Monday, October 27, 2008

Biogen Idec (BIIB) Growth Accelerating

Biogen Idec just keeps growing revenues and profits. At a time when the entire stock market is melting down, smart people can make money (in the long run) by buying almost anything, but there is a lot of insurance in buying cash rich, rapidly growing companies like Biogen.

Biogen has a lot of cash (and marketable securities), over $2 billion at the end of Q3. Its non-GAAP (cash) net income was $288 million in Q3.

Aside from truly apocalyptic scenarios, I see no reason why profits should not continue to grow rapidly for the foreseeable future. 3rd quarter revenues were up 10% from the second quarter and up 38% from Q3 in 2007. GAAP net income was sequentially flat, but up 73% from $119 million last year, with GAAP EPS at $0.70.

For details of Biogen's Q3, see my Biogen Idec Analyst Conference Summary, Q3 2008.

There are three mostly-independent components to Biogen Idec's future growth. Its main revenue generators include two drugs for Multiple Sclerosis (MS), Avonex ($573 million Q3 sales) and Tysabri ($173 million Q3 sales). Avonex is the older drug, approved and marketed in the U.S., Europe, and many other countries. Tysabri, the newer, even more effective drug, is still in the global approval process. When MS patients switch to a new drug, they switch often switch to Tysabri. In terms of revenue, however, the main component at present is international expansion. It will take years for Tysabri to be approved and for sale in all the world's major markets. MS is a life-long disease at present; you can't stop taking your therapies without it starting to progress, though Tysabri seems to actually cause the disease to regress in many cases.

The second revenue and profit building leg is expanded indications for existing drugs. Rituxan, which had sales of $299 million in the quarter, has been approved for Non-Hodgkin's Lymphoma (NHL) and is in Phase III for Chronic Lymphocytic Leukemia (CLL). Tysabri is in a Phase I trial for multiple myeloma and was recently approved for treatment of Crohn's Disease.

The third leg is the pipeline, which is impressive. There are drugs in every stage of development from pre-clinical to Phase III, and Biogen has the cash to buy rights to promising therapies as well. There are five novel compounds in late stage (Phase III) registrational trials (BG-12, Lumiliximab, Galiximab, Lixivaptan, Adentri).

For those who don't following biotech batting averages, only a relatively few of the drugs that are tried in Phase I trials eventually get good Phase III results and are profitably brought to market. As with any other biotechnology or pharmaceutical company, BIIB will see drugs that don't live up to their early promise. That said, BIIB has a rather exceptional record in actually developing drugs that help patients enough to become revenue blockbusters. Some of BIIBs pipeline candidates will be approved and turn into profit engines in the future.

Every company's stock is risky. Drug candidates can fail, and even successful drugs can be driven off the market by rivals. BIIB should be bought only as part of a portfolio that makes sense to you.

The main risk that remains in BIIB (though I think it has already led to a discount in the stock price) is from the known adverse event associated with Tysabri, PML (Progressive Multifocal Leukoencephalopathy). This was a little-known disease until HIV infections became widespread, resulting in a large pool of people with suppressed immune systems. It is an opportunistic infection, rare even in immune-suppressed patients. There have been several PML cases in patients being treated with Tysabri. Doctors are warned to watch for PML symptoms when they prescribe Tysabri. PML can be deadly.

You might think that would kill sales of Tysabri, but it has not, because doctors and patients, or enough of them, are looking at the bigger picture. MS is an auto-immune disorder. Stopping it involves keying down the immune system. With the choice being between watching MS symptoms progress and taking a drug that stops the progression, most patients are going to want to take the drug. PML is a risk, but a small one, and if detected in time can be survivable. It is sad to have to make choices like that, but when you know you have MS, and what its progress will be if untreated, it is still the best choice for most people.

I hope you have some cash to buy stocks during this giant Wall Street Geniuses' fire sale, but in any case ...

Keep diversified.

More data:

Biogen Idec home page

Tuesday, October 21, 2008

Gilead (GILD) Thrives Despite Downturn

Investors who own good, or even great, companies right now are often feeling bad about their investments because stock prices are low even for these companies. As far as I can tell, while some low stock prices are needed to factor in the troubles of the economy, in the case of great companies this is purely due to liquidity issues. People who know they own valuable stocks that should be kept because of their current value and future potential are being "forced" to sell them to maintain their own liquidity. Also, money flows into the stock market on a comparison basis; it will tend to flow into the (perceived) best bargains of the moment.

Gilead Sciences (GILD) showed it is a great company for shareholders when it reported on its third quarter on October 16, 2008. It is one of the most successful biotechnology companies because it developed and sells great antiviral products that target HIV infections and hepatitis. These drugs are not dispensable; people who need them buy them even in economic downturns. In addition, Gilead's drugs continue to replace competitors' drugs in these spaces.

Q3 revenues tell the story pretty well. They were $1.37 billion, up up 7% sequentially from $1.28 billion in Q2 and up 29% from $1.06 billion year-earlier. Earnings per share (EPS) were $0.52, up 13% sequentially from $0.46 and up 24% from $0.42 year-earlier.

There is no need to worry about liquidity at Gilead. They are sitting on top of $3.26 billion in cash and equivalents. Operating cash flows were $555 million for the quarter.

See my Gilead (GILD) analyst conference summary for Q3 2008 for more details.

Fortunately, I am not overextended and am gradually adding to my portfolio. It almost feels like stealing. After years of watching hedge fund managers tell the world what hot shots they were when all they were doing was leveraging credit into ordinary investments, picking their pockets while they are down feels pretty good. You can almost correlate how much of a stock was owned by hedge funds by viewing its price percentage decline this last year.

I own Gilead as part of a long term strategy. My one suggested change for management would be that they start paying a dividend. I prefer that over stock-buy backs. Dividends allow me to choose to diversify, or to take income, without having to sell stocks and pay capital gains.

Biogen Idec reported some very impressive results today. You can get a good picture of the current state of the company at me Biogen Idec (BIIB) analyst conference summary for Q3 2008.

More data:

Sunday, October 19, 2008

AMD Breaks New Microprocessor Ground

AMD is feisty. Despite the brutal monopoly tactics used by rival Intel (illegal kickbacks to customers; using the cash accumulated by earlier monopoly pricing to try to drive AMD out of the market; etc.), AMD is not only still in the game, it presents a growing strategic threat to Intel and a growing opportunity for eveyone else in the computer industry.

In the third quarter of 2008 AMD made progress on four major fronts. It showed a degree of creativity and flexibility that we have not seen from Intel since the 1980s. While Intel, which "owns" about 80% of the global microprocessor market, continues to have enormous advantages, it is AMD that is leading. Even if you just bought a PC with an Intel processor, its main advances over processors from 5 years ago - combined 32 and 64 bit capability, multiple processors on a single piece of silicon, and lower energy use - were all invented at AMD and then reluctantly introduced by Intel.

You can read some of this history in articles listed at my main AMD page for investors. I'm going to focus this blog entry on recent stategic developments.

One place AMD has consistently lagged Intel is process technology, which is the technology of creating semiconductor chips with ever smaller surface features. Each new generation allows more gates and hence capacity to be fit on the same size of silicon (or you can put your old design on a smaller piece of silicon, which costs less). It is very, very costly to develop each new generation, both in terms of R&D expense and then in creating the equipment that the new fab (semiconductor factories are called fabs) needs to make the improved chips. Intel made so much money from its microprocessor technology that it was able to keep well ahead of everyone else in the industry, often having as much as a two year lead time. For makers of chips requiring less transistors, this was not a big problem, unless they competed directly with Intel for a particular product.

AMD met this challenge by doing more with less; their processor designs were significantly better than Intels from about 2000 until 2006. But if AMD could be at the same level of process technology at the same time as Intel, it would be in a better position to press its design advantage. During the last decade AMD, working with IBM, has created very sophisticated fabs in Germany, and it has narrowed Intel's lead time. But it is still 6 months to a year or more behind Intel, and Intel has the money to drive the research and investment to keep that lead or even extend it. AMD is now shipping chips using 45 nm technology, but Intel started shipping theirs at the beginning of 2008.

In the past decade many major semiconductor players have emerged that don't have their own fabs. These fabless companies, like NVIDIA and Marvell, have done very well. But the independent foundries that produce chips for them have not been able to keep up with AMD in process technology, much less Intel. You might think that independent equipment makers like Applied Materials and KLA Tencor, would focus on getting ahead of Intel, but most chip makers don't have to put but a fraction of number of gates on a chip as AMD or Intel do, so the economic incentives are not there.

AMD's new stategy is to start allowing other companies to use its foundries when they need the advantage of cutting-edge chip manufacturing. As this happens research and development costs can be spread out over a larger number chip makers. With IBM, AMD and others working together it is possible that the AMD coalition could catch up with the Intel axis in process technology over the next few years.

To accomplish this strategy AMD brought in new investors, basically the nation of Abu Dhabi. AMD is contributing its fabs and some of its intellectual property to the Foundry Company, but Abu Dhabi will be the majority owners, in return for a multi-billion dollar cash infusion. In addition to continuing to expand the AMD plants in Dresden, Germany, AMD will break ground on a new plant in New York State. At a time when most new foundries are being built in places like Malasia and China, you might wonder why New York State. Well, what some people believe is the most sophisticated chip factory in the world, one of IBM's fabs, is in New York. These factories are mainly run by robots. There is no need for a lot of low-paid laborers doing hand work.

Except for the cash infusion, we won't see the results of this strategic turn until 2010 and beyond. But there are the three other fronts I spoke of: graphics, servers, and profits.

AMD aquired NVIDIA rival ATI for about $5 billion back in 2006, just in time to see ATI lose much of its share of the graphics chip market (at about the same time re-designed Intel microprocessor chips caught up with AMD's and Intel lowered prices to make all microprocessor sales unprofitable). I want to repeat what I've said many times, I think the NVIDIA team may be the smartest guys in the tech world. Still, they are AMD rivals in graphics. Recently ATI (now an AMD division) stole a march on NVIDIA with a new line of chips and graphics cards that became very popular very quickly with game enthusiasts this summer. All NVIDIA could do was lower the prices on their own chips while they rushed back to the drawing board (okay, these guys never leave the drawing board, they sleep on the drawing board, but you know what I mean).

NVIDIA still owns the graphics card market, but in Q3 AMDs graphics division revenue jumped to $385 million from $285 million in Q2, a 55% increase in 3 months. More important, AMD/ATI has two advantages over NVIDIA that might come into play in the next 2 years and allow them to eat further into NVIDIA market dominance. AMD leads NVIDIA in process technology, precisely because NVIDIA does not have its own fabs. And AMD can integrate its processor (CPU) development with its graphics development, which NVIDIA can't. This is also a three way race because Intel has long made low-end graphics chips and is trying to upgrade that division in response to the AMD threat. All this will be very good for consumers, who are already seeing inexpensive video cards that are targetted at gamers but that can easily handle high definition video and that can be used as super computers those of us who like to crunch numbers.

In server chips, so important to the Internet world, AMD is shipping its first 45 nm Opterons. Depending on what they are used for, they can be seen as better or worse than Intel's current server chips. AMD chips use less power and are better at math and sending information to and from memory. Intel chips are better at heating your building (actually, they are quite good, having finally incorporate much of the Opteron circa 2002 design improvements). The same advantage you see in Opteron server chips will soon become available in Phenom chips for desktop computers. AMD already has great notebook computer chips, the Puma series.

And for the final strategic advance, we have: profits. While still working towards GAAP and even non-GAAP net income, in Q3 2008 AMD showed operating profits. Much of the industry was concerned that if AMD continued to lose money it would be forced into bankrupcy, and Intel would go back to its high-prices and low performance everyone came to expect in the 1999s. By lowering costs, including by making the Dresden fabs highly efficient, and raising sales, AMD would have been back in the game even without the Abu Dhabi deal.

I own AMD stock and two computers containing AMD processors. I also own stock in Marvell. In the past I owned NVIDIA stock, but do not at present.

See also

Tuesday, October 14, 2008

Rackable Systems (RACK) Hit by Economy

Rackable Systems issued a press release yesterday (October 13, 2008) stating customer purchases slowed down in September. This should not be a surprise; we will be hearing a lot of such statements in the coming weeks. In theory, since this is a known issue, stock prices have already tanked enough to more than compensate for it. Instead, just as Rackable (RACK) has had a major price hit today, we will probably see more individual hits corresponding with September quarter earnings announcements going forward.

Rackable released quite a bit of good news along with the bad, and it bears looking at. They signed up 25 new customers in the quarter. Their customers are all large corporations that need energy efficient, powerful, and managable datacenters, so 25 is a very good number. New generations of products are available for Q4. This is on top of the deals with IBM and NetApp from earlier in the year.

Opportunities and dangers abound for Rackable. As the leader in designing energy-efficient large scale server systems, it must compete with much larger players like IBM, Dell, HP and Sun, who have all been improving the energy efficiency of their systems. Rackable has plenty of cash on its balance sheets, almost $200 million at the end of Q2, and it is highly focussed on its niche. Its annual sales guidance is now $275 to $300 million, scaled back from above $350 million. It has been losing money on a GAAP basis but stayed in the break-even range on a cash basis. All in all, with a market capitalization today of $224 million, it seems undervalued even by current market standards.

I am a long term investor in Rackable Systems.

For more details, see

My Rackable Systems (RACK) analyst conference summary for Q2 2008
Rackable Systems press release of October 12, 2008

Monday, October 13, 2008

Strange Securities Auctions

This column already has several essays about economic, and investment, issues created when prices are set by auctions. The recent financial meltdown has given many real world examples of this, but they are difficult to explain to people who are not familiar with stock and bond pricing, much less derivative pricing. So I have made up an imaginary example that encapsulates, in a dramatic way, a particular type of auction malfunction (if by malfunction we mean pricing that veers from free market ideals).

I'll walk you through the example, then relate that imaginary experience to selected current economic and financial events caused by the lack of liquidity in the markets.

You hear about an auction and it sounds like you might want some of items in it, if the prices are right. The auctioneers will take only cash, so you put together what you have, say $55. You get stuck in traffic, so you arrive late. Outside people are already boasting of what great bargains they won. You hurry in.

The auctioneer, "the next item is a bundle of $1 bills, 100 of them." You think it is a strange item to auction: it is clearly worth $100 [assume these are not bills of value to collectors, or counterfeits, just ordinary $1 bills]. No one makes an offer at first, because everyone says assumes that it will be bid up to just short of $100, so bidding is a waste of time. But the tension builds and you decide why not, and open at $10. At that point the bidding goes quickly up to $29, then stalls. You offer $30. No one else bids against you. You win the $100. You pay $30 for the $100 and have $70 at the end. Meanwhile the auction has ended.

How could that happen (aside from the fact no one would auction off actual money like that)? Everyone else had run out of money. The next richest bidder in the room only had $29. It is your lucky day.

Translating this imaginary excursion closer to reality, now suppose that the item you bid $30 on and won was a mortgage bond worth $100. It really is worth $100, because the mortgage backing the bond is sound and will pay $100 over time. You win the auction not because the bond is worth $30, but because there is not enough cash to efficiently price the auction. Free market ideals have broken down.

Lately, almost no one has wanted to participate in auctions of at least two types of securities, mortgage-related bonds derivative securities and auction-rate securities.

There are two basic reasons there has been little bidding for weeks now: fear and lack of cash to bid with. The kind of institutions that can play this sort of game were all suddenly short of cash, and wanting to auction off what they could for cash, rather than using their precious cash to buy more securities. But no one else knows how to price the securities. For instance, it is difficult to find out which particular houses correspond to which particular mortgage bonds; linking the houses to derivatives is even more complex. So it is not exactly like buying a bag of $1 bills, if you just start buying a bunch of bags without looking in them. It is like buying an unopened bag of $1 bills and moths. It might have $100 of usable bills in it, or it might be all moths, or anywhere in between.

This is a problem for the government bail-out program; is the government going to look in each bag before it uses taxpayer money to buy it, or is it going to guess about the value of huge groups of bags using sampling techniques.

In free market theory prices are supposed to emerge in an efficient manner and result in efficient allocations of resources. Putting aside that there may be (in fact, are) problems with free market economics even when pricing of commodities is efficient, in the real world the conditions necessary for efficient pricing often don't exist.

For an auction to price items efficiently, there need to be a reasonable number of bidders and a reasonable number of items to bid on. If anyone has the power to set prices, prices will be set by that person, not by the market.

Even when there are reasonable numbers of buyers and sellers, because of human nature, prices can get out of whack, as in both bubbles and Depressions. The housing market is an auction market. Two years ago there were relatively few houses compared to bidders, resulting in unrealistic, high pricing. Now the same houses are in abundance compared to bidders, so in many cases sales are either not made (because in effect the people auctioning off their houses have set a minimum bid that no one will meet) or made at well below the real value of the house. The actual cost of construction being a good surrogate for real value for new homes, and that cost adjusted for inflation and physical deterioration being a good surrogate for used homes.

The Federal Reserve has been tasked with making sure their are neither too many nor too few dollars in circulation. When there are too many dollars, they are used freely to create inflation and asset bubbles. When there are too few dollars, people are forced to sell assets at less than their real values. Free market theories pretend that the only real value is the selling price, and it a very real sense that is true. But when selling prices depend on the whim of the Federal Reserve, you might want to ask yourself: what really is true, and what is bull?

Friday, October 10, 2008

America For Sale

This week we are seeing the largest turnover in the ownership of American corporations since the Great Depression.

We know who the people (and institutions) that are selling undervalued stocks are. They are people who are panicking, and people who have no choice because the stocks they are selling are their only source of cash to pay their debts on losses in mortgage-related securities.

But who is buying? Every sale requires a buyer. I don't have the best vantage point, but it sure looks to me like it is mainly petroleum cash coming into the market. I don't mean commodities investors fleeing the popping oil bubble (which I first wrote about back in Oil Bubble to Burst, on March 11, 2008). I mean the actual oil producers, mainly Arab nations, that have accumulated vast amounts of dollars (and Euros) that had not yet been invested.

Back in the 1980's we worried that the Japanese would end up owning the United States. They bought into U.S corporations, but mainly they bought land and buildings. In the short run they created a mini-bubble and got hurt, but those that kept their American real estate did well long-term.

Do I care that Arabs are going to own substantial portions of America's economy? No, it is part of the global economy. Only a few decades ago U.S. corporations owned much of Arabian oil production. The Arabs are not just lucky to have a lot of oil. They have worked hard, for decades, to develop their production capacity and their financial knowledge. They know the oil will run out eventually, so they are investing much of their returns, rather than spending them (not that they don't have plenty to spend, too).

Americans, as a whole, have been way too busy spending money and way too careless about making it. I think most Americans work reasonably hard, they just don't worry about the future enough to be bothered to save or invest. Some of us save, but we are more than balanced by the spendthrifts.

Today it looks like the future belongs to the Arabs, and maybe the Indians and Chinese. These United States of America are probably good for a comeback, but only if we create an economy that is not dependent on giving credit to spendthrifts to keep going.

Monday, October 6, 2008

Dendreon (DNDN) Provenge Interim Results

I previously said that if Dendreon missed the mark with its interim results for Provenge for late stage prostate cancer, I would not wait around for the final results. However, it appears that the interim results were quite positive, even though they did not make the predesignated FDA cutoff. Dendreon management explained why, with Provenge resulting in a 20% reduction of deaths, it is highly likely that when final results come in they will meet or exceed the 22% threshold needed for final approval. But this does mean more waiting for Dendreon as the final study won't be completed until mid-2009. Also, the company will continue to burn crucial cash during this final clinical stretch, leaving it weaker even if it gets final approval.

The Dendreon Provenge press release gave the basic information passed on from the independent data committee, so I'll focus on what management said in today's analyst conference.

In past Phase III trials Provenge showed more benefit over time than in the short run. This makes sense since its mode of action is to create an immune response to the prostate cancer. At this point in the prior studies the death risk reduction rate was 22%, and if that had been replicated in the current study, there was an agreement with the FDA that the trial could be stopped and approval quickly granted. However, the death reduction rate in the current study was 20%. That is not an unusual statistical fluctuation in a trial with this number of patients.

So on the whole, the interim results confirm the Dendreon story. In the past trials, when patients were looked at longer term, the death rate benefit (relative to placebo) increased to 33%.

But according to their agreement with the FDA, Dendreon does not need even that 33% reduction for approval. They only need a 22% reduction. That means that even if the trend of doing slightly worse than the earlier studies continues, the death risk reduction rate should come in around 29%, a very nice safetry margin above the 22% target.

Of course, a few adverse reactions (so far Provenge has proven extemely safe) or statistical fluctuations on the down side could still cause the study to fail. Also, I don't think the guarantee from the FDA is absolute. They will look at all the data and won't approve Provenge unless they feel it is safe and effective.

While it would have been nice to start getting this therapy out to prostate cancer victims quickly, it certainly now seems very hopeful that Dendreon will get the data needed to approve Provenge some time in 2008.

I own Dendreon stock and have owned it for years. You can read my Dendreon historical commentary and analyst conference summaries for more background.

Every thing in life involves upside and downside risks, so stay calm and ...

Stay diversified.