Thursday, April 26, 2007

The 3G of biotech

The three biotechnology companies I follow all reported 1st quarter results in the last couple of weeks. How do I rank their performance at the moment?

1= Gilead
1= Genzyme
3 Genentech


GILD has a huge amount of momentum at the moment with its HIV drugs. In Q1 its HIV sales grew 56% to $700 million. Its drug cocktail Atripla is rapidly becoming the number one treatment for newly diagnosed patients. It also has a new HIV drug under development which is about to enter Phase III trials.

GILD's 'flu drug Tamiflu is providing a growing income stream and sales of their Hepatitis B drug grew 35% to $71 million in the first quarter.

To cap it all off GILD has a new drug for the treatment of PAH under review by the FDA with the result due on June 18, as well as a Cystic Fibrosis drug in Phase III trials.

Analysts were estimating earnings of $3 for 2007 but as GILD earned $0.93 in Q1 full year earnings could be closer to $4. That would put GILD on a 2007 PE of 21 - not bad for a company that just grew revenues at 48%!


What is there not to like about GENZ? The drugs may be obscure but revenues are growing at a 20% rate and margins are tightening as GENZ leverages its scale.

Management are extremely bullish about the future, recently stating that they could double their revenues in five years based on their current drugs alone. Behind the current drugs is a strong pipeline including a C-difficile drug in Phase III trials, a tranplant aiding drug in Phase III trials and a viscosupplement drug also reaching the end of its Phase III trials.

GENZ have just raised 2007 guidance to $3.25. Using a growth rate of 20% a PEG of 1 would value it at $65 - right where it is now. However EPS growth should be above 20% as margins are increasing. Either way a 2007 PE of 20 seems cheap for a company of the quality of GENZ.


Genetech is the big boy of the three, with Q1 revenues of $2.8 billion. Earnings increased 60% in the last quarter but the share price is going nowhere. The reason is the pipeline. There are no new drugs on the immediate horizon, just expansions of the uses of the current drugs. Avastin has been so successful it is almost making DNA look like a one trick pony.

The pipeline is particularly difficult to understand thanks to Sue Hellmann's love of jargon. I quote from the recent conference call: "We anticipate that event-driven regular interim analysis will begin in 2007 in the Phase III adjuvant colon cancer study, NSABP C-08." A sentence you may need to read more than once!

DNA is probably good value at $80 but it may be worth waiting for more multiple contraction before buying in.

My time is up. My opinion of large biotechs is unchanged - at these levels they offer a compelling risk - reward ratio.

Thursday, April 19, 2007

eBay looking solid

eBay reported another solid quarter last night with revenue up 27% and non-GAAP eps up 34%. Not bad for a company on a 2007 PE of 27.

The bottom line grew faster than the top line thanks to a weak US dollar, a higher operating margin and a lower share count. Obviously the dollar weakness may not continue for ever but it is great to see the share buyback program making a material difference and to see expenses growing slower that revenues.

One plus point was the acceleration of advertising revenue growth which grew by 65% compared to 2006, compared to 49% growth in the last quarter. Advertising revenue is still relatively insignificant though at $60 million compared to other revenues of $1700 million.

The problem eBay faces is the one all large, successful companies face - saturation in their largest markets. In this sense eBay are a victim of their own success, with growth in the US and Germany stalling. The management are doing their best to re-ignite growth and if they succeed this will obviously have a very material impact on the results.

The pattern is still one of slowing revenue growth. The figures for the last five quarters are:

35, 30, 31, 29, 27.

One positive is that international marketplace revenue now accounts 51% of total marketplace revenue, so hopefully the faster growing international revenue will become more and more significant.

What do I think of eBay? I think it is cheap at $35 and deserves to trade at $40 at least. It is recession-proof and still growing at a respectable rate. In light of that and the ongoing share buyback it is a buy for me.

Thursday, April 12, 2007

The mystery of insurance

As this blog is called "Mistaken Phil" I feel at liberty to admit that a recent report I studied left me with more questions than answers.

The company in questions is Friends Provident (FP), a FTSE 100 life insurance provider.

Here are the basics: the market cap. is £4 Billion, the PE is about 15 and the yield is about 4%. The analysts expect earnings growth of 10% in 2007 but as the income jumps all over the place depending on external factors that is at best a rough guess.

The confusion arises from the 2006 report. Group profit before tax is stated twice, once on an EEV basis and once on an IFRS basis. EEV profit decreased 34% while IFRS profit increased 34%!

I am used to seeing results stated on a GAAP and pro forma basis where the pro forma results normally look better but are in the same order of magnitude as the GAAP results. But I have never seen anything like this, where two different measures give totally conflicting information.

What is EEV? Wikipedia comes to the rescue. European Embedded Value is an attempt to standardise how embedded value is calculated between life insurance companies. The embedded value of a company is calculated by added together its net assets and the present value of future profits from its insurance contracts. Obviously the present value of future profits will vary considerably depending on what assumptions are made during the calculation. EEV attempts to standardise these assumptions.

Still awake? So as the EEV profit is designed to be appropriate for life insurance companies I guess I should use that rather than IFRS? So doesn't that mean 2006 was a very bad year? So what does chief executive Philip Moore say about 2006?

"We are announcing a strong set of results built around solid operational performances in both UK and international life and pensions." Right.

There is another EEV metric that presumably Philip was looking at when making that statement. PVNBP or Present Value of New Business Premiums increased by 31% in 2006; an impressive result which makes me wonder why the EEV group profit decreased by so much.

Turning away from confusing numbers, FP has three businesses: UK life insurance and pensions, international life insurance and pensions and asset management through the struggling Foreign and Colonial arm.

Philip Moore is confident about the future: "We are confident that we have three businesses well positioned to deliver excellent long-term future growth."

Is FP a buy? Maybe. It has a nice yield and if I can get my head around the figures it could indeed be worth accumulating.