Wednesday, March 30, 2011

Dendreon Provenge Medicare Prostate Cancer Payment Decision

Good news for prostate cancer patients: Medicare will pay for Provenge therapy. For now they will only guarantee payment for prostate cancer that has reached the metastatic stage that does not respond to anti-androgen therapy (hormone refractory) and is still minimally symptomatic (not yet causing significant pain). Since prostate cancer is common in elderly men, many of those needing Provenge are on Medicare. Most private insurance companies also cover Provenge. The therapy, which sensitizes the patient's immune system to the cancer, has few side effects and has been shown to be effective for some men. Dendreon is expanding its capacity for providing the therapy; currently there is a waiting list. Some doctors and patients have worried that Medicare might decide against reimbursing the cost of the therapy. For more information see: Dendreon Press Release on Medicare Coverage for Provenge New York Time article: Medicare Says it will Pay for Expensive Prostate Drug Centers for Medicare Services (CMS) Proposed Provenge Decision For investors, check out my Dendreon for Investors page, which has links to analysis and dozens of articles on Dendreon and Provenge.

Monday, March 28, 2011

Oracle, Adobe, Red Hat Show Software Leverage

In theory the software business model is an attractive one. Write a piece of software. Once released, the production cost of each new copy is new zero. Sell enough copies to cover your R&D cost and your operating overhead, and you break even. After that you (and your stockholders) get rich, since each copy costs you nothing. Compare that to hardware based technology, where there (usually) is nowhere near as much profit leverage. Oracle (ORCL) , Adobe (ADBE) and Red Hat (RHT) all showcased the strength of this model when they announced their latest quarter results. Oracle reported fiscal Q3 ending February 28, 2011 on March 23. Partly because of its acquisition of Sun, revenues were up 37% y/y to $8.76 billion and net income was up 78% to $2.12 billion. [See Oracle analyst call Q3 2011] Adobe reported fiscal Q1 ending March 4, 2011 on March 22. Revenues were up 20% y/y to $1.03 billion. Net income was up 84% to $234.6 million. [See Adobe analyst call Q1 2011] Red Hat reported fiscal Q4 ending February 28, 2011 on March 23. Revenues were up 25% y/y to $244.8 million. Net income was $33.5 million, up 43% y/y. [See Red Hat analyst call Q4 2011] Note that for all three companies, profits (net income) were up on a larger percentage basis than revenues. That is the software model: once costs are covered, incremental sales have very high profit margins. Of course, if it were that simple, everyone would start a software company. Software sales are very competitive. Each of these three companies is the market leader in its domain: Oracle with database and business intelligence; Adobe with content generation; Red Hat with enterprise-grade Linux. Fail to make sales and you can lose money, or just scrape by. Naturally hardware companies are very interested in selling more of their own software with their machines, as the higher margins help the bottom line. IBM and HP, for instance, sell software and services, not just computers. One interesting play would be the small storage company Dot Hill. It has adding storage management software to its offerings, which should have a positive effect on its margins in 2011 and beyond. [See also my Dot Hill analysis page] I don't own any of the above mentioned stocks except Dot Hill, although I have owned Red Hat in the past. There are many issues to consider before buying a software stock, including its trailing and future-looking price-to-earnings ratios. So keep diversified!

Wednesday, March 23, 2011

Itanium Near Death

Itanium processors, decreed Intel back in 1998, were the next big thing. The question was how to deal with the 32 bit to 64 bit data path transition, which had already been made by some high-end competitors like Sun and IBM. Itanium would be the high end, while consumers and small businesses could make due for another decade with 32 bit Intel based machines.

AMD (then Advanced Micro Devices) saw an opportunity and introduced x86 chips that could run either 32 bit or 64 bit software, or both. The idea was popular partly because it was far easier for software developers to upgrade x86 code from 32 to 64 bits than to create the new, Itanium code, which had a different instruction set.

Intel had to follow AMD's lead and introduce 64 bit, non-Itanium upgrades to its chips. In addition, the original Itaniums, introduced in 2001, were not very competitive with the IBM and Sun chips. Most businesses that wanted a 64 bit transition opted to go with the lower cost AMD or Intel chips.

Intel nevertheless continued to develop Itanium chips, with HP as their main partner. The market for them was miniscule. Software developers put little effort into Itanium. Red Hat dropped Itanium software development in 2009. Microsoft announced it would phase out Itanium in 2010.

Today Oracle announced it would no longer support Itanium. Oracle dominates enterprise business and database software stacks. At the high end, it now owns the former Sun franchise, and it also runs on the new SGI high-end computers, as well as the more everyday x86 chips from AMD and Intel.

That leaves Intel working with its original partner HP. They are both big companies, but they are drifting away from reaching critical mass with Itanium. Intel is likely to drop Itanium, which means HP will have to stick to commodity CPU chips or look for another partner, perhaps IBM.

The only significant winner I see from this inevitable death of Itanium is SGI. They once made machines based on Itanium, but their new supercomputers, the Altix UV series are popular because, while they run on standard CPUs, they are very effectively glued together by SGI technology. While SGI is a small company compared to HP and IBM, if they can catch even a modest percentage of the customers that need to replace aging Itanium-based computers, they will get a very significant boost. [note: I own SGI and AMD stock at the time this is written]

See also:
Intel Itanium processors

Tuesday, March 22, 2011

Adobe Creative Suite 5 and 6 plans; Q1 call

I have posted my usual notes for the Adobe Q1 2011 Analyst Call which took place today.

Aside from record revenues, to me the most interesting bit was that soon an update to Adobe Creative Suite 5 (CS5) will be released. The main point is to make it easier to address the growing Babylon of computer devices out there. Once you just needed Acrobat and the ability to create Web pages. Now you need to be able to publish using mobile applications, and it seems every cell phone and tablet computer is different. Adobe hopes to keep the write once, read anywhere dream alive. Of course, it will cost you. In addition to CS5, they are now recommending the extra expense of their new Digital Publishing Suite. No big deal for publishing empires, but tough on lone wolves like me.

CS6 will come out some time in 2012. Adobe will be encouraging customers to change over to a subscription based system on a world wide basis. In other words, pay every month, get updates as Adobe is able to issue them.

See also:

Tuesday, March 15, 2011

Biogen Idec PML Test Approved in Europe, Changing Tysabri Outlook

For all the publicity about multiple sclerosis drug Tysabri, investors tend to forget that the real breadwinner so far for Biogen Idec continues to be Avonex, also for multiple sclerosis (MS). Avonex revenues in Q4 2010 were $654 million; Tysabri revenues were $242 million.

Tysabri is the more effective drug, but it has been held back by the risk of PML, progressive multifocal leukoencephalopathy. This is in turn caused by JCV, a virus often quietly, apparently harmlessly residing in human brains. MS is an immune disorder; its treatments involve dialing down the immune system. In about 1 in 1000 patients, JCV wakes up, and instead of being taken care of by the immune system, causes serious damage or even death.

As a result, despite its effectiveness many patients and doctors have only used Tysabri as a last resort.

Now that score should change. The new test will let physicians know which MS patients have JCV and which don't. Presumably, those that don't have JCV could take Tysabri without fear. It is believed that about one-half of potential patients in the U.S. and Europe have JCV, although it is more common in cultures with poor sewage systems.

Those who have JCV can still take Tysabri, but would be closely monitored. So far PML incidents have occurred in patients taking Tysabri for a period longer than 1 year.

New MS therapies are also being developed or marketed, notably Gilenya by Novartis, which is the first oral treatment for the disease, but which was not as effective as Tysabri in clinical trials.
Meanwhile, Biogen is narrowing the scope of its development program, eliminating oncology and cardiovascular candidates to focus on immunology. This should reduce costs in the short run.

Since the quarter ended Fampyra for mobility for MS patients was rejected by the European Medicines Agency (EMA), but Biogen is appealing the decision. Fampyra is approved in the United States. The FDA also approved Rituxan as a maintenance treatment for advanced follicular lymphoma. In the quarter Rituxan generated $258 million.

Because Tysabri can now be "risk stratified," Biogen has stopped enrolling patients in the long-term Surpass trial, which is designed to show off its superior efficacy.

Going forward, Biogen has a lot riding on the questions of whether doctors and patients can put the PML scare behind them, and on whether they will prefer an easy to administer oral drug to the more effective, but harder to administer Tysabri.

See also

Friday, March 11, 2011

Cantel Medical (CMN) Growth Spurt

Cantel Medical has been a good stock to hold in 2010 and so far in 2011, recently crossing the line to over $25 per share after showing a 52 week low of $13.39. Cantel is not a household word, so I thought I'd fill in my readers on what they do and why they might want to own a piece of this company.

The biotechnology stocks I own are mostly drug plays, with one surgical robotics play. Cantel Medical is a smallish company (market capitalization today ended at $440 million). Cantel specializes in infection control through sterilization and disposables. I know that infection control is more cost effective than treatment, and is becoming a much larger problem because of the evolution of multiple-antibiotic resistant bacteria. I watched Cantel for a while, then bought stock a couple of times when I thought the valuation was good.

Cantel is not a well-known name, even in hospitals, partly because it operates through named divisions. Minntech makes and markets endoscope and dialysis equipment sterilizers. Crosstex is the disposables business, working mostly in the dental market, but also moving into the general medical market. It makes face masks, sterilization patches, and other single-use items. Mar Cor makes machines to purify water, often for specialized medical needs. A smaller division is Saf-T-Pak, which produces specialty packaging for transporting specimens, and related materials.

When there are infectious disease scares Cantel gets bursts of extra revenue, so in evaluating the stock you might want to both zero-out such bursts to get a real trend line, and also figure that over time those bursts do add up.

Also, while Cantel does develop products and grows by increasing sales organically, they also grow by acquisition. If you, like me, have been burned by poor acquisition strategies of other companies, you might not take this as a recommendation. However, for the few years I have followed Cantel they have done very well with acquisitions. They don't pay to much and they usually acquire a division of a company they want, rather than the whole company. Then they cross-sell the new products with their established sales force. They have made it work.

As to the latest bump, management attributes that mainly to strong endoscope sterilizer equipment sales. The newer machines are called reprocessors; they do helpful things like inventory management that the aging machines can't do. For some reason their are a lot of aging endoscope reprocessors out there, particularly in VA hospitals, and 2011 seems to be the year they have a capital equipment budget for new machines. This burst will probably slow down later in 2011, but will stay above 2010 levels.

The water purification business just keeps growing. Also the disposables business should ramp up as the unemployment rate tweaks down this year. People have been avoiding doctor and dental visits for economic reasons; when they have the dough to head back in for a checkup, the run rate will pick up again.

So, in summary, the overall anti-infection story is a good one. Cantel is a pure infection play, and it has top-notch management. Should you be cautious because the stock has already had a good run lately? Sure, but the trailing P/E ratio at the end of today was 22.6 (per NASDAQ), which is still reasonable for a company with a strong growth track record. Today's ending price seems fair to me and attractive for long-term investors looking for diversification in the healthcare space. You might want to note that the company has more debt than cash, as debt was used to make recent acquisitions, but cash generation can make quick work of the debt.

For more details on quarter results, see my Cantel Medical Q2 fiscal 2011 analyst call summary.

Tuesday, March 8, 2011

Marvell Technology: What Inflection Point?

Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and telecommunications. Although for the most part Marvell has had a brilliant run since it was founded in 1995, recently the going has been rough, as reflected in its stock price. After a 52-week high of $22.87 last April, the stock closed at $15.81 yesterday, then bounced back a bit today. The release of quarter results on Thursday (the 3rd) and the analyst conference call caused a big sell off Friday, to $16.13, after closing Thursday at $18.22.

Should Marvell be abandoned, or is this a buying opportunity?

First, keep in mind that Marvell has a fiscal year that ends on January 30th. Their Q4s are typically seasonally slower than their Q3s because shipments of chips going into devices sold over the holidays typically are made in Q3. Q1 fiscal 2012 will end at the end of April; Q2 at the end of July; Q3 at the end of October.

On the other hand, a technology company with rapidly ramping revenues can sometimes overcome seasonal declines. Marvell has lined up two sequential q/q declines. In Q2 revenues were $896.5 million; in Q3 $959.3 million; in Q4 $900.5 million; and for Q1 guidance is for $800 to $850 million. That is worse than normal seasonality.

Last year Marvell CEO Sehat Sutardja, at the Marvell March 4, 2010 analyst conference call, predicted that Marvell would reach an "upward inflection point" within the next twelve months. We seem to be in a downward deflection point instead. Now Mr. Sutardja is saying that revenues (and profits) will ramp again in the second half of this year (more precisely, the second half of fiscal 2012). Should we discount his prediction, given he made it before and reality proved him wrong?

Let's look at why the prior inflection point prediction went awry. The hard drive market was not as robust as expected, mainly because global PC sales did not grow much in 2010. Marvell already has more than half of the market for the controller and other chips in hard drives, and in the latest quarter those still accounted for almost half of Marvell's revenue. Even with new products ramping up, the decline in hard drive chip revenue put a big dent in projections. Marvell is competitive in controllers for solid state drives too, but is not dominant there.

The other problem was Research in Motion (RIM), although Sehat did not mention them by name, everyone knew which customer he was talking about. It isn't that RIM (maker of Blackberry phones) is itself in trouble, despite competition from Apple and Android-based devices. Marvell makes chips for only a couple of RIM models. For those models there was an inventory issue, not with too much inventory, but with a change that results in Marvell holding inventory for RIM. The main issue is that in many developing nations RIM is moving 2.5G phones, and Marvell does not have a chip for 2.5G. However, Marvell should have such a chip later this year.

So two major sources of revenue Marvell counted on were down in Q4 and will continue to be down in Q1. But the big issue, the lack of an inflection point, has to do with OPhones in China. These phones sold slowly late in 2010. Sehat believes that is mainly a matter of introducing them and prices that were too high on the original models. During 2011 a number of Marvell based OPhones will be introduced in China at far more attractive prices, yet which maintain Marvell's own profit margins.

Hence, still an upward inflection point. I don't blame potential Marvell investors to take a wait and see approach. The problem (with not buying at today's stock price) is that Marvell, even in these "bad" quarters, is generating a lot of cash. The low price/earnings ratio for the stock reflects the "show me" attitude about OPhones. If you wait for the revenue ramp to be in the rear-view mirror, the stock is going to be a lot more expensive.

So watch for OPhone news out of China. Maybe consumers there will want iPhones or other alternatives instead. But if hundreds of millions buy the new Marvell-based OPhones, Sehat and crew are going to look a lot more far-sighted than they do right now.

I own Marvell stock and understand the risk of competing against the talented people at Qualcomm, NVIDIA, Apple, etc. Right now I would not sell my Marvell stock for less than $30 per share. Come this fall, depending on the OPhone ramp, I may need to change my estimate of its value.

See also:

My March 2011 Marvell (MRVL) analyst call summary

Wednesday, March 2, 2011

Applied Materials: Value, Growth, and Tablets

Applied Materials (AMAT), the semiconductor capital equipment maker, reported stronger than expected revenues and earnings for its first quarter of fiscal 2011 ending January 31, 2011. Revenue growth was up 45% year over year. Yet its PE (price/earnings) ratio is far lower than most technology stocks with similar growth records.

Trying to place a bet on tablet computers or smart phones? You can bet on the brands like Apple, Motorola, and Samsung. Or you can bet on the companies that supply the chips to make the tablets work, for instance, Qualcomm, TI, NVIDIA, Marvell and others. These are all pretty well known companies, but who really knows who consumers will be in love with in 2 years? Who knows whose chips two years from now will be winning the majority of slots in the new machines?

One thing you can pretty much count on: the constituent parts for tablet computers will be manufactured by someone. When it comes to actually making the silicon, Applied Materials is the dominant supplier of the necessary equipment.

In 2008 and 2009 Applied Materials had a rough time. No new capacity was needed; even shrinks (to smaller transistor sizes) were put off as long as possible. But because the company was well managed and had plenty of cash, it navigated successfully through the recession.

In 2010 Applied came roaring back as fabrication companies started making up for lost time.

Are people going to be satisfied with the computational or memory powers of 2010 style tablets and smart phones? No. The ARM processors are (so far) no match for the silicon from AMD or Intel that is available in a desktop or notebook computer. People may want portability, but they still want highly capable, fast machines. That means cramming more transistors onto chips, and using new technologies that keep voltage and power requirements down. In turn, to achieve that, the fabs need new machines capable of imprinting silicon with ever smaller patterns.

As reported in the Applied Materials February 24, 2011 analyst conference call, different aspects of the industry are at different points in their supply demand cycle. Fortunately overall the cycle is heading up. Display equipment sales will likely be weak in 2011, in part because tablet and smart phone displays are so much smaller than monitor and TV displays. But demand for most major types of silicon chips is headed up, as is demand for the equipment used to make crystalline silicon solar cells.

With $0.38 per share GAAP earnings in Q1 and about the same expected in Q2, it is fair to guess that fiscal 2011 earning will indeed hit at least $1.50 per share, which is AMAT's guidance.

While growth in 2011 won't be as strong as in 2010, I still see Applied's PE rising eventually to about 20. That would put it at $30 per share and still give it a 5% earnings return. As I write this you can buy the stock for just $16.36 per share. Note too that Applied has plenty of cash and pays a $0.28 annual dividend. I'd like to see that dividend raised to something more like a third of earnings, but other than that I think Applied Materials is a great company for stock holders.

See also:

Tuesday, March 1, 2011

Dendreon (DNDN) Q4 results and call

Dendreon Q4 2010 analyst call summary, my notes from today's conference.

In short, the Provenge rollout is going as planned. This month the FDA should approve the addition of new Provenge work stations to the Dendreon New Jersey facility. When those stations come online capacity will be up fourfold. That ramp should occur in Q2. The current run rate is under $30 million per quarter, so the new run rate potential would be $120 million per quarter.

The buildout at Atlanta and Los Angeles is on schedule for going online later in the year. The quarter run rate when all systems are go should be about $360 million per quarter, or $1.3 billion per year.

There is no shortage of patients. There is a waiting list. New doctors and medical centers are being signed up, so as the machines become available their should be patients getting prescriptions for them.

Prostate cancer patients have some of their blood removed, then processed to tell their immune system to attack the cancer. The therapy is called Provenge; it is not a drug per se.

The biotechnology company is also setting up clinical trials to see if the general process will work for other types of cancer.

See also