Investors often overlook SEC filings, and it is the job of the 10Q Detective to dig through businesses’ 8-K and 10-Q SEC filings, looking for financial statement ‘soft spots,'(depreciation policies, warranty reserves, and restructuring charges, etc.)that may materially impact Quality of Earnings.
Eli Lilly (LLY-$35.01) chairman and chief executive office John Lechleiter stated that the drug maker’s deal to co-promote Japan-based Kowa Pharmaceuticals’ new lipid-modifying med Livalo would permit Lilly to expand its “product offerings in the cardiovascular therapeutic area and more efficiently utilize [its] existing cardiovascular sales force.” Corporate-speak, no doubt, to signal that its representatives need something to do. Although still in the early phases of launch in the U.S., worldwide sales for Effient (prasugrel), used to prevent clots in patients undergoing artery-opening stent procedures, were just $22.6 million in the third quarter of 2009.
The VEBA-UAW deal eerily resembles other debt reduction initiatives undertaken by Ford Motor Company (F-$10.00) — improving liquidity and rinsing its balance sheet clean of debt, in part, by issuing new stock and swapping debt for stock. For example, during the first-half 2009 the company exchanged $4.3 billion in convertible debt for 467.9 million shares of common stock.
In the last seven quarters, common stock outstanding rose by some 65 percent to 3.24 billion, which does not include almost 933.6 million in additional shares reserved for issuance under executive bonus plans, VEBA contributions, and debentures/notes with convertible options; yet, in the same period of time stockholder equity plummeted from $5.63 billion to negative $7.3 billion, as the company burned through piles of cash and quarterly losses to survive the dark days of the Great Recession. Read More at BNET AUTO….
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
Gilead Sciences ($43.20) receives a blended royalty on sales of Tamiflu (oseltamivir), marketed by Roche Holdings. Leveraging global concerns over avian and swine flu, Roche has skillfully raised awareness of the purported need to treat the complications associated with seasonal flu in otherwise healthy adults. The Swiss drug maker’s demonstrated success in challenging the conventional wisdom that “rest and aspirin” be the preferred treatment option for seasonal flu is found in sales of Tamiflu, up 362 percent to $1.93 billion in the first nine months of 2009.
Allegations have surfaced, however, that Roche has misled governments and physicians alike on the actual effectiveness of Tamiflu in preventing complications, such as hospitalization from pneumonia or death, in otherwise healthy people afflicted with the seasonal flu…. Read More at BNET PHARMA….
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
The cost of Folotyn (pralatrexate injection) runs about $120,000 a year, a price tag that few drugs for incurable, rare cancers can match. With the runaway cost of healthcare under intense debate, critics contend that Allos Therapeutics' (ALTH-$5.99) drug for for relapsing or refractory peripheral T-cell lymphoma is excessive — especially since clinical benefit, such as improvement in progression-free survival or prolonging life, has not been demonstrated. In the pivotal PROPEL trial that led to FDA approval, duration of response was, on average, 9.4 months and the mean overall survival time was 14.7 months.
The success behind Abbott Laboratories’ (ABT-$53.78) patent-expiry settlement with Teva Pharmaceutical is that it buys the drug maker more time to switch patients from its blockbuster drug TriCor to the brand sequel TriLipix.
Efforts to broaden the commercial appeal of Abbott’s lipid franchise, which also includes Niaspan (extended-release niacin) and Simcor (simvastatin/niacin extended release), hinges on a fixed-dose combination of TriLipix and Crestor, to be called Certriad.
In fiscal 2008, GameStop (GME-$21.35) generated approximately 40 percent of its sales and 56 percent of its operating profit during the all-important fourth-quarter holiday selling season. Christmas is also critical to the company’s cash flow. For the first half of fiscal 2009, GameStop bled $261 million. Nonetheless, the nation’s largest video game retailer expects to generate free cash flow in the range of $400 million to $425 million this fiscal year — fueled by holiday sales.
Last week Wal-Mart declared “Game On,” announcing 15-20% savings on 25 top video game titles, including bestsellers Rock Band: Beatles (Wii) and Left 4 Dead 2 (Xbox 360). Could GameStop find coal in its Christmas stocking this year? Read more at BNET Retail….
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
Valero (VLO-$16.36) is looking to improve margins by shifting its crude diet away from heavy sours to lighter “sweet” (lower sulfur content) grades of oil. Prior to the shuttering of doors at the 200,000 barrel-per-day heavy crude facility in Delaware City, Valero had idled about 20 percent of its total capacity of 2.8 million barrels of oil a day — with another 24 percent of refinery utilization down for maintenance.
Cost cutting will not be enough to shore up weak fundamentals. Though refineries coming online in China and Brazil are expected to serve domestic markets, capacity expansions in the Middle East and India are expected to cater to export markets, dampening any hoped for recovery in near-term refinery margins at Valero. Read More at BNET ENERGY….
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
Novartis’ (NVS-$55.78) fingolimod, first in a new class of immunomodulatory drugs called S1P-receptor modulators, reduces circulating levels of white blood cells (by bottling them up in lymph nodes). Though effective in relapsing forms of MS, treatment with fingolimod – like all disease-modifying agents – is not without risk Skin cancer being Novartis’ alleged alabatross. The FDA will likely weigh the drugs promising efficacy, however, against this adverse event by requiring Novartis to develop a RiskMap protocol.
Can fingolimod cross the finish line before German drug maker Merck KgaA’s cladribine tablet and be the first oral MS treatment to market?
Pfizer’s (PFE-$18.85) anti-HIV drug Selzentry is now approved for combination use with other antiretroviral agents for treatment-naïve patients infected with CCR5-tropic HIV-1. Granted accelerated approval by the FDA in August 2007 for treatment-experienced patients infected with the R5 HIV-1 strain, industry pundits forecasted sales of more than $500 million by 2012. Uptake of Selzentry by HIV specialists has been less than expected — a marketing disaster — with Pfizer reporting paltry sales of just $46 million in 2008.
Will expanded labeling lead to usage beyond salvage therapy for this entry inhibitor? Read More at BNET Pharma….
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
In the newly inked commercial deal with Novartis, drug designer Incyte (INCY-$8.39) retained exclusive rights for the development and potential commercialization of INCB18424 in the US. With more than 100,000 patients suffering from MF or related disorders, on the surface this looks like a sound commercial strategy. Think again — although the company had about $361 million in cash available as of November 5, no revenue stream currently exists to fund in-house development.
With an accumulated deficit of $1.3 billion sitting on its balance sheet, Incyte knows first hand the financial risks that coincide with navigating a small molecule compound from proof-in-principle and clinical trials to FDA approval and commercial viability.
The drilling slowdown has eroded Patterson-UTI Energy’s (PTEN-$15.25) U.S. land rig market share, which is down some 50 percent in the last 24 months to about 7.5 percent. Competitor Helmerich & Payne has been able to snag market share and maintain a relatively higher utilization due to stronger drilling demand — and longer duration of term contracts — for their higher horse-power rigs specially adapted for shale play operations.
With about 350 marketable rigs, Patterson-UTI is the second largest onshore driller in North America. The contractor has deployed six of its new-build Apex to shale and unconventional resource plays …. “Recovery but No Recovery” – continue reading at BNET Energy….
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
Novartis AG (NVS-$55.85) loses patent protection for its $4.4 billion blood pressure medicine Diovan (valsartan) in the major countries of the European Union in 2011 and the following September here in the U.S. Expect generic challengers to strangle Exforge’s (valsartan-amlodipine) lease-on-life, too. Does anyone know CPR? The drugmaker is reaching into its life-cycle playbook to introduce several new fixed-dose combinations before much of its anti-hypertensive franchise experiences near-fatal wheezing episodes.
The two brands comprised almost 23 percent of global pharmaceutical sales for the nine-months ended September 30.
Stelara (ustekinumab), the Johnson & Johnson (JNJ-$62.76) drug approved for the treatment of moderate-to-severe plaque psoriasis in adult patients, could be a blockbuster drug. This first-in-class interleukin (IL) inhibitor offers the appeal of fewer injections than the established biologics for psoriasis, the tumor necrosis factor-alpha inhibitors.
Genzyme (GENZ-$49.63) has already spent more than $1 billion in the last two years to build new and bigger bioreactors — notably in the U.S., Ireland, and Belgium. Eventual plans call for total perfusion bioreactor capacity to climb from 20,000 Liters to 32,000 Liters by 2012. The global brewer of enzyme replacement therapies for rare genetic diseases disclosed this week that the FDA was delaying final approval of the company’s application to market Lumizyme (alglucosidase alfa) for the treatment of Pompe disease.
Do not be mislead by ITT Educational Services (ESI-$93.00) impressive balance sheet or 27 percent gains in new student enrollments for the third quarter, as the trail of money starts and ends back at ITT itself. Federal loan programs are falling short, so the for-profit educator is dipping into its own coffers to help students cover this widening tuition gap. Up to 65 percent of its students need private lending, and analysts estimate that $100 million to $120 million in loans and scholarship assistance will need to come from ITT’s internal lending program.
In the battle for market share and sales, Biogen Idec (BIIB-$46.75) has successfully conveyed the Tysabri message to providers and potential customers alike through popular social media websites ranging from YouTube to Facebook. Despite the increasing amount of PML cases that have been diagnosed since Tysabri was re-introduced to the U.S. market in July 2006, neurologists’ confidence in the drug remains strong – with 63 percent of providers agreeing to a survey statement: “Tysabri’s benefits outweigh the risk it poses to MS patients.”
Notwithstanding the drug’s known efficacy, would it not be interesting to find out (a) to what extent do busy physicians rely on the Internet for drug education and updates? And, (b) how much of this information originates from company-sponsored sources?
Johnson & Johnson’s Invega (paliperidone) is no Dorothy Hamill poised to skate away with the gold anytime soon. The heralded successor to the schizophrenic drug Risperdal took a tumble after flubbing the double lutz. Third-quarter U.S. revenue fell 16.4 percent to $61 million, and Invega slowly wobbled away out of the rink – but not out of sight of prying eyes: providers voicing skepticism that the drug was nothing more than an expensive “me-too” Risperdal — and health insurers restricting its usage and reimbursement (Tier-3, non-preferred status on the drug formulary plans of Kaiser and United).
Generic challenges to the marketing exclusivity of the attention deficit disorder medicine Concerta (methylphenidate), Aciphex (rabeprazole) for heartburn and acid reflux, and Levaquin (levofloxacin), an antibiotic for urinary tract infections means repleneshing a once-robust portfolio will take more effort than a missed “toe off” jump.
MannKind (MNKD-$6.58) is seeking FDA approval of Afresa for the treatment of adults with type 1 or type 2-diabetes. Afresa is a drug-device combination product, consisting of an ultra, rapid-acting insulin [an inhalation powder formulation] pre-metered into single unit dose cartridges and an inhaler. In a one-on-one interview, chief financial officer Matt Pfeffer provides an update on the status of Afresa’s assigned Prescription Drug User Fee Act (PDUFA) date of January 16, 2010 and company plans for the next-generation inhaler.
Teva Pharmaceutical (TEVA-$52.03) became the world’s largest generic manufacturer through an unflinching willingness to knock down the patented walls protecting the branded products owned by Big Pharma. This legal brashness has helped the company to build a portfolio of cheaper versions of such well-known drugs as the colorectal chemotherapeutic agent Eloxatin (oxaliplatin) and blockbuster drugs like Adderall XR (amphetamine salts) for narcolepsy and ADHD and Protonix (pantoprazole) for acid reflux.
In recent years the company has sought to mitigate encroaching generic competition – and resultant pressure that shorter pricing life cycles have on margins – by broadening its drug portfolio to include leading branded products. For example, Teva markets in the U.S. the self-administered, subcutaneous injectable for multiple sclerosis, Copaxone (glatiramer acetate), which now accounts for 25 percent of its total domestic sales.
Teva’s own Sword of Damocles, however, now threatens to cut short the patented life of Copaxone, as Mylan and other generic companies are petitioning the FDA to permit market access for their own cheaper, copy-cat versions of Teva’s MS drug. Ergo, Teva has initiated patent infringement lawsuit(s) against Mylan [and others]. Teva scientists argue, too, that the “seriousness of the disease” warrants a thorough review of its competitors’ products, including clinical trials assessing efficacy.
Does the totality of scientific evidence on Biocryst Pharma’s (BCRX-$10.00)peramivir support the intravenous administration of the drug in patients with suspected 2009 H1N1 influenza — and outweigh the known and potential risks? FDA Commissioner Margaret Hamburg opines that the answer is “yes” in her Letter of Authorization granting EUA to peramivir, despite knowing the following facts:
Dosing in pediatric patients is based on modeling of pharmacokinetic data from adult healthy volunteers and adult patients with influenza. No children (under the age of 18) have received peramivir in clinical trials… .Continue Reading at BNET PHARMA….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
On its recent earnings call, Biogen-Idec (BIIB-$42.59) management brushed aside alleged safety advantage [PML-related] to “drug holidays” for long-term Tysabri users. Specifically, when asked to comment on the proportion of patients in Biogen’s database where providers implemented drug holidays, senior researcher Al Sandrock tersely replied: “From the data we have — we are seeing very, very isolated cases of that.”
About 13,400 patients receiving monthly infusions (or approximately 29 percent of all patients taking the drug) have been on Tysabri therapy for more than two years — paying, on average, $28,500 per year for 13 infusions. It’s easy to do the math, subtract number of infusions and units sold decline.
Could physician and patient distrust lead to Tysabri (once again) losing market share to Teva Pharmaceutical’s (non-interferon) immunomodulator Copaxone?
Continental Airlines (CAL-$11.50) likes to brag that its Work Hard. Fly Right campaign reflects the philosophy of the world’s fifth largest air carrier. That – and its corporate culture –says the company, is what helped make Continental the most admired airline among FORTUNE Magazine’s 2009 list of "Most Admired Global Companies." This adulation, however, likely excludes dog lovers – given its policy of banning certain kinds of puppies from flying to their new foster homes. Just ask Joey, a four-month old pit bull…. Read More at BNET Travel.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
The distribution deal Netflix (NFLX-$55.32) signed with Sony is important because it not only ends the lock Microsoft had on the U.S. movie-rental service provider in the game console market — the Xbox 360 had previously been the exclusive videogame brand (the expiring agreement was recently extended to spring 2010 at Microsoft’s option) — but also because it broadens the number of TV sets already enabled to accept streaming Internet content. And, with about nine million PS3 users, Sony offers fertile ground from which Netflix can grow its own subscriber base.
AMR (AMR-$5.90), the corporate parent of American Airlines, continues to jettison unprofitable routes and shift more traffic capacity to hubs in Dallas/Fort Worth, Chicago, Miami and New York, along with the city of Los Angeles. That said, AMR’s competitive global presence could be severely impaired — think loss of feeder traffic — if two cornerstone OneWorld carrier initiatives collapse.
AMR and fellow partners British Airways and Iberia are looking to expand their existing oneworld pact to include coordinated schedules and prices — figuring that jointly serving destinations will create operating efficiencies and is permissible under the liberalized flight policies of the 2007 U.S. – EU “Open Skies” agreement(intended to deregulate transatlantic markets and permit airline operators to enter into cooperative arrangements, including codesharing, franchising, and leasing). In September 2009, the European Union issued a “Statement of Objection” related to the proposed joint business proposal …. Continue Reading at BNET Travel ….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
Expect European regulators to likely recommend that the use of Biogen Idec’s (BIIB-$44.16) drug for relapsing forms of multiple sclerosis, Tysabri, include mandatory drug holidays after a determined length of use, as 23 cases of progressive multifocal leukoencephalopathy (PML) have been reported in those on therapy. How would this development impact recent sales momentum of Tysabri – e.g. for the first time since early 2008 Copaxone (glatiramer acetate) patients became the primary source of switches – and the growing importance of the MS drug to operating profitability? Read more at BNET Pharma Industries….
Web Buzz: Biogen Idec Update – could there be a link between the seemingly higher prevalence of Tysabri-related PML cases in Germany and lack of oversight? Read More at BNET Pharma….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
At a glance, the financial performance of Atheros Communications (ATHR-$28.90) suggests the wireless chipset provider is weathering the downturn well, due to increasing acceptance for both newer 802.11 products (a set of standards carrying out WLAN computer communication in the 2.4, 3.6, and 5 GHz frequency bands) and its Ethernet solutions. A one-time income tax benefit, however, boosted net income from 11 percent (of net sales) to 25 percent, up from seven percent last year, according to the 10Q regulatory filing with the SEC.
Chief executive officer Craig Barratt boasts the the strength and diversity of the company’s products will enable Atheros to thrive in coming quarters. Could his ringing optimism have anything to do with personal interests to get the Board to revisit his annual base salary, which the Compensation Committee cut in February by 40 percent to $204,000?
Marriott International (MAR-$28.04) learned the hard way that moving from a cash-based business like lodging to a financing-based business like timeshares wasn’t without risk – especially when consumers go bust and credit markets dry up. Going forward, the hotelier will no longer invest its own capital into new luxury-residential and new timeshare properties. Can the company avoid triggering the debt leverage covenant of its revolver credit line by selling off parts of its $1.5 billion in timeshare inventory? To read more about the near “junk status” of Marriott’s indebtedness, click on BNET TRAVEL industry….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
What does the future hold in store for Depomed’s (DEPO-$3.60) investigational non-hormonal therapeutic option for the treatment of menopausal hot flashes, Serada? In an exclusive interview, chief executive Carl Pelzel shared his thoughts with me on the higher-than-expected efficacy seen with patients given placebo and possible outcomes from a likely meeting with the FDA in December. Continue Reading at BNET PHARMA Industries….
KB Homes (KBH-$15.63) said on Monday the Securities and Exchange Commission is investigating it for possible accounting and disclosure violations. As if the SEC were not enough of a distraction – if the homebuilder’s tangible net worth falls below the required maintenance covenant of $278.2 million, its bankers could be poking through its books, too:
As late as August 3, MannKind Corp (MNKD-$6.34) predicted a successful outcome to negotiations with Big Pharma to co-market its lead product candidate, the inhaled insulin product AFRESA. Unfortunately, after burning through more than $1.4 billion to develop the inhaler, still no deal. Notwithstanding credibility issues, the question remains whether the pulmonary route of delivering insulin is finished in the eyes of the FDA — or if MannKind’s inability to secure a marketing deal at this time with a deeper-pocketed pharmaceutical house was nothing more than financial posturing by the company to secure a better deal. Read More at BNET PHARMA….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
Long known as the unlucky kid brother of fashion designer Kenneth Cole, critics have long alleged that Neil Cole, chief executive of Iconix Brand Group (ICON-$12.34), has a history of overpaying for acquisitions -- in his eagerness to add breadth to Iconix's portfolio of apparel, footwear, and household related-accessories. As the recession stumbles along, if licensees of Iconix's clothing and footwear brands, such as iconic names Joe Boxer, London Fog, and Candies, fail to deliver on mandated royalty streams, what will this mean to the company's financial health and growth prospects going forward?
Cole has built Iconix on a novel, licensing-only business model with guaranteed royalty streams from 15 direct-to-retailer distribution partnerships, with such well-known stores as Wal-Mart, Target, Sears, K-Mart, Kohl's, and Lowes. The attractiveness of this business model, says management, is that it shifts all the cost-risks of inventory, manufacturing, and distributing goods to the licensing partners, which pay Iconix guaranteed royalties of up to 10 percent.
To date, Neil Cole has proven his detractors wrong, as sales increased from $80.7 million in 2006 to $216.8 million in 2008, largely resulting from acquisitions and licensing deals. Nonetheless, this growth has not come cheaply. Cole has spent more than $800 million in the last three years acquiring trademarks of long-lived brands that had fallen on tough times -- with the goal of resuscitating their growth prospects through licensing arrangements and marketing campaigns with leading global retailers. Nonetheless, concerns still linger that Neil's entrepreneurial reach might exceed his managerial grasp.
Iconix's revenues are primarily dependent on the recurring royalty streams from its licensing agreements -- which in most cases provide for guaranteed, minimum payments from its retailing partners (up to $500 million under existing contracts). However, a substantial portion of revenue is concentrated with a limited number of retailers: Target, Wal-Mart, Kohl's, and K-Mart represent approximately 17 percent, 15 percent, seven percent, and five percent, respectively, of total revenue.
Not to rain on the company's successful picnic, but could nimbostratus storm clouds be forming on the horizon? Target's U.S. licenses for Mossimo, Fieldcrest, and Waverly Home-branded products expire in January 2012, July 2010, and January 2011, respectfully; license agreements with discount, retailing powerhouse Wal-Mart for Ocean Pacific and Danskin expire in June 2011 and December 2010; and, Candies and Joe Boxer-branded product categories trademark agreements with Kohl's expire in January 2011 and December 2010, according to a recent common stock prospectus. If these retailers fail to re-up, or negotiate new agreements at less-than favorable terms to Iconix, future revenue and cash flows could be adversely affected.
The real scorcher to Iconix's financial health, however, could be the material impact changes in the amount of goodwill and other intangible assets, including trademarks, would have on the company's growth prospects. Goodwill represents almost $152 million, or 11 percent of total assets, and trademarks and other intangibles account for approximately $1.06 billion, or about 76 percent of total assets! The 10Q Detective finds it troubling that despite uneven comparable store sales at the company's key customers in the last three years -- e.g. Joe Boxer-branded sales at K-Mart dropped sequentially from $19.4 million in 2006 to $10.8 million in 2008 -- the company did not believe any impairment write-downs of its brand names were warranted.
Could the fact that asset impairments often signal a weakening undertone of fundamentals -- and reinforce industry watchers possible uneasiness with baby brother Neil Cole's continued ability to lead -- explain the reluctance to move forward with this financial litmus test? That said, asset write-downs could decrease shareholder equity, increasing financial leverage, and borrowing costs of future debt.
A read of the company's regulatory filings with the SEC shows that debtors of $328.9 million in asset-backed loans hold liens on trademarks acquired in connection with the debt borrowings. Ergo, violations of debt covenants or debt default would enable the lenders to foreclose on valuable assets such as Mossimo, Candies, Bongo, Joe Boxer, Mudd, and London Fog. Luckily, this debt, however, does not come due until 2012.
Iconix anticipates five percent organic growth for fiscal 2009, although it said in a recent press release that underlying operations will not be strong enough to offset dilution from a recent $153 million stock offering and changes to licensing terms of its Rocawear women's lines. The industry trade group, National Retail Federation, is predicting the all-important holiday retail sales season will record its second consecutive decline this November - December, too, which suggests apparel and retail clients of Iconix are not out of the winter's woods just yet.
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
Raser Technologies (RZ-$1.40) still maintains that the five production wells drilled to date are viable geothermal resources, with demonstrated flow temperatures in “commercially productive” ranges of approximately 240° Fahrenheit to 300° Fahrenheit, and bottom-hole temperatures in excess of 350° Fahrenheit. Never mind questioning previous statements by management supporting the economics of its technology at “lower temperatures.”
Given Raser’s checkered history, I wouldn’t pin my hopes on the company solving its geothermal power problems. Management will likely stumble onto other revenue pathways to profitability:
Remarkedly, even with the highest unemployment rate in 27 years, H J Heinz (HNZ-$38.69) continues to maintain its pricing power in the United States. Chief financial officer Art Winkleblack told analysts on the earnings call that 88 percent of total U.S. retail sales were sold off the shelf at full price. That said, fears about consumers buying more store brands or trading down to discounters seem mostly overblown:
Cabot Oil & Gas (COG-$33.94) estimates that production from developed (producing) reserves will decline sequentially at projected rates of 21 percent, 17 percent, and 12 percent during the years 2009 -2011. Ergo, development of Marcellus Shale leaseholds will grow in importance to Cabot: in addition to known reserves, the region offers longer-life wells with attractive economics. How will suspension of activity in PA affect total additions to reserves?
Smithfield Foods (SFD-$13.46) will continue to raise hogs and produce fresh pork, but management is intent on changing the cyclical nature of profits. Going forward, packaged-meats sold under the Armour, Butterball, and LunchMakers (among other) brands, will playing a larger role. Uncertainty exists at to whether CEO Larry Pope & his current management can “get the job done. ” In the first-quarter of 2010, packaged-meat sales of pork products actually declined two percent, as increases in average selling prices could not offset a 9 percent decline in volumes. Read More at BNET Food Industries….
To further develop its Big 4 shale leaseholds, Chesapeake Energy (CHK-$28.14) plans to operate an average of approximately 101 rigs in 2010 to drill up to 795 wells. The current operating rig count is 83. The company has had some success in raising cash - and lowering its own drill bit costs - by selling investment interests on some of this acreage. For example, the company expects that its joint venture partner, StatoilHydro, will pay 75 percent of drilling costs in the Marcellus for 2010. If weak natural gas prices persist during the next two years, can the company live within its cash resources? Read More at BNET Energy….
Lower yields resulting from declining fuel surcharges are expected to hurt 2010 sales at FedEx Corp (FDX-$73.38). The package-delivery giant plans to increase shipping rates in January 2010. Continue Reading at BNET Travel….
With only about 21 percent of anticipated 2010 gas production hedged, Chesapeake Energy (CHK-$28.11) is gambling that an economic recovery will push demand for natural gas – and prices – higher in coming quarters. The largest domestic producer of natural gas currently carries a Ba2 bond rating by Moody’s. Higher energy prices, however, could change the company’s credit rating picture…. Continue Reading at BNET Energy….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
The health of Cephalon (CEPH-$58.49) going forward could be influenced by more than just the drugmaker’s initial success in switching sleep-disorder patients from its blockbuster Provigil (modafinil) to long-term Nuvigil (armodafinil) users prior to the patent clock running down on its flagship drug. Adding to an already restless sleep for stockholders, the 10-Q Detective has identified potential intangible assets sitting on the balance sheet whose value is questionable.
At June 30, goodwill and intangible assets, totaling $1.14 billion, accounted for 25.4 percent of total assets. In my opinion, Cephalon has been ‘less-than’ transparent in adjusting the carrying amounts of certain assets, including the anticipated useful lives of certain products:
Cephalon is carrying $26.0 million in Actiq marketing rights, which is a fentanyl lollipop used to treat “breakthrough” pain in opioid-tolerant cancer patients. The company has estimated the drug has a useful life in the range of 10 – 12 years—even though generic alternatives have been available since June 2006. A price increase of 15 percent did little to offset a year-on-year 32 percent decline in sales.
Net carrying amount of the anticonvulsant Gabitril is $41.6 million in product rights. In the second-quarter ended June 30, sales of Gabitril in the U.S. decreased 25 percent from the prior year period, as prescriptions declined 19 percent. A late-stage clinical trial failure in patients with generalized anxiety disorder lessens the likelihood that the drug will find greater acceptance among primary care physicians who treat anxiety. Throw in the fact that two key patents expire in 2011 and 2012, and estimated useful life of between 9 – 15 years is obsolete.
$374.4 million in Ception Therapeutics product rights—but should its most promising drug candidate, a humanized monoclonal antibody (mAb) against interleukin-5 (IL-5), reslizumab, disappoint in clinical trials as an effective treatment for eosinophilic esophagitis in pediatric patients, expect asset impairment charges to follow.
The company is amortizing the $46.2 million intangible assets of its Durasolv orally disintegrating tablet (ODT) technology, a delivery system that permits the medicine to dissolve quickly in the mouth without chewing or the need for water, over an estimated economic life of 14 years. SPI Pharma’s Pharmafreeze ODT, Catalent Pharma Solutions’ Zydis ODT, and FlashDose (Fuisz Technologies) —a multitude of competing mouth dissolving options are flooding the market. That fact, combined with ongoing litigation against KV Pharma’s OraQuick tablet formulation [not going in Cephalon’s favor], suggest Cephalon might not be successful in protecting its intellectual drug delivery property—raising the risk a test of the useful life of this asset is coming (read charge-off).
Although impairment charges of such intangibles are non-cash in nature, such write-downs do affect stockholder equity and possible debt covenants—and could signal deteriorating fundamentals lay ahead. As if jet-lagged Cephalon stockholders donot have enough worries to keep them up at night.
Web Buzz: A working capital surplus of $1.07 billion and cash flow from operations of $313.5 million for the first six-months will not throw off enough cash sufficient to repay $750 million of convertible notes (if presented) and other cash obligations coming due in the next 12-18 months. Read More at BNET Pharma….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
In the opinion of the 10Q Detective, there is no better source to directly educate consumers on identifying and avoiding the deceptive and predatory income traps of multi-level marketing (MLM), pyramid, and Ponzi schemes than Robert L. Fitzpatrick, President of Pyramid Scheme Alert. Responding to our recent analysis on Medifast, “Ultimate Weight-Loss System or Pyramid Scheme,” we offer Mr. Fitzpatrick’s perspective on the financial consequences to self and our economy when the FTC and SEC fail to regulate or enforce existing laws against pyramid scams and Ponzi operators:
“Writing about pyramid schemes and stocks presents a strange dilemma. I have been asked to offer my views to various financial analysts regarding publicly traded pyramid selling schemes. Investors tend to view the pyramid scheme question with ambiguity. On the one hand, they don't want to be investing in a scheme that will collapse. However, given the pyramid's great capacity for rapid "growth", they do want to cash in on the revenue it generates. The issue of inherent fraudulence and harm caused is usually not on the table, only the question of timing for investment.
Pyramid selling schemes transfer money, causing losses to many and profits to a very few, without value being exchanged. In this sense, they cannot be called "businesses."
In the guise of selling products, they leave the victims with products they would not have normally bought, at prices they would never have paid in the open market, and with months or years of wasted time trying to make money from recruiting other "salespeople." The schemes use the fraudulent "endless chain" proposition, a per se fraud, as their main "selling" tool to induce the purchases and the futile, misdirected and uncompensated marketing work of the "last ones in" (who are 80-95% of the total at all times).
It is sad to me to see that these fraudulent practices, which, by design, concentrate wealth and derail real entrepreneurship, have become imbedded in the economy. When they come to Wall Street, they gain new stakeholders who are betting on cashing in as they rise. They constitute a "Main Street Bubble" of perhaps $15 billion each year, causing losses to about 10 million Americans each year. Today, this bubble, much like our mortgage bubble a few years ago, has a large lobby in DC, in the Direct Selling Association. This Main Street Bubble can sustain itself longer than a Wall Street bubble, as long as it upholds a facade of a "legitimate business" and enough people believe they offer an "opportunity", which currently millions still do. Losses tend to be hidden and so while it causes enormous harm, the structure itself remains intact to continue preying on people (and so, as you noted, continue to reward shareholders.)
China is the only country that has banned them outright and is using the force of the state to keep them out of the economy. In the end, I see them as a self-destructive force in our country, hitting us at the grass roots where maximum damage is inflicted to the heart of the economy. They are sapping wealth, a form of economic cancer. Predators are feeding off the savings or debts of many others. Nothing is being invented, produced. No true growth is occurring and certainly true value is not being exchanged.”
H&R Block (HRB-$17.52) performed miserably in the 2009 tax season, handling 5.8 percent fewer in-store, retail tax returns, as clients sought lower-cost IRS filing alternatives due to difficult economic conditions. Can the largest provider of tax preparation services in the U.S, with almost 13,000 retail outlets, draw more customers to its stores for the 2010 tax season by re-focusing marketing and operational initiatives back towards its core, store-front business? … Continue Reading at BNET Finance Industries….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
Liquid protein drinks, raw foods, Scarsdale and Atkins — is the Medifast (MED-$19.44) Meal Plan an amazing weight-loss product, or just another in a long list of fad diets? Medifast meals are formulated with low-fat protein and fiber, and are supposedly “clinically proven” to help users lose weight quickly — up to an alleged 20 pounds a month — through a process called ketosis, a metabolic state where the body is tricked into burning its own fat reserves. A review of the clinical studies provided by the company online and in regulatory filings, however, finds a troubling theme underlying most of the treatment protocols… Continue Reading at BNET Health Care Industries.
The Take Shape For Life (TFSL) website boasts that becoming a health coach is a business opportunity that has a low cost of start-up, requiring no holding of inventory as all orders are shipped to the end consumer. Detractors allege, however, the company’s growth is attributable to nothing more than a twist of the notorious Ponzi postage stamp con of 1921 — a modern day, multilevel pyramid scheme…. Continue Reading at BNET Health Care Industries.
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
With many positives developing for solar companies and the industry, such as subsidies offered by governments and plummeting prices of the key raw material poly-silicon, why are the solar stocks giving up their huge gains of the last three months? Could it be that “grid parity” is more dependent on the price of fossil fuels than previously hypothesized? Just check out the fortunes at solar panel maker Trina Solar (TSL-$26.00) for answers … Read More at BNET Energy….
Terry Swift, chief executive of Swift Energy (SFY-$20.00), announced on the second-quarter earnings call that the E&P company is planning to commence drilling in South Texas’ emerging Eagle Ford shale-gas play and expand horizontal drilling operations in the Olmos tight-sand formations of its AWP Field. With North America awash in natural gas and the commodity price environment showing no signs of improvement, does it make economic sense to increase drilling activities—especially where some gas pockets are estimated in some spots to be as deep as 12,000 feet?
Management believes that its balanced approach to growing reserves and production—total proved reserves at December 31 were comprised of approximately 43 percent crude oil, 42 percent natural gas, and 15 percent natural gas liquids - located onshore and the shallow waters of Louisiana and Texas, permits the company to adjust production output to prevailing market sensitivities. For example, a 35 percent sequential increase in second-quarter oil prices offset a 26 percent decline in natural gas prices, resulting in a 14 percent increase in average prices per BOE in the second quarter of 2009 to $36.71. Production revenue increased nine percent to $82.9 million over comparable first quarter 2009 levels.
With the pricing decline, chief operating officer Robert Banks insisted to analysts on the call that the company could make money at $4.00 gas—if it could continue to push down drilling costs. For the second-quarter, G&A decreased year-on-year 26 percent to a composite $3.36 a barrel, resulting from workforce reductions; Production costs fell year-on-year 34 percent to $8.34 per barrel, due to lower natural gas and NGL processing costs, and lower plant operating costs.
The Energy Information Administration reporting that inventories of U.S. natural gas in storage were at a multi-year high sent the Henry Hub price of natural gas falling below $3.00 (per MMBtu) for the first time since August 2002. At June 30, Swift Energy had in place price floors in effect through the September 2009 contract month for crude oil. The oil price floors cover notional volumes of 645,000 barrels –expected to cover between 69 percent and 73 percent of third-quarter production — at a weighted average floor price of $62.00 per barrel. The company, however, has not hedged any natural gas scheduled for delivery in the third-quarter.
With the pricing of natural gas unlikely to rebound in the second-half of 2009, the 10Q Detective believes Swift management is being too optimistic on its ability to profitability develop its newer properties in South Texas. It is doubtful that the successful focus on controllable per unit cost in anchor fields in Louisiana and Texas can be applied with similar success on unconventional reserves, such as the Eagle Ford shale play or the Olmos tight-sand property. The rock layers that hold the reserves in both geological formations are very dense, so the gas doesn't flow easily. Completing such wells are enormously expensive—requiring more advanced—and expensive-fracturing and horizontal drilling technologies. If the company can economically recover gas from such unconventional properties at $4 a thousand cubic feet, investors have a lucrative investment opportunity—as opposed to a merely ‘promised’ one.
Editor David J Phillips holds a short interest position in Swift Energy. The 10Q Detective has a Full Disclosure Policy.
Although DaVita (DVA-$52.38), posted solid second-quarter financial results, chief financial officer Rich Whitney admitted to analysts on the earnings call that Medicare composite rate adjustment provided for in 2009 and 2010 would not be sufficient to compensate for anticipated increases in forward operating costs subject to inflation, such as labor and pharmaceutical supplies. Whitney opined that the dialysis provider would likely continue the trend of steady growth and consistent cash flow going forward, but the 10Q Detective believes that operating profitability could tumble if the defined scope of new MediCare bundling rules, scheduled to be implemented in 2011, limit coverage for higher-cost cases and cap the utilization of prescribed erythropoiesis-stimulating agents (ESAs), such as Amgen’s Epogen (for end-stage renal disease (ESRD) patients with anemia).
Highlights of Business Operations
For the three-months ended June 30, DaVita said second-quarter revenue rose 8 percent year-on-year to $1.5 billion, driven principally by additional treatment days and average revenue per treatment (helped along by a one-percent increase in the Medicare composite rate), and gains in prescribed pharmaceuticals and average selling prices of drug reimbursement rates. The gains were partially offset by higher procurement costs for heparin and a seasonal decline in lab testing.
Operating income increased year-on-year by 8 percent to $236 million, due to an increase in average dialysis revenue per treatment, improved labor productivity, and lower operating costs of dialysis centers (due to the timing of certain expenses previously recorded in the first quarter of 2009).
Cash flow from operations during the quarter was $212 million, up from $147 million last year. The main contributors to this increase were the gain in net income and positive working capital changes (such as comparable declines in accounts receivables and inventories).
Implications of Medicare Bundling Rate Changes
DaVita generates approximately 65 percent of its sales from Medicare patients, but nearly all of its profits are derived from the 35 percent of its patients who have commercial health insurance, as rates from private insurers have historically paid on terms that are significantly higher than government programs (the average Medicare composite rate was $157 per treatment in 2008). Even lucrative payments from these private insurers, however, are unlikely to offset cuts expected in payment rates under the Medicare ESRD program, according to the second-quarter 2009 regulatory 10-Q filing:
In July 2008, the Medicare Improvements for Patients and Providers Act for 2008 was passed by Congress. This legislation provides for an increase in the composite rate of 1% in 2009 and in 2010. In addition this legislation introduces a new payment system for dialysis services beginning in January 2011 whereby ESRD payments will be made under a “bundled” payment rate which will provide for a fixed rate for all goods and services provided during the dialysis treatment, including laboratory services and the administration of pharmaceuticals. The initial 2011 bundled rate will be set 2% below the payment rate that providers would have received under the historical fee for service payment methodology. Beginning in 2012, a new single bundled payment base rate will be adjusted annually for inflation based upon a market basket index, less 1% of such index.
The two-percent reimbursement cut will reduce Medicare revenues by an estimated $60 million, according to Whitney. As DaVita operates principally as a dialysis and related lab services business, the company does not have the ability to quickly offset the hit to revenues. What the company can do, however, is continue to focus on cost-control initiatives, such as increased use of cheaper drugs where possible. For example, a generic alternative to Watson Pharmaceuticals’ Ferrlecit, an intravenous iron-supplement for the treatment of iron deficiency anemia in hemodialysis patients receiving supplemental epoetin therapy, is expected to enter the market later this year. Ferrlecit currently has about 30 percent of the $660 million U.S. IV iron-replacement therapy market, according to IMS Health, a pharmaceutical market researcher.
Prior to bundling, use of branded iron was a benefit, for the company was reimbursed at average selling price plus six-percent. Come 2011, a bundling system that includes one payment for treatment plus drug use likely motivates DaVita to extract margin gains through clinical outcome efficiencies. For example, several studies suggest regular IV iron-supplementation can reduce the total amount of the more expensive EPO needed by patients. Avoiding the high cost of EPO therapy is not without its own set of risks for DaVita, however, as Epogen currently accounts for approximately 20 percent of dialysis and related lab services revenues.
Analysts estimate that 60 percent of the 345,000 U.S. dialysis patients with ESRD now dialyze at either DaVita or its larger rival, Fresenius. This stronghold on the dialysis market, however, means little when it is the U.S. government that ultimately controls pricing power.
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
