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W.A. Cowan
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One of my favorite celebrity quotes that has been echoing for years (since before I was in college back in the 1980s) on public radio is, "Well, that's the news from Lake Wobegon, where all the women are strong, all the men are good looking, and all the children are above average." --... More
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  • The SmallCap BioTech Beauty Pageant

    I attempted to get this article published but it was rejected. So, here is the thing. Feel free to poke holes and best of luck to you.

    We were fortunate to be holders of Idenix Pharmaceuticals (NASDAQ:IDIX) prior to the announcement that Merck (NYSE:MRK) was acquiring the company. As this was the sole biotech company in our portfolio, we need to find a replacement now that we have sold our IDIX shares. The following is an overview of how we screened through the Biotech industry to arrive at a short list of candidates that we could then evaluate further.

    In order to fundamentally rank companies it helps for the companies to have positive earnings. Furthermore, in an arena like biotech it also helps to take advantage of companies with positive momentum. Therefore, we screened the 305 companies that comprise the biotech industry and found that only 27 are profitable. Of the 27 profitable companies, we plucked out the 15 that ranked in top 20% of all biotechs for their 52 week performances. Finally, we made the decision to look at smaller capitalization companies. The rationale here is to take advantage of the prospect that, generally speaking, smaller companies tend to offer outsized gains. So, in our final pass we screened for market capitalizations that were less than $1 billion. This last screen whittled our sample to just 7 companies.

    Two of these seven companies Titan Pharmaceuticals (OTCQB:TTNP) and Mymetics (OTCQB:MYMX) are microcaps and penny stocks. So, we have decided not to research these couple any further because of their lack of market liquidity. Another company, Anacor, only passed our screens because of a litigation settlement with Valeant. Otherwise the company would not have been profitable over the past 12 months.

    So the finalist in our SmallCap BioTech Beauty Pageant are:

    • Osiris Therapeutics (NASDAQ:OSIR) - pioneer in mesenchymal stem cell research for clinical applications with products targeting wound care, cartilage mesh, and bone matrix. When you think wound care, one obvious area of treatment involves diabetic patients. Thus, OSIR can be thought of a derivative play in the diabetes arena and has some legs considering its Graphix is currently only approved for Medicare in nine states.
    • Emergent BioSolutions (NYSE:EBS) - has a virtual monopoly on the sale of Anthrax vaccines to the US government through its 5 year $1.25 billion contract with the CDC. Through its acquisition of Cangene the company acquired IXinity, a recombinant Factor IX product used in the treatment of Hemophilia B with a PDUFA date of July 29, 2014. Be on the lookout also for news on ES414 which is early in the pipeline; the company plans to advance this treatment for metastatic prostate cancer to Phase I trials by the end of the year.
    • Repligen (NASDAQ:RGEN) - primarily sells products used in the manufacturing process for biological drugs including monoclonal antibodies. Best known as a supplier of Protein A to companies like GE (NYSE:GE) and Millipore, a subsidiary of Merck . Good to keep in mind that its OPUS chromatography columns, a newer product where sales are ramping, hold lower gross margins than RGEN's other business lines.
    • BioSpecifics Technology (NASDAQ:BSTC) - main product is injectable collagenase which has been launched under the name Xiaflex in the US and Xiapex in the EU. The recent launch for its use in treating Peyronie's disease (think male Urology, enough said) is off to a good start for the company. Worth noting that royalties are booked on a one quarter lag from its partner Auxilium Pharmaceuticals. The company is also involved in canine research with a product that treats canine lipoma (i.e. benign fatty tumors).

    And the winner is......


    We picked Repligen through our ranking system that attempts to value companies based on their financial condition, share price volatility, balance sheet strength, and future cash flow. In some respects, the characteristics within the Piotroski Score are evaluated, but the importance of book value in our method has a less meaningful impact than it would using a Piotroski method of evaluation. Based on the quantitative characteristics that we measured and weighted, Repligen scored highest in terms of operating margins, relative valuation, and share price volatility.

    ^BTK Chart

    ^BTK data by YCharts

    Repligen's shares have taken off like a scalded dog in recent months. This may scare some off through the perception that its valuation is already getting stretched. And the integration of the recent acquisition of Refine Technologies (fermentation optimization processing) adds another layer to its existing execution risks. As we saw recently, a sell off in the market was magnified in the drop in RGEN shares. Thus, playing a high beta stock like RGEN, if you are expecting a retraction in the market, probably does not make great sense. Our current view is that market remains in a bullish phase. As such we are viewing the recent pullback as a good entry point for shares. Please keep in mind that most biopharma/biotech analysts have a background in the industry. I do not. Caveat Emptor.

    Disclosure: The author is long RGEN.

    Tags: RGEN, BioTech
    Jul 08 9:18 PM | Link | 1 Comment
  • Letting The Chips Fall Where They May

    While the Nasdaq Composite and many tech components are starting to look green around the gills, QualCOMM's (NASDAQ:QCOM) shares have held strong at near six-month highs. Folks involved in the Tech Sector may not share this view; but my impression as a generalist is that QualCOMM flies under the radar. A characteristic that in my book may be a double-edged sword. Right now the company benefits from its relative obscurity versus the likes of Google (NASDAQ:GOOG), Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL) or Intel (NASDAQ:INTC) because this is not where people first look when they think about selling tech. In good times the same holds true but in the opposite direction. So, this characteristic of QualCOMM shares may make it a less volatile means of exposure to technology, and given today's mood, that should not be overlooked.

    By finding the average P/E for QualCOMM using a constant $5.11 (consensus for 2014; source: Yahoo! Finance) as the denominator for both YTD and the last 9 months of 2013's share prices, I found that the market is projecting growth of 13.6% on an annualized basis. The math is based on an average P/E this year of 14.6x divided by an average P/E last year of 12.9x. To put this into context the Street is looking for growth of 10.8% (FY15 EPS of $5.66 divided by FY14 EPS of $5.11). Interestingly, when you add back in its dividend yield of 1.8%, these two perspectives on perceived growth come into close alignment (i.e. 13.6% versus 12.6%). All this to say that there is not much variability on QualCOMM's valuation at present.

    But things can change very rapidly and in many cases are not company specific but rather related to the industry. This may be a long shot, but Blackberry (NASDAQ:BBRY) reports its 4Q14 and FY14 results this Friday March 28, 2014. The company has been a cash drain for a while. So, whatever its management says about its own prognosis should be taken with a grain of salt. Still, given the tech sector's funk of late; any negative sentiment that BBRY may report regarding the industry could be used as a catalyst spurring broader sell-off in their vendors and all communication equipment providers.

    I would be interested in picking up QualCOMM on a dip; but only at the right price. Based on my analysis of the company's balance sheet, cash flow statement, and income statement; I get to a fair value of $82 per share. Dividing that by 1.108 (the expected growth) yields a price of $74 per share as my entry point. Whether or not it gets down to my range in the near-term, the outlook for QCOM relative to its peers definitely has me interested (see table at end of article for comparisons).

    Outlook for QualCOMM

    As of January 29, 2014, QualCOMM's management provided revenue guidance that ranged from $26 billion to $27.5 billion. The consensus of $26.8 billion for FY14 is slightly above the mid-point of QualCOMM's management's guidance. The mid-point of management's 2014 sales projection is 7.6% higher than actual revenue for FY13. However, this would mark a deceleration from +30% growth for FY13 versus FY12's revenue.

    Outlook for Nokia

    The comparison of projections with past revenue is not beneficial for evaluating Nokia (NYSE:NOK) because the company recently sold its Devices and Services business to Microsoft (NASDAQ:MSFT) for EUR 5.44 billion. With that said the company reported that its continuing operations posted a net sales decline of 17% during FY13. Looking forward the company's sales are expected to grow at the second fastest pace among its larger peers.

    Outlook for Ericsson

    Net sales for Ericsson (NASDAQ:ERIC) during FY13 were flat versus FY12 levels (SEK 227.4 versus SEK 227.8 billion). However, sales adjusted for FX grew approximately 5% year-over-year. The company has been targeting an annualized growth rate of 4% through years 2012 - 2016. Thus, consensus estimates of 3.8% between FY15 and FY14 are similar to the company's long-term guidance.

    Outlook for Motorola Solutions

    Motorola Solutions (NYSE:MSI) sales were flat in 2013 at $8.696 billion, just $2 million below what the company posted in the prior year. The company's guidance for 2014 ranges from flat to an increase of 2% over 2013 sales. But the company is anticipating that it can improve its non-GAAP operating margins to 18.5%, from 17.6% or a 90 basis point climb y/y.

    Outlook for Cisco Systems

    Cisco Systems (NASDAQ:CSCO) did not provide specific annual revenue guidance in its recent conference calls with investors other than to suggest that investors should model revenue conservatively. The company has however provided non-GAAP EPS guidance that ranges from $1.95 to $2.05 for FY14. The expectations on Wall Street are just below the mid-point of this range at $1.99 per share with consensus assuming that FY14 revenue equates to $46.4 billion or ~ 5% below the prior year. If Cisco's 3Q14 shapes up in a fashion similar to the company's guidance, then CSCO will have to have a strong 4Q14 in order to achieve its full year EPS guidance.

    Appendix - Tables and Charts

    source: Yahoo! Finance

    (click to enlarge)

    QCOM data by YCharts

    Source: S&P Dow Jones Indices McGraw Hill Financial, February 28, 2014

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Mar 27 2:33 PM | Link | Comment!
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