Thursday, January 27, 2011

Celgene Reports Q4 Results, answers analyst questions

I just posted my summary of the Celgene analyst call and results for Q4 2011.

Celgene just acquired Abraxis and has a large number of clinical trials underway. It looks to me like it could double its revenues again by 2015. Great for a long-term investor, but there is always the risk that drug candidates will fail to be approved.

Wednesday, January 26, 2011

Gilead Sciences, Tamiflu, and Antivirals

Gilead Sciences (GILD) is an enourmously profitable company with a cheap stock price, as measured by its Price to Earnings (P/E) ratio. Yesterday Gilead released in fourth quarter (Q4) 2010 results and held its analyst conference.

Gilead is best known for selling anti-HIV drugs and for Tamiflu for flu, which is sold by Roche. Last year there was a major flu scare, resulting in Q4 2009 royalties including Tamiflu of were $228.0 million. This year royalty revenues were $68.4 million. That is actually up from Q4 2008 royalties of $40.4 million.

Analysts mostly saw 2009 royalty revenues as a one-time event in 2009, but making up for a y/y drop of about $160 million is quite a feat. For the therapies Gilead sells directly, Q4 2010 revenues were up 7% y/y to $1.93 billion versus $1.80 billion. Antiviral product sales were up 5% y/y to $1.7 billion.

Overall revenues were down 2% y/y, but on a very difficult comparison.

How were profits on $2.00 billion in revenues? GAAP net income was $626.4 million. Non-GAAP net income (excluding stock-based compensation and one-time expenses) was $779.3 million. Cash flow from operations was $775 million.

Mostly affecting the stock today was Gilead's stock buy-back plans. In Q4 $614 million was used to repurchase stock. The remaining pre-authorized $2 billion should be used during 2011, and another $2 billion was authorized. Buying back stock has helped keep up earnings per share, which rose, on a non-GAAP basis, to $0.95, up from $0.93 year-earlier despite the lower revenues and non-GAAP net income.

Gilead will be rolling out a number of new therapies over the next few years for HIV and Hepatitis C. In addition, new health guidelines are for physicians to start patients on retrovirals sooner after infection with HIV. This makes for a tremendous pool of new patient adds in the next three years, given that Gilead has a 68.5% share of this market.

Like all major drug inovators, Gilead has had some some potential products that have failed to achieve results. Developing drugs is expensive, and most drug candidates fail to gain FDA approval. You just figure that in as a cost of doing business, spread out over the successful drugs. All drug patents expire eventually, meaning price drops as generics become available, but again that is as it should be, as it spurs companies to continue to search for better drugs. Gilead's upcoming "quad" single pill therapy for HIV is an example of working for continuous improvement instead of sitting still.

Given all that, at some point Wall Street is going to realize that Gilead's PE ratio is too low. In my mind even now it should not be lower than 20. If it rose to 20 tomorrow, from today's 11, the price would run up to $71.35 per share from (as I write) $39.26. Nevertheless, there are risks, including the whims of other investors, so keep diversified!

See also:

my Gilead Sciences Q4 2010 analyst call summary

Friday, January 21, 2011

AMD: Fusion Without Dirk Meyer?

I admire Dirk Meyer, who recently resigned (under pressure) from computer chip maker AMD (Advanced Micro Devices). I also admire Hector Ruiz, his predecessor as CEO. But both men apparently had their flaws as AMD's leaders, and if you want to value AMD stock appropriately, you should understand the dynamics of the situation.

Dirk only served as head of AMD for about two and one-half years (he was promoted in July 2008). They were very eventful years. Notably, AMD became a fabless company by spinning off its foundries to GlobalFoundries, and the first models of the Fusion line of combined CPU/GPUs on a chip (APU, for Advanced Processing Unit) were released.

The problem is that the Fusion concept was in place when AMD bought graphics chip maker ATI back in 2006. Note it is now 2011. It took AMD five years to put a graphics processor on the same chip with a CPU.

That was simply too long. Rival Intel, a much larger company, brought out an admittedly inferior set of chips combining CPUs with GPUs this month. But that is probably good enough, since Intel can heavily out-advertise AMD.

Imagine, now, that the first Fusion chips had come out in the summer of 2010. It would be a whole new ball game. Intel would try to stall their OEM partners, but it would be a hard sell because they would have to get OEMs and consumers to accept an inferior product late. A six month lead in the computer industry can be an enormous advantage, as AMD showed by bringing out DX-11 capable discrete GPUs about six months ahead of rival NVIDIA, which had been the dominant discrete GPU company, until then.

While no one would say getting out a new line of chips is an easy task, the blame for the delay really has to be taken by Dirk Meyer. This is the second time in the last decade this has happened. Mid-decade AMD had a temporary advantage over Intel in the server market with its Opteron chip. Dirk was then chief operating officer, and when Opteron went from single to dual core, there were serious delays. Those delays enabled Intel to introduce new products and beat back the Opteron challenge. AMD has never been able to regain the market lead in server chips, although its newest 12-core processors are much better than Intel's at certain tasks.

But what investors really want to know is, what is next? Yesterday's call (see my AMD Q4 2010 analyst conference call summary for details) demonstrated that the board of AMD is looking for faster execution on plans to bring out new, specialized processors that can better compete with Intel in certain markets. The typical press view, and Wall Street sell-side analyst view, is that it is about AMD pursuing the tablet computer market. That would be only one small facet of it.

The new Fusion chips run the new DX 11 graphics standard. The Intel chips can only run DX-10 (it is fair to say Sandy Bridge is instantly obsolete). But Intel just made a deal with NVIDIA that doubtless allows it to import their DX-11 designs. How long will it take Intel to move that to silicon? Probably not that long.

Which means AMD has to execute faster. As the smaller, underfunded company, it has to stay ahead technologically and offer a good value proposition to OEMs and end consumers. AMD needs to deliver on the promise of Fusion and perhaps APU's that incorporate other special functions. Maybe even cell phone technologies.

It is a big task, and it needs a leader who can speed up the ball game without causing any fumbles. As we saw in the last decades, fumbling when up against Intel amounts to losing the game.

Dirk Meyer would be a superhero if he had gotten Fusion into consumer laptops in time to make them the mass-market choice for the 2010 holiday season. Instead the products are going to start ramping in Q1, which is a slow sales quarter, and have to sell against the confusion Intel is trying to create in comparing the two technologies. It is going to be a hard sell.

See also:
AMD main page
AMD Fusion
my other AMD articles and conference summaries

Wednesday, January 12, 2011

Nokia N8: CPU, GPU Roles Shift

Most days I check Anandtech because the staff there does an excellent job of reviewing new computers, smartphones, and peripherals. By excellent I mean they actually give details about the software and chips used in the devices, and also run benchmarks. Today the only chip stocks I own are AMD and Marvell (MRVL), but my customers own (far larger) positions in other technology companies, so I follow the industry as best I can. Today's review of the Nokia N8 smartphone should be of particular interest to technology investors since it illustrates a fundamental shift in computing technology.

The N8 is "the first Nokia phone to have a discrete GPU." GPU is Graphics Processor Unit, as opposed to the more general purpose CPU, Computer Processing Unit. Smartphones are now expected to have excellent displays, which is hard to achieve without a GPU assist. But for years now AMD and NVIDIA (the rival makers of high-end GPUs for personal computers) have been talking about how computer work loads are starting to shift from being CPU-bound to GPU-bound. This is not just because of the need to have large, detailed, rapidly changing displays for gamers. It is because many ordinary computing tasks can be done faster if they are broken into parallel processes that accelerate results.

The Anandtech N8 article is the first time I have heard someone say the transition has already been made in an actual device (aside from professional video content creation machines). "You see, pretty muhc everything in the N8 runs around the BCM2727 media processor. I would hazard a calculated guess that appart from lightweight low-level OS functions and interfacing with the baseband and other radios, there isn't much else for the CPU to do on the N8."

I think that in effect the Broadcom (BRCM) GPU is acting as a DSP (digital signal processor) in addition to doing graphics processing, leaving the CPU little to do. Note that the 2727 (like AMD's new combo CPU/GPU chips) can output 720p HD video through an HDMI port.

NVIDIA has tried to place itself at the center of the GPU revolution, but it's anybody's game. There are two fronts right now: graphics for notebooks/PCs and graphics for cell phones/tablets. The graphics for smartphones can't display games on big screens at a high frame rate (which smooths the action) yet. But in 5 years, maybe sooner, they should be able to do that. The big differentiator is that anything that runs on batteries has to do its graphics work with minimal watts, but a machine plugged into the electric grid can do a lot more a lot faster, using a lot more watts (say, 200 watts versus 1 watt). NVIDIA's strategy is to keep rolling with its high end discrete graphics units while rolling out mobile combined CPU/GPU chips based on the ARM architecture. These would integrate its current offerings that work with ARM, but with the GPU on a separate chip.

AMD's strategy is called Fusion, which combines CPU and GPU on a chip based on the 8086 architecture.

Intel's strategy is to advertise, and hope that the reviewers dependent on its advertising revenue do a good job not mentioning that its current generation of combined CPU/GPU chips, code named Sandy Bridge, are instantly obsolete because they are a generation behind both NVIDIA and AMD in graphics capacity (ask for DX11 capable computers, and you have eliminated Intel, which had trouble implementing the now ancient DX10 standard) and in low-power consumption. Also, Intel is using its vast resources to get back into the ARM-based architecture. They sold their ARM mobile chip unit to Marvell Technologies a few years back. Marvell has since become one of the bigger players in ARM devices, most notably with its chips inside some Blackberry devices and the XBox 360 Kinect.

Then of course, in addition to Broadcom, we have Qualcomm, Apple, TI, Samsung, etc., scrambling to combine graphics and CPUs into single chips or small chip sets to power smartphones and tablet computers.

Software programming is changing too. Want a job? Show you can recode older non-parallel software for parallel processing on GPUs. Lots of shortages in that department.

For investors, you might want to buy a piece of every company in the race. I am certainly not certain who will emerge a winner. On the other hand, there are no pure plays here. A victory in smartphones would add very little to Intel's fortunes, or Samsung's, but it is essential to Qualcomm. Broadcom itself has a diverse set of chip products that cover Ethernet, set-top boxes, and Wi-Fi, among others.

See full Anantech Nokia N8 Review

Monday, January 10, 2011

Dot Hill Exceeds Q4 Guidance

The price of Dot Hill stock is soaring today (up $0.46 per share to $2.35, or 24.3% as I write) after preliminary Q4 results were released that exceeded prior guidance. See my Dot Hill Q3 analyst conference call report for Q3 results and Q4 prior guidance.

Dot Hill has been trying to rebuild its data storage hardware business for years, following the demise of its relationship with it former major client, Sun. Its products are mainly sold to OEMs that relabel them or incorporate them into larger systems. Its main client is HP, but it has won a swarm of smaller OEMs and system integrators in the past 3 years. Margins, however, were a problem. Hill's second largest client, NetApp, refused to negotiate prices that allowed Hill to make a profit, so that relationship was terminated as of December 1.

Anticipation of a decline of revenues due to the NetApp termination has been a major reason for Hill's low stock price. Instead, in even with 2 final months of NetApp included in the quarter, revenues increased from $62 million in Q3 to about $65 million in Q4. Keep in mind that for enterprise data storage systems Q4 is typically the best season. Even so, Hill's new line of data storage products must be selling extremely well to hit $65 million with NetApp out of the picture.

And those sales have higher profit margins, allowing Non-GAAP earnings per share to be in the range of $0.02 to $0.04. After years in the red, this is great news for Dot Hill.

Profit margins should continue to expand in 2011 because Hill should be selling an increasing amount of software along with its hardware offerings. Software, in this case storage management software, carries much better profit margins than the hardware.

Q1, 2011, will be a bit tougher. It will be the first full quarter without NetApp revenues, and it is traditionally a seasonally weak quarter. Dot Hill has a new relationship with Lenovo which should ramp in 2011, but apparently that won't affect Q1 much.

Good work and thanks to the entire crew at Dot Hill!

See also

Friday, January 7, 2011

Provenge Prostate Cancer European Availability Planned

All fifteen Medicare regions and 80% of private payers have now approved Provenge (sipuleucel-T) for (asymptomatic or minimally symptomatic metastatic hormone refractory) prostate cancer for reimbursement. Expects to increase capacity by a factor of ten in 2011; should have 450 infuser sights by the end of the year; already hired 100 sales people.

$48 million total Provenge revenue in 2010, with about $25 million in Q4. $350 to $400 million revenue expected in full 2011, with about half of that coming in Q4. $280 million cash balance at the end of the year. GAAP loss of $310 million to $350 million for 2011; non-gAAP loss of $230 to $270 million.

Europe will be the first target for further Provenge approval. Believes addressable market would be about the same size as in the United States. There is a major unmet medical need there. After meeting with the European regulatory agency (EMA), IMPACT and other data already available should be sufficient to get European regulatory approval. Will engage a contact manufacturing organization for initial Provenge supply in Europe. Will also use this for trials for earlier-stage prostate cancer. But will concurrently build a Dendreon facility in Germany in 2011.

EMA decision would be possible in 2013. Reimbursement must be achieved nation by nation, and there are challenges. But as overall survival is the gold standard for European payers, and overall costs are actually reasonable for Provenge. Cancer therapy prices are largely similar in Europe to the U.S.

$125 million will be spent in 2011 to support American and European expansion, with about half attributed to capital expense and half to operating expense. Will require more capital for the European expansion.

ACI (autologous cellular immunotherapy) platform now includes an investigational product Nuvenge (DN24-02) for invasive bladder cancer. This is a highly immuno-responsive. Will be a randomized Phase II study for patients with HER2+ invasive transitional cell carcinoma of the bladder following cystectomy. Patients with advanced cancer have few good treatment options at present. Endpoint would be overall survival.


Plans are for one plant in Europe? It is not necessarily our expectation that we would only ever have one. If reimbursements are approved, we could build more plants.

The European, or global, study would not be to support the regulatory filing. It would be to provide evidence of the efficacy of Provenge for earlier stages of prostate cancer.

Trajectory for expanding infusion centers? Started with 50, finished with slightly more. 450 should be available in Q4. The launch centers had been in previous clinical trials, many in very small clinics. Some of the new centers are much larger in terms of numbers of patients. First additional capacity should come on line in New Jersey, corresponding to about a third of the new centers also starting up.

Europe, maximum capacity for German facility? Seen as very similar to the Los Angeles and Atlanta facilities in design and capacity. Because population density is higher, the center could serve all of the EU countries.

The Contract Manufacturing Facility in Europe would support the new study there. The new Dendreon facility should be ready around the time of approval.

Any message change on prostate cancer since Provenge approval? We are in a golden era now for prostate cancer. Good data sets are coming out for drugs for the chemo-sensative prostate cancers.

Still 2000 patients for 2010? That was for middle of the year, which would be in July 2011.

New Jersey expansion should come online some time in March, but new clinics are already ready to go when that capacity does come online.

How will you raise money, equity or debt? Looking at the alternatives, no decision yet.

CMOs capable of making provenge? Yes, we used 2 CMOs in the U.S. before we began manufacturing our own.

See the accompanying press release: Dendreon Announces Plans to Seek Marketing Authorization for PROVENGE in Europe

Saturday, January 1, 2011

2010 Economic Analysis & Forecast

For once I am basically in agreement with most mainstream economists on what is ahead in 2011.

We are still in the virtuous cycle ramp that follows an economic downturn. Most of the differences between economists are about the strength of the ramp and what particular sectors will lead and lag the economy as a whole. Wild cards include possible actions by the Federal government, the Federal Reserve, and bankers in China and Europe. Double wild cards include natural catastrophes and military incidents.

Leading the trend both globally and in the United States will be manufacturing. This could be more than a bounce-back in the U.S. because it is an increasingly attractive place to do manufacturing now that wages are closer to the global norm. People forget that losing factories to China has not destroyed as many jobs in the past century as advances in information technology and automation have destroyed. I expect increased demand in the U.S. and globally for U.S. products, and the beginnings of a round of capital investment in new and expanded U.S. manufacturing facilities.

Lagging the trend will be the housing and general construction market, which in turn creates demand for wood products, metals, and etc. However, there is very, very little new housing stock in existence right now, in a nation that typically adds over 3 million people each year. Also, a lot of people are overcrowded. College and high school graduates from the past few years are dying to get a job and move away from mom & pop. Even if people who gain employment enter the housing rental market (instead of buying houses), this will make landlords happy and more willing to buy up existing housing stocks. I don't expect a price boom in 2011, but building new houses (and apartments) is going to start looking attractive in some specific markets as the year goes on. If banks gain confidence, we could get back to a normal balance between buyers and sellers by the end of the year. However, predicting timing is difficult because the decisions are driven by diverse buyers' mental states.

Bonds should fall (resulting in higher interest rates), but that is dependent on Fed action and risk assessments by bond holders. The stock market should rise because return on investment, at least in the next few years, should be a lot better than investments in bonds or real estate. In the stock market, however, it will be more important to look for companies with long-term growth prospects, rather than just growth due to bouncing back from the recession.

The national debt is going to grow by leaps and bounds because even strong economic growth won't generate enough tax revenue to cover the spendthrift ways of the Democratic Party and Republican Party. The 2011 budget is already shot and 2012 is an election year, so expect the new Congress of 2013 to contend with a tidal wave of debt.

Jobs should be more plentiful in 2011, but employers will still be able to pick the best workers and offer relatively low wages. This is good (for the economy, not for the unemployed) because low-productivity workers are a drag on businesses. Good workers help generate the profits that are needed to expand, and which eventually force companies to hire and try to train less reliable workers. The unemployment rate should drop by a percent or two, but will remain brutally high for the least employable citizens.

The Federal Reserve should have already raised interest rates to the 2% level, but I expect them to keep rates near 0% for the entire year, because they have a proven record of irresponsibility and incompetence. Or perhaps I should say they are competent at serving their fellow bankers, but not at their mission of maintaining relatively even economic growth. Why say rates should rise even with continuing high unemployment? Because any rate under 4% will support economic growth, and having to raise rates rapidly later on will lead to bad decision making or even panic.

People at every level are looking for opportunities, and 2012 will be a good year for many.