Wednesday, September 30, 2009

Onyx Pharmaceuticals Breast Cancer Trial Results

Onyx Pharmaceuticals (ONXX) held an analyst meeting this morning to discuss the results from one of its clinical trials for Nexavar (sorafenib) for breast cancer. It also issued a press release on the results of a separate trial for the same indication, but with a different simultaneous chemotherapy. All together these two Phase II trials indicate that Onyx should design and initiate Phase III studies for this indication. If Phase III results are positive, then it would be likely that the FDA would approve Nexavar in combintion with chemotherapy for HER-2 negative breast cancer. Investors (and cancer patients) should keep in mind that 2011 would be an early date for this event.

Onyx is not exactly the darling of the investment community right now, and several analysts asked questions that have been circulating about the validity of the study results.

In the conference and the September 23, 2009 Nexavar breast cancer press release, the study methods were explained in detail. Patients had HER-2 negative breast cancer that was locally advanced or metastatic. The study was double-blind and had 229 patients. All patients received capecitabine, a common chemotherapy agent for breast cancer, especially in Europe. Half reveived Nexavar and half a placebo.

Those treated in the Nexavar arm had progression-free survival (PFS) of 6.4 months, compared to 4.1 months in the chemotherapy-alone arm.

That is an extremely good result in the world of breast cancer. Jose Baselga, M.D., who spoke at the conference and was the principle investigator for the study, reported that a colleague told him the results were comparable to the early results for Herceptin (a Genentech drug) for HER-2 positive breast cancer. About one-fourth of malignant breast cancers are HER-2 positive.

Chemotherapy is notably rough on patients, so toxicity of added therapies is always a big concern. The main additional side effect from Nexavar was hand-foot rash. These rashes could be serious, but were managed by gradually reducing dosages of the two compounds in the patients affected. One analyst asked if there could have been investigator bias because patients with the severe rash could be assumed to be on Nexavar. Doctor Baselga disputed that, pointing out that the rash affected those getting capecitabine only, but to a lesser extent. In a Phase III trial additional precautions could be taken to eliminate this issue.

The press release today for Nexavar in combination with Paclitaxel for advanced breast cancer was vague, but that is because the industry practice is to have detailed results presented at professional medical conferences. The key result was that the Nexavar patients "demonstrated a positive trend towards improvement of progression-free survival in the treatment group." This may turn out to not be sufficient to warrant a Phase III trial with this combination, but even so lends support to Nexavar's effectiveness for breast cancers.

So why did Onyx stock take a dive today? Probably two different issues. One is that Phase III trials are expensive and will probably eat into Onyx's not particularly robust profits in 2010 and 2011. Nexavar is already generating significant revenue for Onyx's partner Bayer: in the latest quarter global sales were $200 million, but Onyx reported GAAP net income of only $9.4 million ($15.3 million non-GAAP). This is largely due to expenses for ongoing trials for Nexavar for kidney (renal) and liver cancer. Other trials are planned or under way for lung and other coancers. Nexavar is still being rolled-out globally, which is an expensive process since drugs must be approved for sale (and for reimbursement) on a nation-by-nation basis.

But the big clunker is the plan to make a major acquisition. Onyx does not want to be dependent on a single therapy, Nexaver, no matter how broadly it might be applied in oncology. But spending a large sum of cash on a promissing, but not-yet-approved, therapy is always a big gamble.

I own Onyx stock, but have spread my risk over many therapies by holding a number of biotechnology stocks. I think Nexavar revenues, and Onyx net income, are going to improve in 2010, from liver and kidney cancer.

Onyx won't buy a clunker on purpose, so I don't think there should be any deep discounting because of an acquisition that has not yet been decided upon. But Onyx is definately a long-term play. It may be cheap now, but the big payoffs won't be until 2011 or later, when the global rollout for liver cancer is complete and we have more definitive data on Nexavar's benefit for other kinds of cancers.

Keep diversified!

See also:
my August 4, 2009 Onyx Analyst Conference Summary
Onyx Pharmaceuticals web site

Sunday, September 20, 2009

Mixed Software Report: Adobe and Oracle

Adobe and Oracle, two of the larger software companies, reported quarter results this week. Adobe (ADBE) was the weaker of the two, with revenue for its quarter ending August 28, 2009 (3rd fiscal quarter 2009) at $697.5 million, down 21% from $887.3 million year-earlier.

Oracle (ORCL), in contrast had revenues of $5.05 billion, down only 5% from $5.33 billion year-earlier.

The two companies are not, in the main, competitors. Adobe sells applications that are used for content creation (print, graphics, and video), and dominates that field. Oracle sells its database applications and related business management software. It competes mainly with IBM, Microsoft, and SAP, mostly successfully.

Adobe's slow sales mainly reflect the economy, not a loss of market share to competitors. Oracle has certainly gained market share this last year, allowing it to compensate for the slowed economy.

Both companies are involved with big acquisitions, which are always a danger for shareholders, but both have been successful with acquisitions in the past. Adobe is aquiring Omniture, a web analytics company. Adobe wants to build web analytics into its web products, and Omniture is a profitable business in its own right.

Oracle, in case you had not heard, is acquiring Sun Microsystems. It may not be able to keep all of Sun because of regulatory issues. A lot of people are afraid it will kill MySQL, the main open-source competitor to proprietory database applicatins. My SQL was bought by Sun not that long ago. The thing about acquiring Sun is that it has been years since Sun has made a profit. Sun, like IBM, is both a hardware and software company. Oracle appears to be wanting to add more hardware to its lineup. Hardware has low profit margins, but if you sell the hardware, you can usually sell software with it.

You can find out more at my Oracle Analyst Conference Summary for September 16, 2009 and my Adobe Analyst Conference Summary for September 15, 2009.

This week, a smaller but still-important software company reports: Red Hat (RHT) on Wednesday, September 23. You can visit my Red Hat Analyst Conference Summary page and bookmark it. I usually post my summaries by the end of the day the conferences occur, unless I have too much other work.

I don't own Oracle or Adobe stock at this time, and I sold my Red Hat stock recently.

Keep diversified!

Monday, September 14, 2009

To The Federal Reserve: Start Raising Interest Rates

The Federal Reserve should have set its "federal funds" rate at 0.25% at its last meeting. Unless there is a marked reversal in the economy, it should raise the rate to 1% in steps.

Confidence in the Federal Reserve is near zero at this point. We have had two major asset bubbles in less than a decade. While there were other reasons for the bubbles, the main reason the bubbles grew to catastrophic proportions was the failure of the Federal Reserve to raise rates quickly in response to the bubbles. True, there should have been better oversight of the mortgage industry and the derivatives based on it. But when an economy as a whole inflates unreasonably, it is the money supply and interest rates that need to be controlled.

The Board of Governors of the Federal Reserve current policy is to "maintain the target range for the federal funds rate at 0 to 1/4 percent." [See August 12, 2009 Federal Reserve meeting release]

One of the causes of the crash of 2008 was inadequate consumer savings. Because most consumers had little of no savings, when credit was reduced they had little or no ability to keep consuming.

Since the Fed lowered interest rates to deal with the crash it should have prevented, those who did save by putting deposits in CDs and saving accounts have been severly punished. True, they may be happy that they were not invested in stocks or speculating in real estate, but as time passes the punishment becomes more real. It must be particularly gauling to get a notice that you credit card interest rate has been raised to over 20% from the same bank at the same time your CD renewal rate is lowered to 0.5%.

There is something obviously corrupt, and diverging from free market pricing doctrines, when the Fed is lending to banks (at the discount rate) without charging interest, and the banks are turning around and charging over 20% interest to the citizens of the United State.

But if you can, forget about justice for a moment. Consider the economic implications of the Fed's current policy. Money costs nothing to those borrowing directly from the Fed. What are the chances that free money will be allocated in an economically efficient manner? Zero, the same as the interest rate.

The biggest problem, however, is that the Fed is signaling that it does not care about inflation. With global supplies of oil, grain, and other basic commodities likely to tighten quickly once the global economy starts expanding, the danger of inflation from commodities alone is high. In addition, the Federal deficit and debt are huge indicators of potential inflation.

It is unlikely that a Fed funds rate of 1% would derail a recovery, even if such a rate had been announced in August. Putting 1% gradually into place is no danger at all. The danger is that the Fed will, yet again, get behind the curve and then be forced to overreact. The even greater danger is that the Fed will get behind the curve and then fail to ever catch up without causing a crash, as happened in 1999 and 2007.

Even if the economic recover is gradual, there is no reason to have rates below 3% by the end of 2010. High interest rates reward savings. That is not just putting money in a savings account. That is thrift, doing things efficiently, doing without waste or luxury. High interest rates also punish borrowing, which is associated with economic inefficiency and waste.

You can let the Federal Reserve know what you think at Federal Reserve Feedback.

Tuesday, September 8, 2009

I Sell Red Hat (RHT)

Today I sold all of my Red Hat (RHT) stock at $24.51 per share. I bought about half at $17.91 per share on January 21, 2008 and half at $10.86 on November 14, 2008.

This is in no way a reflection of lost optimism about Red Hat the company. I think they will continue to gain share in the server operating system and middleware markets. They have a great product (Linux Enterprise Edition) and serve their customers well.

Nevertheless, I do not like to bet on market psychology or price momentum. By the numbers Red Hat's stock price has gotten ahead of itself, especially compared to other technology stocks that have not run up as much. Last quarter revenues (not profits) were $175 million. So at a flat run rate 2009 revenues will be $700 million. Yet the market capitalization for the stock is $4.6 billion. There is a lot of optimism built into that market cap number. My guess is that in 2 years Red Hat will easily justify that number, but today I would rather have the cash.

I am going to continue to do analyst conference summaries for Red Hat. If the price dips, or if revenues and profits accelerate faster than I am assuming, I could buy back in. I watched Red Hat a long time before buying in; it is one of my favorite stock stories.

The next Red Hat results and analyst conference is scheduled for September 23.

See also Red Hat's site.

And keep diversified!

Thursday, September 3, 2009

Applied Materials Under the Hood

Applied Materials makes capital equipment, which is equipment used to manufacturer further equipment or goods. In Applied Materials' case it manufactures the machines used to make semiconductors and related electronic equipment. It has four major segments: semiconductor; display; solar; and services.

Capital equipment can be a bad place to be in a down cycle. With demand slack, manufacturers don't need to expand their capacity. Even after the macroeconomic cycle has hit bottom it may take months or years for capacity to become constrained enough to force businesses to make significant investments in new capital equipment.

Each type of capital equipment, however, has its own quirks. The main quirk to be aware of in the semiconductor industry is that the expansion of capabilities of logic and memory chips is dependent on ever-shriking circuit elements. In the industry the vocabulary is in "process technologies" measured in nanometers (nm). For instance, not that long ago the cutting edge was 90 nm; today it is 45 nm; 33 nm is expected shortly.

So while the 2008-2009 recession left manufacturers with plenty of capacity, much of it is now the wrong capacity. For a specific NAND (Flash) memory chip, for instance, the oldest manufacturing capacity may no longer cost effective because the prices for the chips have dropped so dramatically. To keep up to pace, smaller process technologies must be used.

While semiconductor making equipment sales dropped sharply for AMAT during the recession, they did not drop to zero. Part of this was because orders had been made long in advance. Partly it was because some confident, well-funded manuacturers continued to buy the newest equipment in order to be set to have better profit margins than competitors.

When will the need for new equipment compensate for the decreased overall end demand? It has not happened yet. For Q2, semiconductor segment revenue ramped from Q1 to $498 million, but was down 34% from $756 million in Q2 2008, which itself was a soft quarter. Management said orders picked up significantly in the June.

The most likely scenario is that 2010 will be a good year for Applied Materials. Between the ongoing shift to smaller process technologies and the shift in computer memory to DDR3, a lot of new equipment is going to be required. Whether the ramp up will be strong in the second half of 2009, however, is an open question.

Applied Materials has also invested heavily to develop technologies for manufacturing solar cells. Several solar cell factories are now operating that use Applied equipment. Financing restraints have cut back planned equipment purchases, but this is likely to be a temporary effect. When the global economy revives and oil prices start heading up again, there will be another rush to solar. This time Applied Materials will be ready with perfected manufacturing processes.

In display, which is flat panel displays, demand in the China market is breathing life back into the market. There was plentiful capacity in mid 2008, so most manufacturers paused their equipment purchases. Now, while prices are still low, unit sales globally have ramped to the point that factories are nearing their capacity constraints. So expect new equipment orders, especially in 2010.

Applied Materials did a pretty good job cutting back on expenses during the difficult times. As a result, in Q2 GAAP its GAAP loss was $55 million, but cash flow from operations was $194 million.

Applied Materials is predicting to at least break even on a GAAP basis in Q3.

The usual business risks from competition and shifting demand patterns remain present.

So keep diversified!

Applied Materials main page

Applied Materials Investor Relations page

Openicon Applied Materials main page