Thursday, September 30, 2010

Biogen Idec (BIIB) Hemophilia Therapies

Biogen Idec is known for its multiple sclerosis therapies Tysabri, Avonex, and Rituxan. It also has an extensive pipeline of potential therapies in immunology, oncology, cardio and hemophilia. Yesterday Biogen (BIIB) held a three hour conference on its hemophilia therapies. Here I'll summarize some of the key points that were made. You can listen to the entire conference from a link at the Biogen Idec Investor Events page.

Hemophilia (alt spelling: haemophilia), the chronic inability of the blood to clot, is a rare, but no extremely rare, disease: under 20,000 people have it in the United States. It is typically caused by a defect in one of two blood clotting proteins: coagulation factor VIII in hemophilia A or factor IX in hemophilia B.

Managing hemophilia usually involves infusing the clotting factor into the blood. This can be done when there is an incident that would cause bleeding, or it can be done on a regular basis as a prophylactic. Over time most U.S. patients have moved towards prophylactic use of either natural or recombinant factors. However, the clotting factors have a lifetime of only a few days in the blood. So for hemophilia A, the most common type, infusions are typically done three times a week or every other day. For hemophilia B, two to three times a week is typical.

A variety of pharmaceutical and biotechnology players have sought to extend the life of coagulation factors in the blood. Biogen appears to be on track to be the first company to deliver such a therapy. The initial development was done by Syntonix, which Biogen acquired in 2007. The long-acting factors were created by fusing a recombinant factor of each type with Fc antibody fragments. The rFactor binds to cells that line the blood vessels, but can be re-released back into circulation without being degraded.

Long Acting rFactor IX for hemophilia B is has started a Phase 3 trial after having been shown to be safe and effective in Phase 2. As always, Phase 3 trials involve far more patients than Phase 2 trials, so issues can arise that are unforeseen. That said, given that other Fc-fusion therapies have been safe and recombinant factors are safe, the prospects are pretty good.

Long Acting rFactor VIII for hemophilia A, the more common type, has completed a Phase 2 trial. While the data has not been released, it is good enough that management is preparing for a Phase 3 trial.

If the Phase III trials are successful, it is likely patients can be treated just once a week or so. That would be a tremendous benefit to patients who must being infused as babies and continue the process for their entire lives. It would likely encourage more patients to use therapy prophylacticly.

Current therapy is rather expensive (see hemophilia financial issues), another reason some patients do not dose regularly. I don't know how Biogen will initially price their version, but costs could be reduced in the long run because of the less frequent dosing needed.

For investors, gaining FDA approval for long-acting hemophilia therapy would be an obvious plus and might help overcome doubts due to possible upcoming MS competition from Novartis's Gilenya (fingolimod).

Keep diversified!

See also:

my Biogen Idec Medical Analyst Conference Call summaries
Biogen Idec Hemophilia site

Wednesday, September 29, 2010

Hansen Medical (HNSN) New Technology

Hansen Medical (HNSN) has had a rough couple of years. The maker of flexible catheter surgery robots was thought of as the next Intuitive Surgical (ISRG) back in 2007. Its stock price hit $39.32 back on October 22, 2007. That year it got its first FDA approval and shipped its first commercial system. Today the stock closed at $1.45.

Hansen has been selling its Sensei robots, but in low volume. The price does cover their direct production costs, but it has not covered administrative overhead or ongoing research and development costs. As a result, Hansen ran through its cash from its 2006 IPO and then had to sell more stock. Dilution is one factor that has hurt the stock price. But mainly in 2008 investors became risk-adverse. It seems unlikely in the current climate that anyone is going to bid as if HNSN is the next ISRG until it starts selling more robots and shows a profit. That would be in 2011 at the earliest.

The technology is great, but currently is mainly used for electrophysiology, which is measuring the nerve impulses in malfunctioning hearts. The next step would be using the catheter to "ablate" or kill some nervous tissue to fix atrial fibrillation. The treatment was approved in Europe this July, with commercial shipments due in Q4 2010. It is not yet approved by the FDA for use in the U.S. [see FDA Conditional IDE Approval for Evaluating Sensei X Robotic Catheter System for Treatment of Atrial Fibrillation, 5/12/10]

I believe there is a lot of value to be unlocked in Hansen, but to get there will require at least three steps. Hospitals need to be sold more Sensei systems for electrophysiology, and doctors need to use those that are installed more (the catheter part of the robot is used only once). Then treating atrial fibrillation has to become common (same robot, different catheter), which should mean more systems sold.

A much bigger market for the robots, and one requiring another specialized catheter, is vascular surgery. Experiments are being done for this application, but it may take years to get it to market.

Bigger medical technology companies are very interested in Hansen's technology. It has partnerships with St. Jude Medical, GE Healthcare, and Philips Healthcare, which are all coordinating their imaging technologies with Hansen Sensei robots.

Until sales pick up Hansen will continue to show quarterly losses and run through its cash. It conceivably could need to sell more stock to support its R&D efforts. So anyone buying the stock now should be prepared to be patient (unless there is a merger offer). The usual risks apply: another company could create a better catheter robot, the FDA or European agency might cause further delays or refuse to approve new applications for the robot, or hospitals could decide the advantages of the robots are not worth the capital investment needed.

I think it is a good bet, particularly at this price. While trading is liquid on a daily basis, Q3 results (not due until early November) could have a big impact. Hansen shipped only 3 robots in Q2, down from 7 in Q1. If it gets back up to 7 or higher, that would be a good sign. If it is under 4 again, that means profits are far, far away.

So keep diversified!

See also my Hansen Medical Analyst Conference Call summaries

Monday, September 27, 2010

AMD Lowers Guidance, But Stock Price Rises ... Why?

On September 23, 2010, AMD, a maker of CPUs for servers and personal computers, made a big downward correction in its guidance [See AMD Update Third Quarter Outlook]. Yet the stock shot up from a base of $6.40 the next day, and since has risen to $7.02 at the close today. In the past few years, AMD stock has not done well on good news, much less bad news. What is the difference now?

Some pundits think Oracle may buy AMD. That makes no sense to me. Oracle may be in the market for a chip stock, but the idea would be to improve their datacenter hardware offerings, which are now based largely on Sun's old proprietary processors. AMD would bring a lot of baggage with it. The only attractive things about AMD would be its engineering teams, which are first-class, and its low price. Its market capitalization was just $4.73 billion end of today, and its non-GAAP P/E is 4.56, about as low as you can get.

Buying AMD would put Oracle in the desktop and notebook chip business, which are low-margin businesses. Oracle hates low margin business. They shut down a good part of Sun when they acquired it because margins were not high enough to please them. What Oracle needs is a smaller chip company with skills storage and networking chips as well as data processing. Marvell would be a good acquisition, but I doubt very much Marvell Technology would allow itself to be acquired. An even smaller company would make more sense.

Back to AMD, it is most likely that the stock price bounce had to do with short covering. Lots of people like to short AMD, which is the perennial loser in its competition with Intel. Intel had lowered its third quarter guidance weeks ago. In general the PC industry was known to be having a relatively slow Q3. I think the problem for the shorts was that AMD's problems were already built into the stock price. In fact, the new guidance could have been a lot worse. Then there are the Fusion products that will begin shipping in Q4 and ramp in Q1 2011. No short wants to be around to see what happens then.

When AMD's price rose after the announcements, the shorts had nowhere to go. They had to cover their bad bets. Momentum players jumped in too, taking advantage of the distress of the shorts.

AMD's new guidance is revenue for Q3 "in the range of down one to four percent as compared to revenue of $1.65 billion for the quarter ended June 26, 2010." What investors should be looking for when AMD actually reports Q3 numbers on October 14 is margins. Did they at least get good prices for the CPUs and GPUs they sold? After that, look at guidance for the release of Fusion APUs. All evidence is that they will be widely and happily adopted by OEMs that want to offer consumers better graphics capabilities than Intel can provide.

See also: Can AMD Ignite Fusion? [June 7, 2010]

AMD Q3 guidance given at Q2 analyst conference [July 15, 2010]

Note: I currently own AMD and Marvell stock, but not Intel or Oracle.

Keep diversified!

Wednesday, September 22, 2010

Biogen Idec, the MS market, and Gilenya

Multiple sclerosis (MS) is a disabling and eventually deadly disease in which the human immune system attacks otherwise healthy nervous tissues. It affects about 2.5 million people worldwide including about 400,000 in the U.S., where prevalence is much higher than the global average. Today the FDA announced it had approved Novartis's Gilenya (fingolimod) as the first oral treatment for MS.

Biogen Idec stock has sold at depressed prices for several years now, despite the company's high level of profitability. The long-term, main reason for this is that Tysabri (natalizumab), which is the most effective MS drug ever developed, has the unfortunate effect of allowing a virus that is resident (and normally harmless) in many people's brains to become active, causing progressive multifocal leukoencephalopathy (PML), which can be fatal. All Tysabri patients are now monitored for symptoms of PML, but there is no doubt that many doctors and patients have refused the drug because of the side effect.

The problem with Tysabri, and with MS drugs in general, is that the cure involves suppressing the immune system. Therapies less effective than Tysabri are not as good at suppressing the immune system; Biogen's Avonex is an example. Other partially effective treatments for MS include corticosteroids, interferons (Avonex is one), Copaxone (which requires once-a-day injection), and Novantrone (which has harmful side-effects on the heart, and is somewhat of a last resort).

Gilenya acts by keeping lymphocytes in lymph nodes, so that they do not attack the central nervous system in MS. But that means that, like all immune system suppressors, it is likely to occasionally prevent the immune system from doing its job of controlling infections. It seems to have a side effect of inducing basal-cell carcinomas as well as opportunistic infections. "Cases of serious eye problems (macular edema) have occurred in patients taking the drug and an ophthalmologic evaluation is recommended." In trials it reduces relapses of MS by over 50%, which is a good number, but not as effective as Tysabri's.

So what Gilenya has going for it is that it can be administered orally. Tysabri is given by infusion, a less convenient method to be sure.

Meanwhile Biogen Idec has an oral MS medication, BG-12, in Phase III trials. Data should be out in 2011. BG-12 Phase II data was reported in terms of decreasing lesions caused by MS, also stating that relapse rates decreased, and frequency of infection was low. It should be noted, however, that short-term studies have typically underestimated the effects of long-term immune system repression on infection rates and mortality.

Since BG-12 has a novel mechanism of action, which "defends against oxidative-stress induced neuronal death, protects the blood-brain barrier, and supports maintenance of myelin integrity," if it has good phase III results and is approved by the FDA, there will be reason for prescribing it apart from its oral administration.

For investors, in short today's reaction to the FDA approval of Gilenya is overblown. Biogen sells at a very attractive P/E. Biogen Idec's strong pipeline of potential therapies promise to expand its overall market share over time.

At this point, however, I would suggest that given its profitability, Biogen Idec should pay a dividend. I own Biogen (BIIB) stock and believe paying a dividend would compensate for the low P/E ratio while waiting to see if I am right that revenues and profits will indeed continue to ramp nicely in 2011 and 2012.

See also my Biogen Idec Analyst Conference Call summaries.

William P. Meyers

Tuesday, September 21, 2010

Federal Reserve Behind the Curve?

A wise investor always keeps in mind the spectrum of risk. For any given investment there is a spectrum of likelihoods, including unforeseeable events that could bring an upside or downside. With bonds, of course, you have a lot less complexity than with stocks, and with Federal bonds you have less complexity than with corporate bonds. Typically, however, while bonds limit some downside risks, they also limit the upside.

The economy (whether defined as the United States or as global) has an astonishing number of variables at play at any given moment. The decision makers at the Federal Reserve have considerable experience in the banking sector, but typically have little experience in manufacturing or, for instance, in the black market economy (which is mainly services performed by individuals who do not report their income to the government). Their collective record for steering the economy in the past two decades is dreadful; if they were drivers, they would have had their licenses taken away.

The history of the United States, and other nations, is replete with instances of false booms based on excessive credit and speculation. Real economic growth does require a degree of credit, but it is mainly based on savings and profits that are then redirected to new growth opportunities. Americans are now saving, which is good. They should save considerably more, but in aggregate won't be able to until employment returns to "normal" levels. Judging from price-to-earnings (P/E) ratios, American businesses are generating profits and mostly don't need much in the way of credit to keep up a modest pace of expansion.

Today's Federal Reserve statement (September 21, 2010) gives the impression that the economy is still growing, but at a slower pace than earlier in the year. Of course. Aside from the inventory restocking bounce that always follows a recession, we had a lot of reluctance to anticipate growing demand because of the "double dip" howling of the wolfpack. But there was no double dip, not even during the Euro freeze.

Growth is growth, and it will speed up and slow down from month to month and sector to sector. What the Federal Reserve won't admit is that its zero-interest rate policy is not doing much more for the economy than, say, a 2% interest rate policy would do. It is helping the banks (recall that the Fed does not represent the people, but is all too much like a bank collusion mechanism), but they aren't lending much. When they do lend, it is often on credit cards at ridiculously high interest rates. Which at least encourage consumers to save rather than spend.

The fed could easily start raising interest rates now, showing some confidence, and normalising the situation. At 0.25% today, maybe 0.5% after the holidays, working towards whatever is appropriate by the end of 2011, probably at least 2%. If the recovery is slower than I expect, rates should still go up gradually to at least 1.5%, which is very, very accomodative.

The Federal Reserve can't make a recovery. That will be built by the people themselves, as it always has been. There is a lot of work that needs doing, notably repairing millions of homes that have been damaged by thieves and neglect during the past 3 years. Schools are overcrowded due to teacher layoffs. American services and manufacturing are becoming more competitive with China because of rapidly increasing wages in China. This does require capital as well as person-power; the banks could play a part.

We know what the banks will do. When it stops raining, they will start handing out their supply of umbrellas.

Today's Federal Reserve decision to leave interest rates near 0% may be politically popular, and popular with Wall Street banks, but it is not a responsible decision given the data available.

Wednesday, September 15, 2010

Virtuous Economic Cycle Components

After a severe recession there are going to be some very damaged sectors of an economy. They don't all spring back at once. Some lead, some lag the general upturn. While past upturns offer patterns that may be repeated, the economy is a complex beast, so it is not surprising if details differ in each cycle.

In 2009 the stock market indexes hit bottom, then had a good climb. In 2010 so far we have been up and down a number of times, ending around flat today after a good start to September. Not knowing history, one might theorize that the stock market should have a damping effect on economic cycles (not dipping as deeply, not rising as quickly). This would be because a common theory is that stocks are about future value. So stock prices should take into account long-term returns, which should in turn take into account the cycles of growth and recession that characterize capitalist economies.

But, in just one for-instance, in early 2009 the stock market averages dipped far more, as a percentage, than GDP. Same in the 2001 crash. But in 2001 the fall came mainly because leading up to 2000 investors forgot to take into account that the profitability of the companies' would drop when a recession took hold. The Federal Reserve failed in its duty to dampen a bubble because big egos mistakenly believed, and told the mass of investors, that cycles were over, to be replaced by more-or-less steady economic growth.

At its bottom in 2009 the stock market was suffering from the opposite delusion: that the economy would never recover. I would argue that in 2007, with the exception of the banking sector, most stocks had in fact priced in the entire economic cycle. The commodity sector had not, and of course housing prices and loans against housing had not. Many people lost all or much of their retirement investments not because they had invested badly, but because they panicked and sold near the bottom.

The big price swings in stocks are because they are auction markets. They are efficient at matching buyers with sellers, but they overprice and underprice securities when there is a deficit of one party or the other.

Today housing, both used housing stock and the building of new housing, is still weak. There are still some pockets of vacuum where people pretend there are loans that will be repaid; there is still turbulence. But the economy can suffer a fair amount of turbulence without crashing.

Demand continues to pick up despite the fact that we are no longer seeing net stimulus from the government sector. Some sectors of the economy are showing strength, notably agriculture and export-oriented industry. Those who are employed are much more confident of keeping their jobs than they were a year ago. They also, on the whole, have paid down their debts and are in a much better position to shop more without getting themselves into trouble. So I would expect that as the employed spend more retailers will be encouraged to do more hiring.

That is the thing about the virtuous part of the cycle. More hiring means more retail sales, and less of a drain on government for unemployment compensation and the like. More retail sales means more manufacturing. And in turn more hiring.

In 2011 we can expect people who have huddled together in houses and apartments to save money to begin to feel secure enough to venture out on their own. That means more rental income (if not increased rents or housing prices, at first) and, after all these many years, the absorption of excess housing stock.

All these processes take time. The stock market is an important part of this cycle. People spend more when their stocks are up. Those who own stocks represent a disproportionate part of the spending equation. If investors are so cautious that stocks take another dive, that will slow down the natural upswing. If the market moves up smartly in the near term, that will accelerate the recovery.

Wednesday, September 8, 2010

Dot Hill Reacts to Storage Acquisition Events

I have been following Dot Hill since the spring of 2006. See my Dot Hill analyst summary page for everything I have written on this data storage company in the past. I have mainly accumulated, occasionally sold HILL over that period, most recently buying a chunk at August 12, 2010 at $1.05 per share. At the moment I am writing it is $1.52 per share. Yesterday it topped out at $1.65 per share.

The sudden interest (other than from those who track popping stock prices and don't care much about the underlying reasons) was the bidding war between HP and Dell for 3Par, a data storage company. HP won, if paying $2.4 billion for a company with revenues just breaking the $200 million a year level, can be considered winning. Presumably HP and Dell thought that 3Par technology is worth a lot more when integrated into their large selling machines.

By comparison Dot Hill had 2009 sales of $234 million, and most recently reported $65.5 million for its second quarter of 2010 ending June 30, 2010, an annual run rate of about $260 million. See my Dot Hill Q2 2010 analyst call summary for details on the quarter.

But there are a lot of different approaches to the storage sector, ranging from hard drive manufacturers to pure software plays. Dot Hill has mainly been the supplier to OEMs of low to mid-range enterprise-level disk storage solutions (for network attached storage (NAS) and storage area networks (SANs)). A few years ago most of Hill's business came from Sun, but they are no longer a client. The big client: HP. Next on the list: NetApp, but apparently the NetApp contract is being terminated by Hill because its profit margins did not work out.

In order to not be so subject to one or two big clients Hill has been working hard for a couple of years now to pick up many smaller OEMs. In numbers of new clients this is working out, but in the last quarter HP still accounted for 58% of revenues.

The big change, and the one that might add 3Par like value to Dot Hill, is their increased focus on software solutions that go along with their hardware. In fact, their new software solutions can work on almost any hardware platform. If anything drives profits, or makes Hill a desirable acquisition target, it is the software, which is already available from Xiotech and should become generally available from other clients in 2011. I should note that the software builds on Hill's expertise, which in turn in reflected in their large number of patents for data storage techniques.

I am not counting on Hill being acquired. I am counting on sales of storage software and hardware (less the known NetApp termination) ramping, with profit margins being higher than in the past couple of years. With a market capitalization this moment of only $84 million, and revenues as I have stated, no debt, and cash balances (end of June) at $42 million, I see Hill as a stock with tremendous upside. On the other hand, data storage is a very competitive field, and there is no guarantee that Dot Hill's software will gain the kind of traction it needs to be a major contributor to profits. It has not had a profitable quarter in quite a while.

Keep diversified!

Tuesday, September 7, 2010

SGI Outlook Improves, Still in the Red

Silicon Graphics International, or SGI, reported seasonally down GAAP revenues of $101.6 million for its 4th fiscal quarter ending June 25, 2010. That is down 6% from the 3rd quarter. It is also up 74% from $58.4 million in the June 2009 quarter, but the high y/y revenue growth is mainly the result of a major merger (Rackable bought SGI, then took the name too), not a bounceback from the recession.

The stock is up recently, I suspect, largely because of an announced $40 million stock repurchase program. At the end of the quarter SGI had $133 million in cash. It burned $15 million in the quarter, but management thinks the company will reach break-even in 2011.

The history of SGI and Rackable is a cautionary tale, but there are always causes for optimism. During the latest analyst conference (See also my SGI Q4 2010 analyst conference call notes) management was emphasizing that the new Altix UV supercomputer began shipping. Stephen Hawking bought one; maybe he knows a thing or two. 14 were shipped, and that is not a full quarter's worth.

Also, notably, in the datacenter business (Rackable's old business), Ebay was signed up as a customer. As you can imagine, Ebay could be a very big customer. The problem is that margins have been low for internet server farms. Management reports that they are beginning to sell more Rackable products to corporations and government, outside the Internet sector, and that they can get higher margins with those clients.

Margins have been a big problem historically for both Rackable and the old SGI. Selling a government agency a supercomputer at less than cost goes against all known business-to-government selling practices. You are supposed to jack up the costs when taxpayer money is at stake. Maybe SGI needs to borrow someone from Boeing, Lockheed Martin, or Northrop Grumman to set their prices.

In the quarter gross profit was $19.6 million, operating expenses were $44.3 million, leaving an operating loss (GAAP) of $24.7 million. If operating expenses could be held flat, even doubling revenue at the current margins would not get the company to break even. Each and every product needs to have profit margins that can cover its share of operating expenses. If management can't get there, and quickly, they might as well close the business down.

As I said, they said they are going to break even in 2011, so maybe there already are good margins built into the Altix UV and other new and upcoming products.

See also my main SGI page at

Wednesday, September 1, 2010

The Recession is Dead!

The Recession is Dead. Deceased. Finished. Kaput. Terminated. Over.

For six months or so a variety of interests have tried to revive the Recession. They have, purposefully or not, driven bonds up, stocks down, and generally scared a lot of people. They, using the broadcast media, have urged people to not buy homes. They have urged employers to not hire more employees. They have been responsible for a lot of human misery.

Certainly selected facts were woven into the Double Dip recession scenario. The thing about recessions, especially the bigger, gnarlier recessions, is that they are complex. There are cycles within cycles. There are healthy economic sectors and geographic areas, and unhealthy ones. There are leading indicators and lagging indicators.

As much as pundits tried to scare everyone this summer, apparently in August there was enough demand for manufacturing to expand in the United States, and at a good clip. According to the Institute for Supply Management August 2010 report, we just had the 13th consecutive month of growth in manufacturing. It isn't all gung ho: 11 industrial sectors expanded in August, 5 shrank, and two were flat. That just means there is still room for improvement.

Put that in your cup of tea. Yes, there are a lot of people who want to sell their homes. Yes, people in general are more frugal than a few years ago, as they ought to be. Sure, the banks are still scalawags. On the other hand, global demand for U.S. goods is booming. The agriculture sector is strong. Retail is recovering. Hotels are starting to fill up again. Many companies actually are hiring. Of course some businesses continue to fail and to lay off workers; that happens even during booms.

The recession is dead. We are now in an up cycle. So buy what you need, and hire who you need to hire. Borrow what you need to borrow. After all, interest rates probably won't stay this low all that much longer.

There will always be business cycles, but hopefully individuals and businesses have learned a lesson from the causes of the latest recession that will stick in their minds. Hopefully most of us will borrow less and produce more. We will look for long term gains, not quick steals. We will think about investments carefully and avoid a herd mentality. And we will not be conned by banks, bureaucrats, or politicians.