For the last two weeks, I have published a Q&A piece on Mondays called "Monday Morning Quarterback." The discussions and questions asked have been tremendous, and therefore, the show must go on. However, the name has been changed to "Weekend Blitz," staying with the football theme, as has been the cutoff day for questions to Thursday night. I will continue to take questions through Seeking Alpha, NicholsToday.com, or through Twitter in the week prior to future postings. This week's questions cover broad topics, in particular investment strategy questions; therefore, I hope you enjoy, learn, and at the end, feel free to chime in.
WillB335 from NicholsToday.com asks, "My brother works at a leading medical research facility and he was explaining to me that in such facilities, there seems to be a move towards more cell-based therapies in oncology and in autoimmune diseases. What companies are most likely to benefit from this trend?"
Your brother might very well be correct, as medical research facilities are usually at the forefront of upcoming trends in biotechnology. Just recently Novartis (NVS) acquired a technology from UPenn and pledged to invest $100 million to its development. This technology involves engineered T cells to target CD-19, which achieved complete remission and literally removed kilograms of tumor mass after being used on bulky diseases. Other companies are now finding that by stimulating the immune system and targeting specific cells that it is very possible to effectively fight cancer. Therefore, we are seeing smaller companies focus on this approach and larger companies developing candidates with this approach.
For proof that this might be correct, I turn to a small $100 million biotechnology company named NeoStem (NBS). Most view the company as one in clinical development (due to two segments of clinical development); however, it also has a revenue-producing segment called Progenitor Cell Therapy (PCT). This particular segment is involved in manufacturing, regulatory, and commercialization expertise for therapeutic development. It is a very large business with over 100 clients (three in Phase 3 and seven in Phase 2), 55,000 square feet in facilities, and has performed more than 30,000 cell therapy procedures during its 12 years of existence.
If in fact there is a shift occurring and a focus towards cell-based therapies in biotechnology, then we should see a boost in revenue in PCT first, before any approvals. The reason is because PCT manufactures cells while in clinical studies, and then also on a larger commercial level following an approval. Below I have included revenue and performance for each of the first three quarters in 2012; you should see trends that validate the belief that cell-based therapies are in fact growing in development.
Three Quarters Combined
NeoStem has partnerships to manufacture cells for a wide array of customers such as the large diversified Baxter (BAX) to the small and speculative ImmunoCellular Therapeutics, and had even manufactured all of the cells for Dendreon's (DNDN) Provenge during clinical studies. The performance of PCT could be a good indication of the trends in biotechnology, and currently, NeoStem's manufacturing business is doubling in size year-over-year (as shown above). This tells us that your brother may be right and that there is in fact a shift occurring towards cell-based therapies in clinical development.
Last year I spoke with the CEO of NeoStem to discuss how large this manufacturing business could become. In our discussion, we were speaking about the $50 billion regenerative medicine industry and the $5 billion that cell manufacturing facilities could return, but not necessarily the company's clients in oncology such as ImmunoCellular Therapeutics and SOTIO. As a result those in oncology open new doors, and in 2012 it was those companies with advancing trials in oncology such as SOTIO and ImmunoCellular that helped to almost double NeoStem's manufacturing business.
NeoStem is one of the few industry leaders in cell manufacturing and is among the very few companies that have the capabilities to manufacture these types of cells. Therefore, I personally have invested in this company because of my belief that this trend will continue. Some have elected to choose individual companies developing products in this space, which in many cases will turn out to be a great investment. The problem is that there will be a lot of winners and losers along the way, those that are successful and those that fail in developing therapeutics. But PCT is a diversified approach, a business that benefits from the shift. For example, auto has been the strength of the North American economy during the last three years, yet during this period, auto stocks have performed badly. Sirius XM (SIRI), a company that benefits from the strength in auto due to its product being in most automobiles has returned the best gains. In my opinion, PCT and other cell manufacturing facilities are similar; it is the Sirius XM of the cell based therapeutic space.
NicholsToday user ggallat asks, "ImmunoCellular Therapeutics (IMUC) mentioned in its Q4 earnings call that interim results would not be announced until Q2 and that interim analysis will be based on safety and futility, meaning no survival data. Should I sell and rebuy later with survival data expected later in the year?
This is a great question regarding a company that I have followed since the beginning of this process. The CEO's exact words in regard to the Data Monitoring Committee's process were, "following their review of the data, they will make a recommendation to the company that we either continue the trial or stop the trial based on safety and futility. It is very important to remember that the company will remain fully blinded during the interim analysis and throughout the remainder of the trial." He went on to say, "By the end of the year, we expect to see overall survival primary endpoint data and numerous data on secondary endpoints from the trial such as progression free survival, OS and PFS at various time intervals, immune response and safety."
Based on these two statements, we now know that the company will not and can not update investors on survival until a later date. This interim analysis is simply an assessment after 32 deaths in a 278 patient trial where 124 were randomized. The trial is designed for one-third of patients to be treated with placebo and two-thirds to be treated with ICT-107. As I mentioned in the previous piece, 105 patients were enrolled as of July 2, meaning that the "potential" for 32 deaths on a disease where standard of care (SOC) improved survival by just 2-3 months was highly likely in the first quarter of 2013. While there are a lot of unknowns such as the date that patients were vaccinated, date of randomization, and progression of the disease for both groups, we do know this is among the most dangerous of cancers. Therefore, I formed three possible scenarios based on what we know about enrollment and the fact that patients were most likely treated immediately to obtain the best results.
- No difference in vaccine vs. control group: 32 events should occur in Q3/Q4 2012
- Six months of survival improvement: 32 events should occur in Q1 2013
- More than six months of improvement: 32 events should occur later in the year
Keep in mind, the fact that the company will not be announcing interim safety data until Q2 is not a guarantee that the vaccine has and will improve SOC by six months. It does take time to collect data and then to report that data back to the company. In fact, the company still thinks and said, "the process of conducting the interim analysis could begin this quarter." Therefore, you can take the information and assess however you would like, but my thought process is that the longer it takes the better the results.
Seeking Alpha user 9720461 emails, "Brian, I think two of your best articles were about Facebook (FB). The company is very difficult to trade and you seem to have figured it out. Do you think that now is the right time to buy FB?"
First off, I wouldn't say that I have "figured out" Facebook, but I do think investors can successfully trade it by being logical when the market acts senseless. For example, just follow the analysts, when they are saying "sell" then buy, or vice versa. My previous two articles, one saying to buy at $22.50 and another after Barron's said it was going to $15 were based on overly pessimistic outlooks for a tech company that has the greatest grasp that we've seen on the Internet space since Google. But more importantly, my $22.50 buy was based on a price/sales that I thought was attractive and realistic based on market perception and the valuation placed on Internet based companies.
One thing I like about Facebook is that it seems to be calming down. The stock is no longer trading in such wild swings. The company is growing at about 35%/year and continues to have great growth prospects because of its user base. However, back in May when I said NOT to buy it was because the stock was trading at 17 times sales, which I thought was too big of a premium based on the 10 times industry average. Therefore, because I thought Facebook was the best of the bunch, I set a target of $22.50 with a price/sales goal of 12.00, a 20% premium on the average.
So the question is if FB is a "buy" right now? The company does have a lot going in its favor. Its new Sponsored Stories service is performing well, the new search service has large advertising potential, mobile is performing well, and many of its other new services such as "gifts" have large revenue potential. Therefore, I believe that it will be a "buy" at $25.50. The reason I consider it a "buy" at $25.50 is because it would represent a current price/sales ratio of 12.0, which I believe is appropriate based on the catalysts that are in the works. However, finding the perfect balance of sales growth, industry average, and outlook is very important and is a topic I discuss thoroughly in my book (here's a brief summary below).
Basically, while a company is smaller and in its aggressive growth phase, it can often trade with very large price/sales ratios (look at Workday (WDAY)), but as the company grows, its stock will eventually correct to find a valuation that is consistent with the market. When this happens, two things occur: Either a stock becomes dead money (i.e. Google between 2006 and 2012) as its valuation corrects or it sees a sharp decline in valuation (i.e. Netflix in 2012) until valuation, growth, and fundamentals all align. At this point, Facebook is worth 12 times sales because of speculation and Internet valuation, but we could likely see many years of 25% growth and 10% stock performance as those numbers align and correct.
Twitter user mcherry631 asks, what is the most important metric to the market?
Here's a question that transitions nicely from the previous question, and answer. For this basic question, I like to look at just "home page metrics," which are the first things you see on a stock's home page when you visit a financial site. These are important because they are typically what retail investors who don't have time to read through hundreds of quarterly and annual reports use to get an idea of valuation. My personal favorite is price/sales because earnings and even some balance sheet metrics can be adjusted accordingly with good accounting to reflect a better than actual number. However, it's hard to fake or rework sales and sales growth. But with that being said, the performance of a stock is primarily psychological short-term and fundamental long-term, and it's the short-term performance that creates value and allows for a good long-term investment. Therefore, the question "what metric is most important to the market?"
Think about it this way; when a company announces earnings, its stock automatically reacts, before the conference call and before digging deeper into the numbers. The market is reacting to top and bottom line performance, and according to many psychological studies, the EPS or bottom line is the most important number to market sentiment. In my book I address several levels of valuing a company based on these important psychological metrics with one being the P/E ratio to growth and valuation. While there are many variations of this tool, I will show you how you can use it with just mid and large-cap stocks (this is the first step of three).
Chipotle Mexican Grill (CMG)
Yearly Stock Performance
Annual EPS Growth
As you can see from the chart above, the performance based on valuation fits into the theory of valuation compared to sales described with Facebook. With Chipotle, the stock appreciated rapidly from 2009 to 2010 as earnings growth was explosive. As you can see, earnings growth was consistent with the stock's P/E ratio. However, in 2010-2011 as earnings slowed the stock continued to appreciate, which created separation between growth and the metric used to value a company based on bottom line performance (P/E ratio). Then, because of this distinction, in 2012 the stock corrected and traded lower so that the P/E ratio could reflect growth. And according to this first step, the stock might still be a little too expensive. However, like I said, there are several steps to this process, such as measuring and comparing the S&P 500 valuation based on economic growth. Either way, this one process of valuation has held up nicely over a course of many years, and may help you indicate when a stock is too expensive or when it may trade higher or lower long-term.
NicholsToday user Colfelt asks "what does it mean when people say that there is a great rotation of capital out of Apple?"
During the last six months, Apple (AAPL) has lost 37% of its value or almost $240 billion from its market capitalization. During this same period, we have seen a number of other high-profile tech names and or stocks that were beaten down during Apple's dominance to trade considerably higher. As a result, this indicates that investors are removing capital from Apple to invest elsewhere. Take a look below:
Six Month Performance
Billions in Market Cap Added
The stocks above most likely would have traded higher with or without Apple's decline but probably not to the same degree, especially Google and Facebook. The theory is that Apple will find a bottom when these stocks find a top, particularly Google. I first presented this idea back in early February and so it continues to hold. I think there is some merit to this idea and I would continue to monitor the performances of these stocks for any shift in perception.
If you have a question about any of the stocks I follow, a market-related question, or would like my opinion on a specific topic, please feel free to send me an email or provide feedback in the comments section below. The goal of this series will be to provide analysis from the previous week, or to talk about market-related events that might change the direction of the market. I hope you enjoyed, found it beneficial, and that you will keep the questions coming.