When I last 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. Last Friday April 27, GILD closed at $52.16, following the announcement of Q1 results after market close on Thursday.
The forward-looking story is now largely about curing Hepatitis C, but first the backward-looking numbers.
In Q1 revenue was $2.28 billion, up 4% sequentially from $2.20 billion and up 18% from $1.93 billion in the year-earlier quarter. GAAP net income was $442.0 million, down 34% sequentially from $665.1 million and down 32% from $651.1 million year-earlier. GAAP earnings per share (EPS) were $0.57, down 34% sequentially from $0.87 and down 29% from $0.80 year-earlier.
The poor GAAP profit showing relative to revenue was mainly related to the acquisition of Pharmasset, closing on January 17, for $11 billion. Pharmasset held important therapies for hepatitis C that Gilead wanted to add to its own hep C pipeline. Non-GAAP EPS was $0.91, up from $0.87 year-earlier.
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, which lead to AIDS if untreated. 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 GS7977), Phase II candidate Mericitabine, and Phase II candidate PSI-938, all for hep C. Pharmasset also brought candidates for HIV and hepatitis B treatment.
Thursday Gilead executives reviewed recent hep C data and clarified their strategy. The GS-7977 plus ribavirin hepatitis C (HCV) genotype 1 Phase 2 study showed no detectible virus after 12 weeks of treatment, but at end of treatment the majority of patients relapsed. GS-7977 plus BMS-790052 (owned by Bristol Myer) showed high hepatitis C cure rates: >90% for genotype 2/3 and 100% for genotype 1.
Based on those and other results, Gilead is designing Phase III studies that could be fully enrolled by the end of May. Several paths are available to get therapies to market, but they need to talk more to regulators before the final trials are initiated. They would clearly prefer an all-Gilead single tablet regimen that cures most hep C, so working with Bristol Myer would be a fall back position. Given the number of drugs Gilead owns and could combine with 7977, it is a good, but not certain, bet that something will work.
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 have chronic hepatitis C, with the U.S. figure likely somewhere between 3 and 6 million (many people have undiagnosed hep c).
It is too early, I think, to put a number on the value of a hep c cure, but note that Gilead paid $11 billion for Pharmasset. They went through most of their cash and borrowed some $5.5 billion to do it. Gilead annual cash flow runs around $2 billion.
The main risk here is that a competitor (or multiple competitors) will also create an all-oral hepatitis c therapy, and might even gain FDA approval first. Even so, it is a big market and I don't think Gilead's present price reflects much of this opportunity.
Even with a great growth and value combo like Gilead, there are the usual risks from competition, macroeconomics, failure to execute, etc. See SEC filings for a complete set of risks.
And 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 Q1 2012 analyst call summary
www.gilead.com
Sunday, April 29, 2012
Friday, April 27, 2012
Celgene Q1 Disappoints, but take the long view
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.
However, Celgene executives admitted that Q1 disappointed them a bit. Of course it disappointed momentum players who were hoping for better-than-expected results. After the Celgene press release and analyst call on Thursday (April 26) the stock dropped from $77.91 to $72.92. On the other hand the stock has been on a long-term uptrend since it was at $38.01 on April 20, 2009, and is still well up off a 52-week low of $51.70 on August 10, 2011.
Celgene maintained its full year guidance of $4.70 to $4.80 non-GAAP earnings per share. If that outlook proves good, and the price ends the year at today's level of $73.38, it would have a (non-GAAP) P/E of about 15.5, which means the level of risk at this price is low enough for conservative investors looking for growth.
The secret to doing well with Celgene is not in this quarter's numbers. It is in the Celgene pipeline. Winning on that bet takes a long-term view.
Short term Celgene should be fine. Q1 numbers would have been impressive if it were not for higher expectations. Revenue was $1.27 million, down 1% sequentially from $1.28 billion but up 13% from $1.13 million in the year-earlier quarter. GAAP net income was $401.5 million, down 2% sequentially from $410.2 million but up 57% from $255.6 million year-earlier. GAAP EPS (earnings per share) were $0.90, down 1% sequentially from $0.91, but up 67% from $0.54 year-earlier.
Non-GAAP EPS, which is the measure used in guidance (and excludes stock-based compensation expense, acquisitions expenses, and one-time items) was $1.08. Obviously to reach guidance Celgene will have to do better than that in each of the three upcoming quarters.
Most of Celgene's revenue currently comes from REVLIMID, which is approved in combination with dexamethasone for treatment of multiple myeloma patients who have had at least one prior therapy (second-line MM). It is also approved for treating myelodysplastic syndromes (MDS) associated with a deletion 5q genetic abnormality. Revlimid has ramped up sales over the years as it has proven itself to doctors and patients and received regulatory approval around the world. In Q1 Revlimid revenues were $861 million, up 1% sequentially from $855 million and up 17% y/y. It is currently in three Phase III trials, one each for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphomas), and expanding its MDS indication. Success in any one trial would greatly expand revenues once it is commercialized.
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, Pomalidomide, and Apremilast.
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.
Apremilast is in Phase III trials for psoriasis and psoriatic arthritis. Data should be in from the trials in 2012. Positive data could mean FDA approval in 2013.
While there is always a potential down side to stocks, especially short term risk due to economic and market conditions, I don't see substantial down side risk for Celgene. I see a large 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.
However, Celgene executives admitted that Q1 disappointed them a bit. Of course it disappointed momentum players who were hoping for better-than-expected results. After the Celgene press release and analyst call on Thursday (April 26) the stock dropped from $77.91 to $72.92. On the other hand the stock has been on a long-term uptrend since it was at $38.01 on April 20, 2009, and is still well up off a 52-week low of $51.70 on August 10, 2011.
Celgene maintained its full year guidance of $4.70 to $4.80 non-GAAP earnings per share. If that outlook proves good, and the price ends the year at today's level of $73.38, it would have a (non-GAAP) P/E of about 15.5, which means the level of risk at this price is low enough for conservative investors looking for growth.
The secret to doing well with Celgene is not in this quarter's numbers. It is in the Celgene pipeline. Winning on that bet takes a long-term view.
Short term Celgene should be fine. Q1 numbers would have been impressive if it were not for higher expectations. Revenue was $1.27 million, down 1% sequentially from $1.28 billion but up 13% from $1.13 million in the year-earlier quarter. GAAP net income was $401.5 million, down 2% sequentially from $410.2 million but up 57% from $255.6 million year-earlier. GAAP EPS (earnings per share) were $0.90, down 1% sequentially from $0.91, but up 67% from $0.54 year-earlier.
Non-GAAP EPS, which is the measure used in guidance (and excludes stock-based compensation expense, acquisitions expenses, and one-time items) was $1.08. Obviously to reach guidance Celgene will have to do better than that in each of the three upcoming quarters.
Most of Celgene's revenue currently comes from REVLIMID, which is approved in combination with dexamethasone for treatment of multiple myeloma patients who have had at least one prior therapy (second-line MM). It is also approved for treating myelodysplastic syndromes (MDS) associated with a deletion 5q genetic abnormality. Revlimid has ramped up sales over the years as it has proven itself to doctors and patients and received regulatory approval around the world. In Q1 Revlimid revenues were $861 million, up 1% sequentially from $855 million and up 17% y/y. It is currently in three Phase III trials, one each for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphomas), and expanding its MDS indication. Success in any one trial would greatly expand revenues once it is commercialized.
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, Pomalidomide, and Apremilast.
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.
Apremilast is in Phase III trials for psoriasis and psoriatic arthritis. Data should be in from the trials in 2012. Positive data could mean FDA approval in 2013.
While there is always a potential down side to stocks, especially short term risk due to economic and market conditions, I don't see substantial down side risk for Celgene. I see a large 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.
Thursday, April 19, 2012
AMD Guides to Strong 2012
Executives were positive on AMD's prospects for the rest of 2012 at the first quarter analyst call today.
The numbers for Q1 were towards the top of AMD's previous guidance, and contrasted well with arch-rival Intel's report. Because of the acquisition of SeaMicro and a deal to exit ownership and certain contracts with GlobalFoundries, GAAP and non-GAAP net income and EPS results were vastly different.
Revenue was $1.59 billion, down 6% sequentially from $1.69 billion and down 2% from $1.61 billion in the year-earlier quarter. Prior guidance had been for Q1 revenue to be down sequentially from 5% to 11%. Graphics chips (GPUs) were the main reason for the better-than-normal seasonality.
GAAP net income was negative $590 million, down sequentially from negative $177 million, and well down from positive $510 million year-earlier. That is a big hole, but included a roughly $700 million charge related to GlobalFoundries. In addition the year-earlier number included a $492 million gain in an equity position, also in Global Foundries.
GAAP EPS (earnings per share) were negative $0.80, down sequentially from negative $0.24, and down from positive $0.71 year-earlier.
I prefer GAAP numbers as a baseline, but in this case non-GAAP numbers give a clearer picture of reality, and of what we are likely to see going forward. Non-GAAP net income was $92 million, down sequentially from $138 million but up from year-earlier $56 million. EPS was $0.12. Adjusted EBITDA was $215 million.
Those are not great profits, but 2012 is likely to be a year of ramping, despite ongoing intense competition from Intel and NVIDIA. Because of improved 32 nm and 28 nm yields (AMDs new process technology, but behind Intel's 22 nm), supply constraints are unlikely.
The key take away is that computer makers, especially notebook computer makers, have signed up for a record number of designs using next generation AMD APUs. These have the combination manufacturers are looking for: great graphics, strong CPU performance, and low energy use, at a great price point. OEMs will be able to sell thin and light "ultrathin" computers at mainstream prices, whereas the Intel design (ultrabooks) will be in a higher price category. Trinity AMD APUs will be the upgrade for Llano for mainstream notebooks, and Brazos 2.0 will upgrade Brazos for economy notebooks.
In servers AMD is less competitive, but the technology acquired with SeaMicro should help in gaining share late in 2013. Gaining market share with Opteron chips will be a gradual process.
Both AMD and Intel, and in fact the entire Windows computer ecosystem, are highly likely to be helped by the introduction of Windows 8 later this year, exact date not yet announced.
Guidance for Q2 is for sequential growth from zero to 6%. Even at the low end of the range that is considerably better than the typical Q2 seasonal decline of 4%. The real proof of whether AMD has become a tech tiger again will be in Q3. If Trinity based notebooks are a hit for back to school sales, then 2012 will be a very good year for AMD and its investors.
Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published.
See also my AMD Q1 2012 analyst call summary;
The numbers for Q1 were towards the top of AMD's previous guidance, and contrasted well with arch-rival Intel's report. Because of the acquisition of SeaMicro and a deal to exit ownership and certain contracts with GlobalFoundries, GAAP and non-GAAP net income and EPS results were vastly different.
Revenue was $1.59 billion, down 6% sequentially from $1.69 billion and down 2% from $1.61 billion in the year-earlier quarter. Prior guidance had been for Q1 revenue to be down sequentially from 5% to 11%. Graphics chips (GPUs) were the main reason for the better-than-normal seasonality.
GAAP net income was negative $590 million, down sequentially from negative $177 million, and well down from positive $510 million year-earlier. That is a big hole, but included a roughly $700 million charge related to GlobalFoundries. In addition the year-earlier number included a $492 million gain in an equity position, also in Global Foundries.
GAAP EPS (earnings per share) were negative $0.80, down sequentially from negative $0.24, and down from positive $0.71 year-earlier.
I prefer GAAP numbers as a baseline, but in this case non-GAAP numbers give a clearer picture of reality, and of what we are likely to see going forward. Non-GAAP net income was $92 million, down sequentially from $138 million but up from year-earlier $56 million. EPS was $0.12. Adjusted EBITDA was $215 million.
Those are not great profits, but 2012 is likely to be a year of ramping, despite ongoing intense competition from Intel and NVIDIA. Because of improved 32 nm and 28 nm yields (AMDs new process technology, but behind Intel's 22 nm), supply constraints are unlikely.
The key take away is that computer makers, especially notebook computer makers, have signed up for a record number of designs using next generation AMD APUs. These have the combination manufacturers are looking for: great graphics, strong CPU performance, and low energy use, at a great price point. OEMs will be able to sell thin and light "ultrathin" computers at mainstream prices, whereas the Intel design (ultrabooks) will be in a higher price category. Trinity AMD APUs will be the upgrade for Llano for mainstream notebooks, and Brazos 2.0 will upgrade Brazos for economy notebooks.
In servers AMD is less competitive, but the technology acquired with SeaMicro should help in gaining share late in 2013. Gaining market share with Opteron chips will be a gradual process.
Both AMD and Intel, and in fact the entire Windows computer ecosystem, are highly likely to be helped by the introduction of Windows 8 later this year, exact date not yet announced.
Guidance for Q2 is for sequential growth from zero to 6%. Even at the low end of the range that is considerably better than the typical Q2 seasonal decline of 4%. The real proof of whether AMD has become a tech tiger again will be in Q3. If Trinity based notebooks are a hit for back to school sales, then 2012 will be a very good year for AMD and its investors.
Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published.
See also my AMD Q1 2012 analyst call summary;
Tuesday, April 17, 2012
Inovio Pharmaceuticals (INO)
I have been aware of Inovio Pharmaceuticals (INO) for at least a couple of years. They invented an electroporation device that allows biological substances to be infused into the skin. While the device itself is not for sale, it is being tested for delivery of several vaccines, and Inovio has also bought the rights to vaccines and is conducting clinical trials delivering the vaccines using the electroporation device.
Inovio is thinly traded and consistently loses money each quarter, though it does get some revenue from grants and licensing. I would call it very risky, since there is no guarantee that it will ever make a profit. On the other hand it could be very rewarding if one of the vaccines it or its partners are working on is ever approved by the FDA and put into commercial production.
In 2011 Inovio received substantial new funding by issuing stock and warrants, but of course that dilutes the pre-existing stock. They have a good bankroll now, but further dilution may be necessary before
Rather than repeat myself, for my notes on Inovio's Q4 results see Inovio Q4 2011.
I also created a page for Inovio to track their results and, if they have them, analyst conferences: Inovio at openicon.com.
And there is a lot of information at Inovio itself.
Disclaimer: I've been tempted to buy very small amounts of Inovio, but so far am just watching developments. I won't take any position (long or short) in Inovio for at least 24 hours after posting this.
Inovio is thinly traded and consistently loses money each quarter, though it does get some revenue from grants and licensing. I would call it very risky, since there is no guarantee that it will ever make a profit. On the other hand it could be very rewarding if one of the vaccines it or its partners are working on is ever approved by the FDA and put into commercial production.
In 2011 Inovio received substantial new funding by issuing stock and warrants, but of course that dilutes the pre-existing stock. They have a good bankroll now, but further dilution may be necessary before
Rather than repeat myself, for my notes on Inovio's Q4 results see Inovio Q4 2011.
I also created a page for Inovio to track their results and, if they have them, analyst conferences: Inovio at openicon.com.
And there is a lot of information at Inovio itself.
Disclaimer: I've been tempted to buy very small amounts of Inovio, but so far am just watching developments. I won't take any position (long or short) in Inovio for at least 24 hours after posting this.
Thursday, April 12, 2012
Opportunities in Data Storage: Seagate, Western Digital, and Marvell
Because I own stock in Marvell Technologies (MRVL), which gets about half of its revenue from sales of HDD controller chips, I read a detailed interview with Steve Luczo, the CEO of Seagate Technology (STX) [See Seagate CEO Interview at Forbes]. Seagate is one of only 2 remaining major hard disk drive (HDD) manufacturers. The other is Western Digital (WDC). While I already agreed with the overall HDD story, Steve made some very good points that I had not thought of or heard before.
In addition to MRVL and STX, I'll be discussing semiconductor manufacturing capital equipment makers Applied Materials (AMAT) and KLA (KLAC) as well as Dot Hill (HILL), EMC, AMD, and Intel (INTC).
Let's tackle the Thailand flooding aftermath before taking on long-term trends. Industry-wide, quarterly unit sales were projected to be 180 million before the floods hit. Instead Q4 2011 production was 120 million units. Q1 production rose to 140 million units, Q2 expectations are 160 million units, and Q3 should be back to 180 million. If there are still shortages, Q4 could see between 180 and 200 million units produced.
In addition, as the year progresses industry average drive capacity will increase as new, high-capacity equipment replaces older machines damaged by the flooding.
For makers of parts that go into the drives, that is good news. It is also good news for PC and server manufacturers (and suppliers like AMD and Intel (INTC)) that have been constrained by HDD shortages. In Marvell's case, they report quarters with a one-month lag and also ship pre-production. That means that Marvell is currently in a quarter that runs February to April. April chips will go in May HDDs, so run rates should be pretty good by then. It is possible that Marvell's July quarter will be back to record HDD controller chip shipments.
Overall expectations are that once we get past Q1, this should be a banner year for almost everyone in the storage industry, with good margins (because shortages will persist) and unit shipments improving markedly in the second half.
But aren't Solid State Drives (SSD's) going to replace HDDs, which are not used in tablet computers, smartphones, or possibly in thin and light notebook models? Should investors continue to flee the entire HDD industry? Why else, except investor flight, would Seagate have a forward P/E of just 4.1?
Luczo does not think so. The anti-HDD argument that has been around investor circles for some time is that as SSDs become mass-market, and technologies shrink, SSD capacities will go up, prices will come down, and HDD demand will decline in short order.
The typical counter argument is that data storage requirements are based on the expanding storage needs of the world. Storage is a volume business, so while SSDs may provide speed, HDDs need to continue to improve both capacity and units shipped just to keep up with expanding volumes of data, particularly video data. For every iPad there has to be disk capacity in the cloud somewhere, because iPads mostly need to connect to data stored on disks in the cloud to be useful.
The stronger argument is this: semiconductor fabs cannot be built fast enough to make the SSD replacing HDD dream come true, not anytime soon, if ever.
A new semiconductor fab (factory) is a very expensive investment at $10 billion. If the chips produced by the fabs (in this case mainly memory chips) are not expensive enough, building a new fab is a money loser. In effect the prices for chips are set by the capital required to build the fabs.
It is much, much cheaper to add data storage production capacity, on a byte basis, by building new HDD factories than by building new semi fabs. The same data capacity expansion could be achieved with less than $1 billion in capital, Thus HDDs will have a considerable price advantage for the reasonably visible future.
Technology investors have learned that when a technology is dying, you might as well exit. Some companies role well from one technology generation to another, as Intel has. But the point here is that the HDD industry is not dying. The SSD industry can grow rapidly for an entire decade and the HDD industry will still be far larger at the end of the decade than it is today, and than the SSD industry will be. Of course many companies will play both sides of the SSD/HDD game, and hybrid drives are already available.
But suppose Luczo is wrong in the sense that chip manufacturers do decide to invest rapidly in fabs to drive as much SSD expansion as quickly as possible. I still think Seagate is undervalued in that scenario, but there would be other winners. The obvious ones are the semiconductor equipment manufacturers whose machines make the silicon wafers and create the tiny transistors that make up Flash memory. There are still a number of companies in this category, but as capital requirements increase this segment is consolidating as well. Two big players that should gain from SSD fab accelerations are Applied Materials (which recently acquired Varian), and KLA-Tencor. Both currently have attractive P/Es that do not reflect any future boom in the SSD industry.
Meanwhile data storage equipment makers from giants like EMC and HP to specialists like Dot Hill should continue to do well, since the systems they manufacture can accommodate both SSDs and HDDs, depending on the needs of the end customers.
Disclaimer: I own MRVL, AMAT, and HILL. I do not own STX, WDS, KLA, INTC, or EMC. I won't trade in any of these stocks for 3 days after this article is published.
Keep diversified!
In addition to MRVL and STX, I'll be discussing semiconductor manufacturing capital equipment makers Applied Materials (AMAT) and KLA (KLAC) as well as Dot Hill (HILL), EMC, AMD, and Intel (INTC).
Let's tackle the Thailand flooding aftermath before taking on long-term trends. Industry-wide, quarterly unit sales were projected to be 180 million before the floods hit. Instead Q4 2011 production was 120 million units. Q1 production rose to 140 million units, Q2 expectations are 160 million units, and Q3 should be back to 180 million. If there are still shortages, Q4 could see between 180 and 200 million units produced.
In addition, as the year progresses industry average drive capacity will increase as new, high-capacity equipment replaces older machines damaged by the flooding.
For makers of parts that go into the drives, that is good news. It is also good news for PC and server manufacturers (and suppliers like AMD and Intel (INTC)) that have been constrained by HDD shortages. In Marvell's case, they report quarters with a one-month lag and also ship pre-production. That means that Marvell is currently in a quarter that runs February to April. April chips will go in May HDDs, so run rates should be pretty good by then. It is possible that Marvell's July quarter will be back to record HDD controller chip shipments.
Overall expectations are that once we get past Q1, this should be a banner year for almost everyone in the storage industry, with good margins (because shortages will persist) and unit shipments improving markedly in the second half.
But aren't Solid State Drives (SSD's) going to replace HDDs, which are not used in tablet computers, smartphones, or possibly in thin and light notebook models? Should investors continue to flee the entire HDD industry? Why else, except investor flight, would Seagate have a forward P/E of just 4.1?
Luczo does not think so. The anti-HDD argument that has been around investor circles for some time is that as SSDs become mass-market, and technologies shrink, SSD capacities will go up, prices will come down, and HDD demand will decline in short order.
The typical counter argument is that data storage requirements are based on the expanding storage needs of the world. Storage is a volume business, so while SSDs may provide speed, HDDs need to continue to improve both capacity and units shipped just to keep up with expanding volumes of data, particularly video data. For every iPad there has to be disk capacity in the cloud somewhere, because iPads mostly need to connect to data stored on disks in the cloud to be useful.
The stronger argument is this: semiconductor fabs cannot be built fast enough to make the SSD replacing HDD dream come true, not anytime soon, if ever.
A new semiconductor fab (factory) is a very expensive investment at $10 billion. If the chips produced by the fabs (in this case mainly memory chips) are not expensive enough, building a new fab is a money loser. In effect the prices for chips are set by the capital required to build the fabs.
It is much, much cheaper to add data storage production capacity, on a byte basis, by building new HDD factories than by building new semi fabs. The same data capacity expansion could be achieved with less than $1 billion in capital, Thus HDDs will have a considerable price advantage for the reasonably visible future.
Technology investors have learned that when a technology is dying, you might as well exit. Some companies role well from one technology generation to another, as Intel has. But the point here is that the HDD industry is not dying. The SSD industry can grow rapidly for an entire decade and the HDD industry will still be far larger at the end of the decade than it is today, and than the SSD industry will be. Of course many companies will play both sides of the SSD/HDD game, and hybrid drives are already available.
But suppose Luczo is wrong in the sense that chip manufacturers do decide to invest rapidly in fabs to drive as much SSD expansion as quickly as possible. I still think Seagate is undervalued in that scenario, but there would be other winners. The obvious ones are the semiconductor equipment manufacturers whose machines make the silicon wafers and create the tiny transistors that make up Flash memory. There are still a number of companies in this category, but as capital requirements increase this segment is consolidating as well. Two big players that should gain from SSD fab accelerations are Applied Materials (which recently acquired Varian), and KLA-Tencor. Both currently have attractive P/Es that do not reflect any future boom in the SSD industry.
Meanwhile data storage equipment makers from giants like EMC and HP to specialists like Dot Hill should continue to do well, since the systems they manufacture can accommodate both SSDs and HDDs, depending on the needs of the end customers.
Disclaimer: I own MRVL, AMAT, and HILL. I do not own STX, WDS, KLA, INTC, or EMC. I won't trade in any of these stocks for 3 days after this article is published.
Keep diversified!
Monday, April 2, 2012
Dendreon's Provenge Challenged by Marie Huber
Recently some people have declared Provenge, a treatment for prostate cancer, "dead." This is because of an analysis made independently by Marie Huber [See Insight: New doubts about prostate-cancer vaccine Provenge (Reuters)]. Marie has a BA in Biochemistry from Cambridge and a Masters of Philosophy in Bioscience Enterprise from Cambridge and MIT. Her work history is not as a scientist but as a business analyst, and she claims to currently be an independent citizen-scientist.
Before getting to her analysis, I should say there is no point to the character assassination that apparently Ms. Huber has been subjected to. Her analysis either stands on its own weight or it does not. [Disclaimer: my own biostatistics credentials are challengeable too. I took one probability course in college, worked for 1 year at a low-level job at a biostatistics company, and otherwise I am mainly self-taught. I have done professional analysis of biotechnology companies for about 5 years now, invest in biotechs myself, and have a good, but not perfect, track record.]
If you want to see it for yourself, Marie Huber's analysis is available on the internet as her video Understanding the Provenge Trials as is the paper she co-authored, published in the the Journal of the National Cancer Institute (of Britain): Interdisciplinary Critique of Sipuleucel-T as Immunotherapy in Castration-Resistant Prostate Cancer.
In the video she specifically tries to convince oncologists and urologists to not prescribe Provenge for patients with metastatic prostate cancer. She says her analysis shows that Provenge "might" be harmful, rather than helpful to patients. Given the low rate of side effects for Provenge, far lower than typical cancer treatments including chemotherapy and physical interventions, that is an extraordinary claim.
Ms. Huber starts with a perfectly reasonable review of prostate cancer, the immune system, the Provenge mechanism, and the trial design and results. Her first factual critique (here I am assuming she is being factual about data Dendreon released) is that only 27% of treated patients showed an immune response to PAP, the target protein. For me, that in itself might account for the low response rate; but we already knew there was a low response rate, one acceptable to the FDA given the low risk of side effects. More troubling, those 27% who did respond (with longer time till death) to PAP, as with the 73% who responded to the PAP-catalyst combination meant to induce response, could not be shown to have a survival difference. So, if that holds up, the process is prolonging survival in some patients, but not for the reasons usually given.
She points out that Provenge showed no effect on time to progression. But that was known long before the final Phase III trial. This should not, in itself, be a problem, and it was not for the FDA, because there are drugs that do delay time to progression, but don't increase overall survival. Overall survival is the gold standard, not time to progression.
It is data released the after the FDA approval that really gets Ms. Huber going (available for you to see at http://www.fda.gov/BiologicsBloodVaccines/CellularGeneTherapyProducts/ApprovedProducts/ucm213554.htm).
What the data proves most obviously is that the FDA raked Provenge data over the coals before approving the therapy. But we already knew that.
Huber focuses on a particular table of age-related survival data. This shows that the benefits in the trial were far greater for patients over 65 years of age than for those under 65 years old. Within the patients receiving the placebo, older patients died about a year earlier than younger patients, which should not be the case if all prostate cancers are equal and are the cause of death. The table also shows, but does not seem to interest her, that African Americans do really, really well on Provenge. So much so that I am surprised no one else has pointed this out.
In most vaccines, per Huber, older patients show lesser responses to vaccines than younger patients. In the Provenge data, again using 65 as the age division point, while the therapy seems to work in older patients, the younger patients who get Provenge survive longer.
Huber believes the most likely explanation of this data is that older patients were hurt by the placebo, but for some reason younger patients were not. If so, what we had may have been double blind, but in fact we were testing against a poison, not a placebo. The claim then would be that the Provenge process, aside from the immune-protein creation part, has negative health consequences for patients.
Interesting, but it involves leaping to statistical conclusions on an arbitrary dividing point, the age 65. A Dendreon spokesperson has indicated that, dividing at age 71, the anomaly goes away.
Statistics work best on like things, like a perfectly balanced, perfectly spaced roulette wheel. Each human is different, genetically and in state of health, when they enter a trial. We don't force cancer patients to eat identical diets or live otherwise identical lives while in trials. We hope our statistics catch meaningful aggregations of data. Dendreon has never claimed that Provenge cures prostate cancer. On the whole, no matter how you divide up the patients, Provenge prolonged survival in a double blind study (actually, 3 studies). If, like other cancer drugs, it hurt some patients while helping others, that is just par for the course. Chemotherapy frequently kills elderly patients before their cancer can. From Huber's statistics, at worst Provenge causes slight harms to some subsets while showing greater benefit to other subsets.
At the extreme, you can take the ten percent of patients who live longest and the ten percent who die quickest, and claim Provenge (or any therapy) does not work because the second set does worse than average. The right question to ask is: did the average improve, with minimal down side for the worst-affected? By that criteria, Provenge passes, and that is basically the criteria used by the FDA for approval.
Huber speculates that the blood processing reduced the number of lymphocytes in the blood returned to placebo patients. This would be easy to test. Perhaps her team can get a grant for that. I would like to see the results. Of course, if you want to kill lymphocytes, that is easy to do. Dendreon's process was intended to preserve lymphocytes. Huber admits that her speculation is unproven.
If lower lymphocytes in placebo patients were a problem, then the question arises: what caused the early deaths? In the beginning Huber stated that one reason patients have prostate cancer in the first place is that their immune system is not attacking cancer cells. Removing lymphocytes should not alter that. So the deaths should be attributable to other causes, like infections. As far as I can tell, the data does not support more placebo patient deaths from infections. The deaths are from the cancer. There may be other explanations, but the obvious one is that the placebo patients were just that: placebo patients. Which means the treated patients who lived longer did so because they received Provenge. The placebo patients lost the lottery. Sad, but that is what happens in clinical cancer trials of effective therapies.
Marie Huber did some interesting work, and I have no problem with her publishing it in a science journal. Whether or not her conclusions are correct, continuing to collect and analyze data is appropriate. It should soon be possible to generate statistics on patients treated with Provenge since its approval. In addition, Provenge should certainly be studied, in clinical trials, at earlier stages in the cancer progression process.
My problem is: suppose Ms. Huber is wrong. Suppose doctors don't recommend Provenge because they are busy and Huber's work reinforces a prejudice, or a salesman for a rival therapy overstates Huber's case, or whatever. Then lives will be shortened because someone rushed to put out data without checking it by actually conducting a study.
The FDA can get it wrong, but it is the agency responsible to see that drugs are safe and effective. If the FDA thinks Huber & crew are right, they should take Provenge off the market, even if it means they look bad for not being careful enough the first time around. Even if it means I lose some money. But to me the story that comes through Ms. Huber is that the FDA did a very thorough job, while Ms. Huber admits she has not proved her point. Right or wrong, it is speculation.
Disclaimer: I am long Dendreon. I won't trade the stock for at least 3 days after this article is posted.
Before making a decision be sure to read my Q4 2011 Dendreon call summary and check out my main Dendreon page, which has loads of background information.
Before getting to her analysis, I should say there is no point to the character assassination that apparently Ms. Huber has been subjected to. Her analysis either stands on its own weight or it does not. [Disclaimer: my own biostatistics credentials are challengeable too. I took one probability course in college, worked for 1 year at a low-level job at a biostatistics company, and otherwise I am mainly self-taught. I have done professional analysis of biotechnology companies for about 5 years now, invest in biotechs myself, and have a good, but not perfect, track record.]
If you want to see it for yourself, Marie Huber's analysis is available on the internet as her video Understanding the Provenge Trials as is the paper she co-authored, published in the the Journal of the National Cancer Institute (of Britain): Interdisciplinary Critique of Sipuleucel-T as Immunotherapy in Castration-Resistant Prostate Cancer.
In the video she specifically tries to convince oncologists and urologists to not prescribe Provenge for patients with metastatic prostate cancer. She says her analysis shows that Provenge "might" be harmful, rather than helpful to patients. Given the low rate of side effects for Provenge, far lower than typical cancer treatments including chemotherapy and physical interventions, that is an extraordinary claim.
Ms. Huber starts with a perfectly reasonable review of prostate cancer, the immune system, the Provenge mechanism, and the trial design and results. Her first factual critique (here I am assuming she is being factual about data Dendreon released) is that only 27% of treated patients showed an immune response to PAP, the target protein. For me, that in itself might account for the low response rate; but we already knew there was a low response rate, one acceptable to the FDA given the low risk of side effects. More troubling, those 27% who did respond (with longer time till death) to PAP, as with the 73% who responded to the PAP-catalyst combination meant to induce response, could not be shown to have a survival difference. So, if that holds up, the process is prolonging survival in some patients, but not for the reasons usually given.
She points out that Provenge showed no effect on time to progression. But that was known long before the final Phase III trial. This should not, in itself, be a problem, and it was not for the FDA, because there are drugs that do delay time to progression, but don't increase overall survival. Overall survival is the gold standard, not time to progression.
It is data released the after the FDA approval that really gets Ms. Huber going (available for you to see at http://www.fda.gov/BiologicsBloodVaccines/CellularGeneTherapyProducts/ApprovedProducts/ucm213554.htm).
What the data proves most obviously is that the FDA raked Provenge data over the coals before approving the therapy. But we already knew that.
Huber focuses on a particular table of age-related survival data. This shows that the benefits in the trial were far greater for patients over 65 years of age than for those under 65 years old. Within the patients receiving the placebo, older patients died about a year earlier than younger patients, which should not be the case if all prostate cancers are equal and are the cause of death. The table also shows, but does not seem to interest her, that African Americans do really, really well on Provenge. So much so that I am surprised no one else has pointed this out.
In most vaccines, per Huber, older patients show lesser responses to vaccines than younger patients. In the Provenge data, again using 65 as the age division point, while the therapy seems to work in older patients, the younger patients who get Provenge survive longer.
Huber believes the most likely explanation of this data is that older patients were hurt by the placebo, but for some reason younger patients were not. If so, what we had may have been double blind, but in fact we were testing against a poison, not a placebo. The claim then would be that the Provenge process, aside from the immune-protein creation part, has negative health consequences for patients.
Interesting, but it involves leaping to statistical conclusions on an arbitrary dividing point, the age 65. A Dendreon spokesperson has indicated that, dividing at age 71, the anomaly goes away.
Statistics work best on like things, like a perfectly balanced, perfectly spaced roulette wheel. Each human is different, genetically and in state of health, when they enter a trial. We don't force cancer patients to eat identical diets or live otherwise identical lives while in trials. We hope our statistics catch meaningful aggregations of data. Dendreon has never claimed that Provenge cures prostate cancer. On the whole, no matter how you divide up the patients, Provenge prolonged survival in a double blind study (actually, 3 studies). If, like other cancer drugs, it hurt some patients while helping others, that is just par for the course. Chemotherapy frequently kills elderly patients before their cancer can. From Huber's statistics, at worst Provenge causes slight harms to some subsets while showing greater benefit to other subsets.
At the extreme, you can take the ten percent of patients who live longest and the ten percent who die quickest, and claim Provenge (or any therapy) does not work because the second set does worse than average. The right question to ask is: did the average improve, with minimal down side for the worst-affected? By that criteria, Provenge passes, and that is basically the criteria used by the FDA for approval.
Huber speculates that the blood processing reduced the number of lymphocytes in the blood returned to placebo patients. This would be easy to test. Perhaps her team can get a grant for that. I would like to see the results. Of course, if you want to kill lymphocytes, that is easy to do. Dendreon's process was intended to preserve lymphocytes. Huber admits that her speculation is unproven.
If lower lymphocytes in placebo patients were a problem, then the question arises: what caused the early deaths? In the beginning Huber stated that one reason patients have prostate cancer in the first place is that their immune system is not attacking cancer cells. Removing lymphocytes should not alter that. So the deaths should be attributable to other causes, like infections. As far as I can tell, the data does not support more placebo patient deaths from infections. The deaths are from the cancer. There may be other explanations, but the obvious one is that the placebo patients were just that: placebo patients. Which means the treated patients who lived longer did so because they received Provenge. The placebo patients lost the lottery. Sad, but that is what happens in clinical cancer trials of effective therapies.
Marie Huber did some interesting work, and I have no problem with her publishing it in a science journal. Whether or not her conclusions are correct, continuing to collect and analyze data is appropriate. It should soon be possible to generate statistics on patients treated with Provenge since its approval. In addition, Provenge should certainly be studied, in clinical trials, at earlier stages in the cancer progression process.
My problem is: suppose Ms. Huber is wrong. Suppose doctors don't recommend Provenge because they are busy and Huber's work reinforces a prejudice, or a salesman for a rival therapy overstates Huber's case, or whatever. Then lives will be shortened because someone rushed to put out data without checking it by actually conducting a study.
The FDA can get it wrong, but it is the agency responsible to see that drugs are safe and effective. If the FDA thinks Huber & crew are right, they should take Provenge off the market, even if it means they look bad for not being careful enough the first time around. Even if it means I lose some money. But to me the story that comes through Ms. Huber is that the FDA did a very thorough job, while Ms. Huber admits she has not proved her point. Right or wrong, it is speculation.
Disclaimer: I am long Dendreon. I won't trade the stock for at least 3 days after this article is posted.
Before making a decision be sure to read my Q4 2011 Dendreon call summary and check out my main Dendreon page, which has loads of background information.
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