Wednesday, February 24, 2010

Hansen Medical's Long March

Hansen Medical (HNSN) reported its Q4 2009 numbers yesterday. Although the revenue numbers showed good improvement both sequentially and year over year ($7.2 million, up 56% sequentially from $4.6 million and up 33% from $5.4 million in the year-earlier quarter), revenue does not even meet half of expenses. (See also my Hansen Medical analyst conference summary for Q4 2009).

What we have in Hansen is an opportunity to be a venture-capitalist-equivalent using a listed and liquidly traded stock. This is not uncommon in biotechnology. Starting a biotechnology company is a lengthy process, and venture capitalists like to IPO these stocks long before they reach profitability. Often, several rounds of stock sales are needed to keep the companies going, and many simply go under, as we say in 2008 and 2009 when funding dried up. The risks are high, but so are the potential returns.

At least Hansen is selling its robotic catheter machines. Six were shipped in Q4. They are predicting a seasonally down first half, but total sales of 30 to 35 in 2010, so lets say 8 per quarter.

There are a bunch of problems in developing robotic surgery businesses. That they can be overcome has been proven by Intuitive Surgical (ISRG). Hansen has to get approval from the FDA for each type of surgery for its machines. Also, each type may require the development of a different catheter. Right now the Sensei Robotic System and its Artesian Control Catheter are approved only for electrophysiology (EP).

Just because the first goal of Hansen was to get approval for EP, does not mean that is where the real money is. While certainly useful for EP, flexible catheter robotics has broader uses. With its flexible EP platform a success, Hansen needs to move into other areas. And since the EP business is money losing (and might remain so), capital is needed for research and development.

Fortunately, Hansen both has some cash raised in a stock offerering in 2009 and a partner in Philips Medical Systems. The next big target is peripheral vascular disease. This would seem to be a perfect match for Hansen's technology, and it is a much bigger market than EP. But the machinery has to be perfected, FDA approval obtained, and then surgeons have to be convinced that they should use these rather expensive machines (over $600,000 each).

You can put a target price where ever you like on a stock like Hansen Medical. It was trading for over $20 per share in 2008, now it is under $2.50 per share. Investors thought that once the robots started to be used in hospitals, there would be a continuous ramp-up, and ISRG like stories were told.

I think at $2.50 per share, as long as it is a small part of a risk-balanced portfolio, Hansen is very, very attractive for long-term investors. I mean people who can wait two years or more to see how things develop. [I own HNSN]

There might even be an upside to the EP business while other markets are developed. The catheters cost over $1500 each, and 539 were sold in Q4. It is not far-fetched that the run rate could be pushed up well above current levels; that is one of management's explicit aims.

Europe apparently has a more flexible system regarding robotic medical devices, so there is a possibility that in 2010 we will start seeing more machines sold there than in the U.S. Of the six machines shipped in Q4, 3 went to Europe.

Nibble before you bite, and keep diversified!

See also the Hansen Medical site

Tuesday, February 23, 2010

Waiting for the FDA, with Dendreon

Patience has proven to be a virtue for Dendreon investors. On the other hand, you might want to invest in some valium, because no matter how confident Dr. Gold and the rest of Dendreon's management is, we won't have an FDA approval of Provenge for prostate cancer until we actually have it.

We should have it by May 1 (called the PDUFA date; don't ask), but we could get an earlier response, and you can't truly exclude a delay. The working presumption is that Provenge will be approved, based on the data from the IMPACT study that shows it prolongs time of survival in men with bad cases of prostate cancer, with no significant side effects.

Meanwhile, Dendreon has bet big with investors' money. They will be ready to start manufacturing Provenge for paying patients on May 1. Each patient has blood taken out, then treated to create Provenge, then reinjected. The first facility is in New Jersey, and even as we speak it is being expanded. Additional facilities in Orange County and Atlanta are in the works and should be online by mid 2011. If they are, and the demand is there, Dendreon could be showing a profit by the end of 2011. After that profits could be considerable as operating costs should be far less than setup costs.

In Q4 2009, Dendreon spent $36.4 million. Some of that is R&D for other therapies beyond Provenge, but most of it is in anticipation of the launch.

Getting started quickly is important because if active cellular immunotherapy (ACI) works for Dendreon, it is going to work for other companies as well. That is the nature of nature. Each cancer type, or even subtype, treated needs to be studied in clinical trials in order to get FDA approval. The failure to success ratio will probably continue to be high. The company that gets the most approvals becomes the new cancer king, say by 2020. People who own that company will be like the Microsoft Millionaires of 1990. But that company is not necessarilly Dendreon. Bigger companies will compete, or buy up successful startups. Lots of money is going to be spent in this race, so I guess I should be looking into equipment suppliers for this space, too. But certainly Dendreon, if Provenge is approved, will have a good headstart.

I would not assume that FDA approval will automatically result in a Dendreon price spike. It may be factored into the current price; when a spike fails to materialize, short-termers will probably sell on the news. At this point Dendreon is a play for long-term investors, those who can wait five to ten years for outsized returns.

And remember that in medicine, things can go wrong even after FDA approval, as we have learned from quite a number of companies these past few years.

I have owned Dendreon stock since August 2004. It has been a roller coaster.

See also:
my Dendreon 2/22/2010 analyst conference summary
my Dendreon main page . Talk about Provenge like you actually know something about it!
Dendreon web site

Keep diversified!

Thursday, February 18, 2010

Applied Materials and NVIDIA correlation

Yesterday I listened to the quarterly analyst conferences for graphic chip maker NVIDIA (NVDA) and semiconductor equipment manufacturer Applied Materials (AMAT). You can see my summaries at:

Applied Materials (AMAT) Q1 Fiscal 2010 analyst conference summary
NVIDIA (NVDA) Q4 Fiscal 2010 analyst conference summary

One data point that matched up was that there is a shortage of key production capacity for semiconductor manufacturing. Nvidia described this as a supply constraint. This is called process technology, and it comes in generations, with less nanometers (nm) being better. 40nm is where Nvidia is at for process technology its newest chips.

The result was a great quarter for semiconductor equipment makers including Applied, which had revenues of $1.85 billion, up 21% sequentially, and up 39% from the year-earlier quarter.

The question for Applied is, how long can this last. Executives were cautious with their guidance, saying it is hard to predict the second half of 2010 at this point. The jump in the quarter that ended January 31 has a lot to do with manufacturers needing to make up for pent up demand. Remember the gloom and doom of January 2009? No one was buying manufacturing equipment; there was plenty of capacity. But designers like Nvidia expect a new generation of smaller chips about every 2 years. So their new products can't even be done on the older processes, which have plenty of capacity.

So two scenarios are possible. One is that with some extra equipment bought in the second half of 2009 and first half of 2010, manufacturers will be up to date on the newer technology. This assumes that the global economy, and in particular the consumer electronics segment of the U.S. economy, grows slowly in 2010.

I think the other scenario is more likely. Demand in nations like India, China, Indonesia, and Brazil will grow rapidly, and the U.S. will ramp moderately, rather than slowly. People are going to want the new smartphones, especially ones that use Marvell's chips to get prices under $125 in Asia. At the same time mobile pushes the small end of web presence, technologies like Nvidia's 3D Vision and AMD's Eyefinity will reinvigorate the large screen segment. Applied Materials makes equipment to manufacture large screen displays, so they should benefit.

All bets on technology involve risks. So ...

Keep diversified!

Monday, February 15, 2010

Biogen Idec (BIIB) Revenue Lull

Biogen Idec (BIIB) reported Q4 2009 financial results and held its quarterly analysts conference last week. I used Biogen as an example in my Choosing a Biotech Stock series, and later chose to buy some myself, which I still own.

Biogen is in an interesting phase. Its revenue growth has slowed from the high levels of the past few years, to just 6% from the year-earlier quarter. At the same time, year over year, net income for the fourth quarter rose 48% to $305.6 million (GAAP).

So what is going on? The flat revenue is because Rituxan for rheumatoid arthritis revenues are expiring outside the U.S. Biogen will continue to sell Rituxan inside the U.S.

Compensating for that drop, we still have ramping sales of Tysabri for Multiple Sclerosis, which had revenues jump 39% from year-earlier. Tysabri is still being introduced internationally. It is something of a miracle drug for MS. Tysabri has very good profit margins. Biogen's older MS therapy, Avonex, had revenues up only 5% y/y. Tysabri had scared investors because of cases of PML associated with it, but recently the FDA announced that with Biogen's monitoring program for PML, the benfits of Tysabri outweigh any danger. Biogen is continuing to work to reduce the possibility of PML.

Biogen has an extensive pipeline of drugs that, if approved, could significantly increase its revenues and profits over the next decade. The first possible revenue boost would be from Fampridine for MS. Unlike Tysabri and Avonex, which work by suppressing the immune response that causes MS, Fampridine works by strengthening the signaling of intact nerve cells. It can give patients temporary control of their movements. This is likely to be very attractive to MS victims.

I continue to like Biogen, but its main value is over a long time from of 2 years or more. In the meantime I hope they either use the cash they are generating to pay a dividend or to acquire more quality drug candidates for development.

Analyst conferences coming up this week:

Applied Materials (AMAT) Wednesday
NVIDIA (NVDA) Wednesday

See also:
Q4 2009 Biogen Idec analyst conference summary

Friday, February 12, 2010

Alice in Wall Street Land

Today it was announced that the government of China tightened up on lending by increasing the reserve requirements of banks.

Stocks fell in most of the world and in the United States.

And yet we should be celebrating that the Chinese government, unlike the American government, has at least a vague sense of sound capitalist economics. We really don't want the Chinese economy to overheat and then crash. We want to see sustainable growth. Even with that goal, we would expect to see more cyclic activity than is desirable.

China has become the engine of the world economy. Just as Great Britain was in the 19th century and the U.S.A. was in the 20th century. What is good for China is good for the world. China is one of the largest national markets for many of the stocks I own or follow like Marvell Technologies (MRVL) and Microchip (MCHP). Even my biotechnology companies are selling rapidly increasing volumes of their products to Chinese end markets.

The rest of the world, particularly the United States, needs to catch up to China in this cycle. It helps us if China taps the breaks a bit. We need to improve our competitiveness and absorb our own excess capacity.

Selling stock because China tightens its credit policies, this early in a recovery cycle, is just stupid.

Professionals on Wall Street may have a lot of competitive advantages over individual investors, but on the whole they are a narrow-minded, stupid and cowardly lot. It's hard to match the top 10% of Wall Street guys, but beating the average is not very tough if you do your homework, analyse situations carefully, and don't get emotional.

Choosing individual stocks is still where the competitive advantage is for smaller investors. It does not take very much research to know more about a particular company than most brokers and professional traders. You can even beat computerized trading programs simply by taking a long view; they aren't programmed to understand companies or markets, they seldom trade well on time frames of over a week.

Markets should be cheering the Chinese government. Investors should be pressuring the Federal Reserve to raise interest rates to a defined point like 0.25% or $0.50% to signal that credit generation will not be allowed to get out of hand in this cycle, the way it was in the last two cycles.

Friday, February 5, 2010

Akamai Accelerates Profits in Q4

Akamai (AKAM), the internet acceleration specialists, saw accelerating revenues in the fourth quarter of 2009. This is typically a seasonally strong quarter for Akamai due to the increase in internet shopping for the holidays.

Revenue was $238.3, up 15% sequentially from $206.5 million, and up 12% from $212.6 million in the year-earlier quarter.

Profits were good, but slightly below Q4 in 2008. GAAP Net income was $40.1 million, up 23% sequentially from $32.7 million, but down 1% from $40.5 million year-earlier. EPS (earnings per share) were $0.21, up 17% sequentially from $0.18, but down 5% from $0.22 year-earlier.

As to guidance, the March quarter is expected to be seasonally down.

With Akamai there is an argument that you should look beyond the GAAP numbers. Cash flow from operations was $124.9 million, far greater than GAAP net income. One difference is that taxes actually paid have been far lower than taxes for GAAP purchases, due to use of NOLs (net outstanding losses) generated during Akamai's startup period. However, in the analyst conference (held February 3, 2010), management said that in 2011 Akamai will become a full tax payer, so the gap between GAAP and Non-GAAP net income and EPS should narrow to more typical numbers.

Akamai believes that its value-added services will continue to drive revenues and profits as the internet bandwidth expands globally.

For details on what management said at the conference, including responses to questions from analysts, see my Akamai (AKAM) analyst conference summary for Q4 2009.

And of course see Akamai's site,

I own some Akamai stock.

And Keep Diversified!

Thursday, February 4, 2010

Microchip Gains Market Share

Microchip (MCHP) reported impressive results for the December quarter this Wednesday.
Revenues were $250.1 million, up 10% sequentially from $226.7 million and up 30% from $192.2 million in the year-earlier quarter.

Net income was $69.4 million, up 56% sequentially from $44.5 million and down 4% from $72.4 million in the year-earlier quarter. EPS (earnings per share) were $0.37, up 54% sequentially from $0.24, but down 5% from $0.39 year-earlier.

Of course the December quarter of 2008 was an easy comparison, as the recession was in full swing. But the take away should be that Microchip outperformed its rivals in the microcontroller space during 2009. In retrospect it is easy to see why.

Microchip entered the recession with plenty of cash. Rather than laying off large numbers of employees, it retained most but reduced benefits and pay. It kept investing in new product development, and in new customer relationships. It even bought some small companies with key technologies. It kept its lead times short, while rivals underinvested, resulting in long lead times. Microchip gained market share.

Microchip looks ready for strong growth in 2010, but of course that is dependent on the global economy. It is also notable that year/year revenue increases were strongest in Asia, at 12.4%, and weakest in the Americas, at 6.1%. At this point over 50% of sales are to Asia.

For a more detailed report, see my Microchip Fiscal Q3 2010 analyst conference summary.

Normally I classify chip technology companies as having at least a moderate amount of risk, but Microchip is a dividend paying company (typically around 5% of the stock price), so it is a good way to get both growth and safety in the semiconductor sector.

See also

And Keep Diversified!

Tuesday, February 2, 2010

SGI Revenues: GAAP v. non-GAAP

SGI (Silicon Graphics International) reported results for its quarter ending December 25, 2009 today, and the numbers look good to me. However, that interpretation requires breaking a general rule.

I like to use GAAP (Generally Accepted Accounting Principle) numbers unless there are good reasons to use non-GAAP numbers for putting a value on a company. Usually revenues are the same, or close, for GAAP and non-GAAP. If there are differences, they appear as non-GAAP net income and EPS. In the past some companies have pushed non-GAAP numbers that misled investors.

In this quarter, for SGI, GAAP revenues were $94.1 million, but non-GAAP revenues were $151.5 million. How can that be? In this case, apparently the higher figure represents payments received on equipment and services sold. But because the high-end computer equipment sold by SGI includes software and maintenance commitments, all of the revenue can't be booked under the accounting rules used.

SGI results from a combination of Rackable Systems and the old, bankrupt Silicon Graphics that took place in 2009. The old SGI was technologically formidable, but had a business culture of putting innovation above profits. I had some worries that the combination might end up with the wrong culture, but so far I have been pleasantly surprised. Rackable bought SGI's assets for a song, and brought a big pile of cash into the combined company. Having shed its debt and some not-so-brilliant business ideas, SGI looks pretty hot. It sells supercomputers and other high end products and services to government agencies and enterprises that need them. Rackable, of course, was known as the leading vendor for energy efficient server farm systems.

Still, there is a way to go before getting too bullish on the future of SGI. Non-GAAP net income was only $5.6 million, or $0.18 per share. While that might seem to justify today's stock price, there are a lot of moving parts involved.

I own some SGI stock (I kept my RACK stock), but would like to see at least a couple more quarters of good revenues and profits before adding significantly to it. It is a classic investor dilemma. If I wait and SGI does well, I'll certainly have to buy in at a higher price than today's. On the other hand, the potential for going back to a string of losses with just an occasional quarter of profits is all too real at this point.

For a detailed account, see my SGI Analyst Conference Summary for 2/2/2010. The new corporate web site is

So I had better ...

Keep diversified!