Wednesday, July 27, 2011

Gilead Sciences Readies Pipeline Value

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 second quarter (Q2) 2011 results and held its analyst conference.

A convergence of factors is driving Gilead profits higher. This trend should accelerate in 2012 and continue through at least 2015.

Gilead dominates the anti-retroviral, HIV drugs market in the U.S, where its market share has grown to 70.4%. Its global market share is not as high, but continues to ramp. Gilead AIDS drugs (Atripla, Truvada and Viread) brought in $1.76 billion in the quarter, up 11% y/y. Gilead's therapies are popular because they combine several drugs in a single pill, which makes for good patient compliance.

You might think that in a highly competitive field, with over 70% market share, there would be little upside left. A couple of factors show that thinking is wrong. Recent trials have shown the benefit of starting those infected with HIV much earlier than is currently the case, and that therapy reduces the risk of infection for partners by 96%. The percentage of Americans who are infected and who are already taking Gilead anti-retroviral drugs is estimated to be only 42%. Globally, as nations modernize and become wealthier, the demand for the best HIV therapies is also expanding.

In addition, in 2012 Gilead should be bringing to new combination pills to market, pending FDA approval. Endurant for HIV single tablet regimen of Truvada plus Rilpivirine is likely to get FDA approval in August. The Quad regimen data from two Phase III trials will be released in Q3 2011. In the likely case the data is positive, we should see Quad for sale in the second half of 2012. While some patients may shift from one Gilead pill to another, most the likely course is that Quad and Atripla will continue to take share away from older, non-Gilead therapies.

Branching out from anti-virals, Gilead has made progress with Letairis for pulmonary arterial hypertension, which generated $74 million in revenue. Ranexa for chronic angina hit $86 million in the quarter.

The coming pipeline of Gilead non-HIV drugs is so large that I can only give an overview here and refer you to the conference slide show (see link below). There are even more HIV therapies at stages of the pipeline, including two stand parts of the Quad, Elvitegravir and Cobicistat. There are four hepatitis drugs in phase II, and three in phase I, which will likely be made into a combination therapy for hepatitis C. There are six drugs, mostly in Phase II, with cardiovascular, respiratory and oncology targets.

Gilead had an astonishing free cash flow in the quarter of $943 million. I'd like to see a dividend, but I agree that at this point the stock is so undervalued that buy-backs make a lot of sense. Gilead spent $724 million in buy backs in the quarter. Yet it ended with a cash balance of $5.5 billion. Gilead is in a great position to acquire and develop more drug candidates.

Short of a Black Swan type disaster, I see Gilead as being a much, much larger company by 2020. That is why I own Gilead stock and may continue to acquire it (in a balanced fashion).

But even with a great growth and value combo like Gilead Sciences, there are the usual risks from competition, macroeconomics, failure to execute, etc. See SEC filings for a complete set of risks.

And Keep Diversified!

See also:

my Gilead Sciences Q2 2011 analyst call summary

Gilead Q2 2011 slide show

Sunday, July 24, 2011

AMD Key Question

AMD had a big jump in stock prices Friday, after reporting Q2 results after the market closed on Thursday. Q2 was not a stellar quarter, but AMD reported that its Fusion line of processors that combine a CPU and a GPU on single chip are ramping nicely. OEMs like them and consumers like them, so the demand is there. Intel, AMD's far larger rival, cannot match them. So it predicted a much better Q3.

If good time were more obviously ahead AMD's stock price would be far higher. Assuming AMD continues to release new Fusion projects, as well as its high-end CPU Bulldozer chips, on schedule, we still can't assume AMD will pick up appreciable market share from Intel.

Intel's law breaking, monopolistic practices days might be behind it, but it still has oodles of money it can throw at problems. It's problems are multiplying, to be sure, but it has a mountain of cash and a cascade of cash flow, unlike AMD.

An analyst at the Q&A part of the Thursday conference asked if Intel is going to lower its prices to compete with AMD Fusion. Let me quote my own summary of AMD's Q2 2011 conference, which is probably not an exact quote of the question and response:

Q. In the past when AMD has done well, we have seen price aggression from Intel. What are you seeing now?

A. It has always been a competitive market. The strength of our products will bring our plans to fruition.

In other words, not so much price aggression so far, but AMD is aware of the potential problem.

I believe Intel is somewhat constrained in its ability to lower prices. This is because investors are worried about Intel. Intel has about 80% of the market. To significantly lower prices on 80% of the market to keep AMD from gaining a percentage point here or there would cause Intel margins to drop, endangering the very cash flow that is such a competitive advantage. Also, the share AMD can take is limited by its production capabilities, which are very limited compared to Intel's.

Instead, Intel will rely on its marketing muscle. It will spend more on advertising, expecially the kind of "Intel inside" deals that convince retailers to promote computers with Intel CPU's instead of those with AMD Fusion chips. Intel will also keep trying to play catch up in the graphics arena. Intel is an entire generation behind AMD (and NVIDIA) in graphics technology, but they have been doing a good job in catching up, including by licensing technology from NVIDIA.

So again we have a situation where AMD has a window of opportunity, which should last until about the end of 2012. AMD will still be ahead in graphics and in integrating graphics with general cpu technology at the end of 2012, but going into the year 2013 Intel's combined GPU+CPU chips are likely to be good enough.

To really compound investor value AMD has to do great in 2012, generating enough money to keep up R&D and start exerting some advertising muscle of its own.

As far as the stock price goes, the Fusion chips are nice, but the real question is whether AMD will be able to pick up share in the server market with its upcoming Bulldozer based offerings. We won't begin to see if that is happening until we get results from Q4 2011 in January of 2012.

I own AMD stock, and I am cautiously optimistic, but I know how hard it is to compete with Intel's marketing machine, no matter how good AMD's chips may be.

See also

And my AMD summary page

Keep diversified!

Tuesday, July 19, 2011

Biotechnology High Risk Watch List

Yesterday I made up a new list of high-risk biotechnology stocks to watch and consider for investment.

The list is overdue. I did reasonably well with my first set of high-risk stocks, which included both information technology and biotechs. Anesiva (ANSV) bombed, went to zero, but I more than made up for that with Dendreon (DNDN), Dot Hill (HILL), Biogen Idec (BIIB) and Hansen Medical (HNSN).

My strategy is to sift through high risk stocks with high returns potential, based on my knowledge of science, technology, and business practicalities. Then I create a bundle, so that if one or more stocks tank, I can take that in stride. Say I choose 5 stocks and invest $1000 in each. A typical outcome might be that one tanks (Anesiva), one goes wild (Dendreon) and returns 10 for 1, and 3 do okay, lets say breaking even. My $5,000 has become $13,000. Typically my time horizon for the process is 3 years. In biotech in particular you need patience because of the long time needed to test therapies, get FDA approval, and bring them to market. In the case of Dendreon I had to wait 5 years to 10x my money.

I also balance risk by not having all my money in high-risk bundles. I typically have a number of medium and lower risk positions in my portfolio. At this point, for instance, I still retain some Dendreon stock, but I would classify it as medium, rather than high, risk. Of course even my low risk stocks take beatings at times, as in 2008 and last week with Microchip (MCHP).

The new list is currently:

I may add to or delete from the list as I go along. At this point I have not bought any of these stocks. I have not done any deep research on them. Typically before I buy a stock I do at least one analyst conference summary on the stock, so I have a baseline. Typically I nibble; having nibbled, I redouble my research efforts.

Anyway, here are the (high risk!) stocks for my possible new bundle, in no particular order:

KERX, Keryx Biopharmaceuticals
AEZS, AEterna Zentaris
ONTY, Oncothyreon
RNN, Rexahn Pharmaceuticals
RXII, RXi Pharmaceuticals
MITI, Micromet
INO, Inovio
DSCI, Derma Sciences

The list started somewhat longer, but I already eliminated a number of companies for a variety of reasons. Mostly it is companies with Phase II or Phase III products that have not yet generated significant income. Much of the risk is from the possibility that trial outcomes will be insufficient to gain FDA approval.

Of course you can watch this blog for my thoughts on these stocks as I do my research.

Keep diversified!

Friday, July 15, 2011

Dendreon Ramping Up Provenge Production

For years Dendreon was the Cheshire Cat of biotechnology companies. Its stock price zoomed up and down depending on results of trials and rulings of the FDA on the efficacy of its first therapy, Provenge for prostate cancer. For about a year now the cat has seen flesh added to its bones and paying patients receive Provenge treatments and facilities for those treatments have been built, certified by the FDA, and come online.

In the last 52 weeks Dendreon's price has been relatively stable (compared to pre-2010), the a low of $30.15 and high of $43.96, with the price as I write at $38.92. It its peak, after FDA approval for Provenge, it hit an auction-market frenzy driven level of $55.43 on May 3, 2010.

Dendreon is probably still a couple of quarters away from showing its first profits. On August 3, 2011, it will report on the second quarter, but keep in mind Q2 was one of limited production facilities and high costs as new facilities are built and certified. I would expect revenues between $30 and $40 million (they give annual guidance, not by quarter) and about $100 million for operating expenses, so another red ink quarter. The ball to watch, however, is Q4 2011. That should finally give us a realistic picture of gross margins and operating margins.

Capacity rollout is encouraging; management is executing well. The Los Angeles facility, with 36 workstations, was approved by the FDA on June 29, 2011. Workstations take patient's blood and tweek its immune components to attack prostate cancer cells. The original New Jersey facility with 12 workstations generated $25 million per quarter in revenues. 36 additional workstations in New Jersey were approved on March 10. It should be noted that approval of workstations does not mean they immediately begin operating at full capacity.

However, at $25 million for 12 stations, 48 means $100 million in revenue and approved equipment in New Jersey and LA together could generate roughly $175 million per quarter. I suspect that if extra shifts are worked and the machines have little down time, the figures could be higher. At the same time their is the other constraint: patient demand. Doctors can't just write a Provenge subscription. They need to work with certified infusion centers, which Dendreon has been hustling to set up.

There is another facility under construction in Atlanta. Dendreon is estimating Q4 revenues in the $200 million ballpark. All three facilities should be operating, but by no means will all the workstations be operating at the $200 million mark.

Beyond that, Dendreon is seeking approval for Provenge in Europe. After that, the rest of the world.

It will be interesting to see if Provenge is as effective in the field as it was in clinical trials. That could have a big impact on how it will compete with other therapies.

Finally, and why that $55 per share spike was not all that unreasonable, if a bit premature, Dendreon is a platform company. In other words, Provenge is hopefully just the first of a series of active immunotherapies against various forms of cancer. The down side of that is that a lot of money will continue to go into R&D. The upside is that any further success of the platform really would make Dendreon into a gold mine for its stockholders.

I have been covering Dendreon since 2006. As usual I will write up a summary of Dendreon for Q2 2011 after the conference on August 3, 2011. You can see all of my notes on Dendreon as well as links to other important data at my Dendreon main page.

Looking for the next Dendreon? You might want to check out my Hansen Medical page.

But in addition to known risks, their are potential unknown risks, so keep diversified!

See also: Provenge Press Releases

Monday, July 11, 2011

Biogen Idec (BIIB) Valuation Thoughts

When I wrote "Biogen Idec PML Test Approved in Europe, Changing Tysabri Outlook" on March 15, 2011, the price per share of BIIB was $69.56. Today it closed at $105.53, having backed off its recent 52 week high of $109.63. Quite a run. So, the eternal investor questions: did something change? Does the run up reflect value that was already there back in March? Could this be another momentum run unjustified by fundamentals? Could there be even more value in the stock?

Biogen Idec's two multiple sclerosis (MS) blockbuster drugs are Avonex, with revenues in Q4 2010 of $654 million, and Tysabri, with revenues of $242 million. Also Rituxan generated $258 million. As I wrote earlier, most investors and analysts expect Tysabri revenues to rise now that patients can be pre-tested for JCV. Trailing earnings are $4.35 per share, so the current price/earnings (PE) ratio, while not real high, does anticipate solid earnings growth. This is despite competition from new MS therapies, notably Gilenya by Novartis, which is the first oral treatment for the disease, but which was not as effective as Tysabri in clinical trials.

I have always argued that there is undiscovered value in the earlier stages of the Biogen Idec pipeline, but that situation is little changed since March. With 8 indications in Phase III trials, chances are that several new therapies will be approved over the next couple of years. However, Biogen does plan to narrow the scope of its development program, eliminating oncology and cardiovascular candidates to focus on immunology. This should reduce costs in the short run.

On June 7 Biogen announced the EU had approved its Avonex PEN, which is a single-use injection device which will make taking the drug more convenient for MS patients. Nice, but not responsible for a $40 stock run-up.

On June 22 Biogen announced the EU approved including JCV status as a risk factor for Tysabri, which we presumed would happen in March.

On July 3, after the run-up, Biogen announced some nice science research on the role of death receptor-6 (DR6) in MS. Nice, but probably ten years away from adding to revenues, if it should work out.

It is fair to conclude that the price of BIIB had been low because of fears about Tysabri revenue being permanently stalled by the JCV complication. Those fears stopped being justified as we learned more about JCV and its detection. It is remarkable how a rising stock price can make fear evaporate.

So are we at a just-right stock price? Of course next year's price will depend on how revenues and profits ramp (or don't) in 2011, and what the outlook looks like for 2013.

During 2010, when Tysabri was still under suspicion, Biogen grew total revenues grew to $4.72 billion from $4.38 billion in 2009. That is just 7.7% annual growth. But earnings per share grew 17.6%. In the latest reported quarter, Q1, revenue grew 9% y/y.

I will be surprised if Tysabri revenue growth does not accelerate. I am fine holding the stock in the current price band, but I would want to see actual revenue and profit acceleration before feeling a higher band is a safe bet.

At this point Biogen pays no dividend, but is certainly a profitable enough company that it could. It would also show management's confidence in the company's future.

See also

Friday, July 8, 2011

Hansen Medical: Run Up Spurs Valuation Thoughts

I wrote on February 9, 2011: "Hansen Medical (HNSN) may be about to reach an inflection point. In fact, given the recent announcement of Philips paying $30 million to license just one part of Hansen's technology, we may be past the inflection point."

Last week "Piper Jaffray upgraded its stock-investment rating on Hansen Medical Inc. to overweight from neutral, saying its endovascular robot–pending 510k clearance–provides needed clinical solutions and will find a receptive audience in vascular surgeons." [ Wall Street Journal blog, June 30, 2011]

It is difficult to put an exact value on Hansen stock. Today Hansen closed at $4.59 per share, giving the company a market capitalization of $250.4 million. On February 9 it closed at $2.07. You could by it for $1.26 per share in early December 2010. Has it run up too much since December? Have there been new developments that justify today's price? Do future developments mean it could keep booming?

Hansen Medical stock price chart July 8 2011

I believe the current price does not yet take into account information that has been available for several months now. It only reflects that Piper Jaffray called the undiscovered value of the company to a broader array of investors.

Hansen Medical has a technology platform. Repeat: technology platform. Its Sensei systems allow surgeons to control robotic catheters. There are a lot of kinds of surgery these could be used for, but each type of surgery requires some specialization of the catheter or its control system, as well as clinical trials proving safety and effectiveness, and FDA approval (EMA approval in Europe, etc.).

Hansen has been selling it Sensei systems with Artisan catheters to perform electrophysiology, the measurement of the nerve activity of the heart. The systems have been selling at a rate of a few per quarter, and cost more to make at that level of production than they sell for. They have shipped at least 100 systems to date. In addition, money raised from investors is spent on R&D for new applications, and of course on overhead. So Hansen has been losing money.

Now Hansen has received a large payment from Philips for one of its technologies: $23 million so far, with more to come. This should mean that the new and upcoming applications can be paid from existing cash and cash flow. In addition to electrophysiology, Hansen has permission in Europe to sell it Lynx ablation catheter. That allows surgeons to destroy nerve tissue to cure atrial fibrillation. It is a fair guess that FDA approval for U.S. use will come some time this year.

The first really big application is coming up to: vascular surgery catheters. Ultimately there will be a range of these, but the first approvals in Europe and the U.S. should come this year.

After that, anything goes. Hansen should be able to apply it robotic catheters to a wide variety of surgeries. There could end up being several in every hospital in the world.

Of course the usual risks apply. Hansen could screw up. Or a competitor could emerge. Or the FDA could delay approvals for longer than expected. Or patients could die or be injured if the system fails in unseen ways. In other words, this is not a sure thing. Keep diversified.

I still think Hansen should be worth over $10 a share based on present information, and up approval of the vascular robotic system by either the FDA or EMA, should head up from there.

I have owned Hansen stock since July of 2009, after starting posting Hansen analyst call summaries in February of 2009. I may be excited today and may not be seeing all sources of risks. Despite a relatively small investment in Hansen Medical it has shot up so much it may violate my portfolio rules (caps on % of portfolio in a single stock) so I may sell portions of my current stake if the price keeps running up.

See also:

Hansen Medical main page
my other Hansen Medical articles and conference summaries