The Return of Netflix
The market has seen some incredible roller coaster rides with regards to turnarounds that have defied odds to return to glory. In 2012, none was greater than Netflix (NFLX). As many may remember, in July 2011, Netflix astonished both its customers and the markets with the decision to divide its streaming and DVD segment while also introducing a 60% price hike. As a result, the company lost about 600,000 U.S. subscribers in the following quarter and saw its stock price fall as low as the 50s range within a year (a drop of ~80%). The PR disaster of 2011 had Netflix and its CEO, Reed Hastings, ridiculed for putting the company before its customers.
The Netflix turnaround began towards the end of Q3 2012, when the company was once again showing growth and profitability, both suggesting a step towards recovery after the disastrous year. As a whole, the online streaming market had experienced vast growth benefiting Netflix. Meanwhile, the company continued to promote its streaming business to the emergent market while expanding its viewing selection. Netflix closed out 2012 strong as it rallied from its low of $52.81 to $92.81. Its growth numbers were further verified with Q4 2012 earnings crushing analyst estimates. On this news, shares of Netflix soared to figures investors hadn't seen since its first run-up in late 2010/early 2011 by testing the $200 price. As a Forbes article explains, Netflix used market cannibalization to drive the demand of its streaming market by forgoing profits of the vanishing DVD segment. This assisted Netflix in growing its in-demand business with the funds of its diminishing one.
Though it may seem farfetched, the strategy Netflix adapted has the company focusing on the future outlook of its market, similar to what Apple (AAPL) did under Steve Jobs in the early millennium. Jobs led Apple into an early shift with online music, which helped establish the iPod in 2001. Of course, this revolution in digital media propelled the iPod as the market leader by being one step ahead of the evolving market. In 2007 however, Apple had bigger ambitions. The giant cannibalized its iPod market by launching the iPhone, which ate up redundant iPod sales. Yet again, Apple was the frontrunner in a revolving mobile market by predicting what the market would soon evolve to. It can be argued that this is what Netflix was aiming for with its 2011 decision. The market was evolving and Netflix wanted to be ahead of the charge. The company focused on the streaming division, which proved to be the correct strategy as it led the turnaround with its continued immense growth. Although the timing and scale of this strategy was far from perfect, Reed Hastings managed to make Netflix relevant again as the company's outlook appears promising.
Boston Scientific Surging With New CEO
A Boston Scientific Corporation (BSX) turnaround has been a broken record remark for the past five years as the company has experienced a steady decline in its stock price. Skeptics have questioned the medical device maker's ability to reverse direction after it's faced large declines due to pricing pressures and diminishing market demand. Faithful long investors, however, are excited as BSX's latest attempt at turning over a new leaf seems to be advancing quite well.
In September of 2011, Boston Scientific announced its CEO transition plan to hand over the reins of the company to Michael F. Mahoney, a chairman of competitor Johnson & Johnson. Mahoney's first day as chief executive was not until November 1, 2012 though, due to the non-compete clause exercised by J&J. With Mahoney at the helm, the company intends to invest in acquisitions to strengthen product pipelines for future revenue streams while also re-adjusting cost structure to achieve leaner operations.
As part of this restructuring program, BSX has reduced spending and shed jobs in an attempt to turn its operations around. For 2013, the company foresees dismissing another 1000 employees worldwide in conjunction with further operation cuts, which would save around $100 million in expenses. Acquisition activity is expected to accelerate for the year as BSX needs to grow faster than its market if it wants to achieve the desired turnaround. Deals, such as the one to acquire Vessix Vascular, need to continue so that BSX may compete in market share of existing fields and extend its range to new areas.
A historic turnaround strategy was implemented by pharma giant Merck and Co. (MRK) during the Vioxx scandal in September of 2004. Vioxx, one of Merck's most profitable drugs at the time, was voluntarily removed from the market after patients had developed serious cardiovascular problems. Studies showed that more than 27,000 patients had suffered heart attacks since its FDA approval in 1999. MRK was the source of controversy as its reputation had been tarnished and lawsuits were flooding in. As a result, the company experienced a 46% plummet in the stock price within six months. Richard Clark took control of the turmoil in May 2005, as many around the industry believed the scandal was impossible to recover from. Clark made staff cuts and closed five manufacturing plants in a bid to save nearly $4 billion by 2010. The focus of resources was laid exclusively on Merck's promising pipeline of new drugs through innovation and acquisitions. Clark restored the company's reputation, settled the Vioxx lawsuit for $5 billion (instead of the original $20 billion) and administered eight drug approvals in two years. By 2008, Merck's share price had recovered to pre-Vioxx levels.
Clearly, BSX is not in the same alarming situation as Merck was back in 2004. It goes to show that any turnaround may be feasible with a competent leader. Mahoney has taken the right approach to return BSX to former heights through effective cost cutting and concentration on pipeline development. Though this will be a long process, immediate results are slowly surfacing. Q4 2012 earnings continued their sliding trend as both sales and earnings figures fell from the prior year. Guidance for 2013, however, topped analyst estimates as the implementation of the restructuring program starts to restore shareholder value. Since Mahoney took over, the share price of BSX has seen a 40% increase. The medical device maker`s assertive leader is poised to reward shareholders with returns to double-digit price levels as he moves on the right path to stabilize long-term growth.
Sanuwave Resurgence is Under way
Sanuwave (SNWV.OB), an emerging medical device company, applies its Pulsed Acoustic Cellular Expression [PACE] technology in regenerative medicine with a focus on diabetic food ulcers. The technology utilizes shockwave therapy on afflicted tissue by stressing cells to elicit a biological response, which promotes therapeutic treatment. In December of 2011, the company received news from the FDA that it would not obtain the required approval to market its dermaPACE technology. Following this news, the price of SNWV fell 80% to levels of $0.30. However, the original data submitted to the FDA indicated that dermaPACE was effective in healing diabetic foot ulcers, but was not able to meet the primary endpoint (100% wound closure). Later on, in May 2012, the FDA granted conditional approval on an additional clinical trial for dermaPACE to build on its already compelling results. The approval was reaffirmed on March 13, 2013 as the company received full approval from the FDA to conduct pivotal clinical trials.
Since SNWV will be incorporating the results of the first trial, the supplemental trial provides a robust pathway to a Premarket Approval (PMA) submission with the FDA for its consideration of device approval. Consequently, only 90 patients have to be enrolled in the study, which initiates in mid May (timeline shown below). The study will include some important changes that the company believes will greatly increase the probability of success. Doubling dermaPACE treatment during the 10 weeks of administrations is believed to improve the wound closure, in favor of the company, to reach a statistically significant primary endpoint. These additional treatments are expected to close the wounds 100% (primary endpoint) for patients that were 90%+ healed at the end of 12 weeks during the original trial. Since the device is externally applied to the body, safety is not as big of a concern when compared to ingested drugs. If SNWV can prove efficacy of its technology on diabetic foot ulcers, a broad range of opportunities become available beyond the chronic wound market. Subsequent to FDA approval, the dermaPACE may develop into a platform technology that can be applied to other markets such as tissue regeneration, orthopedics and vascular. Obviously, this is in the wider horizons that could lead into a lucrative opportunity for SNWV.
Sanuwave is in the process of a turnaround with new CEO directing operations, a recent oversubscribed funding and an ongoing clinical trial indicative of a potential approval. Similar to the BSX situation, CEO Joseph Chiarelli is focused on improving cost structure to run leaner operations and getting dermaPACE into the market. Interestingly enough, CEO compensation is contingent on the following:
- Completion of a financing
- Enrolment of final patient in Phase III clinical trial
- FDA approval for the use of dermaPACE
- Execution of a license or distribution agreement
These conditional bonuses portray Mr. Chiarelli's confidence in the technology to achieve the above targets and reap the rewards. For shareholders, the above list forecasts the company's intentions, all of which provide promise to enhance value in the near future. To add, the recent financing exceeded SNWV's goal by 60% as existing investors were satisfied with the direction of the company. These same investors were the ones who were endorsing the company when it was at valuations double its current price. This is a very bullish sign.
At its current valuation, Sanuwave appears undervalued as it offers investors lucrative potential with a continuing turnaround. To compare, Invivo (NVIV.OB), a preclinical stage company that hasn't even been validated to work on humans, has a valuation almost 8x greater than SNWV. Invivo may make a case as its market could prove to be more attractive with a spinal cord injury product than that of Sanuwave. Nevertheless, there remains an apparent imbalance with the company`s discounted value. Investors may still capitalize on the developing turnaround as SNWV has climbed 157% in the last month.
Disclosure: I am long SNWV.OB.