Tuesday, November 29, 2011

SGI Supercomputer Revenue Growth Continues

Looking for the technology company that reported calendar Q3 2011 revenue that was 58% higher than its Q3 of 2010? That would be Silicon Graphics International (SGI), manufacturer of high-performance technical computers (supercomputers) and high-efficiency server systems for datacenters and cloud computing.

GAAP revenues for fiscal Q1 2012 ending September 30, 2011 were $178.9 million, down 8% sequentially from $195.5 million, but up 58% from $112.9 million in the year-earlier quarter. GAAP net income was negative $2.7 million, improved sequentially from negative $12.1 million and improved from negative $11.2 million year-earlier. EPS (earnings per share) were negative $0.08, improved sequentially from negative $0.39, and also improved from negative $0.37 year-earlier.

While in the red on a GAAP basis, on a non-GAAP basis (mostly eliminating non-cash expenses like stock-based compensation) SGI managed a profit of $2.2 million, or $0.07 per share. SGI has gone through a period of investing to introduce new products, and also expanding its sales force. Profit margins could improve as further ramps in revenue should not require similar ramps in operating expenses.

While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.

How are they achieving such stellar growth while other computer makers are lagging? SGI specializes in expensive computers used for scientific research, as well as large systems for cloud computing and Web farms. These are all areas that continue to grow quickly. While there is competition from the likes of IBM, HP, Dell, and Cray, the newest systems introduced by SGI, notably Altix UV, are better at addressing the needs of their markets.

Nor is SGI resting on their laurels. They are introducing computers that run large scale systems running Windows SQL Server. They have improved their compatibility with Hadoop and Red Hat Enterprise Linux. They continue to be a major supplier for Amazon's cloud system. They also have started acquiring small companies that specialize in supercomputer application software. SGI expects that the ability to sell software as well as hardware will be a major advantage for verticals they service, with higher profit margins.

Finally, they ended the latest quarter with $115 million in cash with no debt. They did use $30 million of cash to build inventory in the quarter, but the systems built had been pre-ordered and should be shipping this quarter.

Because of the size of the systems involved, some quarter-to-quarter lumpiness is to be expected.

If you read what scientists are saying about Altix UV, you will realize why management has become very confident in SGI's future. On the analyst call they stated the next big SGI milestone will be $1 billion in annual revenue, which should bring between $1.75 and $2.00 non-GAAP EPS per share.

The recent growth has been in the face of a lot of uncertainty and a poor macroeconomy. Even so, if the doomsayers are right about global slowdown or meltdown scenarios in 2012, that could impact sales. I am more concerned about competition, but it does seem that for now SGI has found a niche where it can outcompete far larger companies.

For more details on calendar Q3 results, see my SGI Q1 fiscal 2012 analyst call summary.

Disclaimer: I am long SGI. I won't change my position for at least one week from today.

The usual risks apply, so keep diversified!

See also: www.sgi.com

Monday, November 28, 2011

Microchip (MCHP) Inventory Correction End May Be Near

There is no way to describe Q3 2011 as a good quarter for Microchip (MCHP). The maker of microcontroller and analog chips reported revenues of $340.6 million, down 9% sequentially from $374.5 million in Q2 and down 11% from $382.3 million in the year-earlier quarter.

GAAP net income was $79.3 million, down 20% sequentially from $99.3 million and down 24% from $104.7 million year-earlier. GAAP EPS were $0.40, down 18% sequentially from $0.49 and down 26% from $0.54 year-earlier.

Given that and the general stock-market and macroeconomic malaise, the main thing propping up Microchip's stock price (closing today at $33.07) is the dividend, now running at $1.392 per share per year, or 4.3% at today's price.

As to the outlook, Q4 guidance was week, with revenue in the range of flat to down 7% from Q3.

I don't think that Microchip is failing to compete in its market segments. It continues to be the world's leading microcontroller provider. Economic uncertainty caused weakend demand, which in turn caused OEMs to tighten up their inventories.

Then again, the picture could be brighter for Q1 2012. The first quarter is typically seasonally slow for semiconductor chip makers, but within that seasonality Microchip's management, as early as the analyst call on November 3, foresaw an uptick, predicting that "shipment rates in December will be below the consumption rates of our customers."

Here it is important for analysts to note that, unlike most chip manufacturers, Microchip does not recognize revenue when it makes shipments to distributors. Because of the nature of Microchip's business (selling a large number of parts to a large number of OEMs), a lot of sales are through distributors. Microchips recognizes the revenue when the distributors have shipped the chips to end customers.

This means that Microchip tends to see results (reported revenue) of general semiconductor trends, both up and down, a quarter earlier than its peers. While there can be differences in results because of focus and competition for market share, a Microchip revenue downturn is a fair predictor of a sector downturn one quarter later, and the same for upturns.

If this December shapes up to be a good one for electronics sales in the U.S., and if Europe holds together, January may look very different than most investors would have expected until recently. If end sales cause inventory shortages at OEMs, the pace chip sales in Q1 could be strong, compared to the usual range from seasonality.

So keep an eye on Microchip's Q4 results and Q1 2011 results. In the meantime, if you are holding MCHP, enjoy the dividends.

Keep in mind that the semiconductor industry, including its microcontroller and analog segments, is very competitive.

Disclaimer: I am long MCHP and have no plans to change my position this year.

See also:


Tuesday, November 22, 2011

Hansen Medical: Slow Magellan Ramp Planned

Hansen Medical Inc. (HNSN) manufactures catheter based medical robots. It is effectively still a startup company, since it typically loses money each quarter. When it has shown a profit is has been from licensing its technology, not from robot sales. However, this is a well-understood business model. Research and development has to be done upfront. The FDA and other national medical agencies must approve each application of the technology. At the moment one application, electrophysiological exploration, is approved both in the U.S. and Europe. Two other applications have been approved in Europe, but have not yet produced revenue.

The difficulty of guessing the future value of this technology is why (along with overall market volatility) the stock price of Hansen has been all over the map this year. The fifty-two week high was $5.28, the fifty-two week low was $1.24, and the stock was up $0.15 today to close at $2.37. If Hansen continues to burn through its cash, $1.24 might be generous. If it starts selling significantly more surgical robots at a good profit margin, $5.28 will seem like nothing two or three years out.

I expected Hansen to trade higher after the new peripheral vascular surgical system, Magellan, was approved in Europe back in Q3. I expected it would take time to ramp up sales since these robots are big ticket items. The November 2, 2011 analyst call about Q3 results, however, tempered my short term hopes. The first working Magellan had been installed in St. Mary's Hospital in London, but Hansen wanted to take things slowly. One might hope their salespeople would have ten or more sales lined up for Q4, but instead they wanted to do a number of actual surgeries at St. Mary's and study the results.

Based on earlier trials they expect good results, but more data would not only help to drive sales. Experience is something that can be shared. Getting the surgeon's experiences at St. Mary's should help future surgeons and the Hansen employees who train them. That means better outcomes for patients and a better argument for the value of robotic vascular surgery.

Investors, of course, want their results this quarter, not sometime in the vague future.

If Hansen continues to move cautiously it may be a couple of quarters into 2012 before we see significant sales of the new Magellan system. Also Hansen, after an earlier accounting practices muck-up, now only recognizes revenue when doctors are trained and successfully operating a system. So the ramp will probably be in deferred revenue before it hits the actual revenue line.

Nor are the current Sensei robots for electrophysiology likely to come to the rescue. Only two systems were shipped in Q3, although revenue was recognized on five systems. Hansen lost $10.1 million in the quarter on revenue of $5.4 million.

Management seems confident that the new Magellan system will turn the company around. Hansen ended the quarter with $26 million in cash and just $3.6 million in debt. Answering an analyst question about running out of cash, management said they would get another $3 million from their licensing agreement with Philips. That should get Hansen through Q2, the commercial launch in Europe, and FDA approval for Magellan in the U.S. They are considering strategic financing similar to the Philips financing as well as debt or equity financing. They said they were confident of their ability to raise capital. A few days later they raised $10 million selling stock to existing investors.

Market capitalization ended today at $130 million. While that sounds high for a company with a $22 million annual revenue run rate and a history of losses, I know I am not the only person who thinks the future value of this technology is much higher. Earlier this year Philips paid $29 million for non-exclusive rights to use one of Hansen's technologies.

Start up costs for surgical robotics are high, but we are reaching a point when Magellan sales should start pointing us in the right direction. Buying in now has its risks, but so does waiting until later in 2012 when buying in is likely to be much more costly. The price can be very volatile because this tends to be traded in large blocks by aggressive traders.

I have owned Hansen Medical stock since July of 2009, after starting posting Hansen analyst call summaries in February of 2009.

Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post.

Monday, November 21, 2011

Onyx Pharmaceuticals (ONXX) Sees New Product Upside

Onyx Pharmaceuticals (ONXX) was one of the few stocks that were up today, closing up $0.63 to $37.86. Still, it is well beneath it's 52-week high of $45.90.

Management thinks the full year will be non-GAAP EPS positive, based largely on a $160 million payment from Bayer this quarter. Bayer sells Onyx's Nexavar for kidney and liver cancer, splitting the after-costs profits. The $160 million was to buy-out the rights for Nexavar in Japan, which has been ramping up to be a lucrative market because of the high incidence of liver cancer there. This was part of a larger deal to end litigation for a Nexavar-related drug, Regorafenib. Under the settlement Onyx will get 20% royalties if the drug makes it to market.

Regorafenib recently had positive Phase III data for metastatic colorectal cancer. Like Nexavar, it appears it may be a useful therapy for a variety of cancers.

The predicted annual positive non-GAAP results were hard to predict before the deal announcement because in most quarters so far Onyx's own operating expenses have been sufficient to wipe out the receipts from Bayer. For Q1 non-GAAP net loss was $14.2 million, for Q2 net loss was $27.2 million, and for Q3 net loss was $19.5 million. One reason for the net losses is that both Bayer and Onyx have been spending large sums on running Nexavar through a set of clinical trials that have shown it may be effective for other forms of cancer, and to strengthen its role in liver caner. If you subtract out the research and development (R&D) costs, in most quarters Onyx would have shown a profit. Onyx has started recruiting patients for Nexavar Phase III trials for breast cancer and thyroid cancer, and has Phase II trials underway in colorectal and ovarian cancer.

Fortunately Onyx Pharmaceuticals has been able to maintain a high cash balance despite the regular losses, ending Q3 2011 at $530 million. Assuming the $160 million payment is a Q4 event, cash at the end of the year should approach $675 million.

I would not expect Regorafenib revenue until at least 2013, and like any drug it could fail for a currently unknown reason.

Carfilzomib is still the key to Onyx's value in the 2012 to 2015 time frame. Carfilzomib is a proteasome inhibitor that had positive data for relapsed and refractory multiple myeloma in a Phase IIb trial. In fact the data was good enough that it is being submitted to the FDA for approval. At the same time two Phase III trials have been initiated. More detailed data from the Phase IIb trial will be presented at the American Society of Hematology (ASH) Annual Meeting, December 10-13, 2011. While there is an outside possibility carfilzomib will not gain FDA approval, the main question is when it will get approval.

If both Regorafenib and carfilzomib are approved by the FDA, the nature of Onyx's model will change. It should be possible, starting in 2013, to have a vigorous R&D program to continue expanding the indications for Nexavar, carfilzomib and other pipeline candidates without actually throwing the bottom line into the red.

I believe that there is always risk in biotechnology stocks from competition, the need for FDA and other national medical agency approvals, and from failure to execute.

However, with expanded indications for Nexavar, plus likely revenues from carfilzomib and royalties on Regorafenib, in the next few years Onyx should become a highly profitable company. I do not think the current stock price reflects full value.

Disclosure: I am long Onyx Pharmaceutical. I have no plans to sell or buy ONXX in the immediate future.

Keep Diversified!

Monday, November 14, 2011

TTM Technologies (TTMI) Sees E-Reader PCB demand

TTM Technologies (TTMI) makes PCBs (printed circuit boards) for the communications, industrial, medical, and consumer electronics industries. It owns plants in the U.S. and in China. The U.S. facilities generally do small runs of PCBs for prototypes and specialized, low volume products. Chinese facilities do larger PCB runs for computer and communications equipment, cell phones including smartphones, and more recently tablet computers and e-readers.

Q3 2011 was a no-growth quarter. Revenues were $358.3 million, down 2% sequentially from $366.1 million, and about flat against $356.8 million in the year-earlier quarter. GAAP net income was $24.5 million, up sequentially from negative $20.3 million, but down 16% from $29.1 million year-earlier. Q2 profits were hit by a one-time non-cash accounting charge for writing off some obsolete factory equipment. So, switching to a non-GAAP view of net income, we have: Q3 2011 $31.0 million, Q2 2011 $32.9 million, Q3 2010 $35.0 million.

While growth has been stagnant this year, profits have remained healthy. Annualizing Q3 non-GAAP EPS gives a P/E ratio is about 7.2 at today's closing price of $11.01 per share.

Because TTM has a broad array of end customers and a global presense, to a large extent its fortunes reflect those of the electronics industry as a whole. For that industry Q3 was a slow quarter in a slow year. Everyone is worried about end demand because of the economy. I believe TTM's ability to make a profit in this environment means it is a reliable cash generator. If the electronics industry picks up again in 2012, there is upside potential.

In the Q3 conference call on November 2nd management noted that some orders were pushed out past the end of the quarter. Cash flow from operations was $42.6 million. The cash and equivalents balance ended at $207.7 million. Long term debt ended at $366.7 million. TTM made capital expenditures of $28.3 million, mostly for new high-end manufacturing equipment in China.

It is notable that debt still exceeds cash. The debt was used to build and expand plants in Asia. So far it has been a good use of debt, but it does create some risk if there is an extreme economic slowdown. Paying down debt has been a priority use for cash.

TTM tracks end markets into 5 segments. For the quarter aerospace and defense was below trend. Cell phones were strong, particularly smartphones. Computers and related were weak and are expected to continue to be weak in Q4. The medical and industrial segment was flat. Networking and communciations, which accounted for 38% of revenue, is expected to be soft in Q4. There is also an "other" category, which saw growth because they are producing the PCBs for a new e-reader for an unspecified customer.

The top five customers were: Apple, Cisco, Ericsson, Huawei and ZTE. Only one of them accounted for more than 10% of revenue.

I believe that as the global electronics industry recovers TTM will continue to pay off debt and eventually be better positioned to use cash for buy-backs and dividends.

Disclaimer: I am long TTMI. I have no plan to change my position this quarter.

Keep diversified!

Monday, November 7, 2011

Celgene Q3 shows model strength

Celgene provides a double dose of growth potential: further growth of its currently approved therapies and a rich pipeline with some therapies closing in on FDA approval and commercialization. Since I last wrote about Celgene on August 2, its stock price has risen from $57.29 to today's close of $64.29. Celgene's 52 week high is $68.25 reached on October 24th.

Consider Celgene's Q3 earnings reported last week. Revenue was $1.22 billion, up 3% sequentially from $1.18 billion and up 41% from $886 million in the year-earlier quarter. GAAP net income was $373.0 million, up 34% sequentially from $279.2 million and up 33% from $281.2 million year-earlier. GAAP EPS were $0.81, 37% sequentially from $0.59 and up 35% from $0.60 year-earlier. Non-GAAP EPS was EPS $1.02.

Most of this rapid growth was based on a single therapy, Revlimid for multiple myeloma (MM) and myelodysplastic syndromes (MDS). Revlimid revenues grew 28% from a year earlier. Expansion is largely international now, with Russia, China and Brazil still ahead. In addition various clinical trials have indicated Revlimid will be beneficial in other types of cancer. Revlimid is in Phase III trials for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphoma) and prostate cancer.

Thalomid is ancient and had revenues $83 million, down 12% y/y.

VIDAZA for multiple myeloma revenues were $191 million, up 35% y/y. This is despite losing exclusivity in the United States.

The bit new revenue generator is ABRAXANE for breast cancer. Abraxane is also in clinical trials for treating lung, pancreatic, bladder, skin, and ovarian cancers. ABRAXANE revenues were $114 million, up 20% sequentially, that is quarter over quarter; Celgene did not market it a year ago. A Phase III trial comparing it to decarbazine for metastatic melanoma is expecting to read out data in mid 2012. Phase III Pancreatic cancer trial should complete enrollment in Q1 2012. International revenue continues to ramp. For instance, in the quarter Celgene received reimbursement permission for Abraxane in in Greece and the Czech Republic.

Earlier in the pipeline Celgene displays depth-of-field. Of course most pre-clinical drugs don't make it through all the clinical phases and FDA approval; there are likely to be some losers. Celgene's pipeline is so broad and important you could write a book about it.

In Oncology/Hematology we have pomalidomide in Phase III trials for myelofibrosis and nearing the end of Phase II for multiple myeloma. There is Amrubicin, in Phase III for small cell lung cancer. In Phase II we also have ACE-011 for CIA and ABI-008 for prostate cancer. In Phase I we have Tork Inhibitor and ABI-009, both for solid tumors. There are two additional pre-clinical ABI variants for solid tumors.

Apremilast completed enrollment of patients in Phase III trials for psoriasis and psoriatic arthritis, with three more Phase III trials to complete enrollment by year-end. Phase II trial data for ankylosing spondylitis will be presented in November. In inflammation and immunology we also have JNK CC-930, CC-11050 and PDA-001 in Phase II.

Pomalidomide Phase II data for relapsed and refractory myeloma will be presented at ASH in December. The company is conducting a broad clinical program to support global registrations for pomalidomide.

Beyond that Celgene lists over a dozen agents in discovery and pre-clinical phases.
Of course, what will affect Celgene's stock price soonest are the late stage candidates. The first big movers is likely to be expanding the label for Revlimid to first-line (initial) treatment of multiple myeloma. The second would be Abraxane for non-small cell lung cancer, with FDA submission in second half of 2011 and a decision likely in the first half of 2012.

In general it is a very good time to invest in biotechnology, even given the known risks. Celgene is a cash cow that also has unrealized value in its pipeline. Small, risky biotechs aren't commanding the high premiums they used to, which is good because many of their drug candidates don't work out. With the larger biotechs like Celgene if a drug candidate fails it is disappointing and the stock can lose some momentum, but cash flow can be used to buy and develop more candidates. Celgene's cash and equivalents balance ended at $2.58 billion. Cash flow from operations was $602 million. $885 million was spent on share repurchases in the quarter.

Hopefully some time soon Celgene will start paying out a dividend, which is the true gold standard for today's investors.

Keep diversified!

Disclaimer: I am long Celgene. I have no plans to buy or sell Celgene in the next two weeks.

Friday, November 4, 2011

Dendreon Capitulation

Following the announcement of Q3 results on November 2, 2011, Dendreon (DNDN) stock capitulated. One can only surmise that those who came to the Dendreon game late and hoped to make easy profits, thereby showing their lack of understanding of cancer drug introductions or poor choice in momentum stocks, are now out of the stock. It would be interesting to know who now owns all that stock. Dendreon's 52-week high was $43.96, but it actually hit a post-FDA approval of Provenge for prostate cancer high of $55.43 on May 10, 2010. Its 52-week low was on November 3, at $6.46, with a dead cat bounce today bringing it up to $6.69 at the close. That represents a market capitalization of just under $1 billion.

Q3 results were about what any reasonable person would expect. On August 9, 2011, I guesstimated Q3 revenue at $66 million. It came in at $64.3 million. That included $3 million in non-Provenge royalty payments. Which puts Provenge at $61 million, up 23% from $49.6 million in Q2. Where else would that be a slow ramp?

For those who baled there were two major factors. Revenues were not ramping as quickly as they hoped, and there is a not-unreasonable questioning of where Provenge revenues might peak. In a mere 12 months we have gone from wildly optimistic to deeply pessimistic projections.

What are reasonable projections for Provenge revenues? You have the number of patients covered by the label annually, less those who don't try the therapy. There is no financial reason to not try the therapy since it is covered by Medicaid and Medicare, as well as all major private health insurance plans. The current label constitutes a window through which most prostate cancer patients whose disease progresses will pass, but currently you have to wait for the window. If you a different therapy during the window and wait long enough you can find yourself off label. There is no good reason for a rational patient (or physician) to let that happen. Provenge is very safe and takes only 1 month to administer. It should be the first therapy tried when a patient enters the window. Other therapies can then be tried before waiting to see if Provenge is working, a good strategy given the low percentage of men it provides complete remission for.

33,000 men are expected to die of prostate cancer in 2011, but not all of those go through the Provenge label window because the cancer can become symptomatic before becoming castrate-resistant. I estimate that 15,000 men in the United States will reach the stage of hormone-refractory, non-symptomatic or minimally symptomatic, metastatic prostate cancer each year. This estimate is less that the over 30,000 deaths from prostate cancer each year, since not all men go through the window before dying. Men who knowingly hit this stage usually have already had surgery or radiation therapy plus hormone therapy, but many are not diagnosed until after they have passed the window. Provenge therapy costs about $90,000. If 10,000 men per year try Provenge revenues would be $900 million per year. (There will be 240,890 new prostate cancer cases in the U.S. in 2011 according to the National Cancer Institute, but most men are cured by surgery or radiation or die of something else before their cancers become metastatic.)

I can only conclude that the $61 million for Provenge in Q3, annualized to $244 million, is just the beginning of the ramp. Add to that European patients. Add to that the rest of the world. Add to that the possible expansion of the label. Provenge works by getting immune cells to attack cells presenting PAP (Prostatic Acid Phosphatase). It is present in symptomatic disease and during the hormone dependent phase. It would not be surprising if Dendreon were able to extend the label following clinical trials targeting off label phases.

Guaranteed? Of course not. It may make sense to prescribe Provenge, but that does not mean doctors will universally make that a practice. Competitive therapies may prevail, and we can expect new therapies to come down the pipeline until something really can cure the great majority of metastatic prostate cancers.

Dendreon won't stand still either. In addition to global expansion and Provenge label expansion, we can expect other immunotherapies to be developed. Each cancer type that has an appropriate immune system target should be addressable by this paradigm.

Will this happen over night? Of course not. Management was way overconfident in their projections in early 2011. Now they seem to have received the message and are digging into the task of educating patients and physicians. Q4 will not see much of a revenue ramp, but that is because patients and doctors are not likely to start a complicated, month long procedure during the holidays.

Just guessing, but I would expect Q1 2012 to show a better revenue ramp, probably to between $75 and $80 million. Management won't give guidance, and it is really up to the doctors who deal with prostate cancer. I think as word gets out about successes from Provenge, the process will become demand driven. How long that might take, I am not willing to guess.

In any case Dendreon is a stock for patient investors, as has been keenly demonstrated several times in the last 5 years.

Disclaimer: I am long Dendreon. I won't trade the stock for at least 3 days after this article is posted. I am likely to be a buyer at today's price.

Wednesday, November 2, 2011

Biogen Idec: Q3 Clues to Value

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. When I wrote "Biogen Idec, Is there more Value?" on July 11, 2011, it closed at $105.53, having backed off its recent 52 week high of $109.63. Quite a run. It is headed up today after closing at $114.23 yesterday, so at least those wise people who are in the stock market these days think the answer is yes, there is still more value to be had from Biogen.

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?

We have had a number of recent data points to inform our views. BG-12, an oral agent for multiple sclerosis (MS), produced Phase III clinical results that should gain marketing approval from the FDA (of course, there is no guarantee of that). Biogen is generally held to sell the most effective MS drugs, but recently Gilenya by Novartis, became the first oral agent on the market.
In addition Daclizumab HYP showed good Phase 2b trial results. Dexpramipexole for Lou Gehrig's (ALS) disease Phase III trial became fully enrolled recently.

Third quarter (Q3) results released on October 28, along with the analyst conference call, demonstrated that current therapies are still ramping revenues. Biogen Idec's two multiple sclerosis (MS) blockbuster drugs are Avonex, with revenues in Q3 of $682 million, up 6% y/y, and Tysabri, with revenues of $277 million, up 26% y/y. Avonex has been around a long time and dominates the market, but its sales had flattened until the PEN was recently introduced, which makes administering it much easier. On June 22 Biogen had announced the EU approved including JCV status as a risk factor for Tysabri, which we presumed would happen in March. The risk of death or severe injury from PML, a result of JCV getting out of control when immune responses are suppressed (immune responses are the cause of MS), had been a big problem for Biogen. Now patients can test to find out if they are infected with JCV or not and with the help of their doctors make appropriate decisions about the risks versus the benefits of Tysabri.

Given all this good news and the big run up in 2011, 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 2012, and what the outlook looks like for 2013.

I will be surprised if Tysabri revenue growth does not accelerate in the second half of 2012 if BG-12 comes online. I am would not sell the stock in the current price band, and believe BIIB is currently a good bet for new money. However, in aside to the usual macroeconomic and stock market risks, all therapies run some risk from new adverse reactions being discovered and from current and future competing products.

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. They spend a lot on R&D, over $300 million (GAAP) in Q3, and have a lot of cash, $2.9 billion, and a lot of non-GAAP net income, $395 million in Q3. They do use cash for stock buy backs and to acquire promissing pipeline candidates.

Disclaimer: I am long Biogen Idec. I have no plans to buy or sell in the next 3 days, but do sell stocks I feel have become overpriced.

See also http://www.biogenidec.com/

Tuesday, November 1, 2011

Akamai Grows with Internet

Akamai Technologies' (AKAM) stock price is $26.43 as I write. Before (Wednesday, October 26, 2011) Akamai's Q3 results announcement and analyst conference call the price ended at $23.77, and its peak the last few days was $28.28 on Friday. Clearly the results and outlooks pleased more traders than they displeased. What can we learn from the results and conference call?

Akamai is best known from the dot.com boom bust era, when it soared in price before it started showing profits. During the last decade its earnings have grown pretty steadily on a year to year basis. Its stock price and P/E ratio has been pretty well-aligned with reality. Today the trailing 12 month P/E is 26. Non-GAAP earnings for Q3 were up 10% y/y, and revenues were up 11%. The P/E is a bit high for this market, but the almost the entire market is undervalued due to fear still triumphing over greed.

Akamai's core business is content delivery, speeding up web page and file delivery from originators to consumers. Increasingly its income and profits are derived from "value-added" businesses, including security for cloud datacenters and DSA (dynamic site acceleration). It is also involved in accelerating the delivery of content to mobile devices.

As the amount of data delivered by the Internet, including cellular networks, grows, so does Akamai, presuming it maintains its large market share in the business. But prices also drop on a per unit basis as volume goes up. Akamai management believes that the delivery of video content is going to drive up volume, revenue and profits. While video data delivery is growing rapidly, it has not yet started to accelerate at rates that would compensate for Akamai's aggressive pricing to its clients.

There is always concern about competition, but mostly competitors have had to compete on price to win customers, making their profit margins thin or non-existent.

Akamai has $1.2 billion in cash and equivalents and generated $116 million in cash flow from operations in the quarter. They invested $47 million in capital expenditures. It is hard to compete with that, as I wrote in Akamai or Limelight? in January of this year.

At this price I am holding my Akamai stock, believing that downside risks are mainly market risks while upside potential is present from both increased video delivery and broader adoption of Akamai's cloud services solutions. Another bright spot is international revenue, which grew 15% y/y. Akamai started in the U.S. and is still expanding its reach to developing economies.

I first bought Akamai for $17.56 per share in September of 2008 when everyone else was panicking. I have both bought and sold shares since then, as P/E ratios have swung rather wildly (the 52 week high was $54.65, 52 weak low was $18.25).

For more detail see my Akamai (AKAM) Q3 2011 conference call summary.

Disclaimer: I am long AKAM, but occasionally trim or expand my position. I don't plan to trade AKAM in the next 3 days.

See also: www.akamai.com