacturing facility and other cost cutting measures.
Shorts and backers of rival prostate cancer therapies have been trashing Provenge for close to a decade now. But from its introduction until Q1, 2012 revenues grew each quarter sequentially. Note that even the poor Q2 results were up 66% from the year-earlier period. Dendreon supporters (including me) understood that since Provenge is complicated to administer, and expensive, it was not likely to ramp as quickly as an oral or even an IV administered therapy.
$80.0 million, at about $0.1 million a pop, means about 800 patients in the quarter. Management offered the theory that sales were poor because individuals in their sales force had been lured away by rivals (not necessarily prostate cancer therapy rivals). They claimed a correlation between areas where there were holes in the sales force and areas where new patients failed to materialize. While that may be true, it also says something about Provenge not yet being a preferred option for many oncologists, urologists, and patients.
On the positive side, more data analysis of Provenge's effectiveness were released during the quarter. It is possible that, as the word gets out that it extend's the average patient's life more than a few weeks, it will become more attractive. Doctors and patients will be more likely to try it during the "window" that the label allows for (you can't prescribe on-label if the cancer is not metastatic and hormone-castration resistant, but once it progresses to being symptomatic, in this case meaning painful, the patient has again also gone off-label).
It is easy to verify that Provenge is now widely available as a therapy. As a test I was easily able to find several qualified providers within a 100 mile radius of my home [try: Provenge provider locator]. There may still be holes in the geographic coverage, but they are not very extensive. Anecdotal evidence that there are men who have lived much longer than expected following Provenge therapy is also easy to find, at least on the Internet. While Provenge is complex to administer, its side-effects are minimal for a cancer therapy.
How much hope is there for a Dendreon stock price recovery at this point? Today Dendreon closed at $$4.94, corresponding to a market capitalization of $761 million. The recent low, following the release of Q2 results, was $4.17, while the 52 week high was $17.04. In the euphoria after FDA approval the stock hit $54.06 in April, 2010.
When the New Jersey facility is closed and the deadweight in Seattle is ushered out, current management expects a break-even run rate of $100 million per quarter, or $400 million per year.
It is anyone's guess whether Dendreon can make it to break even and beyond. Break even means over 1000 patients per quarter, or up over 200 from Q2, or a 25% increase. You would think that would be doable, but if were doable it should have been done in Q2.
What we have, apparently, is an army of rival sales people in the field not only pushing their therapy, but in the process trying to push patients out of the Provenge therapeutic window. The Provenge data looks compelling to me, but apparently it is not so compelling to at least a portion of the oncologists and urologists out there. It may be too bad we have medical decisions effectively made by profit-driven sales pitches, but that is not going to change anytime soon.
On the upside is the possibility of European approval some time in 2013. Given the expense of Provenge therapy, and the state of European economics, even if approved there might be some negotiation over price and another slow ramp. Still, Europe is a big market, and then there is the rest of the globe.
If Q2 turns out to be an anomaly, if Q3 revenues are north of $85 million, then those who dumped Dendreon in the $4 range will look like fools. I like Dendreon at this price, but not enough to actually buy any more until I see a significant uptrend in revenue.
Manage your risk, keep diversified!
Disclaimer: I am long Dendreon. I won't trade DNDN for 1 week following the publication of this article.
See also my Dendreon Q2 2012 analyst call summary
Q2 revenues from Provenge for metastatic non-symptomatic prostate cancer were $80.0 million, down 2% sequentially from $82.0 million, but up 66% from $48.2 million in the year-earlier quarter.
Investors were not appeased by management's plan to close down it New Jersey manufacturing facility and other cost cutting measures.
Shorts and backers of rival prostate cancer therapies have been trashing Provenge for close to a decade now. But from its introduction until Q1, 2012 revenues grew each quarter sequentially. Note that even the poor Q2 results were up 66% from the year-earlier period. Dendreon supporters (including me) understood that since Provenge is complicated to administer, and expensive, it was not likely to ramp as quickly as an oral or even an IV administered therapy.
$80.0 million, at about $0.1 million a pop, means about 800 patients in the quarter. Management offered the theory that sales were poor because individuals in their sales force had been lured away by rivals (not necessarily prostate cancer therapy rivals). They claimed a correlation between areas where there were holes in the sales force and areas where new patients failed to materialize. While that may be true, it also says something about Provenge not yet being a preferred option for many oncologists, urologists, and patients.
On the positive side, more data analysis of Provenge's effectiveness were released during the quarter. It is possible that, as the word gets out that it extend's the average patient's life more than a few weeks, it will become more attractive. Doctors and patients will be more likely to try it during the "window" that the label allows for (you can't prescribe on-label if the cancer is not metastatic and hormone-castration resistant, but once it progresses to being symptomatic, in this case meaning painful, the patient has again also gone off-label).
It is easy to verify that Provenge is now widely available as a therapy. As a test I was easily able to find several qualified providers within a 100 mile radius of my home [try: Provenge provider locator]. There may still be holes in the geographic coverage, but they are not very extensive. Anecdotal evidence that there are men who have lived much longer than expected following Provenge therapy is also easy to find, at least on the Internet. While Provenge is complex to administer, its side-effects are minimal for a cancer therapy.
How much hope is there for a Dendreon stock price recovery at this point? Today Dendreon closed at $$4.94, corresponding to a market capitalization of $761 million. The recent low, following the release of Q2 results, was $4.17, while the 52 week high was $17.04. In the euphoria after FDA approval the stock hit $54.06 in April, 2010.
When the New Jersey facility is closed and the deadweight in Seattle is ushered out, current management expects a break-even run rate of $100 million per quarter, or $400 million per year.
It is anyone's guess whether Dendreon can make it to break even and beyond. Break even means over 1000 patients per quarter, or up over 200 from Q2, or a 25% increase. You would think that would be doable, but if were doable it should have been done in Q2.
What we have, apparently, is an army of rival sales people in the field not only pushing their therapy, but in the process trying to push patients out of the Provenge therapeutic window. The Provenge data looks compelling to me, but apparently it is not so compelling to at least a portion of the oncologists and urologists out there. It may be too bad we have medical decisions effectively made by profit-driven sales pitches, but that is not going to change anytime soon.
On the upside is the possibility of European approval some time in 2013. Given the expense of Provenge therapy, and the state of European economics, even if approved there might be some negotiation over price and another slow ramp. Still, Europe is a big market, and then there is the rest of the globe.
If Q2 turns out to be an anomaly, if Q3 revenues are north of $85 million, then those who dumped Dendreon in the $4 range will look like fools. I like Dendreon at this price, but not enough to actually buy any more until I see a significant uptrend in revenue.
Manage your risk, keep diversified!
Disclaimer: I am long Dendreon. I won't trade DNDN for 1 week following the publication of this article.
See also my Dendreon Q2 2012 analyst call summary
Monday, August 13, 2012
3 NASDAQ 100 Biotechs: Gilead, Celgene, Biogen Idec
When I wrote about Gilead Sciences (GILD), on July 26, 2011, I said "A convergence of factors is driving Gilead profits higher. This trend should accelerate in 2012 and continue through at least 2015." [See Gilead Sciences Readies Pipeline]. Gilead stock that day closed at $42.16. This morning GILD opened at $56.42. While I am a long-term investor, it is encouraging to see these short-term results.
The forward-looking story is now largely about curing Hepatitis C and refreshing Gilead's market-dominating anti-HIV franchise, but first the backward-looking numbers.
In Q2 revenue was $2.41 billion, up 6% sequentially from $2.28 billion and up 13% from $2.14 billion in the year-earlier quarter. GAAP net income was $711.6 million, up 61% sequentially from $442.0 million, but down 5% from $746.2 million in the year-earlier quarter. GAAP earnings per share (EPS) were $0.91, up 60% sequentially from $0.57, but down 2% from $0.93 year-earlier. Eliminating one-time and non-cash items, Non-GAAP EPS was $0.99, up 9% sequentially from $0.91, but down 1% from $1.00 year-earlier.
The y/y EPS showing may make you wonder why the stock is up so much. Bringing the new HIV drugs to the FDA and the hepatitis drugs through clinical trials is adding to expenses. The price of the stock had been beaten down because of fears of expiring patents. The increased revenue promises a healthy dose of future profits since it now appears the HIV franchise will remain strong and hep c revenues may kick in as early as 2014. Recent Phase II hep c trials have been encouraging. The goal is to have a multi-agent, highly effective once-a-day tablet that will completely cure hepatitis C over a reasonably short period of time.
Gilead's P/E Ratio? Just over 17. It's a bargain.
Celgene (CELG) also is generating healthy profits while getting ready to introduce blockbuster therapies over the next few years.
Celgene Q2 revenue was $1.37 billion, up 8% sequentially from $1.27 million and up 16% from $1.18 billion year-earlier. GAAP net income was $367.4 million, down 8% sequentially from $401.5 million but up 32% from $279.2 million year-earlier. GAAP EPS (earnings per share) were $0.82, down 9% sequentially from $0.90, but up 39% from $0.59 year-earlier.
With a 39% y/y growth in GAAP EPS, you might think Celgene would be flying with a higher P/E ratio. Is is just GAAP accounting? No, non-GAAP EPS in Q2 was $1.22, up 13% sequentially from $1.08 and up 37% from $0.89 year-earlier.
Celgene closed a bit down today at $71.85, but a year ago it was selling for under $55. Its P/E Ratio is near 21.
The two new Celgene drugs that could produce revenue in 2013 are Pomalidomide for relapsed and refractory multiple myeloma and Apremilast for psoriatic arthritis and psoriasis. Safety and efficacy look good for both drugs, but there is always a chance that the FDA will disapprove or cause delays by asking for more clinical data.
Biogen Idec has already proven itself to be one of the big winners of late.
Biogen (BIIB) closed today at $144.54. In 2010 you could have bought it in the fifties most of the year. It has a higher P/E Ratio than Celgene or Gilead at just over 26.
So is BIIB more of a product for profit taking? [Disclaimer: I did already take some profits on this one, but it's gone up since then.]
Q2 revenue was $1.421 billion, up 10% sequentially from $1.292 billion and up 17.5% from $1.209 billion in the year-earlier quarter. GAAP net income was $386.8 million, up 28% sequentially from $302.7 million and up 34% from $288.0 million year-earlier. GAAP EPS (earnings per share) were $1.61, up 29% sequentially from $1.25 and up 36% from $1.18 year-earlier.
That alone would seem to justify the P/E, but like Celgene and Gilead, Biogen has a pipeline that could mint money for investors. The first one coming up for an FDA decision is BG-12 (dimethyl fumarate), an oral therapy for multiple sclerosis. The data looks good and a positive FDA decision would mean a commercial launch this year.
While each of these stocks has its risks, as a group they have a large number of profitable drugs and a large number of therapies in their pipelines. Holding all three minimizes risk. They are all in the NASDAQ 100.
Keep Diversified!
Disclaimer: I am a long-term investor in Gilead Sciences, Celgene, and Biogen Idec. I will not trade in the stock for a week from today.
See also:
my Gilead Sciences Q2 2012 analyst call summary
Celgene Q2 2012 analyst call summary
Biogen Idec Q2 2012 analyst call summary
The forward-looking story is now largely about curing Hepatitis C and refreshing Gilead's market-dominating anti-HIV franchise, but first the backward-looking numbers.
In Q2 revenue was $2.41 billion, up 6% sequentially from $2.28 billion and up 13% from $2.14 billion in the year-earlier quarter. GAAP net income was $711.6 million, up 61% sequentially from $442.0 million, but down 5% from $746.2 million in the year-earlier quarter. GAAP earnings per share (EPS) were $0.91, up 60% sequentially from $0.57, but down 2% from $0.93 year-earlier. Eliminating one-time and non-cash items, Non-GAAP EPS was $0.99, up 9% sequentially from $0.91, but down 1% from $1.00 year-earlier.
The y/y EPS showing may make you wonder why the stock is up so much. Bringing the new HIV drugs to the FDA and the hepatitis drugs through clinical trials is adding to expenses. The price of the stock had been beaten down because of fears of expiring patents. The increased revenue promises a healthy dose of future profits since it now appears the HIV franchise will remain strong and hep c revenues may kick in as early as 2014. Recent Phase II hep c trials have been encouraging. The goal is to have a multi-agent, highly effective once-a-day tablet that will completely cure hepatitis C over a reasonably short period of time.
Gilead's P/E Ratio? Just over 17. It's a bargain.
Celgene (CELG) also is generating healthy profits while getting ready to introduce blockbuster therapies over the next few years.
Celgene Q2 revenue was $1.37 billion, up 8% sequentially from $1.27 million and up 16% from $1.18 billion year-earlier. GAAP net income was $367.4 million, down 8% sequentially from $401.5 million but up 32% from $279.2 million year-earlier. GAAP EPS (earnings per share) were $0.82, down 9% sequentially from $0.90, but up 39% from $0.59 year-earlier.
With a 39% y/y growth in GAAP EPS, you might think Celgene would be flying with a higher P/E ratio. Is is just GAAP accounting? No, non-GAAP EPS in Q2 was $1.22, up 13% sequentially from $1.08 and up 37% from $0.89 year-earlier.
Celgene closed a bit down today at $71.85, but a year ago it was selling for under $55. Its P/E Ratio is near 21.
The two new Celgene drugs that could produce revenue in 2013 are Pomalidomide for relapsed and refractory multiple myeloma and Apremilast for psoriatic arthritis and psoriasis. Safety and efficacy look good for both drugs, but there is always a chance that the FDA will disapprove or cause delays by asking for more clinical data.
Biogen Idec has already proven itself to be one of the big winners of late.
Biogen (BIIB) closed today at $144.54. In 2010 you could have bought it in the fifties most of the year. It has a higher P/E Ratio than Celgene or Gilead at just over 26.
So is BIIB more of a product for profit taking? [Disclaimer: I did already take some profits on this one, but it's gone up since then.]
Q2 revenue was $1.421 billion, up 10% sequentially from $1.292 billion and up 17.5% from $1.209 billion in the year-earlier quarter. GAAP net income was $386.8 million, up 28% sequentially from $302.7 million and up 34% from $288.0 million year-earlier. GAAP EPS (earnings per share) were $1.61, up 29% sequentially from $1.25 and up 36% from $1.18 year-earlier.
That alone would seem to justify the P/E, but like Celgene and Gilead, Biogen has a pipeline that could mint money for investors. The first one coming up for an FDA decision is BG-12 (dimethyl fumarate), an oral therapy for multiple sclerosis. The data looks good and a positive FDA decision would mean a commercial launch this year.
While each of these stocks has its risks, as a group they have a large number of profitable drugs and a large number of therapies in their pipelines. Holding all three minimizes risk. They are all in the NASDAQ 100.
Keep Diversified!
Disclaimer: I am a long-term investor in Gilead Sciences, Celgene, and Biogen Idec. I will not trade in the stock for a week from today.
See also:
my Gilead Sciences Q2 2012 analyst call summary
Celgene Q2 2012 analyst call summary
Biogen Idec Q2 2012 analyst call summary
Friday, July 20, 2012
ONYX Pharmaceuticals, AMD notes
I am busy with a Microsoft project, so I am unlikely to post a full article here again until some time in August.
Meanwhile, my portfolio illustrates that while diversification has its benefits, it has its risks too. My AMD stock is way, way down. I did take notes on Thursday's analyst call, which you are welcome to read, as always: AMD analyst call summaries.
Onyx Pharmaceuticals (ONXX) on the other hand is way up because Kyprolis was approved ahead of schedule for treatment of multiple myeloma. See their press release: Onyx Pharmaceuticals Receives FDA Accelerated Approval of Kyrpolis.
Great work, everyone at Onyx.
What do you think Onyx is worth now? For the moment I'll stick with my ONXX back of envelope thinking.
Meanwhile, my portfolio illustrates that while diversification has its benefits, it has its risks too. My AMD stock is way, way down. I did take notes on Thursday's analyst call, which you are welcome to read, as always: AMD analyst call summaries.
Onyx Pharmaceuticals (ONXX) on the other hand is way up because Kyprolis was approved ahead of schedule for treatment of multiple myeloma. See their press release: Onyx Pharmaceuticals Receives FDA Accelerated Approval of Kyrpolis.
Great work, everyone at Onyx.
What do you think Onyx is worth now? For the moment I'll stick with my ONXX back of envelope thinking.
Wednesday, June 27, 2012
Onyx Pharmaceuticals new Back of Envelope Valuation
On June 21, 2012, Onyx Pharmaceuticals popped 37% from the prior close of $44.58 to $61.20 per share. On June 26 it closed at $67.12 after hitting a 52 week high of $67.62. The immediate cause was the June 20 vote of the FDA's cancer advisory panel in favor of approving carfilzomib (now Kyprolis) for patients with relapsed and refractory multiple myeloma who have received at least two prior lines of therapy [See Kyprolis Receives Positive Vote from ODAC, June 20, 2012]. This vote does not guarantee an FDA approval, but makes it highly likely.
I have been an Onyx optimist (with the usual caveats) since I first bought stock at $34.87 per share in May of 2008. Is today's price too high? Should I cash in or cut back my position? More importantly, is it too late to get in, or is this a good time for new investors to get in on what might be a very nice train of future profits? Either way it is a good time to make a new back of the envelope estimate of the future value of Onyx Pharmaceuticals. That done, I'll compare it to estimates from sell-side (Wall Street investment bank) analysts.
By way of background, at analyst conferences and in investor presentations, Onyx management (led by CEO Anthony Coles) has emphasized that while they think the Kyprolis data is compelling, it comes from a Phase 2 trial. The FDA rarely approves drugs based on Phase II results, they usually require Phase III trials, which are based on considerably larger numbers of patients. The company already has two Phase III trials of Kyprolis underway. These could provide data sufficient for approval even if the FDA turns the drug down in this round, and in any case would be necessary for approval by the European medical agency.
So why should an advisory board vote (ODAC, the Oncologic Drugs Advisory Committee), even if it was for Kyprolis approval 11-0-1 (the 1 is an abstention), cause such a large jump in the stock price? Most pharma analysts are pretty good at interpreting trial data. Everyone knew, from public presentations, that the Kyprolis data was pretty darned good and so highly likely to get approved when the Phase III data is submitted, if not based on the Phase II data alone.
There are two possible reasons for disapproval: lack of effectiveness, and side effects (adverse reactions, in industry parlance). The concern of stock analysts was mainly about side effects; some serious ones showed up in the Phase II data. That said, adverse reactions have to be taken in context. If a patient has no other treatment options and is likely to die in a few weeks of blood cancer, some side effect risk is much more acceptable than if the same side effect occurred in a drug intended give long-term to control weight or blood pressure, for instance. Kyprolis so far has shown a reasonable safety profile compared to other cancer and chemotherapy drugs.
This is a very risk adverse stock market in general. Just the possibility that Kyprolis data might not get FDA clearance was enough to dog the stock. There is always the possibility that Phase III data would come in worse than the Phase II data. It has happened to other drug candidates, and statistically it should happen every so often just because of the sampling probabilities involved. The ODAC vote did not really change the likelihood that Kyprolis would be on the market sooner or later, but it did give investors a higher degree of confidence in the outcome. Of course earlier market entry also means revenue and profits sooner.
Onyx already has a successful cancer drug, Nexavar, which is marketed by Bayer. The main reason that its profits have been minimal these last few years is that it has taken the Nexavar cash flow and invested in trials for further indications for Nexavar and in other candidates in its pipeline, notably Kyprolis, which it acquired from Proteolix in 2009.
Given that Nexavar revenue already covers basic operation expenses, and that Kyprolis is not a particularly expensive drug to produce in quantity, profit margins on any new revenue generated by Kyprolis should be high.
Multiple myeloma is a fast moving, deadly disease. While current therapies slow it down, they rarely cure it. If approved for third-line therapy Kyprolis could be given to most people who develop the disease. Sadly, the drop outs from the first two lines of therapy would be patients who die.
Between 14,000 and 15,000 new cases of multiple myeloma are diagnosed each year in the United States; worldwide the number is probably between 60,000 and 100,000. A safe, ballpark estimate is that if approved by the FDA, and with no new, improved competitor, Kyprolis could serve about 10,000 U.S. patients per year, and probably about the same number in Europe. Asia has a low incidence of multiple myeloma, and while Africa has a high incidence, the system there is not likely to deliver a significant number of patients in the next few years.
So 10,000 patients U.S. How much per patient? Lenalidomide (Revlimid) with dexamethasone would be a reasonable comparison, as would bortezomib (Velcade). Available cost data varies, but Revlimid appears to run around $8,000 per month, while Velcade is around $6,000 per month, but varies more because it is injected, has more variable time schedules, and is administered by body weight.
Since this is back-of-envelope thinking, I will use $100,000 per year as a guess at Kyprolis pricing. Then, assuming these very sick patients stay on the drug on the average of 1 year, annual Kyprolis revenue to Onyx would be 10,000 times 100,000, which gives us a neat $1 billion per year in revenue.
Keep in mind that it would take some time, several years, to reach a goal of prescribing to 10,000 patients per year. I could have overestimated, or possibly underestimated, the price, duration of therapy, or number of eligible patients.
Businessweek says five (investment bank) analysts estimated 2016 revenues at $523 million. Much of the ramp in the U.S. should be in by 2016. Being conservative, I'll use $500 million rather than my $1 billion guesstimate.
Again, given other costs are covered by Nexavar, I'll figure 80% of that $500 million will be profit. That is a nice round $400 million.
Giving a price to earnings ratio of 20, also conservative, that would mean a market capitalization of $8 billion due to Kyprolis sales in the U.S. alone. Doubling that for Europe would give us $16 billion, but I should note that national healthcare agencies in Europe are sensative about the pricing of therapies.
Today Onyx Pharmaceuticals ended with a market capitalization of near $4.3 billion. Onyx ended Q1 with $620 million in cash.
By my back-of-envelope reasoning, today's stock price is still at the low end of its future range, depending on actual outcomes. If Kyprolis is not approved for some reason, obviously we are due for a fall. If it is priced high and data shows it is a compelling choice over other therapies, then with global marketing the $500 million per year estimate I used will prove to be minimal. Even at $500 million a year in revenue, and ignoring cash, the stock should roughly double in price again by 2016.
In addition, if the trials of Nexavar result in approvals for cancers in addition to liver and kidney, there is a lot of upside to the Onyx equation from that quarter.
On the whole I think Onyx is still underpriced, even given the risk of delayed approval and the other usual risks. I think we will know more after FDA approval (if it is granted) and we see how Kyprolis is priced. After a couple of quarters on the market we should also have a better idea of what profit margins will look like.
One last factor to look for in the future is R&D spend. I am not opposed to Onyx enlarging its pipeline, but R&D spend does reduce earnings. At some point investors will need to see solid earnings, or all the speculation about future profits will fall apart. Keeping R&D spend flat as Kyprolis revenue ramps would be a very nice scenario.
Disclaimer: I am long ONXX and will not trade the stock for 3 days after the publication of this report.
See also: www. onyx.com
My main Onyx Pharmaceuticals analyst conferences page.
I have been an Onyx optimist (with the usual caveats) since I first bought stock at $34.87 per share in May of 2008. Is today's price too high? Should I cash in or cut back my position? More importantly, is it too late to get in, or is this a good time for new investors to get in on what might be a very nice train of future profits? Either way it is a good time to make a new back of the envelope estimate of the future value of Onyx Pharmaceuticals. That done, I'll compare it to estimates from sell-side (Wall Street investment bank) analysts.
By way of background, at analyst conferences and in investor presentations, Onyx management (led by CEO Anthony Coles) has emphasized that while they think the Kyprolis data is compelling, it comes from a Phase 2 trial. The FDA rarely approves drugs based on Phase II results, they usually require Phase III trials, which are based on considerably larger numbers of patients. The company already has two Phase III trials of Kyprolis underway. These could provide data sufficient for approval even if the FDA turns the drug down in this round, and in any case would be necessary for approval by the European medical agency.
So why should an advisory board vote (ODAC, the Oncologic Drugs Advisory Committee), even if it was for Kyprolis approval 11-0-1 (the 1 is an abstention), cause such a large jump in the stock price? Most pharma analysts are pretty good at interpreting trial data. Everyone knew, from public presentations, that the Kyprolis data was pretty darned good and so highly likely to get approved when the Phase III data is submitted, if not based on the Phase II data alone.
There are two possible reasons for disapproval: lack of effectiveness, and side effects (adverse reactions, in industry parlance). The concern of stock analysts was mainly about side effects; some serious ones showed up in the Phase II data. That said, adverse reactions have to be taken in context. If a patient has no other treatment options and is likely to die in a few weeks of blood cancer, some side effect risk is much more acceptable than if the same side effect occurred in a drug intended give long-term to control weight or blood pressure, for instance. Kyprolis so far has shown a reasonable safety profile compared to other cancer and chemotherapy drugs.
This is a very risk adverse stock market in general. Just the possibility that Kyprolis data might not get FDA clearance was enough to dog the stock. There is always the possibility that Phase III data would come in worse than the Phase II data. It has happened to other drug candidates, and statistically it should happen every so often just because of the sampling probabilities involved. The ODAC vote did not really change the likelihood that Kyprolis would be on the market sooner or later, but it did give investors a higher degree of confidence in the outcome. Of course earlier market entry also means revenue and profits sooner.
Onyx already has a successful cancer drug, Nexavar, which is marketed by Bayer. The main reason that its profits have been minimal these last few years is that it has taken the Nexavar cash flow and invested in trials for further indications for Nexavar and in other candidates in its pipeline, notably Kyprolis, which it acquired from Proteolix in 2009.
Given that Nexavar revenue already covers basic operation expenses, and that Kyprolis is not a particularly expensive drug to produce in quantity, profit margins on any new revenue generated by Kyprolis should be high.
Multiple myeloma is a fast moving, deadly disease. While current therapies slow it down, they rarely cure it. If approved for third-line therapy Kyprolis could be given to most people who develop the disease. Sadly, the drop outs from the first two lines of therapy would be patients who die.
Between 14,000 and 15,000 new cases of multiple myeloma are diagnosed each year in the United States; worldwide the number is probably between 60,000 and 100,000. A safe, ballpark estimate is that if approved by the FDA, and with no new, improved competitor, Kyprolis could serve about 10,000 U.S. patients per year, and probably about the same number in Europe. Asia has a low incidence of multiple myeloma, and while Africa has a high incidence, the system there is not likely to deliver a significant number of patients in the next few years.
So 10,000 patients U.S. How much per patient? Lenalidomide (Revlimid) with dexamethasone would be a reasonable comparison, as would bortezomib (Velcade). Available cost data varies, but Revlimid appears to run around $8,000 per month, while Velcade is around $6,000 per month, but varies more because it is injected, has more variable time schedules, and is administered by body weight.
Since this is back-of-envelope thinking, I will use $100,000 per year as a guess at Kyprolis pricing. Then, assuming these very sick patients stay on the drug on the average of 1 year, annual Kyprolis revenue to Onyx would be 10,000 times 100,000, which gives us a neat $1 billion per year in revenue.
Keep in mind that it would take some time, several years, to reach a goal of prescribing to 10,000 patients per year. I could have overestimated, or possibly underestimated, the price, duration of therapy, or number of eligible patients.
Businessweek says five (investment bank) analysts estimated 2016 revenues at $523 million. Much of the ramp in the U.S. should be in by 2016. Being conservative, I'll use $500 million rather than my $1 billion guesstimate.
Again, given other costs are covered by Nexavar, I'll figure 80% of that $500 million will be profit. That is a nice round $400 million.
Giving a price to earnings ratio of 20, also conservative, that would mean a market capitalization of $8 billion due to Kyprolis sales in the U.S. alone. Doubling that for Europe would give us $16 billion, but I should note that national healthcare agencies in Europe are sensative about the pricing of therapies.
Today Onyx Pharmaceuticals ended with a market capitalization of near $4.3 billion. Onyx ended Q1 with $620 million in cash.
By my back-of-envelope reasoning, today's stock price is still at the low end of its future range, depending on actual outcomes. If Kyprolis is not approved for some reason, obviously we are due for a fall. If it is priced high and data shows it is a compelling choice over other therapies, then with global marketing the $500 million per year estimate I used will prove to be minimal. Even at $500 million a year in revenue, and ignoring cash, the stock should roughly double in price again by 2016.
In addition, if the trials of Nexavar result in approvals for cancers in addition to liver and kidney, there is a lot of upside to the Onyx equation from that quarter.
On the whole I think Onyx is still underpriced, even given the risk of delayed approval and the other usual risks. I think we will know more after FDA approval (if it is granted) and we see how Kyprolis is priced. After a couple of quarters on the market we should also have a better idea of what profit margins will look like.
One last factor to look for in the future is R&D spend. I am not opposed to Onyx enlarging its pipeline, but R&D spend does reduce earnings. At some point investors will need to see solid earnings, or all the speculation about future profits will fall apart. Keeping R&D spend flat as Kyprolis revenue ramps would be a very nice scenario.
Disclaimer: I am long ONXX and will not trade the stock for 3 days after the publication of this report.
See also: www. onyx.com
My main Onyx Pharmaceuticals analyst conferences page.
Monday, June 18, 2012
Inovio Prospects
Inovio (INO) is a micro-cap biotechnology company that is developing innovative vaccines and delivery systems. It has a market capitalization, today, of $56 million and a stock price of $0.42 (52wk High/Low $0.94/$0.35). Its therapies would need a successful Phase III trial enabling FDA approval before being commercialized, and the most advanced therapy is only in Phase II, which means it may be years before it turns a profit.
So why own Inovio? A lot of money has gone into developing its products. Paid-in capital is $257.8 million. Results from some early, Phase I, trials are encouraging. The thing to do, in this situation, is to look at the technology and make an estimate as to whether or not it can be commercialized. Also consider how much more capital might need to be raised, resulting in dilution of current stock, in order to achieve that crucial first product commercialization.
Inovio's vaccines are aimed at difficult to treat viruses that typically exist in multiple strains. This means a specific traditional vaccine has to be developed to protect people from each strain. That takes times, and a new strain can emerge and infect a global population faster than a traditional vaccine can be developed. Inovio's SynCon vaccines are believed to provide cross-protection against multiple strains.
Inovio has a Hepatitis C vaccine in a Phase II trial, and HIV, Avian Influenza, and Universal Flu vaccines in Phase I. It has 2 pre-clinical viral vaccine candidates. It also has cancer vaccine candidates: cervical dysplasia in Phase II, leukemia in Phase II, prostate in preclinical, and a breast/lung/prostate cancer trial in Phase I.
There is major outside recognition and even funding for Inovio's vaccines. Partners include (it varies by vaccine) Merck, ChronTech, the National Institute of Health, the University of Southampton and the University of Pennsylvania.
What is innovative about Inovio vaccines? They are DNA vaccines. Traditional vaccines consist of weakened or dead viruses or their protein coatings. DNA vaccines need to be inserted into cells (instead of into the bloodstream), but once there can trigger both antibody and T-cell immune responses. To insert the vaccines into cells Inovio uses an electroporation device it developed and has successfully tested. Inovio, in fact, resulted from the merger of a vaccine company and an electroporation developer.
In its latest results, in May, Inovio announced Universal Avian Flu vaccine generated protective antibody responses against six H5N1 avian flu strains in a Phase I trial.
So this is exciting technology. But most therapies drop out after Phase II trials, and many that show good Phase II data fail for some reason in the larger, usually double-blind, Phase III trials. At best it is a low process. Is Inovio equipped to go the whole hog?
On March 31, 2012 Inovio had almost $26 million in cash and short term investments. It generated a GAAP net loss of over $8 million in the quarter, although cash use was less at near $5.5 million. So with the current cash available Inovio could run for about 5 quarters, not enough to get any final Phase III data, much less an FDA approval.This is despite much of the development being paid for by outside grants or third parties.
Financing could come in several forms, but they all amount to dilution. Inovio could partner with a larger firm, possibly Merck. It could sell stock or bonds, but the market has been leery of unproven biotechnology deals these last few years. Or Inovio could simply be bought by a larger pharmaceutical company, which is a likely scenario if its market capitalization stays low even if it gets further proof of concept.
The near future value of Inovio all depends on what Inovio can prove in the next 3 quarters. But on the whole, there is room for dilution, if it is based on more good data. If their DNA vaccine platform does succeed, there is no reason the company would not be worth in the hundreds of millions, or more. Raising money from investors to allow Inovio to prove itself would be good for everyone, including current investors.
Despite the obvious risk of failure common to all new biotechnology, I believe Inovio is more likely than not to be worth far more in a few years than it is now. Still, it is only for investors who can handle a high degree of risk.
Disclaimer: I took an initial, small but long, position in Inovio in May. I won't trade it for the next week, but I expect to accumulate more if future trial results are positive.
Keep diversified! You should also take a good close look at inovio.com and SEC documents before risking your capital.
So why own Inovio? A lot of money has gone into developing its products. Paid-in capital is $257.8 million. Results from some early, Phase I, trials are encouraging. The thing to do, in this situation, is to look at the technology and make an estimate as to whether or not it can be commercialized. Also consider how much more capital might need to be raised, resulting in dilution of current stock, in order to achieve that crucial first product commercialization.
Inovio's vaccines are aimed at difficult to treat viruses that typically exist in multiple strains. This means a specific traditional vaccine has to be developed to protect people from each strain. That takes times, and a new strain can emerge and infect a global population faster than a traditional vaccine can be developed. Inovio's SynCon vaccines are believed to provide cross-protection against multiple strains.
Inovio has a Hepatitis C vaccine in a Phase II trial, and HIV, Avian Influenza, and Universal Flu vaccines in Phase I. It has 2 pre-clinical viral vaccine candidates. It also has cancer vaccine candidates: cervical dysplasia in Phase II, leukemia in Phase II, prostate in preclinical, and a breast/lung/prostate cancer trial in Phase I.
There is major outside recognition and even funding for Inovio's vaccines. Partners include (it varies by vaccine) Merck, ChronTech, the National Institute of Health, the University of Southampton and the University of Pennsylvania.
What is innovative about Inovio vaccines? They are DNA vaccines. Traditional vaccines consist of weakened or dead viruses or their protein coatings. DNA vaccines need to be inserted into cells (instead of into the bloodstream), but once there can trigger both antibody and T-cell immune responses. To insert the vaccines into cells Inovio uses an electroporation device it developed and has successfully tested. Inovio, in fact, resulted from the merger of a vaccine company and an electroporation developer.
In its latest results, in May, Inovio announced Universal Avian Flu vaccine generated protective antibody responses against six H5N1 avian flu strains in a Phase I trial.
So this is exciting technology. But most therapies drop out after Phase II trials, and many that show good Phase II data fail for some reason in the larger, usually double-blind, Phase III trials. At best it is a low process. Is Inovio equipped to go the whole hog?
On March 31, 2012 Inovio had almost $26 million in cash and short term investments. It generated a GAAP net loss of over $8 million in the quarter, although cash use was less at near $5.5 million. So with the current cash available Inovio could run for about 5 quarters, not enough to get any final Phase III data, much less an FDA approval.This is despite much of the development being paid for by outside grants or third parties.
Financing could come in several forms, but they all amount to dilution. Inovio could partner with a larger firm, possibly Merck. It could sell stock or bonds, but the market has been leery of unproven biotechnology deals these last few years. Or Inovio could simply be bought by a larger pharmaceutical company, which is a likely scenario if its market capitalization stays low even if it gets further proof of concept.
The near future value of Inovio all depends on what Inovio can prove in the next 3 quarters. But on the whole, there is room for dilution, if it is based on more good data. If their DNA vaccine platform does succeed, there is no reason the company would not be worth in the hundreds of millions, or more. Raising money from investors to allow Inovio to prove itself would be good for everyone, including current investors.
Despite the obvious risk of failure common to all new biotechnology, I believe Inovio is more likely than not to be worth far more in a few years than it is now. Still, it is only for investors who can handle a high degree of risk.
Disclaimer: I took an initial, small but long, position in Inovio in May. I won't trade it for the next week, but I expect to accumulate more if future trial results are positive.
Keep diversified! You should also take a good close look at inovio.com and SEC documents before risking your capital.
Thursday, June 7, 2012
Cantel Medical Posts Q3 Earnings up 58%
Cantel Medical (CMN) specializes in disinfection equipment for dental offices and medical centers. Its products range from face masks to complex endoscope sterilization machines. Fiscal Q3 earnings announced this morning were $0.30, up 11% sequentially from $0.27 and up 58% from $0.19 year-earlier. The stock popped up above $24 following the news. This follows on a 52-week low of $12.68 and high of $25.55.
Cantel has been growing through a strategy of making relatively small, strategic acquisitions while also introducing new products based on its own research and development. In 2011 it made three acquisitions. That added some debt, now near $100 million. The acquisitions have gone well, with cost reductions combining with higher sales levels. Gross margins rose 6% from year earlier to 43.8%.
Fiscal Q3 2012 revenue was $97.2 million, down slightly sequentially from $97.3 million, but up 18% from $82.6 million year-earlier. Net income was $8.2 million, up 12% sequentially from $7.3 million and up 64% from $5.0 million year-earlier. Clearly profits are growing faster than revenues. However, management expects margins growth to flatten out, so future earnings growth will be based on increased revenues.
Most of the revenue comes from four major components: endoscopy at $38.6 million, water purification at $26.0 million, healthcare disposables at$19.3 million, and dialysis at $8.9 million. The sterilization of endoscopes, and sales of supplies for endoscopic procedures, saw revenues rise 41% y/y. With an aging population in the U.S., endoscopic procedures tend to ramp at a pretty steady rate.
One are the company admits it can do better in is international sales. Those only account for 10% of sales at present. Cantel plans to hire more sales personnel in Europe, Asia, and South America this year, mainly to sell endoscopy products.
Another area of future expansion is the healthcare disposables segment, which mainly manufactures disposable face masks for infection control, including some with innovative designs. Originally coming out of the dental sector, these masks are beginning to penetrate medical and veterinary sectors.
Cantel Medical pays a small dividend, under 0.5% per year. Given its rapid growth plans, I believe cash flows will continue to be used to pay down debt or to make further acquisitions. The cash balance at the end of the quarter was $25 million. Cash flow in the quarter was $13 million. It would take less than two years for Cantel to pay off its debts if all cash flow went to that purpose. Given today's low interest rates, it seems like a better strategy to make acquisitions, if they turn out as good as the ones made in 2011.
As a technology and biotechnology investor, it is an obscure data point that most impresses me. Research and development expenses were only $2.2 million in the quarter. Compare that to how much it costs to take a new drug through clinical trials, or design a new semiconductor chip, and you will see why I like Cantel's profit model so much.
Disclaimer: I have owned Cantel Medical since December, 2009. I will not trade the stock for a week from today.
See also my Q3 2012 Cantel Medical notes
Cantel has been growing through a strategy of making relatively small, strategic acquisitions while also introducing new products based on its own research and development. In 2011 it made three acquisitions. That added some debt, now near $100 million. The acquisitions have gone well, with cost reductions combining with higher sales levels. Gross margins rose 6% from year earlier to 43.8%.
Fiscal Q3 2012 revenue was $97.2 million, down slightly sequentially from $97.3 million, but up 18% from $82.6 million year-earlier. Net income was $8.2 million, up 12% sequentially from $7.3 million and up 64% from $5.0 million year-earlier. Clearly profits are growing faster than revenues. However, management expects margins growth to flatten out, so future earnings growth will be based on increased revenues.
Most of the revenue comes from four major components: endoscopy at $38.6 million, water purification at $26.0 million, healthcare disposables at$19.3 million, and dialysis at $8.9 million. The sterilization of endoscopes, and sales of supplies for endoscopic procedures, saw revenues rise 41% y/y. With an aging population in the U.S., endoscopic procedures tend to ramp at a pretty steady rate.
One are the company admits it can do better in is international sales. Those only account for 10% of sales at present. Cantel plans to hire more sales personnel in Europe, Asia, and South America this year, mainly to sell endoscopy products.
Another area of future expansion is the healthcare disposables segment, which mainly manufactures disposable face masks for infection control, including some with innovative designs. Originally coming out of the dental sector, these masks are beginning to penetrate medical and veterinary sectors.
Cantel Medical pays a small dividend, under 0.5% per year. Given its rapid growth plans, I believe cash flows will continue to be used to pay down debt or to make further acquisitions. The cash balance at the end of the quarter was $25 million. Cash flow in the quarter was $13 million. It would take less than two years for Cantel to pay off its debts if all cash flow went to that purpose. Given today's low interest rates, it seems like a better strategy to make acquisitions, if they turn out as good as the ones made in 2011.
As a technology and biotechnology investor, it is an obscure data point that most impresses me. Research and development expenses were only $2.2 million in the quarter. Compare that to how much it costs to take a new drug through clinical trials, or design a new semiconductor chip, and you will see why I like Cantel's profit model so much.
Disclaimer: I have owned Cantel Medical since December, 2009. I will not trade the stock for a week from today.
See also my Q3 2012 Cantel Medical notes
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