Dear New World Investor:
This week’s scary drop in the S&P 500 back to the 910 support level was like throwing meat to the “see, sucker’s rally, we told you so” and “double-dip” lions. Of course, that’s exactly why the market revisits these support levels – to build up energy for the next move up. A meaningful drop below 910 would, indeed, mean something has changed, and also set up 840 as the next support level to be tested. But it is far more likely that we’ll see a slingshot rally from 910 that gets back over 930 with enough energy to finally break the 980 barrier. We’ll see how this plays out and, as always, let the market tell us what to do.
My call last week that the recession is over is getting some echoes. The Charles Schwab economist was on Yahoo Finance’s Tech Trader and said the same thing. Of course, she was roundly reviled in the comments. The more mainstream, cautious types are now saying things like: “The economy is heading in the right direction. And if we stay on track it could lead to the end of the U.S. recession by year-end 2009.” So that means they can start nibbling at stocks now, in June, six months ahead of the end of the recession.
But wait! If I am right that the National Bureau of Economic Research will label June 2009 as the end of the recession, they they should have been buying hand over fist in March, when the stock market bottomed. They’ve missed the first 40% of the new bull market, and by nibbling back in they will underperform for the next 20% or so. That is the dilemma of serious investing – if you wait for the surveys and the numbers to get better, you miss the first big leg up in the market every time.
In last week’s issue I talked about people like the Yahoo Finance commenters who are focused on the lagging indicators, and will do even worse than the survey types. Next week I expect to write about the leading indicators, and one indicator that leads even the leading indicators (no, not the stock market – this one leads even the stock market, which comes in mighty handy). The Conference Board calculates the leading, coincident and lagging indicators, not the Bureau of Labor Statistics as I said last week. When they released the April numbers they pointed out that the leading indicator rose sharply in April, the first increase in seven months, and the strengths among its components exceeded the weaknesses for the first time in 1 ½ years.
This morning they released the May numbers, and the leading indicators rose for the second straight month, beat expectations and posted their biggest gain since March 2004 – 1.2%. The April indicator was revised up a bit to 1.1% from 1.0%. And – get this – the six month period through May rose 1.2%, posting its first gain since April 2007. The cautious Conference Board economist said: “The recession is losing steam. If these trends continue, expect a slow recovery beginning before the end of the year.”
Yeah, like now, Ken. The coincident indicators slipped only 0.2% in May and should be flat in June, confirming that the bottom of the recession is here.
Spreadsheets – Their Use and Misuse
There are many tools one can use to help make an investment decision – macroeconomic models, industry models, technical analysis and the company model, or spreadsheet. Each of these is only as good as the data that goes into them, and the accuracy of the underlying model. When I was at American Express Investment Management we were one of the early supporters of the Wharton macroeconomic model, and I can still remember some of the spectacular misses by the predictions of that early effort. I got my start in the investment business as the IT support guy for a research department, writing industry models in conjunction with the analysts. When I switched to become an analyst, the spreadsheet model was my security blanket.
But the interesting thing about all these models is that their real value lies not in the bottom line number, but in flushing out the questions that have to be asked and the relationships that need to be made explicit. Early on I shared an office with a new hire, Peter Cole, who had come from the mining industry. He was fascinated by my computer’s ability to create dozens of small variations of the models he painstakingly built by hand with a slide rule (this was 1969, remember). So together we built a model of a new copper mine that was going to make a huge difference to some company or another, probably Newmont. The best part of the process for me was listening to Peter on the telephone with the Chief Financial Officer, reading him results from the model and learning what we’d left out or where our estimates differed widely from the company’s. In one memorable call, the CFO passed Peter through to the mine superintendent on site to get a question answered – we had identified a critical assumption or variable that was so deep in model even the CFO hadn’t realized it. Very satisfying.
This turned out to be spreadsheet week for me, when three different incidents happened that led me to write this section. One involved Dendreon (DNDN), one Arena Pharmaceuticals (ARNA) and one Electro-Optical Sciences (MELA).
The Dendreon Spreadsheet: “That can’t be right, because it doesn’t support my position”
As most of you know, I posted an article on SeekingAlpha.com titled Is Dendreon A $360 stock? Or Is That Too Low? You can find the same article here on our website. In it, I put my whole spreadsheet model, which is something I almost never do because it contains proprietary information. One of the comments on the article from “buyforeclosures” said: “Mr Murphy you must be the guy who made the post about 9000 buck gold! WAY too early to be making post like this … just because your long and have option calls…. very irresponsible on your part.”
So I replied: “Which part of the earnings and valuation model do you disagree with?”
And buyforeclosures answered: “The $360 buck part! This market is a lot different than the tech bubble and Pharm bubble days…….. I can see it going from 3 bucks to 30 bucks but not 30 to 360.”
In other words: “Your model made the bottom line come out something different from what I think, so your model must be wrong.”
Now, maybe my model is wrong. Maybe there is something off in my research and estimates about how many men are eligible for Provenge, or how many will choose Provenge over Taxotere or nothing, or how Dendreon will price the drug, or how quickly oncologists will adopt it. But if you just don’t like the bottom line, you need to go back and find out where the model is off. You can’t say all the inputs are right, the math is right, but I don’t agree with the output. Well, I guess you can say that if you are buyforeclosures.
And just as a postscript, I will use this model to follow the roll-out of Provenge. I can adjust it for the final price. If sales are disappointing, I can call the company and go through the model again to see exactly why that happened, and then adjust it. Buyforeclosures will sell at $30 because, well, he believes a stock can go from $3 to $30, but not $30 to $360, and that’s that.
Arena Pharmaceuticals: “Uh, how do these sheetspread things work?”
Arena was slammed in mid-May after Ruthanne Williams Roussel of the Obesity Investor blog published a post headlined “Arena Needs Cash.” (see http://obesityinvestor.typepad.com/obesity_investor_by_rutha/2009/05/arena-needs-cash.html) In her post, she said: “At first glance, it looks to me like they have something like $118 million readily available to them, not counting Level 3 assets (which don’t amount to much anyway) and assuming some $34 more million from Azimuth. Unfortunately, even with the 25% announced headcount reduction (mostly in research, which is where most of ARNA’s over 300 employees are), I still think they will be burning around $200 million in 2009.”
Derek Lowe picked up her post for his Seeking Alpha article snappily titled: “Arena Pharma Could Be on the Verge of Collapse.” In it, he cited Ms. Roussel’s article as his source: “Well, according to Ruthanne Roussel at Obesity Investor, the company looks like it could be running out of cash. So far, at any rate, no partner is appearing. Obesity has always been a tough area to work in, and this economic environment isn’t making it any easier for the smaller companies to survive. Arena’s done some interesting work over the years, and I’d hate to see them collapse. But it sure looks like a possible outcome at this point.”
That set off a firestorm of criticism, mostly focused on another statement in the same article: “They didn’t quite make the minimum threshold for efficacy, and the FDA isn’t in a mood to take a flyer on things that don’t quite work.” This was not only false, it was the second time he’d made that statement, and several of us corrected him the first time. So I disputed his article to the Seeking Alpha editors, and he recanted on the “didn’t quite make the minimum” point.
But it still bugged me that Ms. Roussel somehow thought Arena was about to run out of money. In her original May 15 article she said: “I’ll post a more complete set of numbers on this over the weekend.” I looked for them the next Monday, and every couple of days thereafter until the end of May, but they never appeared. This week I checked back and she had published another post on June 2 titled “Here are my Arena numbers: Please beat them up.” Always eager to please, I downloaded her spreadsheet from http://obesityinvestor.typepad.com/files/arena-projections-6-09.xls and stared with dismay at the single worst published error I have ever seen a purported analyst make. Here is her spreadsheet:
Look at her spreadsheet for the 2nd, 3rd and 4th quarters of this year. Internal R&D and External R&D do not add up to Research & Development – not even close. Look at the 3rd quarter, where she says Internal R&D of $9.243 million plus External R&D of $3.539 million equals $47.670 million! She has the same errors throughout the whole spreadsheet.
Then look at her revenue forecast for lorcaserin in 2011 and 2012. She entered $250,000 and $500,000, with 30% of that going to ARNA. Maybe she meant that, but I suspect she meant to enter numbers 1000 times higher: $250 million and $500 million.
There are numerous other strange things in her spreadsheet, like the big bump in Internal R&D in this year’s December quarter, which could only happen if the company hires a bunch of new people six months after they laid off a bunch of people. Why would they do that if they were tight on money?
I posted the following comment on her blog post with the spreadsheet link on Monday night:
“Ruthanne -
“These numbers are a disaster. I don’t know how many hours of work you caused me with your alarmist story, handholding my subscribers. Derek Lowe looks like an idiot for his Seeking Alpha article based on your work. I decided not to “go public” big time with this because I sense you are new to this business, and a mistake this big can be a career-ender.
“Look at your spreadsheet for the 2nd, 3rd and 4th quarters of this year. Lines 20 and 21 do not add up to line 22 – not even close. Look at the 3rd quarter, where Internal R&D of $9.243 million plus External R&D of $3.539 million equals $47.670 million! You have the same errors throughout the whole spreadsheet.
“Then look at your revenue forecast for lorcaserin in 2011 and 2012. You entered $250,000 and $500,000, with 30% of that going to ARNA. Maybe you meant that, but I suspect you meant to enter numbers 1000 times higher: $250 million and $500 million. Right?
“There are numerous other strange things in the spreadsheet, like the big bump in Internal R&D in Q4:09, which could only happen if the company hires a bunch of new people six months after they laid off a bunch of people. Why would they do that if they were tight on money?
“I redid your spreadsheet, just correcting the formulas, and it is obvious Arena is not going to run out of money in 2009. I really think you owe a public apology to Derek Lowe, Iguanabio and anyone else who relied on your statements based on your spreadsheet. I hope you step up and own up, perhaps in a comment on Derek’s article, and here on your blog.”
She responded a couple of hours later with this comment:
“Michael,
Thank you for your comment, which I have just seen. If there are indeed such egregious errors in the spreadsheet, I am glad to have them pointed out. Let me review it now and respond as soon as practicable. I assure you I am taking your response seriously, as I don’t want to make a fool of myself in public or make wild accusations. Nor do I have anything against Arena.”
Forty minutes later she wrote another comment:
“OK - I’ve fixed the “disaster” and I still see them running out of cash right around the end of the year. I’m going to sleep on these numbers, look at them with fresh eyes, and post them tomorrow morning.
Michael, maybe you’d like to post your version?
The lorcaserin cash flow spreadsheet is in millions — I know that’s confusing but that’s how I’ve always done it. I saw some guy at some big bank do it that way once and copied him. If you look at the per-share values they are the right order of magnitude.”
Well, it’s not just “some guy at some big bank” that does spreadsheets in millions, but this one is not in millions, unless Arena did $2.850 billion in sales in the March quarter. This spreadsheet is in thousands. So when she wrote “250″ for lorcaserin sales in 2011, the spreadsheet is reading $250,000. Even after I pointed this out to her in my first comment, she insists the per share numbers are right. Her spreadsheet shows Arena losing $1.35 in 2011 and $1.34 in 2012. My corrected spreadsheet shows them losing 12 cents a share in 2011 and making 84 cents in 2012.
Yesterday, she posted her “corrected” spreadsheet with this comment:
“Revised Arena Numbers: Still Running Out Of Money, But Not So Fast
“Thanks to commenter Michael Murphy for pointing out a silly error in the previous version of this spreadsheet (albeit in rather apocalyptic language, especially for a CFA — I guess he doesn’t know my glamorous career already ended in the Asian/Russian crisis of 1998). I’ve redone the Arena model in two versions, posted below. When I said “please beat these numbers up,” I meant it.
“The first is basically the earlier version with the silly error fixed (R&D didn’t add up and so was too big). In this version, Arena has almost enough cash to make it to the end of the year. The internal R&D line here is lifted from a version I did earlier this year and dialed down by 25% per management guidance on the first quarter call.
“Michael also points out that internal R&D need not go back up in the fourth quarter as I have it do, and I think that’s fair, since Arena is now going to put just about all its eggs in the lorcaserin basket. So I’ve attached a second spreadsheet where internal R&D is held steady in 3Q09 and 4Q09. This doesn’t help all that much, though, since in this scenario Arena also has almost enough cash to make it to the end of the year.
“The main point — as much as I would prefer not to have had a silly error in the model, that doesn’t change this — is that Arena went public well north of $20 per share, which gave them certain options and prompted them to set off on a business model that involved hiring 340+ research staff, but today’s last trade was $5.19 and debt isn’t readily available these days to small companies either, which restricts their options. They need a partner. They can maybe pole along a few more months by doing a sale-leaseback of the Switzerland facility for around $12 million or by sacking some more people, but to be a viable long-term company, they need lorcaserin to be approved and they need a partner for lorcaserin (probably before it gets approved). I don’t see this as particularly alarmist or controversial, or as reflecting poorly on Arena. It is simply my interpretation of the facts.”
To which I metaphorically threw up my hands in disgust and commented:
“Ruthanne - Your spreadsheet shows total cash available of $118.7 million as of the end of the March quarter, including the property sale. The spreadsheet you posted shows them using $88.0 million in the June, September and December quarters. Please explain how that translates to “almost enough cash to make it to the end of the year.” Are you counting the March losses twice, once in the reduction of available cash and again by including the $50.6 million March quarter loss in your calculation of the amount of money they need to get to the end of the year?
“Although I didn’t see the link to your second spreadsheet, holding the December quarter R&D to the September quarter level reduces their cash need to $82.0 million. Again, using your $118.7 million for total cash available, how can you possibly say “in this scenario Arena also has almost enough cash to make it to the end of the year.” With their burn rate down to $20 million per quarter, why wouldn’t $118.7 million last them well into the June quarter of 2010? That would be well after they could file for approval.
“You also have not corrected the lorcaserin revenues for 2011 and 2012. Your spreadsheet is in thousands of dollars, not millions as you seem to think (unless ARNA had $2.658 BILLION in sales in the March quarter). So you have entered lorcaserin revenues as $250,000 in 2011 and $500,000 in 2012. I am sure you meant $250,000,000 and $500,000,000. Didn’t you think it odd that an additional $250 million in sales in 2012 only changed the earnings per share by a penny?
“Today’s $100 million credit facility from Deerfield makes all this moot, but I still maintain that saying ARNA might run out of money soon when using your own numbers got them to the middle of the June 2010 quarter AND making the egregious error on the contribution of lorcaserin in 2011 and 2012 makes my comment that “These numbers are a disaster” true, not apocalyptic. What was Derek Lowe’s reaction when you told him?”
As I’m sending this out, she has not yet responded to my question. I find it hard to understand how someone can think a new drug will sell $250 million one year and then $500 million the next, but the company won’t make any more money. So I guess the rules from this episode are:
Rule 1: Be sure your math is right
Rule 2: If you are surprised by the results, don’t forget Rule 1.
(For more on the Deerfield $100 million, see Biotech MegaShift, below.)
Electro-Optical Sciences – “I’d never have believed it if I hadn’t run the numbers.”
I’ve been surprised and disappointed that MELA hasn’t moved up since they submitted their Pre-Marketing Approval application for MelaFind on June 4. Worse, the stock had gone down over $1. I assume there are some sellers on the news, but I don’t know why there aren’t buyers on the news. MelaFind is a lock for approval and a lock for a successful product.
Subscriber R.S. of Valencia, CA commented: “Michael, Yahoo! Finance June 5 Short ratio = 2.9. June 12 Short ratio = 5.3 It should be safe to attribute the $8.15 to $7.00 correction to increased shorting. Or is this a bear raid just like what was sprung on DNDN (that one though was sprung before DNDN filed their Application for Approval) Or does someone know something we at NWI have overlooked? Is this FDA application under some kind of “pre-agreed fast-track” evaluation? How does MelaFind compare with other Melanoma scanners in the market and under evaluation?
Can you please share your earnings model on MELA: Specifically, how many MelaFind units, costing how much each, are deployable where? How much will MelaFind scans set the MELA patient back? How much of it will be covered by health insurance?
Is MelaFind a stand-alone equipment, or can MelaFind diagnoses be networked into an artificial intelligence system capable of tracking patient history, and improve early melanoma detection?”
Let me answer the non-spreadsheet questions first. Yahoo’s short ratio, which you can find under Company>Key Statistics, on the right hand side of the page, come from the exchanges. The information is collected once a month, on the trading day nearest to the 15th day of the month. Short interest for listed stocks is published around the 22nd of the month, and for Nasdaq stocks around the 26th. The current data for MELA on Yahoo was released on May 26, but is for May 15 and therefore very out of date. If shorting has been pushing the stock down, we won’t find out until a week from tomorrow. This isn’t a bear raid, because there isn’t any unusual volume. I think it is just some people selling on the news, disappointed that the stock didn’t move up sharply on June 4.
So on to the fundamental questions and the spreadsheet. First, last October the FDA granted MelaFind expedited review. That means the FDA will assign enough resources to render a decision within 180 days from filing. The trials also were done under a protocol agreement, which essentially means both sides are bound if the data are good. Usually, the existence of a protocol agreement also means the FDA can be a bit quicker than 180 days, because it has been decided in advance what numbers have to be hit for what characteristics of the device. As you know, MelaFind hit all its numbers.
The question about how MelaFind differs from other scanners is an interesting one, because dermatologists currently use a dermascope – a skin-level microscope – to look for suspicious moles and discolored areas. Some of them think MelaFind is just a fancy dermascope. For $200, they can get a basic scope with a halogen light and 10X magnification. For $700 they can get a third-generation scope with polarized LED light and 12X magnification. If they want to wow their patients, for $1000 they can buy a video dermascope that hooks to a computer and displays the magnified view on a big LCD screen.
Another (expensive) alternative is the Melanoscan whole-body photographic imaging system. It does not use xrays, just a camera that takes pictures of every square inch of skin in less than 10 minutes. Then you do it again six months later and the dermatologist looks for things that are getting larger:
That’s pretty cumbersome and slow. From the doctors’ and insurers’ point of view, what is needed is a scanner that will (1) identify melanomas early, when they can be cured with a high degree of certainty at relatively little expense, and (2) sharply reduce the number of unnecessary biopsies by identifying what is not a melanoma, but just an atypical mole. MelaFind does this, and is far superior solution to the current dermascopes.
There is one Australian competitor coming along, the SolarScan by Polartechnics, which trades in the U.S. on the pink sheets (PLTFF.PK on Yahoo). It uses epiluminescent microscopy, which illuminates the pigmented layer of the skin with white light from LEDs while eliminating reflections from the epidermis by trapping a layer of clear oil between the skin and a glass plate. The resulting picture is then compared to a database of 15,000 melanomas maintained by the Sydney Melanoma Unit of the Royal Prince Albert Hospital.
The biggest difference between Solar Scan and MelaFind is that MelaFind uses 10 different wavelengths of light, including near infrared, to look as much as 2.5 millimeters beneath the surface of the skin. It can identify melanomas before a dermatologist can even see them, and due to its ability to look under the surface, it is better at distinguishing melanomas from atypical moles. Thus is meets the two most important scanning needs of early identification and low false positives to avoid unnecessary biopsies.
Finally, to the spreadsheet! Because MELA has a camera-and-film model, we are going to have to estimate two different revenue sources. One is sales of the MelaFind scanner, which depends on how many dermatologists there are in the U.S. and how quickly Electro-Optical Sciences can penetrate the market. Each scan uses a flash memory card – a digital “film” just like your camera – that costs $100. The doctor keeps $50 and MELA gets $50. The gross profit margin on this to MELA is on the order of 90%.
Regarding the question of insurance/Medicare reimbursement, if a melanoma is caught early the dermatologist cuts it out at a cost of about $1,800 per patient. But if the melanoma is caught later, treatment costs soar to as high as $170,000 per patient. About 90% of the total U.S. cost of treating melanoma is attributed to late stages of the disease. Insurers and Medicare will not only welcome MelaFind, I think they will require it in a few years.
My experience with devices like this is that MELA will sell it for a lowish price to get as many out into the field as they can, as quickly as they can. I expect it to sell for around $14,000 and have 40% gross margins, not the 50% a device manufacturer normally would shoot for. From the dermatologist’s point of view, if they see 24 patients a day they get an extra $1,200 a day from their share of the card sales, so in 12 days it has paid for itself. Using MelaFind is quicker than using a dermascope, so they should be able to see more patients in a day than they do now, with better outcomes.
There are over 16,000 dermatologists in the U.S., but some of them specialize in cosmetics, pediatrics or surgery, and are unlikely to be early buyers of MelaFind, if ever. To be conservative, I am using only 10,000 as the U.S. market for the device. We know there are a lot of dermatologists waiting for MelaFind, but a much larger number who haven’t paid any attention to it. We also know the device will be approved before yearend, so the roll-out will be in 2011.
I am assuming MELA sells only 1,500 MelaFinds in 2011, which means on average there will be 750 in the field. I then grew that by 2,000 in 2012 and then 3,000 in 2013 and 2014. I am also assuming that each dermatologist only uses it on four patients a day the first year, and six patients a day thereafter. I’m sure that seems low – one American dies of melanoma every 62 minutes, and there were about 116,500 new cases of melanoma diagnosed in the United States in 2008. At my full usage estimate of 10,000 dermatologists scanning six patients a day, that’s only 13.2 million people being scanned once a year. We know many people will be on a six month scan schedule. But it is important to be conservative in these assumptions to provide the margin of safety for a growth investor that corresponds to buying assets below book value for a value investor.
We now know enough to estimate MelaFind’s revenues. We also know the company’s current expense structure, and we can estimate their sales and marketing costs for the new sales force. We can assume they will continue to spend on R&D, in part on RS’s excellent question about networking MelaFind diagnoses to track patient histories and improve early melanoma detection. Electro-Optical Sciences has a database of 6,000 melanomas, the largest in the U.S., but they have plenty of room to grow to get to Sidney Melanoma Unit levels. So here’s the spreadsheet:
What this shows is the incredible power of the camera and film model, which in the case of MELA Wall Street does not get at all. With relatively modest assumptions on machine placements and usage, the company generates over $300 million in revenues in 2012, and grows from there! That’s the same year R&D becomes a more normal 4% of sales, so I had to grow the dollars faster in 2013 and 2014. General & administrative doesn’t get down to 2% of sales until 2013. I assumed selling expenses, primarily commissions, are 20% in the early years, but fall to 15% as the installed base matures and the bulk of the sales come from selling the film.
Look at the earnings explosion – profitable in 2011, and then huge jumps as the installed base grows and gobbles up film. Even growing the outstanding shares by one million a year, the earnings growth is huge.
What is all this worth? A company like this, with high profitability, can easily sell for 6X revenues or 20X earnings. That makes the stock worth $58 to $99 in 2011 and $106 to $174 in 2012. Discounting the $106 target back to today at 25% per year makes MELA worth $54 today if my spreadsheet is accurate.
One thing I can guarantee you is that my spreadsheet is not exactly accurate. Some of these numbers will be higher, and others lower. I may be too aggressive on my roll-out estimates, or Medicare might start requiring MelaFind scans and I might be too conservative. Management may make an acquisition of a complimentary product or company. President Obama might follow Governor Schwarzenegger’s lead and suspend using tax loss carryforwards. Who knows? But the spreadsheet is there for me to go back to, make changes, run sensitivity analyses, talk to management, make more changes…it is both a discipline and a way to cut through the BS to see what the future might really look like.
In MELA’s case, it looks awfully good. We didn’t get the pop I expected to $12 based on the filing for approval of MelaFind, so last week I had to take away the “timely” reason to make it a Top Buy. But there is still the “value” reason based on their potential, so I am raising the MELA buy limit to $8, raising the target price for next year to $17 per the spreadsheet, and putting it back on the Top Buy list for those who want to build serious wealth over a three to five year holding period.
Biotech MegaShift
Arena Pharmaceuticals (ARNA) signed a sweet financing deal with Deerfield Management. Deerfield is a private equity/hedge fund company that already owns 6.9 million shares of ARNA. In spite of what you read on the message boards, they have an excellent reputation. William Slattery, who runs the firm, was the senior healthcare analyst at Amerindo before Alberrto Vilar’s problems tanked that investment management company. Before that he worked in the pharmaceutical industry. Another partner ran the equity research department at ING Baring Furman Selz, and previously was VP of Corporate Development at Alpharma. Another is out of Harvard Business School – these are real people.
They gave Arena a $100 million loan, taking a 2.25% transaction fee. The interest rate is only 7.75%, and the principal schedule is easy: 10% at the end of the first year, 20% at the end of the second year, 30% at the end of the third year and the rest at the end of the fourth year. Deerfield can offer Arena up to another $20 million on the same terms any time during the next two years.
In return, Deerfield gets warrants for 28 million shares of ARNA common stock with an exercise price of $5.42 per share. That will bring about $152 million into the company when they exercise. As I told Ruthanne Williams Roussel, this makes all the trash talk about Arena running out of money completely moot. ARNA is a Top Buy on dips back under $5 for my $20+ target after the BLOSSOM Phase III trial data comes out in September. I still expect the short sellers to try to knock ARNA back under $4, maybe even to $3, before the data comes out. Some of the talk on the message boards probably is them, looking for themes that will scare people in August, when it is easier to move stock prices due to lower volumes.
BioCryst (BCRX) put the web page back up that had disappeared, which I showed you in last week’s Radar Report. On the front page of their website, they now have a box that says:
Emergency use IND information for US health care providers
Intravenous peramivir is available within the US through an emergency use investigational new drug process (EIND) for eligible patients with influenza requiring hospitalization.
For more information on the EIND application process follow this link:
More Information
That link leads to the “disappeared” and now reappeared web page, which says:
Emergency use IND information for US health care providers
Please contact a BioCryst Physician by calling 205-989-3262 for initial evaluation of a potential case. Following a successful evaluation, BioCryst will provide details on how to obtain the required forms to complete the process.
Naturally, I immediately called the number. No reply yet. An EIND is not the Emergency Use Authorization we are waiting for, but it gives me even more certainty that the EUA is coming shortly. An EIND allows one specific doctor to treat one specific patient. The EUA will clear the government to start buying peramivir for the Influenza Drug Stockpile. The stockpile goals are 75 million doses for 25% of the U.S. population, allocated by state, plus 6 million doses for “strategic limited containment at the onset of a pandemic.” All the stockpiled Tamiflu is useless due to the H1N1 mutations. Relenza is marginally effective. Both got EUAs on March 2 to expand usage to younger patients or to begin use earlier. But everyone knows it is IV peramivir that is going to save lives during the next flu season, not Tamiflu. BCRX remains a Top Buy up to $5 for a $12 to $15 target when the EUA is granted, and a $30 target after peramivir is approved.
Isolagen (ILE), in a sad note, filed for Chapter 11 bankruptcy. I don’t know why a former Chief Financial Officer let a company run out of cash, but Declan Daly did it. The stock traded today at three cents a share, but you don’t have to sell it to claim the loss (check with your tax adviser). It is worthless. I will discontinue coverage after today. Sell or write it off.
Content on Demand MegaShift
Harmonic (HLIT) moved up in Monday’s sell-off thanks to two new contract announcements, one for a mobile system and another for a major video initiative. Both involve primarily broadcast or head-end equipment. HLIT is likely to come in a bit above expectations for the June quarter, guide above the consensus for September, beat that guidance and then have a very big December quarter. Video infrastructure spending will accelerate in the second half of the year as the credit markets continue to unlock. HLIT is a Top Buy up to $10 for my $20 target.
NetLogic (NETL) has had a great run. I am hearing from China that the two main wireless operators have decided to slow their expansion. The accelerated build-out of the last several months, funded by Chinese stimulus spending, has led to weak quality controls and some consumer complaints. Today’s stock price weakness probably was due to this issue. I expect NETL to rally back if the S&P 500 runs up as I expect, but we probably will try to sell the stock before they report and give September quarter guidance. For now, continue to hold NETL for my $47 target.
Hyperinflation MegaShift
Investors have lost 28% on 30-year Treasury bonds so far this year, 11% on 10-year notes, and 0.4% on two-year securities, according to a Merrill Lynch study. Treasuries of all maturities are down 6.2% this year, their biggest drop since 1998. I am still waiting for a better entry point for the ProShares UltraShort 20+ Treasury (TBT) exchange-traded fund.
Paramount Gold & Silver (PZG) slipped under $1.50 this week when another newsletter editor recommended to his subscribers to sell half of their shares. To his credit, he got them in between 75 cents and $1 a share, and now he wants them to take some or all of their initial stake off the table.
My experience is that a stock does not know where you bought it, and does not care. It is going to go where it is going to go, with our without you. Selling winners is an amateur’s game, so I was surprised to see him fall into that trap. As far as I know, he did not turn bearish on gold, and if you like gold, you have to love PZG. They will be updating their resource statistics in the fall – I am going to get an exact date out of them – and the stock will skyrocket. PZG remains a Top Buy under $2 for my $10 minimum target.
WiMAX MegaShift
Alvarion (ALVR) won a contract with U.S. rural wireless broadband supplier Open Range Communications that the company says could total $100 million over five years. Industry sources say $150 million is closer to the truth, with shipments starting in the September quarter. Even better, it will be a showcase installation for the rural application, where the Obama administration is pointing a firehouse of stimulus spending. Open Range is private, but we know they raised $100 million in venture capital in January and then got a $267 million loan from the Agriculture Department’s Rural Development Utilities Program. They plans to deliver broadband wireless access to 546 rural communities in 17 states, reaching up to six million people. They are for real.
This order opens new ground for ALVR, which has been focused on less-developed countries and smaller companies like Towerstream (TWER). Alvarion has the best software solution to allow customers to successfully install their own WiMAX modem, and in rural areas it can get really expensive if the network provider has to roll a truck to get the customer connected. ALVR jumped about 35% on the news, and remains a Top Buy all the way up to $11 for my $17 target.
Your improving my hunches Editor,
Michael Murphy, CFA
Editor, New World Investor
TOP BUYS
Avian Flu MegaShift
BCRX – BioCryst – Timely Buy – Emergency Use Authorization for peramivir is imminent.
CRXL – Crucell – Value Buy – Likely buyout candidate after Wyeth deal fell through
Biotech MegaShift
ARNA – Arena Pharmaceuticals – Value & Timely Buy – Lorcaserin diet drug works and will be approved in 2010. More Phase III trial results in September
BACK ON!! MELA – Electro-Optical Sciences – Value Buy – Melanoma detector works! FDA filing completed and approval this year
QLTI – QLT – Value Buy – Combination trial results successful, stock selling near book value.
ROCM – Rochester Medical – Timely Buy – New Medicare regulations are accelerating use of ROCM catheters
VPHM – ViroPharma – Timely Buy – Vancocin continues to grow; Cinryze taking off
Content on Demand MegaShift
AKAM – Akamai Technologies – Value Buy – Leading Internet acceleration and content delivery company
HLIT – Harmonic – Value Buy – Leading video processing equipment company
QUIK – QuickLogic – Timely & Value Buy – Superior programmable logic chips plus new backlight technology contract wins
SNDK – SanDisk – Timely Buy – Leading flash memory producer; flash prices going up due to netbook demand
Hyperinflation MegaShift
PZG – Paramount Gold & Silver – Value Buy – Junior gold exploration and development worth $9 to $30 depending on how much more they find
New Energy Technology MegaShift
ENER – Energy Conversion Devices – Value &Timely Buy – Thin-film solar for building rooftops, Obama spending beneficiary
HTM – US Geothermal – Value Buy – Geothermal electricity producer with actual revenues
WiMax MegaShift
ALVR – Alvarion – Value Buy – Leading producer of WiMax equipment operating in 80 countries
TWER – Towerstream – Timely & Value Buy – Leading supplier of wireless business telecom services approaching cash flow breakeven
