Agenus Scores Victory Over Glioblastoma Multiforme (Brain Cancer)

Just to note that Agenus (AGEN) announced positive results in its Phase II trial for its Prophage vaccine treating glioblastoma multiforme, a form of brain cancer. The results are quite impressive. However, a larger, randomized Phase III trial will be needed to gain FDA approval, and that would take something like 3 years. Agenus is likely to partner with a larger company for the trial and commercialization of Prophage.

See the Agenus Prophage Results press release

I recently covered the broad range of therapies in the Agenus pipeline:

Agenus Platforms Provide Many Shots On Commercialization Goal May 13, 2014 at Seeking Alpha

Agenus stock closed at $3.22 yesterday and as I write has risen to $3.81, up 18%. That gives it a market capitalization of $237 million, which I think is still vastly undervalued given the pipeline.

I own Agenus stock, which I first acquired in October 2013, with my last purchase in April.

Inovio and Dendreon Q3 analyst calls

I own stock in both Inovio (INO) and Dendreon (DNDN). Both reported Q3 2013 results on Tuesday.

You can read my notes on the results and analyst conferences at:

Inovio Q3 2013

Dendreon Q3 2013

Inovio had a good quarter on many fronts, probably justifying the huge leap in its stock price in the past year. It is a development-stage vaccine company, but is in partnership with Roche and apparently has the ability to make vaccines for just about anything, including cancer. Nevertheless, it has not yet had any FDA approvals,  and the risk of failure should be taken into account if you are thinking about investing.

Dendreon continues to struggle. Although Q3 revenue from Provenge was disappointing, they said that October was the best month for enrollments in 2013. So could Q4 come in at $80 million of revenue? No guidance was given, but between the approval in Europe and the

Dendreon's failure to capitalize on the first FDA-approved immunotherapy for cancer, Provenge for prostate cancer, had cast investor doubt on the entire immunotherapy for cancer field. In response to a question from an analyst, Inovio's CEO said if its therapy works and gains approval it would not have the high Cost of Goods Sold (COGS) that has plagued Dendreon. Inovio's therapy is more like its anti-viral vaccines, whereas Dendreon's therapy requires extracting blood from patients, activating T-cells, and then re-infusing the patients. Even at $100,000 per therapy Dendreon is losing money.

I am busy, busy, busy, so I don't know when I'll be able to write up these companies for Seeking Alpha. My last articles on them need updating, but there is still good background material in them:

Inovio's Price Spike and the Future of DNA Vaccines [August 17, 2013]

Dendreon Revenue and Cost Trends [August 13, 2013]

Keep diversified!

Hansen Medical Runs Aground in Q2

Hansen Medical Inc. (HNSN) manufactures catheter based medical robots. Its stock price is in a major slump right now, opening today at $1.48, versus a fifty-two week high of $4.46 on September 20, 2011 and near its 52 week low of $1.42. Is this a buying opportunity, or a stock to be avoided even at this price?

For several years Hansen has marketed its Sensei robot for electrophysiology procedures, which measures electrical activity inside the heart. Meanwhile it has developed its robotic catheter technology for use in vascular (blood vessel) surgery. Last year its Magellan vascular robotic catheter system was approved in Europe. Late in Q2 this year the FDA granted approval for commercial sales in the U.S. Given that Magellan is believed to have an addressable market roughly ten times the size of Sensei, you might think the bulls would be running with the anticipation of future profits.

Financial results for Q2 2011, reported on August 8, are the reason for the slump. I don't think anyone expected HNSN to get to profitability, since there was no time to sell Magellan robots in the U.S. in the quarter. But sales were the worst in company history. Only one Robotic Catheter System was shipped, a Sensei, but two had recognized revenue, including the one that was shipped and one shipped in a prior quarter. Revenue was $3.5 million, down 26% sequentially from $4.7 million and down 34% from $5.3 million in the year-earlier quarter.

Net income was negative $11.5 million, up sequentially from negative $11.8 million, but down from negative $8.8 million year-earlier. EPS (earnings per share) were negative $0.19, up sequentially from negative $0.20, but down from negative $0.16 year-earlier.

Management claimed that talks are underway with hospitals in the U.S. and Europe, with multiple quotes out. While understanding that these are expensive robots that have to go through a lengthy review process before hospitals buy them, you have to ask what happened in the past that the old Sensei system sales dropped to just one in the quarter.

The Sensei systems that are already installed are being used, as indicated by 637 known EP procedures performed with them in the quarter. To try to compensate for the dismal sales results, Hansen brought into the analyst conference call Professor Cheshire of St. Mary's in London, the first hospital to treat patients with the Magellan Robotic System. He spoke on his team's collective experience in peripheral vascular, aortic, and other vascular cases. They discovered a number of useful robotic catheter techniques as they progressed from simple to more complex cases. They can now treat difficult cases. The had prior experience with the De Vinci surgical robot made by Intuitive Surgical. Cheshire believes robotics differentiates St. Mary's from competitors. Studies there showed the advantages of the Magellan system and other minimally invasive techniques. The robot is bringing patients in already.

So you are making a bet buying the stock even at this price. Are the negotiations for sales of Sensei and Magellan going to come through, and are they going to grow long-term? If your crystal ball says yes, you should scoop up all the Hansen Medical stock you can afford.

I don't have a crystal ball and I already own Hansen stock. I believe the technology developed by the company would have a great deal of value for other medical device players. So there is some low point of market capitalization that should trigger that kind of event. Market capitalization today is just $90 million. If I had that kind of money, and could buy all the stock without bidding up the price, I would do it. Then I would assess the sales pipeline. Ff I did not like it I would try to sell the business or the intellectual property to St. Jude (STJ), Intuitive Surgical, or a similar player.

Given that stocks are priced by auction, we may not be at the bottom, but I don't see a scenario where the stock is worth less than it is today if management is willing to break up or sell the company. If there really is a sales pipeline and we start seeing substantial increases in revenue in Q3 and Q4, then Q2 will seem like just a glitch and I'll be using Hansen in the future as an example of how short-sighted investors can be. And kicking myself for not buying more.

Hansen had a cash balance of $29.4 million at the end of Q2. If they don't ramp sales quickly they are either going to have to dilute the stock or borrow more money, neither of which is a pretty scenario.

Hansen Medical is not a stock for conservative investors. It has astonishing potential, long term, but it is also a long way from financing itself through profits. It should only be bought by investors who know how to manage risk.

Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post. I have no position in ISRG or STJ.

Keep diversified!

See also:

Q2 2011 Hansen Medical Analyst Call Summary
Hansen Medical main page
my other Hansen Medical articles and conference summaries

Dendreon Provenge Sales Wobbling

Reporting on Q2, Dendreon managed to pull a skunk out of a hat. I said in my last Dendreon column, Dendreon's Boring Q1 Results, that "Failure to gain approval in Europe, or continue to ramp sales up past the $125 million per quarter level, would tank this stock further."

Q2 revenues from Provenge for metastatic non-symptomatic prostate cancer were $80.0 million, down 2% sequentially from $82.0 million, but up 66% from $48.2 million in the year-earlier quarter.

Investors were not appeased by management's plan to close down it New Jersey manufacturing facility and other cost cutting measures.

Shorts and backers of rival prostate cancer therapies have been trashing Provenge for close to a decade now. But from its introduction until Q1, 2012 revenues grew each quarter sequentially. Note that even the poor Q2 results were up 66% from the year-earlier period. Dendreon supporters (including me) understood that since Provenge is complicated to administer, and expensive, it was not likely to ramp as quickly as an oral or even an IV administered therapy.

$80.0 million, at about $0.1 million a pop, means about 800 patients in the quarter. Management offered the theory that sales were poor because individuals in their sales force had been lured away by rivals (not necessarily prostate cancer therapy rivals). They claimed a correlation between areas where there were holes in the sales force and areas where new patients failed to materialize. While that may be true, it also says something about Provenge not yet being a preferred option for many oncologists, urologists, and patients.

On the positive side, more data analysis of Provenge's effectiveness were released during the quarter. It is possible that, as the word gets out that it extend's the average patient's life more than a few weeks, it will become more attractive. Doctors and patients will be more likely to try it during the "window" that the label allows for (you can't prescribe on-label if the cancer is not metastatic and hormone-castration resistant, but once it progresses to being symptomatic, in this case meaning painful, the patient has again also gone off-label).

It is easy to verify that Provenge is now widely available as a therapy. As a test I was easily able to find several qualified providers within a 100 mile radius of my home [try: Provenge provider locator]. There may still be holes in the geographic coverage, but they are not very extensive. Anecdotal evidence that there are men who have lived much longer than expected following Provenge therapy is also easy to find, at least on the Internet. While Provenge is complex to administer, its side-effects are minimal for a cancer therapy.

How much hope is there for a Dendreon stock price recovery at this point? Today Dendreon closed at $$4.94, corresponding to a market capitalization of $761 million. The recent low, following the release of Q2 results, was $4.17, while the 52 week high was $17.04. In the euphoria after FDA approval the stock hit $54.06 in April, 2010.

When the New Jersey facility is closed and the deadweight in Seattle is ushered out, current management expects a break-even run rate of $100 million per quarter, or $400 million per year.

It is anyone's guess whether Dendreon can make it to break even and beyond. Break even means over 1000 patients per quarter, or up over 200 from Q2, or a 25% increase. You would think that would be doable, but if were doable it should have been done in Q2.

What we have, apparently, is an army of rival sales people in the field not only pushing their therapy, but in the process trying to push patients out of the Provenge therapeutic window. The Provenge data looks compelling to me, but apparently it is not so compelling to at least a portion of the oncologists and urologists out there. It may be too bad we have medical decisions effectively made by profit-driven sales pitches, but that is not going to change anytime soon.

On the upside is the possibility of European approval some time in 2013. Given the expense of Provenge therapy, and the state of European economics, even if approved there might be some negotiation over price and another slow ramp. Still, Europe is a big market, and then there is the rest of the globe.

If Q2 turns out to be an anomaly, if Q3 revenues are north of $85 million, then those who dumped Dendreon in the $4 range will look like fools. I like Dendreon at this price, but not enough to actually buy any more until I see a significant uptrend in revenue.

Manage your risk, keep diversified!

Disclaimer: I am long Dendreon. I won't trade DNDN for 1 week following the publication of this article.

See also my Dendreon Q2 2012 analyst call summary

Onyx Pharmaceuticals new Back of Envelope Valuation

On June 21, 2012, Onyx Pharmaceuticals popped 37% from the prior close of $44.58 to $61.20 per share. On June 26 it closed at $67.12 after hitting a 52 week high of $67.62. The immediate cause was the June 20 vote of the FDA's cancer advisory panel in favor of approving carfilzomib (now Kyprolis) for patients with relapsed and refractory multiple myeloma who have received at least two prior lines of therapy [See Kyprolis Receives Positive Vote from ODAC, June 20, 2012]. This vote does not guarantee an FDA approval, but makes it highly likely.

I have been an Onyx optimist (with the usual caveats) since I first bought stock at $34.87 per share in May of 2008. Is today's price too high? Should I cash in or cut back my position? More importantly, is it too late to get in, or is this a good time for new investors to get in on what might be a very nice train of future profits? Either way it is a good time to make a new back of the envelope estimate of the future value of Onyx Pharmaceuticals. That done, I'll compare it to estimates from sell-side (Wall Street investment bank) analysts.

By way of background, at analyst conferences and in investor presentations, Onyx management (led by CEO Anthony Coles) has emphasized that while they think the Kyprolis data is compelling, it comes from a Phase 2 trial. The FDA rarely approves drugs based on Phase II results, they usually require Phase III trials, which are based on considerably larger numbers of patients. The company already has two Phase III trials of Kyprolis underway. These could provide data sufficient for approval even if the FDA turns the drug down in this round, and in any case would be necessary for approval by the European medical agency.

So why should an advisory board vote (ODAC, the Oncologic Drugs Advisory Committee), even if it was for Kyprolis approval 11-0-1 (the 1 is an abstention), cause such a large jump in the stock price? Most pharma analysts are pretty good at interpreting trial data. Everyone knew, from public presentations, that the Kyprolis data was pretty darned good and so highly likely to get approved when the Phase III data is submitted, if not based on the Phase II data alone.

There are two possible reasons for disapproval: lack of effectiveness, and side effects (adverse reactions, in industry parlance). The concern of stock analysts was mainly about side effects; some serious ones showed up in the Phase II data. That said, adverse reactions have to be taken in context. If a patient has no other treatment options and is likely to die in a few weeks of blood cancer, some side effect risk is much more acceptable than if the same side effect occurred in a drug intended give long-term to control weight or blood pressure, for instance. Kyprolis so far has shown a reasonable safety profile compared to other cancer and chemotherapy drugs.

This is a very risk adverse stock market in general. Just the possibility that Kyprolis data might not get FDA clearance was enough to dog the stock. There is always the possibility that Phase III data would come in worse than the Phase II data. It has happened to other drug candidates, and statistically it should happen every so often just because of the sampling probabilities involved. The ODAC vote did not really change the likelihood that Kyprolis would be on the market sooner or later, but it did give investors a higher degree of confidence in the outcome. Of course earlier market entry also means revenue and profits sooner.

Onyx already has a successful cancer drug, Nexavar, which is marketed by Bayer. The main reason that its profits have been minimal these last few years is that it has taken the Nexavar cash flow and invested in trials for further indications for Nexavar and in other candidates in its pipeline, notably Kyprolis, which it acquired from Proteolix in 2009.

Given that Nexavar revenue already covers basic operation expenses, and that Kyprolis is not a particularly expensive drug to produce in quantity, profit margins on any new revenue generated by Kyprolis should be high.

Multiple myeloma is a fast moving, deadly disease. While current therapies slow it down, they rarely cure it. If approved for third-line therapy Kyprolis could be given to most people who develop the disease. Sadly, the drop outs from the first two lines of therapy would be patients who die.

Between 14,000 and 15,000 new cases of multiple myeloma are diagnosed each year in the United States; worldwide the number is probably between 60,000 and 100,000. A safe, ballpark estimate is that if approved by the FDA, and with no new, improved competitor, Kyprolis could serve about 10,000 U.S. patients per year, and probably about the same number in Europe. Asia has a low incidence of multiple myeloma, and while Africa has a high incidence, the system there is not likely to deliver a significant number of patients in the next few years.

So 10,000 patients U.S. How much per patient? Lenalidomide (Revlimid) with dexamethasone would be a reasonable comparison, as would bortezomib (Velcade). Available cost data varies, but Revlimid appears to run around $8,000 per month, while Velcade is around $6,000 per month, but varies more because it is injected, has more variable time schedules, and is administered by body weight.

Since this is back-of-envelope thinking, I will use $100,000 per year as a guess at Kyprolis pricing. Then, assuming these very sick patients stay on the drug on the average of 1 year, annual Kyprolis revenue to Onyx would be 10,000 times 100,000, which gives us a neat $1 billion per year in revenue.

Keep in mind that it would take some time, several years, to reach a goal of prescribing to 10,000 patients per year. I could have overestimated, or possibly underestimated, the price, duration of therapy, or number of eligible patients.

Businessweek says five (investment bank) analysts estimated 2016 revenues at $523 million. Much of the ramp in the U.S. should be in by 2016. Being conservative, I'll use $500 million rather than my $1 billion guesstimate.

Again, given other costs are covered by Nexavar, I'll figure 80% of that $500 million will be profit. That is a nice round $400 million.

Giving a price to earnings ratio of 20, also conservative, that would mean a market capitalization of $8 billion due to Kyprolis sales in the U.S. alone. Doubling that for Europe would give us $16 billion, but I should note that national healthcare agencies in Europe are sensative about the pricing of therapies.

Today Onyx Pharmaceuticals ended with a market capitalization of near $4.3 billion. Onyx ended Q1 with $620 million in cash.

By my back-of-envelope reasoning, today's stock price is still at the low end of its future range, depending on actual outcomes. If Kyprolis is not approved for some reason, obviously we are due for a fall. If it is priced high and data shows it is a compelling choice over other therapies, then with global marketing the $500 million per year estimate I used will prove to be minimal. Even at $500 million a year in revenue, and ignoring cash, the stock should roughly double in price again by 2016.

In addition, if the trials of Nexavar result in approvals for cancers in addition to liver and kidney, there is a lot of upside to the Onyx equation from that quarter.

On the whole I think Onyx is still underpriced, even given the risk of delayed approval and the other usual risks. I think we will know more after FDA approval (if it is granted) and we see how Kyprolis is priced. After a couple of quarters on the market we should also have a better idea of what profit margins will look like.

One last factor to look for in the future is R&D spend. I am not opposed to Onyx enlarging its pipeline, but R&D spend does reduce earnings. At some point investors will need to see solid earnings, or all the speculation about future profits will fall apart. Keeping R&D spend flat as Kyprolis revenue ramps would be a very nice scenario.

Disclaimer: I am long ONXX and will not trade the stock for 3 days after the publication of this report.

See also: www. onyx.com

My main Onyx Pharmaceuticals analyst conferences page.

Inovio Prospects

Inovio (INO) is a micro-cap biotechnology company that is developing innovative vaccines and delivery systems. It has a market capitalization, today, of $56 million and a stock price of $0.42 (52wk High/Low $0.94/$0.35). Its therapies would need a successful Phase III trial enabling FDA approval before being commercialized, and the most advanced therapy is only in Phase II, which means it may be years before it turns a profit.

So why own Inovio? A lot of money has gone into developing its products. Paid-in capital is $257.8 million. Results from some early, Phase I, trials are encouraging. The thing to do, in this situation, is to look at the technology and make an estimate as to whether or not it can be commercialized. Also consider how much more capital might need to be raised, resulting in dilution of current stock, in order to achieve that crucial first product commercialization.

Inovio's vaccines are aimed at difficult to treat viruses that typically exist in multiple strains. This means a specific traditional vaccine has to be developed to protect people from each strain. That takes times, and a new strain can emerge and infect a global population faster than a traditional vaccine can be developed. Inovio's SynCon vaccines are believed to provide cross-protection against multiple strains.

Inovio has a Hepatitis C vaccine in a Phase II trial, and HIV, Avian Influenza, and Universal Flu vaccines in Phase I. It has 2 pre-clinical viral vaccine candidates. It also has cancer vaccine candidates: cervical dysplasia in Phase II, leukemia in Phase II, prostate in preclinical, and a breast/lung/prostate cancer trial in Phase I.

There is major outside recognition and even funding for Inovio's vaccines. Partners include (it varies by vaccine) Merck, ChronTech, the National Institute of Health, the University of Southampton and the University of Pennsylvania.

What is innovative about Inovio vaccines? They are DNA vaccines. Traditional vaccines consist of weakened or dead viruses or their protein coatings. DNA vaccines need to be inserted into cells (instead of into the bloodstream), but once there can trigger both antibody and T-cell immune responses. To insert the vaccines into cells Inovio uses an electroporation device it developed and has successfully tested. Inovio, in fact, resulted from the merger of a vaccine company and an electroporation developer.

In its latest results, in May, Inovio announced Universal Avian Flu vaccine generated protective antibody responses against six H5N1 avian flu strains in a Phase I trial.

So this is exciting technology. But most therapies drop out after Phase II trials, and many that show good Phase II data fail for some reason in the larger, usually double-blind, Phase III trials. At best it is a low process. Is Inovio equipped to go the whole hog?

On March 31, 2012 Inovio had almost $26 million in cash and short term investments. It generated a GAAP net loss of over $8 million in the quarter, although cash use was less at near $5.5 million. So with the current cash available Inovio could run for about 5 quarters, not enough to get any final Phase III data, much less an FDA approval.This is despite much of the development being paid for by outside grants or third parties.

Financing could come in several forms, but they all amount to dilution. Inovio could partner with a larger firm, possibly Merck. It could sell stock or bonds, but the market has been leery of unproven biotechnology deals these last few years. Or Inovio could simply be bought by a larger pharmaceutical company, which is a likely scenario if its market capitalization stays low even if it gets further proof of concept.

The near future value of Inovio all depends on what Inovio can prove in the next 3 quarters. But on the whole, there is room for dilution, if it is based on more good data. If their DNA vaccine platform does succeed, there is no reason the company would not be worth in the hundreds of millions, or more. Raising money from investors to allow Inovio to prove itself would be good for everyone, including current investors.

Despite the obvious risk of failure common to all new biotechnology, I believe Inovio is more likely than not to be worth far more in a few years than it is now. Still, it is only for investors who can handle a high degree of risk.

Disclaimer: I took an initial, small but long, position in Inovio in May. I won't trade it for the next week, but I expect to accumulate more if future trial results are positive.

Keep diversified! You should also take a good close look at inovio.com and SEC documents before risking your capital.

Marvell Technology Group Hones Edge

Marvell Technology Group (MRVL) was started by a young man, Sehat Sutardja, with a belief that he could make a better chip for controlling disk drives. 16 years later, Marvell dominates the market for hard disk drive controller chips, but now receives about half of its revenue from other market segments.

At the CES this year Marvell showed off some products that again put Marvell on the bleeding edge. I'll come back to those after providing some background for those of you not so familiar with the Marvell story.

For investors the last few year with Marvell have been tough. The stock pays no dividend. After splitting in 2004 and again in 2006, the stock price entered 2007 at well over $20 per share. At the 2008 bottom it hit a low around $4.48. Today it ended sharply up at $15.12 and representing a market capitalization of $8.8 billion.

These stock price gyrations exaggerated Marvell's changes in revenues and net income. Total 2006 (fiscal 2007) revenue was $2.24 billion, with slightly negative net income. Revenues for 2010 (fiscal year 2011, ending January 29) were up to $3.6 billion, with net income hitting $904 million. This fiscal year 2012 revenues are trending towards $3.45 billion, but with just $690 million net income.

A series of problems and even a catastrophe hid Marvell's growing profit potential in 2011. Aside from general global economic turmoil, one major problem was RIM's failure to recapture lost market share with its newer Blackberry smartphone models. This may or may not be temporary. Marvell makes the processors for some Blackberry models. Marvell did not get a slot in the new RIM PlayBook tablet, which sold poorly. It appears that the failures are largely RIM's, and often software related. The Marvell processors, when used, seem to work well.

The catastrophe was flooding in Thailand, which knocked HDD (hard disk drive) factories out of commission, and so the revenue for HDD controller chips will be low for the current quarter. Factories should be mostly back online by February 1 when Marvell's new fiscal year begins.

Meanwhile the main good news has been the rapid ramping of sales of Marvell-processor based smartphones in China. Marvell's chips not only include the processor, but most of the functions needed to run a smartphone (graphics, cellular modem, wi-fi, bluetooth). Thus while brand-happy Chinese are dying (almost literally) to get iPhones, the middle-class masses are buying Android based smartphones that run on a new high-speed, invented-in-China protocol, TD. The ramp in revenue from this in calendar 2012 will be substantial, and the baseline should be noted in the Q4 report due in early March.

Which brings us back to CES (and leaves out Marvell's leading enterprise-grade Wi-Fi and wired internet switch chips). I can only hit highlights, so many products were introduced.

Foremost, Google chose Marvell's ARMADA 1500 HD Media System-on-Chip (SoC) for the next generation of Google TV. While there is no guarantee that Google TV will become a mass market product, it does much to validate the hundreds of millions of dollars Marvell has invested in research and development for ARMADA and related technologies. ARMADA is ARM-based and contains many of the same technologies used with smartphones and tablets. Google has worked closely with NVIDIA, Qualcomm and other ARM-based chip designers; this is a clear sign Marvell is also in the inner circle. The ARMADA chip series has been adopted by OEMs for a wide range of consumer and business appliance applications. See also ARMADA and PXA application processors.

Plug computers are a Marvell invention: inexpensive, small but powerful computers that plug directly into electric sockets and can act as local servers. SMILE plugs are designed to connect a classroom of up to 60 students and complement the One Laptop per Child program and Marvell ARMADA based low cost, low power tablet computers. This is mainly for developing nations, but given funding shortages should be considered by U.S. schools as well.

In storage, much has been said about replacing hard drives with SSDs, and PCs with Flash-based tablets. Change has come slowly. Marvell already leads in SSD controller chips. Now it introduced a chip that attached through PCIe, an existing, faster port than the standard SATA disk port. Everyone agrees this will be popular. Alternately another chip allows for an SSD and hard drive to function together better to lower response times while keeping bulk storage costs low.

Consumer home connectivity and automation were addressed by several products. New models of Avastar wireless chips make it easier for all sorts of devices to connect, including Internet phones and video surveillance. Lighting with LEDs was specifically addressed with new, automation-ready chips. The Smart Energy Platform, a combination of a wireless microcontroller and management software, is aimed at lowering price points for energy-conscious appliances in the home.

Except for Google, OEMs will make their own announcements as branded products become available this year.

I will wait on management's Q4 fiscal 2012 in early March before trying to estimate directionality for the new year. Technology is rapidly evolving. More individual devices mean more information needs to be stored in the cloud, requiring in turn more HDD storage and connectivity. All these trends favor Marvell, but competitors will be gunning for the same revenue and profits.

What do I think would most enhance shareholder value? A dividend. As of last quarter Marvell had 2.4 billion in cash, no debt, and cash flow of $262 million. Marvell has used its cash mainly for stock buy backs, and is likely to continue to do so.

Disclaimer: I am long Marvell. I seldom trade the stock and won't for a week after this article is published.

Keep diversified!

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.

Cantel Medical Keeps Growing

Cantel Medical has been a good stock to hold so far in 2011, closing today at $21.28, up 30% from $16.38 a year ago, with a 52 week high of $28.29 and a 52 week low of $15.57. Not a bad showing in this tough market. 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.

Cantel Medical is a smallish company (market capitalization today ended at $366 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 occasionally by the 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 too 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.

The latest acquisition was of Byrne Medical, announced August 2, 2011. Byrne manufactures products that act as replacements in gastrointestinal endoscopy procedures, eliminating the need for sterilization before reuse. The price of $100 million for a company with trailing annual revenues of $38.6 million seems high on a revenue basis, but trailing annual pre-tax profits were $8.6 million. Cantel expects to increase gross margins in the business, which has a historical growth rate of over 20%. The business is expected to be accretive over fiscal year 2012 ending July 31, 2012.

Since Cantel is already in the endoscopy business, cross-selling is a given. The combined endoscopy businesses will have 80 sales and marketing personnel. Acquiring Byrne is the largest transaction in Cantel's history. Even before the combination Cantel's recent endoscope sterilizer equipment sales had been ramping rapidly. The newer sterilization machines are called reprocessors; they do helpful things like inventory management that the aging machines can't do.

Meanwhile, the water purification business just keeps growing. Also the disposables business should ramp up when (of if) the unemployment rate tweaks down. 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 is up 33% y/y? My guess is that even in the short term the stock could make another run for its 52 week highs, if the overall market firms up. The trailing P/E ratio at the end of today was 18 (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.

For more details on last quarter's results, see my Cantel Medical Q3 fiscal 2011 analyst call summary.

Disclosure: I am long Cantel, and have no plans to buy or sell in the next 2 weeks.

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 http://www.biogenidec.com/

Akamai, Limelight Compared

Akamai Technologies' (AKAM) stock price plunged late last week after fourth quarter (Q4) earnings were released. Limelight Networks (LLNW) stock price jumped today after Q4 2010 earnings were released yesterday. That would seem to indicate that Limelight is the better stock deal.

Both companies compete at helping other companies deliver content over the Internet. In addition to the basic service of accelerating the delivery of web pages, both are involved in cloud computing solutions and ad services. Akamai offers other value-added solutions like security.

Akamai is the much larger company, with Q4 revenues of $284.7 million; Limelight revenue was $55.2 million; those were records for both companies. Disclosure: I own some Akamai, but not Limelight, so for me the question might be, should I buy Limelight in addition to, or in place of Akamai? The stock movements would indicate Limelight, the smaller company, is moving in fast on Akamai's business.

Profits however, are mainly an Akamai story. Its Q4 GAAP net income was $52.5 million; non-GAAP net income was $76.5 million; EBITDA was $129.2 million; cash from operations was $110.4 million. So Akamai profits, by any measure, are near or above Limelight revenues. Limelight had a GAAP net loss of $6.3 million, non-GAAP net income of $1.5 million, and EBITDA of $8.1 million.

Using the measure that makes Limelight look best by comparison, EBITDA, let's look at the stock value. As I write Akamai is selling for $42.46 per share, giving it a market cap of $7.74 billion. Limelight is selling for $8.27 per share, giving it a market cap of $820 million. Taking market cap divided by annualized EBITDA, Akamai is at a ratio of 59.9. Limelight is at a ratio of 101.2.

The results are worse for Limelight if you look at other P/E type ratios (and if you use the conservative GAAP P/E, Limelight looks like a black hole).

I would argue that both Akamai and Limelight are overpriced stocks based on comparing the stock price to various earnings per share measures. Usually when stocks have high P/Es they have explosive growth rates that justify those stats. How does growth look?

Using Q4 2010 to Q4 2011 comparisons, Limelight had revenue growth of 64%; Akamai's growth was 19%, considerably slower. Limelight went from GAAP net loss of $9.7 million to a net loss of $6.3 million, not really that great on such a large revenue boost. Akamai GAAP net income was up 31% y/y.

All in all, the sector (there are a few other players besides Akamai and Limelight), while it may be a favorite of investment funds, has a lot of risk built into it right now. The sector is growing quickly, and is likely to accelerate along with the Internet. On the other hand much of that growth is already priced in. Limelight is growing revenue faster that Akamai, but Akamai has made it clear its interest is in profitable revenue. Limelight apparently is willing to pick up any revenue at all, but that gives it low margins, not what you want to see with a high-priced stock.

I reduced my Akamai holdings as it ran up in 2010. The stock I have now I bought for $17.56 per share in September of 2008 when everyone else was panicking.

From my conservative, value-oriented investing perspective, there are a lot better technology stock plays available now than either Akamai or Limelight. Because I already hold Akamai, and think it will justify its current price pretty well during the course of 2011, I am holding on to what I have. But I would not have a strong argument with anyone saying sell these stocks right now and buy stocks with good growth prospects and lower PEs.

Note that both companies are good companies with great management and technologies. My objection is not to the companies, but to the stock prices relative to proven profits.

See also: http://www.sgi.com ; http://www.limelightnetworks.com/

Springtime Economy Cold Spells

Divorced from nature, human minds often make simplistic assumptions about the future. The most common one is that today's trend is tomorrow's trend. That is the kind of thinking that creates financial bubbles.

Think about the season of spring. I know that can be difficult as we enter winter in the northern hemisphere, but it is just a metaphor anyway. So think, perhaps, of last spring. It does not come on all at once, despite being driven by the steady progression of the sun to longer days. There are cycles of cold and warmth.

We may speak of winter returning, but we know as the weeks pass the snow and ice will melt and we will get more frequent warm spells. We even change our definition of warmth. In late winter a warm day may include a night time freeze. In late spring a warm day may miss freezing by 20 degrees.

Development of spring into summer is uneven across geographies. Once state may be having a late winter storm while another has a summer-like day.

So too it is with macroeconomics. We have been through a fairly severe global recession, but it is already summer in China and India. Within the American economy one sector may advance while another remains flat or even declines a bit. In particular in 2010 we saw reduced government spending, but despite that the economy did not collapse. The economy warmed up a fair amount in 2010 despite dire predictions of catastrophe in Europe and a double dip in the U.S. And despite a still-weak housing construction sector.

There are all sorts of signs that the economy is in recovery. That may not be any consolation to those frozen in an unemployed or even homeless status, but it important for investors to see the overall picture accurately. A lot of people panicked and lost a lot of their savings in 2008 when they sold stocks at the bottom of the market. If they had held on, they would be in far better shape now.

Another economic winter will come, to be sure, but we have not even hit late spring yet, much less summer. The way to prepare for winter is to lay aside your winter supplies during the summer, rather than acting as if summer will never end.

2011 should be a good year for the American economy. That does not mean it will be a good year for every single person, or for every business, or every business sector. But hopefully we have, collectively, learned something about the wise use of credit and the need to produce real goods and services in a global economy. Bidding up the prices of things that already exist, be they Beanie Babies or houses, is not a real economic advance.

Stocks can be bid up too high too, but that was not the problem during the latest bubble. Stock prices should reflect the earnings potential of the companies involved. The more profitable companies are, the higher their stock prices should be. The main danger is getting talked into investing in companies that are not profitable, or are obviously going to become unprofitable as the economy changes.

Spring is in the air. Wise investors can hear the birds singing and the wheat and corn sprouting in the fields. If you don't sow, you can't harvest. People who are 100% in bonds should be seriously thinking of rebalancing their portfolios to include stocks again. The value of low interest bonds tends to melt away during the hot days of summer. Better to own CDs at a credit union than bonds once interest rates start rising. And beware the current line of bull about investing in foreign stock funds. Many nations have even less regulation and transparency that the United States. A good rule for investing is don't do it if you don't know what you are doing. There is plenty of risk involved even when you know what you are doing.

See also: Virtuous Economic Cycle Components [September 15, 2010]

Buying Stocks Low

According to people who aggregate such statistics, in 2010 investors small and large have been, on the whole, moving money out of stocks and into bonds and gold.

They are selling low and buying high. That is what I expect of them. If enough people do that, it allows some of us to buy low and sell high. Which is why I bother with stocks: if you can't generate a good return on an investment, you might as well let a bank or credit union give you almost nothing for your savings, while lending you money out at exorbitant interest rates.

There are really big, flashing neon signs saying that many if not most stocks have bargain basement prices right now. Take the semiconductor sector. Eliminate the loser companies. Look at, for example Microchip (MCHP) and Marvell (MRVL) which I own, or Intel (INTC), Analog Devices (ADI), Maxim (MXIM), etc. which I don't own. Almost all, at Friday's closing prices, have forward price to earnings ratios in the vicinity of 10. That means buying a share of stock is getting you 10% earnings per year. Even if the economy stays relatively flat. Many of these companies are growing profits so quickly you could get effectively 12 to 15% by 2012 if you invested Friday.

Need I say how that compares to investing in CD's, or bonds, or the housing market? Or gold, which earns nothing, and is in a bubble that will burst soon enough?

It is true that at any given time stocks are subject to auction marketing prices. What that means is that the price you get if you buy or sell may not recommend fundamental value. You may get a lot more or a lot less than fundamental value. There is no guarantee what an auction market will do any given day, month, year, or decade.

Which is why smart, long-term stock buyers pick stocks individually and try to do most of their buying when the stock market as a whole is low. When the stock market is high bond markets are (usually) low, meaning bonds carry high interest returns. So the classic cyclical smart thing to to is to sell your bonds (a portion of them, anyway) during recessions (that is selling high). Use the bond returns to buy stocks (buying low). When you get into an obvious bull market, you sell some of your stocks (selling high) and buy bonds again (with high interest rates, which means low cost).

But as simple as this is, and as easy as it is to do with portfolio balancing, most people can't do it. Institutional investors can't, individuals can't, rich can't, not so rich can't. We are human. We get excited by a rising stock market. We buy when we should be selling. We get frightened by a fallen market, and get sell when we should be buying. Brokers don't care, they take their commissions whether you sell or buy.

Keep in mind, for all of this, that individual companies vary greatly against the background of the overall stock market. A company that does well (growing revenues and profits) during a recession may not show off as an investment until the next bull market. But the real value is in the profits, not in the stock price.

Do your own research, including checking what other investors are saying. It is easy and free these days to look at the financial histories of companies, read SEC filings, find out what other investors thing, and even tune into analyst calls.

I like a low stock price when I am buying, and a high price when I am selling, same as anyone. But by focusing on value and keeping fundamental, well-known rules in mind, I keep out of trouble and get way better returns on stocks than I do on my CDs (which I keep, despite the low interest rates, to smooth out my personal finances, since my income varies greatly month to month, and they help with occasional large expenses).

Keep diversified!

Is the Dendreon Sky Falling?

When I checked a few moments ago the auction price of Dendreon (DNDN) stock had fallen to $34.70 per share. That gives Dendreon a market capitalization of just over $4.7 billion. It is a big disappointment for all those investors who bought Dendreon during the last minute run up to the announcement that the FDA had approved Provenge for prostate cancer, or even as the stock soared briefly above $57 per share in late April. Dendreon first moved above $34 per share in March 2010.

I listened to the Dendreon presentation at the Goldman Sachs Global Healthcare conference of June 16. You can access audio files of Dendreon presentations at the Dendreon Investor Page.

The number of American patients who fit the label today for castrate-resistant, metastatic, non-symptomatic prostate cancer was estimated at 103,000, with about 30,000 new patients per year. Obviously the global number would be much larger. Dendreon is already treating patients, but this year will be able to treat only 2000. In 2011 they could treat 8,000, if new capability comes along on schedule. Pricing was not discussed at the conference, but rumors are the charge per patient for the 3 treatment course is around $90,000. Given that Dendreon expects $500 million in revenue (that might be an end-of year run rate) the first year, and $1 billion per year in sales from their New Jersey facility when built out, and $1.25 billion in annual revenue by 2012, I think they need a higher price are a larger number of patients served to hit those numbers. Apparently insurers and Medicare are not balking at the price, but I would bet the health agency in Great Britain will. In any case approvals outside the U.S. will probably take at least a couple of years.

Dendreon expects to be cash flow positive in 2011. Which means GAAP, and possibly non-GAAP, net losses due to depreciation and amortization on the vast sum invested to get us to the current day. My guess is the first GAAP profits may be in 2012.

So if you think (and I do) that Dendreon is going to be able to extend its technology to earlier forms of prostate cancer and to other forms of cancer, it makes sense to build gradual a position in 2010 and 2011 if shares are in the $30 to $40 range.

This scenario has happened to other companies, notably Onyx Pharmaceuticals (ONXX). Bullish enthusiasm is tempered when profits don't flow in immediately. What could be profits from Provenge may get spent, in part or maybe even in whole, trying to generate clinical trial wins in other forms of cancers. This discourages short term investors, and only pays off for long term investors if indeed other indications get FDA approval.

The good news (for investors, not for patients or taxpayers) is that at $100,000 a pop Provenge should have a very high gross margin. The expense is mainly in the research, not so much in the actual operation of immunizing the patients.

We will know a lot more after the Q4 2010 results are reported. We'll see in numbers how much revenue is generated, cost of goods sold, and operating expenses. The reality of building further capacity will also be easier to estimate.

Right now most investors are risk-averse, and most willing to take on risk are doing so in very short time frames. So if you believe we are in a typical, protracted macroeconomic upcycle (I do), you can buy 2012 profits now in a wide variety of growing companies for very attractive prices. Just because there was a market run up in 2009 after the panic does not mean that all stocks are now overpriced. Each stock requires individual analysis.

You can also learn a lot from history. See my Dendreon page for what this situation looked like in the past. For the latest financial numbers, check out the Dendreon Q1 2010 press release.

Dendreon Provenge Approval After Math

I am, of course, happy that the FDA approved Provenge for the treatment of metastatic, castrate-resistent prostate cancer [See Dendreon Provenge approval Press release]. If Provenge extends some lives, or saves some lives, that is all to the good. Better, Dendreon now has a lot of money to pursue further immunotherapy research. We don't know if the human immune system can be precisely directed to destroy cancer cells, but it is certainly worth further study.

But what my readers want to know is, what is Dendreon stock worth now? If you bought it at $5 a share, should you hold it forever, or sell all or some of it if it goes over $57 again (as it did before the most recent Greece-inspired market meltdown)?

It all depends on your investment time frame and risk management style. No one really know how much profit, exactly, Provenge will generate over the years. No one knows how much money Dendreon will eventually sink into other immunotherapy candidates, or whether any of them will show results even as good as Provenge's. No one knows how successful the competition will be. Anyone can look at the facts and make estimates. Try it yourself.

I've met a number of investors that bought Dendreon for over $40 a share, basically because their brokers or financial advisors told them they should. They did fine. Certainly some people in this class booked a nice profit already, others became long term investors and fretted when the stock fell back down to $42.

I've sold some Dendreon stock, but then I bought the shares I sold in the $5 a share range, and I now have as much Dendreon as I am allowed under my portfolio rules. In ten years I may look back and wish I had sunk every penny I had in Dendreon; then again I may wish I had sold the lot at $55.

Look at a five-year chart of Dendreon prices and you'll see that at any time up until 2009, with the exception of a spike in the spring of 2007, you could have picked up Dendreon stock mostly in the range of abut $4 to $6 per share. If you think your stock broker, financial advisor, or analyst is smart for getting you into Dendreon in 2010, you might want to ask, why not back when?

The clinical data is not really any different, though there is more of it. Provenge is not a cure, on average it only extends the lives of patients a few months. But there is not much you can do for prostate cancer in the category Provenge was being tried on, and the results were statistically significant in the first Phase III trial. The FDA could have saved us all a lot of trouble by approving Provenge back then.

For over a year Dendreon's management had been saying the data is solid and the FDA had in effect agreed to approve the data if they couldn't poke a hole in it. Approval should not have been as large of a stock event as it was. You can argue it either way: approval was priced in, so the stock has gone too high now. Or approval was not priced in, so now the price is right, or close to right.

That is not the way to think about it. The past is past. Start with a basic analysis today. How many patients will get Provenge? That depends on how much capability there is to make Provenge, which is not really a drug, but a trick played with blood. Eventually capability can be built to meet demand. Likely there will be a lot of off-label use by doctors who don't think it is smart to wait until the prostate cancer has become metastatic or castrate-resistant. So pick a number, then multiply it by the price of therapy. Subtract cost of goods sold, then Dendreon's operating expenses, which have historically been gold-plated. That leaves your estimate of annual earnings. Pick a P/E multiplier you like and get your target stock price and market capitalization.

My advice is, sell if the stock price gets above 25% of your estimate. Buy more if it goes more than 25% below your estimate. Re-figure your estimate at least every quarter, and certainly every time you are considering buying or selling. If your broker or financial analyst are capable of that, get them to do it for you. Don't let them just rehash Wall Street analysis that is designed to churn stocks and generate commissions.

And if you make some money, and want to make more, look for other biotechnology companies still looking for their first FDA approvals. Be careful; always consider price.

You can also learn a lot from history. See my Dendreon page for what this situation looked like in the past, when every major Wall Street biotechnology analyst was saying Provenge would never get approved.

Dendreon has issued a lot of shares (diluting mine!) based on investor optimism about Provenge. In return they had about $528 million in cash at the end of Q1. For the latest financials, check out the Dendreon Q1 2010 press release.

William P. Meyers

I Sell Red Hat (RHT)

Today I sold all of my Red Hat (RHT) stock at $24.51 per share. I bought about half at $17.91 per share on January 21, 2008 and half at $10.86 on November 14, 2008.

This is in no way a reflection of lost optimism about Red Hat the company. I think they will continue to gain share in the server operating system and middleware markets. They have a great product (Linux Enterprise Edition) and serve their customers well.

Nevertheless, I do not like to bet on market psychology or price momentum. By the numbers Red Hat's stock price has gotten ahead of itself, especially compared to other technology stocks that have not run up as much. Last quarter revenues (not profits) were $175 million. So at a flat run rate 2009 revenues will be $700 million. Yet the market capitalization for the stock is $4.6 billion. There is a lot of optimism built into that market cap number. My guess is that in 2 years Red Hat will easily justify that number, but today I would rather have the cash.

I am going to continue to do analyst conference summaries for Red Hat. If the price dips, or if revenues and profits accelerate faster than I am assuming, I could buy back in. I watched Red Hat a long time before buying in; it is one of my favorite stock stories.

The next Red Hat results and analyst conference is scheduled for September 23.

See also Red Hat's site.

And keep diversified!

Red Hat (RHT) Runs Through Open Field

Red Hat (RHT) is my favorite company to watch because of all the stocks I know its history most clearly demonstrates the need to differentiate between the stock value and the finances of the underlying company. I became interested in Red Hat in the last years of the last century. I am now invested in the company, so you might want to take that into account in case I fall into the cheerleading for my own stocks trap.

Investors often talk of overvalued and undervalued company stocks. Typically one looks at the market capitalization of the company: the value of the stock shares times the number of the shares. This gives a total value for the company. Then one looks at the "true" criteria, which typically is some measure of future profits the company can generate, times some multiplier of how much capital it would typically take to generate those profits. If the market capitalization is higher than the "true" value, the company is overvalued.

Red Hat was one of many companies billed by Wall Street as a "next Microsoft" during the technology boom of the 1990's. Given that Red Hat was already establishing leadership in commercializing the Linux operating system, this was not an altogether dismissible line of reasoning. After all, the Microsoft empire was built around its original operating system, MS-DOS, which later evolved into Windows. The problem was that the stock was bid up to prices implying that being the next Microsoft was a done deal.

Several easily discernable obstacles stood in the way of Red Hat becoming the new Lord of the Computerverse. First, it really did not have very many paying clients in the year 2000. Second, Linux is Open Source, and can be had for free, which really cuts into profit margins compared to a proprietary system like Windows. Third, there was a lot of competition within the Linux space for the few commercial dollars available to it.

Red Hat stock took a big plunge in 2002. In retrospect, that was the time to buy. The stock was almost free. Investors did not want it. Partly they finally understood the three points I made above, but mostly investors don't like to buy stocks that are falling in price.

This week, on March 25th, Red Hat reported on its fourth quarter of fiscal 2009 that ended on February 28. Red Hat is still not the next Microsoft. But it is a highly profitable company with a secure niche in the computing space. Red Hat Enterprise Linux (RHEL) is the gold standard for Linux. Other closely related open source spaces are now attached to it, notably virtualization software and JBoss middleware. In addition, Red Hat has a huge cash reserve. Its profits on a cash basis are typically far above its profits on a GAAP basis.

It is a good company, and its earnings per share are a lot higher than what you can get on T-Bills right now. So it is not too late to buy in. But it is not the next Microsoft. Open Source people just don't bring the predatory hunger to the table that Bill Gates and crew had in their first couple of decades. Red Hat will continue to grow because it enhances the business goals of its customers. It will run profitably, but it won't be able to create the kind of monopoly profits Microsoft has been able to create.

I expect that as soon as IT budgets loosen up again, a lot of enterprises are going to make the shift to Red Hat products. But how big of an income and profit bump that will provide is not easy to predict.

So keep diversified.

And see my Red Hat Q4 fiscal 2009 analyst conference summary for details on the latest quarter.

Akamai Accelerates Delivery

Akamai (AKAK) investors were presently surprised by 4th quarter results released Wednesday. Starting after hours and continuing into Thursday new money poured into the stock, thrusting the price up. I own Akamai stock, but I looked at it for years before purchasing it. If you want some deep background on Akamai, go to my Akamai analyst conferences summaries page, which includes links to my articles on what Akamai does, how they do it, and how the profits are generated.

Fourth quarter 2008 results were not even spectacular by Akamai standards. Revenue was $212.6 million, up 8% sequentially from $197.3 million and up 16% from $183.2 million year-earlier. In past years revenues have grown faster. But this is in sharp contrast to 95% of the technology companies reports on the December quarter. During 2008 everyone said their company gave such great ROI (return on investment) that they would continue to see growth through a recession. Most did until Q2. Many did in Q3. But in Q4 almost every company saw a significant downturn. Even mighty Cisco reported falling revenues yesterday.

Akamai profits were good by any measure. Using the most conservative measure, GAAP net income was $40.5 million. But cash from operations was $92 million and the ending balance for cash and equivalents was $772 million.

Akamai has been periodically raided on rumors that competitors were going to steal its thunder. I don't want to underestimate the role of competition in technology. Akamai has a profitable model, and big companies with lagging sales will eye those profits and try to capture them, and startups will eye them. But so far Akamai has had a significant technological advantage over its competitors. Its systems work well. No competitor has introduced as capable of a system, so they have to compete on pricing. When they win an occasional deal, they often lose money or just break even. Meanwhile Akamai generates cash and uses that cash to see that its technology is the best. They have also added what Cisco likes to call "adjacent" technologies. Akamai calls them value-added technologies. When Akamai has a contract for its basic service - speeding up the delivery of Internet content - it is in a good position to offer higher margin, more specialized services as well.

Guidance is for flat to down revenues in the first quarter of 2009, but that is a typical seasonal effect from the post-holiday drop in e-commerce. The Web is still in explosive growth mode, with video downloads becoming prevalent, soaking up bandwidth. Akamai's fortunes are carried along by that explosive growth.

I think Cicso CEO John Chambers is right in believing that Internet traffic is not going to slow down; just the opposite. So ISPs and carriers are going to have no choice but to lay more wire and install higher capacity routers. They delayed doing that in the December quarter, they might delay capital expenditures in the March 2009 quarter, but they are just getting behind the curve and will have to make up for it at some point.

In the meantime Akamai is not dependent on major capital expenditures by its customers. There are a lot of customers, and Akamai services are a relatively small recurring part of their Web delivery budgets.

There have been times when, by my analysis, Akamai stock has been overpriced, but now is not one of those times, even with today's pop.

Don't forget the risk even for good companies, and

Keep diversified.

See also: www.akamai.com

2009 Investment Plan

Today earnings seasons starts for me, with reports and analyst conferences scheduled for AMD and Intuitive Surgical. This column will be mainly comments on company reports and forecasts for the next couple of months. Before that starts I want to get this column in on my investment strategy.

Like most investors I took a bath in 2008, but for me it was not too bad. I wasted my youth writing vampire novels that did not sell, so I only recently grew up and became an investor. My main asset is my house. It still has a mortgage, but I have been diligently paying it off for years now, and that has been my best investment. I have a fair amount of cash in CDs, which is a necessity because I work freelance and my wife's PeacefulJewelry business has irregular cash flow too.

But I own some stocks and in 2008 I bought more. Almost all the stocks I own have lost value (if I had to sell them at today's auction rate) since I bought them, the notable exception being biotechnology stocks like Gilead and Biogen. But I believe that the current auction market on stocks has vastly underpriced good companies.

So in 2009 I intend, when I have cash to spare, to continue to buy stocks at bargain prices as long as they last. It is tempting to buy real estate too, at these prices and interest rates, but that is a bigger commitment.

I see no reason to buy bonds at these high prices. I think the risk that the U.S. Government won't be able to pay its obligations has become roughly equivalent to the risk of a serious depression. It is a small risk, so I also don't see bond prices going any higher. So with bonds you won't make money from dividends, and you won't make money on the pricing either.

The next time stocks are high and bonds are low (because interest rates are high) I plan to make a foray into bonds. After that I will maintain a balanced portfolio of stocks and bonds.

If you follow this blog, you know what I like in a stock: good technology, good management, and a commitment to bringing in the cash. I might acquire more of the stocks I have, I'll probably add a few new ones in 2009. I won't add too many because doing good research for a large portfolio is time-consuming.

What is right for me may not be right for you. Every stock is different, just like every real-estate indvestment is different. Often general advice turns out to be bad advice for a specific investment.

Spend less than you make (personal financial tipping point 1), and you really can't go wrong.

And keep diversified!

Strange Securities Auctions

This column already has several essays about economic, and investment, issues created when prices are set by auctions. The recent financial meltdown has given many real world examples of this, but they are difficult to explain to people who are not familiar with stock and bond pricing, much less derivative pricing. So I have made up an imaginary example that encapsulates, in a dramatic way, a particular type of auction malfunction (if by malfunction we mean pricing that veers from free market ideals).

I'll walk you through the example, then relate that imaginary experience to selected current economic and financial events caused by the lack of liquidity in the markets.

You hear about an auction and it sounds like you might want some of items in it, if the prices are right. The auctioneers will take only cash, so you put together what you have, say $55. You get stuck in traffic, so you arrive late. Outside people are already boasting of what great bargains they won. You hurry in.

The auctioneer, "the next item is a bundle of $1 bills, 100 of them." You think it is a strange item to auction: it is clearly worth $100 [assume these are not bills of value to collectors, or counterfeits, just ordinary $1 bills]. No one makes an offer at first, because everyone says assumes that it will be bid up to just short of $100, so bidding is a waste of time. But the tension builds and you decide why not, and open at $10. At that point the bidding goes quickly up to $29, then stalls. You offer $30. No one else bids against you. You win the $100. You pay $30 for the $100 and have $70 at the end. Meanwhile the auction has ended.

How could that happen (aside from the fact no one would auction off actual money like that)? Everyone else had run out of money. The next richest bidder in the room only had $29. It is your lucky day.

Translating this imaginary excursion closer to reality, now suppose that the item you bid $30 on and won was a mortgage bond worth $100. It really is worth $100, because the mortgage backing the bond is sound and will pay $100 over time. You win the auction not because the bond is worth $30, but because there is not enough cash to efficiently price the auction. Free market ideals have broken down.

Lately, almost no one has wanted to participate in auctions of at least two types of securities, mortgage-related bonds derivative securities and auction-rate securities.

There are two basic reasons there has been little bidding for weeks now: fear and lack of cash to bid with. The kind of institutions that can play this sort of game were all suddenly short of cash, and wanting to auction off what they could for cash, rather than using their precious cash to buy more securities. But no one else knows how to price the securities. For instance, it is difficult to find out which particular houses correspond to which particular mortgage bonds; linking the houses to derivatives is even more complex. So it is not exactly like buying a bag of $1 bills, if you just start buying a bunch of bags without looking in them. It is like buying an unopened bag of $1 bills and moths. It might have $100 of usable bills in it, or it might be all moths, or anywhere in between.

This is a problem for the government bail-out program; is the government going to look in each bag before it uses taxpayer money to buy it, or is it going to guess about the value of huge groups of bags using sampling techniques.

In free market theory prices are supposed to emerge in an efficient manner and result in efficient allocations of resources. Putting aside that there may be (in fact, are) problems with free market economics even when pricing of commodities is efficient, in the real world the conditions necessary for efficient pricing often don't exist.

For an auction to price items efficiently, there need to be a reasonable number of bidders and a reasonable number of items to bid on. If anyone has the power to set prices, prices will be set by that person, not by the market.

Even when there are reasonable numbers of buyers and sellers, because of human nature, prices can get out of whack, as in both bubbles and Depressions. The housing market is an auction market. Two years ago there were relatively few houses compared to bidders, resulting in unrealistic, high pricing. Now the same houses are in abundance compared to bidders, so in many cases sales are either not made (because in effect the people auctioning off their houses have set a minimum bid that no one will meet) or made at well below the real value of the house. The actual cost of construction being a good surrogate for real value for new homes, and that cost adjusted for inflation and physical deterioration being a good surrogate for used homes.

The Federal Reserve has been tasked with making sure their are neither too many nor too few dollars in circulation. When there are too many dollars, they are used freely to create inflation and asset bubbles. When there are too few dollars, people are forced to sell assets at less than their real values. Free market theories pretend that the only real value is the selling price, and it a very real sense that is true. But when selling prices depend on the whim of the Federal Reserve, you might want to ask yourself: what really is true, and what is bull?