Thursday, July 9, 2009

I Buy Hansen (HNSN)

I bought my first shares of Hansen Medical (symbol: HNSN) today at $2.76 per share. It is a very risky move. It is not clear that Hansen is at a short-term bottom. I don't expect the stock to go up significantly until it reports an increasing number of sales for its robotic surgical catheter systems. That can't happen until after the September quarter ends, and may not be until well into 2010. On the other hand, I am looking at Hensen as a long term investment, and it is going for a small fraction of its 52 week high of $20.20.

Hansen was supposed to be the new Intuitive Surgical (ISRG). Unfortunately its timing was bad. It was starting to sell significant amounts of its products, which only began selling in 2007. Their surgical Sensei Robotic Systems run $600,000 each. When the economic turmoil hit last fall, hospitals started delaying orders. Revenues peaked at $10.9 million in Q3 2008. They seemed to be stabilizing after Q4 came in at $7.3 million and Q1 2009 came in at $7.1 million.

In April Hansen sold more stock, raising an additional $35 million. Which was necessary since they were burning over $5 million in cash per quarter, and the recession made it impossible to know when they might become profitable.

On July 6, 2009, the Hansen announced disastrous preliminary second quarter revenues of $3.1 to $3.3 million.

Hence the low stock price. Hence my buying.

Today the company's market capitalization is $103 million. In my book that still makes it an expensive stock considering that its net loss even in its best quarter so far, Q3 2008, was $12 million GAAP. True, cash burn is not that bad, much of it is depreciation of startup costs. Still if they repeated Q3 for an entire year, they would have just under $44 million in annual revenue.

So why am I buying the stock?

I like robots. The results from surgeries with the Sensei system are getting really good feedback. I think a lot of hospitals want these systems. I think that when credit becomes available again, most of the system sales that have been delayed will come through.

I also think that India and China, as well as the U.S. and Europe, are going to be big markets for these machines. India and China both need to rapidly improve medical care for their middle and upper classes. They are in a position to skip straight to the most modern technologies.

Of course I could be wrong on any of my guesses about the future. There is also danger from competition; Hansen is not the only company making medical robots these days.

The Sensei robots with their Artisan Control Catheters are mainly used for electrophysiology (EP) at present, but other uses are being developed.

So on the whole what I now have in Hansen Medical is a biotechnology startup company that has only recently begun to ramp sales of its products. Better still, I bought my position when people finally stopped pricing Hansen as if it is the next ISRG.

See also my summaries of analyst conferences for Hansen Medical.

Monday, July 6, 2009

Gilead Second Quarter Outlook

Gilead Sciences is a biotechnology pharaceutical company specializing in anti-viral drugs. More specifically, Gilead is the market leader in HIV therapies.

Gilead will be reporting its results for the second quarter on July 21. They will also have their analyst conference. I'll be posting a summary of the Gilead analyst conference as usual. You might want to bookmark that.

I own about as much Gilead stock as my portfolio model will allow.

Gilead's best selling drugs in Q1 were Truvada and Atripla, which together accounted for the bulk of sales. Truvada sales grew 23 % y/y to $590 million. Atripla sales grew 67% from the year-earlier quarter to $510 million. Given these trends, in 2010 Atripla should be Gilead's leading compound.

Atripla seems to be very effective in combatting the HIV virus, the cause of AIDS. It comes in pill form and can be taken once a day, making it easy for patients to comply with compared to older therapies. It contains three components: tenofovir, emtricitabine, and efaverenz. The efavirenz is provided by Bristol-Myers Squibb.

Atripla is effective because it hits the viruses in three different ways. Tenofovir is a nucleotide analogue reverse transcriptase inhibitor. Emtricitabine is a reverse transcriptase inhibitor that is a nucleoside analog of cytidine, while Efavirenz is a non-nucleoside reverse transcriptase inhibitor. Without reverse transcriptase action, the HIV virus cannot reproduce. Because their are numerous strains of the HIV virus, having three inhibitors decreases the chances that a strain might outflank a particular anti-retroviral.

Q2 revenues are likely to be higher than Q1 revenues. Atripla is still in the process of getting approvals in many nations. As doctors find that the older drugs lose effectiveness in individual patients, they are now likely to switch patients to Atripla.

There is concern that Atripla sales will eventually eat into Truvada sales. But Truvada is Tenofovir with Emtricitabine, two of the Atripla ingredients. So any leveling off by brand name would be misleading. The underlying compound's sales will keep growing. While it seldom makes the news any more, the number of new HIV cases diagnosed both in the U.S. and internationally is not slowing down.

The usual risk factors for pharmaceuticals are present. If someone ever created an effective vaccine, there would be a decline in new cases. An actual cure would make Gilead irrelevant. A better therapy would also cut into sales. None of these appear to be on the horizon at present. New side effects could also cause the drugs to be withdrawn from the market, but these drugs have been massively distributed already, so that is unlikely. Patents, of course, will expire as well.

Gilead's research budget, however, is now around $750 million per year. That is bringing along a pipeline of anti-viral and other drugs that should more than compensate for expiring patents in the long run.

So you would think Gilead would be an expensive stock with a high P/E ratio. But it is not. According to NASDAQ, today's market capitalization ended at $41.5 billion and the trailing P/E ratio is 20.7.

For details on Q1 results, see my Gilead (GILD) Q1 2009 analyst conference summary.

And keep diversified!