Falling Apart Over Omrix; Can Some Telcos Gain from the Current Crisis?

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 |  Includes: CSCO, OMRI, ORCT, RVSN
by: Shlomi Cohen

The collapse continues in the markets, with two key U.S. indices, the Nasdaq and the S&P 500, now down by 40% on their level at the beginning of the year. Having erupted initially in the U.S., the crisis is now spreading rapidly to the rest of the world, where the falls have been even heavier than in the U.S. since the beginning of the year. The falls have reached 50% in Japan, 47% in Germany, 43% in France, and were even heavier in the BRIC economies, especially Russia where they reached 76%, followed by India with 67%, China with 65% and Brazil with 50%.

With less than one trading week left in October, the level of the collapse on the Nasdaq is fast approaching the low it hit in the previous crisis in October 1987, when it fell by 27%, compared with 26% as of the end of last week. Last Friday's earthquake on currency markets worldwide, could bring about the collapse of yet more hedge funds, banks, or even small countries.

Trading throughout this week will be affected by the levels of anxiety in the East and the progress of the third quarter results season, but more importantly, by the release of two key macroeconomic announcements in the U.S. The first of these will happen tomorrow, when the US Federal Reserve is expected to make a further 50 basis point cut in the interest rate, bringing it down to just 1%, a low which the previous Fed chairman Alan Greenspan also reached in the wave of aggressive cuts he pushed through in the aftermath of the September 11 terror attacks. Because of those low interest rates, many people now refer to Greenspan as the man responsible for the real estate bubble, for which we are now picking up the bill.

The second keynote announcement due to be made at the start of trading on Thursday, will be the figures for economic growth in the US in the third quarter, with economists predicting a contraction of 0.5%. I believe tomorrow's expected interest rate cut followed by the announcement of negative growth of no more than 0.5 could set in motion an upward correction, at least technical, which should last until the close of the trading week, and month, on Friday.

Omrix - one step forward, three steps back (and then one forward again)

When I added Omrix Biopharmaceuticals Ltd. (OMRI) to my portfolio, tracked by "Globes", I noted that it was a profitable biotechnological company in a most interesting niche - biosurgical sealants for the prevention of hemostasis in surgery - and that it was not an all or nothing company, like Pharmos Corp., for example, where one failed trial can wipe almost an entire investment. It now turns out that while Omrix may not be of the all or nothing genre, it is a real madhouse for investors like me, who were looking for an oasis of tranquility in the biotechnology sector, a sector that has traditionally been fraught with risk.

Since the beginning of the year, Omrix has managed to issue a severe warning (in March) for the fourth quarter of 2007, plunge heavily, and replace its CFO a second time. At the beginning of this month, on the eve of Yom Kippur of all times, it issued an announcement in which it reported positive interim results in the important trial of its advanced surgical sealant, following which the share rose strongly, just as the collapse on the markets was moving into high gear. The news made the fast a bit easier to handle, but the joy was short-lived.

By the next day, Yom Kippur itself, Omrix had already updated investors with the announcement that it was halting the trial due to the occurrence of a critical fault, just a day after declaring it a success. Investors like me switched on their computers after Yom Kippur ended, only to find that the share had plummeted for the second time in six months. Later on in the month, Omrix tried to put the fiasco of the failed trial behind it with a reassuring announcement to investors about a strong third quarter. But Omrix's weary investors found little cause for cheer, and the share barely moved at all.

The denouement came last Friday when Omrix joyfully announced the resumption of the trial, as if nothing had happened at all. "We got it wrong, there was no fault," was what the announcement amounted to, and the company's share regained just a small part of the ground it lost on Yom Kippur. One can imagine how investors, who abandoned the stock on Yom Kippur after it crashed 40% following the announcement of the fault, felt last Friday when Omrix revealed it never actually happened.

The analysts covering Omrix are also finding that their patience is wearing thin. In its latest review, Citigroup describes the company's astounding u-turn as "one step forward, three steps back, one step forward." It assumes that the fault occurred for one of two reasons - either a technical failure due to human error, or bleeding in another place not treated by the sealant. Until such time as they receive further clarification, which will most likely be forthcoming on November 6, when Omrix unveils its results, Citigroup's analysts are retaining the lukewarm "Hold" recommendation they issued following the company's stiff warning in March, with a target price of just $15.

On top of all this, the Omrix roller coaster has been dogged by sporadic rumors that it could be sold for around $25 a share. The identity of the possible buyers regularly changes. Among those rumored to be in the frame are Ofer Group, Johnson & Johnson Inc. (NYSE:JNJ), Omrix's partner in the marketing and development of the aforementioned sealant and, according to "Globes", also European pharmaceutical giant Bayer AG (OTCPK:BAYRY).

The less sensitive Israelis

With the season of results from Israeli technology companies almost upon us, two of the niche telecommunications companies in my portfolio, tracked by "Globes", which I believe will be affected less by the impending recession, will definitely be ones to watch. Video conferencing solutions company Radvision (NASDAQ:RVSN) will report this Thursday, and I do not expect any special news about the third and fourth quarters, in which the company continued, and will continue, to invest and record losses.

On the other hand, it will be interesting to hear what the company has to say in its conference call after the results about the relationship with Cisco Systems Inc. (NASDAQ:CSCO). Investors will be looking to hear when Cisco is expected to make a significant contribution to Radvision's sales and profit line, since it is my belief that its Telepresence video conferencing platform is now beginning to take off, and Radvision's contribution to it in terms of technology has been considerable.

After two years of lip service, the crisis now evolving has given the business world the impetus to seriously consider cutting back on transportation costs, and save more through HD-quality video conferencing over fixed-line IP. Radvision has a tremendous contribution to make here, through its extensive collaborations with Cisco. It swung to a loss in 2008 because of the heavy investment it made in advanced products that should have been developed earlier, and it will reap the fruits from these products from 2009 and onward.

I assume that the optimistic business outlook for 2009 is also the main reason for the succession of share buybacks that chairman Zohar Zisapel has been making lately. Zisapel now holds 18% of Radvision, which, relative to his other holdings, is quite large.

The other telecommunications equipment company worth watching is broadband infrastructure maker Orckit Communications (OTCPK:ORCT). It is less sensitive to periods of recession, and some people say it could even benefit in times like these, since people will be spending more time at home, thereby triggering a spike in demand for services like IPTV. Orckit will report on November 12, and I will therefore comment on it at length at another opportunity.

Disclosure: None

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.