Judah F. - Senior Analyst

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Apple Kicking RIMM While It’s Down
Posted by Judah F. - Senior Analyst on Jun 25th, 2010 4:31pm

Yesterday, after the close, BlackBerry manufacturer Research in Motion (NSDQ: RIMM) reported its first fiscal quarter of 2011.  Earnings per share were better than expected at $1.38 versus $1.34 consensus.  Sales missed expectations and came in at $4.24 billion for the quarter versus $4.35 billion consensus estimates.  In their press release, RIMM also announced a 31 million share buyback program which may be what took the stock up briefly.  But, it was disappointing unit shipments during the quarter which seems to be what the market is focusing on.  RIMM shipped 11.2 million devices during the first quarter, just hitting the low end of the range of consensus expectations which were for 11.2-11.8 million units.  All indicators point to sales of smartphones escalating, which leaves only one explanation for the disappointing level of shipments – someone is taking market share from RIMM.  Prime suspect: Apple (NSDQ: AAPL).

BlackBerrys just don’t garner the excitement that a new iPhone does.  The lines at Apple’s stores yesterday were as insane as ever (check out this guy’s slideshow of his travails outside the 14th street store in Manhattan), Japanese iPhone fans, dressed up as phones, waited 3 days to get their hands on the 4th iteration of the smart phone.  Jason Bateman, of Silver Spoons and Arrested Development fame, was caught cutting the line outside a Los Angeles Apple store and was incessantly booed by the crowd despite the movie role hot streak he has been on.  Sell-side analysts across Wall Street have been handicapping the iPhone 4’s first day sales numbers.  Piper Jaffray’s Gene Munster is casting a wide net with 1-1.5 million units sold , while Oppenheimer analyst, Yair Reiner, is comfortable with the 1.5 million number (600,000 units were pre-ordered).  Of particular interest is the survey the Piper Jaffray team conducted among iPhone customers in San Francisco, Minneapolis, and New York, as they waited in line.  608 customers were interviewed and 77% of them said they upgrading to the iPhone 4 from a previous version of the iPhone.  That number is staggering.  But it got me thinking – how many people do you know who have owned every single iteration of the iPod?  Personally, I have owned 5 versions (and I’ve only lost one); and I’m not even particularly Apple-philic.  Apple has done what only high end pocket book manufacturers have been able to do in this languishing global economy – convince their customers they need a new one every year.  In more bad news for RIMM, 6% of the iPhone 4 buyers surveyed by the Piper team were switching from a BlackBerry (3% were switching from Android phones and 2% were switching from Nokia).

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Droid Does (Scare Apple)
Posted by Judah F. - Senior Analyst on Jun 23rd, 2010 6:26pm

Today, Verizon Wireless (NYSE: VZ) announced the release of the latest and greatest smartphone that runs on the Android operating System (NSDQ: GOOG); the Motorola Droid X (NYSE: MOT).  Cool features on the Droid X include, but are not limited to, a 4.3 inch display, HDMI output, and the ability to record 720p video.  My favorite feature, however, is the phone’s capacity to transform into a Wi-Fi hotspot for up to 5 users; if you have trouble making friends this may be the phone for you. 

Over the past few days there has been some talk about the Droid X giving the iPhone 4 a little run for its money.  To any casual observer the iPhone wins, hands down.  But I have a conspiracy brewing.  Sure, the iPhone is uber-cool.  First, it’s made by Apple.  Second, it’s got a handsome set of its own features; it’s the thinnest smartphone EVER; it also records 720p video, has built-in video editing capability, a gyroscope, and front and rear cameras which facilitates video chat.  Nonetheless, I think the latest Droid has Apple a little worried, and here’s why…

At 1:20pm today, the first “red-barred” news item regarding the Droid X launch hit Reuters and Bloomberg.  The headline was: “Verizon Wireless announces Droid X Android phone from Motorola”.  Several red-barred headlines followed, the final one coming at 1:51pm and saying “Verizon Wireless says Droid X Wi-Fi Hotspot service has 2 gigabytes download limit under the $20/month fee”.  A short 10 minutes later, at 2:01pm, Apple released a statement regarding the availability of the white iPhone 4.  Apparently the white iPhones “have proven more challenging to manufacture than expected”, but “availability of the more popular iPhone 4 black models is not affected.”  And here is the kicker – the Droid X will be available July 15 and the white iPhone “will not be available until the second half of July”.  If I’m not mistaken, the second half of July begins on July 15.  Could it be that Steve Jobs is inventing some story that will allow him to launch the white version of the iPhone 4 on the same day that Verizon launches a worthy competitor, the Droid X?  I mean seriously, how much more difficult could it be to put a white casing on an iPhone versus a black casing?  Just think about it.

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Healthcare Services Update from L.A.
Posted by Judah F. - Senior Analyst on Jun 18th, 2010 3:39pm

Goldman Sachs (GS) has been hosting its annual Global Healthcare Conference in Los Angeles this week.  Yesterday was healthcare services day and Goldman put out a note summarizing the presentations made by Aetna (AET) and Allscripts-Misys (MDRX).  Aetna discussed some important themes currently pervading the health insurance industry.  Aetna said they will raise their 2010 guidance when they report Q2 earnings on July 28 as a result of better-than-expected underwriting of late.  AET also talked about their tempered optimism regarding the proposed treatment of medical loss ratios (MLR).  The MLR is the percentage of insurance premiums actually spent on customers’ medical claims.  Back in the heyday of health reform there was talk about forcing health insurance companies to spend 90% of their collected premiums on medical claims.  Nowadays, the National Association of Insurance Commissioners (NAIC), with backing from Health and Human Services (HHS) Secretary Kathleen Sebelius, is looking to set the MLR at 80%, giving health insurance companies some much-wanted breathing room.  Still, there is much uncertainty surrounding the implementation of health reform, and the health insurance industry is as interested in how it will all turn as you or I.  In the near-to-medium-term, what will unquestionably help managed care companies is an improved employment picture; more people working means more people getting health insurance through their employers, and ultimately from insurance companies. 

 MDRX talked about their recently announced merger with Eclipsys (ECLP) and their intentions to expand their electronic medical record (EMR) offerings beyond doctors’ offices, to hospitals and nursing homes (this is ECLP’s client base).  CEO Glen Tullman discussed an interesting trend developing in the EMR space.  He cited North Shore Long Island Jewish hospital as an example of a hospital system subsidizing affiliated physicians’ implementation of EMR software.  The Goldman Sachs analyst believes this subsidy would be in addition to the fiscal stimulus subsidy that doctors are eligible for.  If hospitals are the target, McKesson (MCK) should have a relative advantage given that they already distribute drugs, medical supplies, and technological solutions to the largest hospital systems in the country.  Athenahealth (ATHN), on the other hand, is focused on the physicians’ office market and this trend could hurt them.

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Should Apple Be #1?
Posted by Judah F. - Senior Analyst on Jun 17th, 2010 8:52pm

At 9:26am this morning, the venerable flyonthewall.com posted a headline that read “Rumor: Apple 4-for-1 stock split speculation circulating”.  This is a topic we have discussed multiple times on our broadcast – the prospect of AAPL splitting its shares so that it becomes a realistic candidate for the price-weighted Dow Jones Industrials index.  Whether the rumor is true or not is not my concern, my concern lies in Apple’s meteoric rise over the past year.  From June 18 of last year through today’s close, AAPL is up 100.51% while the S&P 500 index is up 22.55%.  For comparison, Microsoft (MSFT) is up 11.35% over that time and Google is up 20.44%.  So on a day that AAPL made another all-time, I have to ask the question – does anyone else find this strange??  Apple’s market cap is now $247.38 billion, $16 billion greater than Microsoft, $88 billion greater than Google, and only $47 billion less than Exxon Mobil (XOM).  Thanks to BP and general economic malaise, the oil and gas space isn’t exactly an area of growth.  So, whether they make it into the Dow or not, it is surely conceivable that AAPL could soon be the largest company in the world by market cap.  I can't help but find that strange.  Only about 15% of computers in use are Apples.  As a user, I know the iPod is awesome, and Macs and iPads look great too, but they’re not ubiquitous.  Everyone uses Microsoft Windows, everyone uses Exxon gasoline, but, to me, Apple’s products are more accessories than necessities, and I’m a little uncomfortable with an accessory company being the largest company in the world.  I think most people would disagree with me, and, to a certain extent, I disagree with myself.  Apple is a growth company, they’re a luxury goods company (read iDeans for more on this), a cutting edge mobile technology company, and they seem to have the secret sauce for making money in any economic environment.  Nonetheless, it’s going to take me a little while to wrap my head around this one.

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Drugstore Battle Royale
Posted by Judah F. - Senior Analyst on Jun 9th, 2010 7:00pm

On yesterday’s broadcast I highlighted Walgreens’ (NYSE: WAG) announcement that they would no longer fill prescriptions for new or renewing customers on CVS’s Caremark prescription drug plans.  WAG cited 3 reasons for the demise of the relationship: 1)CVS’s Maintenance Choice offering forces patients to use CVS pharmacies, 2)WAG is not notified in a timely manner of new dealings they should have with a recently acquired CVS  prescription drug plan 3)CVS’s reimbursement rates are unpredictable and unfair.  Items 2 and 3 had some backing from the pharmacists association of America, but item 1, the issue with Maintenance Choice, struck me as odd.  To me, Maintenance Choice is one of the best things CVS’s PBM business has going for it.  It is CVS’s value-added when they are pitching their PBM services to a large employer.  Maintenance Choice, in a nutshell, is a service that allows CVS Caremark customers to fill 90-day prescriptions by mail or at a CVS pharmacy at the same price.  Mail is always a cheaper distribution method for a PBM, so this is quite unique in the business.  When WAG mentioned this as a reason not to do business with CVS it sounded more like a shot across the bow than a legitimate cause for divorce. 

CVS’s response today, that they would now drop customers on Walgreens’ prescription drug plans, confirmed my suspicion.  This is not about patients’ best interests; it’s about the two largest drug store chains in the country outdoing each other.  With 7,500 Walgreens and 7,000 CVS stores across the country there’s some pretty significant geographical overlap between the two, but this will undoubtedly perturb some loyal pharmacy customers.  However, ESRX and MHS, the two other large PBM players in the space, probably aren't too upset.

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Take Two – Don’t Mind if I Do
Posted by Judah F. - Senior Analyst on Jun 8th, 2010 6:00pm

Three weeks ago I had the distinct pleasure to spend the weekend with my favorite second cousin (who just may be my second favorite cousin).  It was a beautiful weekend in Fairfield County, Connecticut, but 16 year old Jack (that’s what I’ll call him) could not be coaxed from the 66 inch television in his entertainment center.  One might think that it was the size of the television that kept him there, yet I am virtually certain that a meager, 32-inch TV would have sufficed, as it was the device connected to the TV that was so engrossing.  After every mandatory meal or family activity Jack would politely ask his father: “can I go play my game now?”  And, as per their arrangement of video games on weekends, Jack would return to the television, grab his Xbox 360 controller and resume his game of Red Dead Redemption.  My video gaming days ended with Super Mario Brothers 3, so I was floored when I saw the graphics on Red Dead.  I would be lying if I said that I didn’t spend a good hour or two just watching Jack play; watching a movie would not have been particularly different. 

With their release of second quarter 2010 earnings this afternoon, Take Two Interactive Software (NSDQ: TTWO) has me believing my cousin is just an adolescent cog in the wheel that is the video game industry.  TTWO’s Executive Chariman, Strauss Zelnick opened the earnings call by saying: “I would like to thank everyone at Rockstar and everyone at Take Two for their hard work and congratulate them on delivering a stellar title.  Primarily as the result of Red Dead Redemption, I'm pleased we're increasing our guidance for the fiscal year.”  He was soon followed by CEO Ben Feder who added that “in less than one month in the market, we have sold over 5 million units worldwide”; not too shabby for the first title in a video game series. 

TTWO’s earnings summary is as follows: they came in at $0.34 bottom line, beating consensus Q2 EPS estimates by $0.07, but missed on the top line by $12m.  TTWO raised Q3 EPS guidance to a loss of $0.10-$0.20 versus consensus of ($0.39) and Q3 revenue guidance to $250-$200m versus $165m consensus.  FY10 EPS guidance was raised to a loss of $0.10-$0.30 versus consensus of ($0.38) and the company’s revenue estimate for the year is now $880-$980m versus $911m consensus.  After being down more than 3% during the trading day, TTWO is now up more than 1% in the aftermarket.  Shares of TTWO are down about 9% over the past 5 days.  Like every other video game maker has on recent calls, TTWO management did acknowledge that 2010 is expected to be a particularly difficult year for the industry.  Nonetheless, a potential second fiddle to their Grand Theft Auto franchise is something for TTWO to cheer about.

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Rolling News Indicator
Posted by Judah F. - Senior Analyst on May 25th, 2010 10:49am

Jeremy Klein, our Chief Market Strategist, has his rolling tick indicator that gauges over-buying and over-selling in the market based on NYSE closing tick orders each day.  I, on the other hand, have a rolling news indicator (completely original name of course).  Albeit less formal, my rolling news indicator is a mental accounting of news flow throughout the day.  The 3 scrolling news services I watch are Reuters, Briefing, and theflyonthewall.  Reuters is tougher to interpret since Reuters is the largest news organization in the world and aggregates headlines from all over the world, resulting in, sometimes, more than 100 headlines scrolled within a minute.  Briefing and theflyonthewall are easier to analyze given their focus on domestic markets.  On average, news flow is heaviest in the morning.  Sell-side analysts’ upgrades and downgrades begin to come out around 5am and continue until about 9am.  During the peak of earnings season, one will also see earnings reports and conference call announcements during this period.  Sprinkle in “news” and you’re looking at between 1 and 5 headlines per minute.  As we approach the market-open, through about 9:45am, news on market technicals takes over and the rate of 1-5 headlines per minute in maintained.  After 9:45am, the rate of news really depends on the day.  On a heavy news day (e.g. earnings season, important congressional hearing, riots in Greece, etc.) one will continue to see headlines every 2-3 minutes until noon.  On a particularly slow day, the gap between headlines can stretch up to 5 minutes, sometimes even 10.  Around lunch time it is not unusual to see gaps of 12 minutes.  And then the gaps tighten as market technicals take over again toward the end of the trading day. 

It is for the above reasons that I have been surprised with news flow over the last 2 days.  It has not been unusual to see gaps of 5 minutes between headlines post 9:45am but before noon.  With volatility in the market up 20% (according to ticker VXX) over the past 5 days, I would have expected more market moving news.  Nonetheless, there isn’t much.  When I woke up this morning, S&P futures were down 29 handles on, what seemed to be, Kim Jong-Il rallying his troops and renewed concerns in the EU – not exactly a “shocker” in either case.

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Really Weird Science
Posted by Judah F. - Senior Analyst on May 21st, 2010 3:38pm

Yesterday evening marked the conclusion to the Jewish holiday of Shavuot, or Pentecost as it is known to those of Christian faith.  Outside of Israel, Shavuot is a two-day holiday characterized by abstention from televisions, cell phones, computers, and electricity in general.  Around 9pm, when the holiday ended, I turned on my Blackberry and watched the unread email count rapidly ascend as the subject lines of my new emails scrolled down the screen.  During that exercise 3 headlines, in particular, caught my eye.  All were alerts that I have sent to me by the Wall Street Journal.  The first was: “Dow Falls Into Correction Territory”.  My first thought was “not good” as I knew our fund had gone into the Shavuot holiday relatively long.  The second headline was “Paintings Worth 500 Million Euros Stolen From Paris Museum”, to which I thought “pretty cool” (I love The Thomas Crown Affair).  The third headline, however, was the one that required a double-take; “Scientists Create First Synthetic Cell”.  I quickly read the attached article and, even then, I didn’t completely grasp what had happened.  And so, today I went to Science, the journal where the paper detailing this herculean feat was presented. 

The long and short of it is that scientists at the J. Craig Venter Institute created a synthetic genome, man-made DNA, that was implanted into a recipient cell and that cell subsequently reproduced itself.  15 years ago, scientists at Venter set out to “chemically synthesize” the DNA of Mycoplasma genitalium, the bacterium with the simplest genome of bacteria known to reproduce independently in a laboratory setting.  The genome was mapped out on a computer and then manipulated to create a new species, albeit a slight variation on the original.  The digitally modified strings of nucleotides were then sent to a DNA sequencing company, called Blue Heron Bio, which turned Venter’s digital DNA into actual, chemical DNA pieces.  Through both in vitro and in vivo processes the genome was eventually pieced together and stably grown in yeast.  After some roadblocks along the way, including the discovery of one wrong nucleotide in a genome of over 1 million, the synthetic DNA was then transplanted into an empty cytoplasm.  The newly created “synthetic cell” then proceeded to reproduce itself when grown in a glucose-rich environment. 

Let that sink in for a second and now try to quantify the magnitude of what you have just read.  Trick assignment – you can’t.  Back in 2003, when Dolly the cloned sheep was all the rage, bioethicists were sent into a tizzy.  These scientists at The Venter Institute have trumped Dolly to the nth degree.  The initial building block for Dolly was a nucleus taken from a different sheep.  The Venter team has now deemed that initial sheep unnecessary – they can make the nucleus on their own.  Think of Dolly as a brain transplant and the Venter cell as building a brain.  The prospects for this technology are endless.  In fact, Exxon (NYSE: XOM) has already jumped on the bandwagon.  XOM invested $600m in July 2009 in Venter’s Synthetic Genomics to promote the creation of biofuels from algae.  Keep in mind, however, that bankable results are still far off.  The Venter cells were able to reproduce, but that’s about it.  It will be some time before synthetic cells can be programmed to synthesize fuel or repair a spinal cord, but probably not much more time after that before animals are built from scratch.  The final paragraph of the
Venter team’s paper drives home this point:

“We have been driving the ethical discussion concerning synthetic life from the earliest stages of this work. As synthetic genomic applications expand, we anticipate that this work will continue to raise philosophical issues that have broad societal and ethical implications. We encourage the continued discourse.”

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WLP & GS, Brothers from Another Mother
Posted by Judah F. - Senior Analyst on May 12th, 2010 9:53am

On yesterday’s morning broadcast I mentioned the latest round of jabs between the Obama administration and the health insurance industry.  Wellpoint (NYSE: WLP) has been the sacrificial lamb of choice in this space.  It started in mid February when HHS Secretary Sebelius pointed out Wellpoint’s request for a 39% increase in insurance premiums in several individual insurance markets in California.  Sebelius, soon after, released a report detailing several other egregious rate increases across the country.  This tactic refocused the country’s ire on the health insurers (it was on Obama) and a trillion dollar health reform bill passed about a month later. 

In an embarrassing twist for WLP, California hired an outside actuary that found several miscalculations in WLP’s formulas that led to their request for a 39% rate increase; that request was withdrawn in early May. 

A second storyline developed April 22 when a Reuters article brought forth some damning evidence regarding WLP dropping women who were recently diagnosed with breast cancer from their insurance roster.  Sebelius jumped at this second opportunity to slam WLP and composed a letter fraught with disappointment to WLP’s CEO, Angela Braly.  Braly responded saying that the article’s claims are unfounded.  During this past Saturday’s weekly radio address, President Obama jumped on the bandwagon and said “When we found out an insurance company was systematically dropping the coverage of woman diagnosed with breast cancer, my administration called on them to drop this practice immediately”.  He didn’t mention Wellpoint by name, but the dig was blatant enough for Braly to write another letter, this time addressed directly to Obama. 

This story has several eerie similarities to what is taking place between the Obama administration and the financial industry.  One could say that Goldman Sachs is the Wellpoint of finance.  Both companies have been singled out in their industry as an example of why industry reforms are necessary.  Coincidentally (or not), the initial claims against these companies came on the heels of reform talks reaching an impass in Congress.  For the most part, this tactic has worked.  Yet, the conspicuous discrepancy between the two situations is Angela Braly’s open defense of her company in the press while Lloyd Blankfein and Goldman’s media relations team remain all but silent.  Unlike WLP, GS is under criminal investigation, but one has to wonder which strategy is correct.  Then again, the healthcare industry’s legislative fate has been sealed; the financial industry’s lobbyists may not want to stir the pot.

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Provenge - walks like a vaccine, but doesn't quack like one
Posted by Judah F. - Senior Analyst on Apr 30th, 2010 2:19pm

The primary purpose of this blog post is to drive traffic to the presentation I delivered this morning on the FDA’s approval of Dendreon’s (NSDQ: DNDN) Provenge vaccine, the first immunotherapy for cancer approved in the U.S.  That presentation can be found here.  Yesterday was a good day for all those who know someone suffering or who has suffered from cancer, it is a giant step forward in medical efforts to train the body to fight cancer on its own.  Unfortunately, approval of a cancer vaccine is not quite as exciting as it sounds.  First, this is not a prophylactic like a flu vaccine; it is an intravenous treatment that works something like this…

The late-stage prostate cancer victim gets blood drawn.  The white blood cells in the blood are then separated via leukapheresis and sent to Dendreon’s manufacturing facility.  Dendreon technicians then introduce a recombinant human protein found on ~95% of prostate tumor cells to the patient’s antigen-presenting cells (APCs) and formulate a vaccine.  The vaccine is then sent back to the patient’s doctor who injects the vaccine into the patient.

This process is quite a to-do and, understandably, is quite expensive.  Each vaccine developed brings with it a price tag of $31,000 and the standard regimen is 3 vaccines for a grand total of $93,000 per treatment.  Furthermore, Provenge does not prolong life much longer than the existing course of chemotherapy used to treat prostate cancer.  In phase 3 trials, patients on Provenge eked out 1 more month of life.  Unfortunately this is not eye-popping data when making a case to health insurance companies for reimbursement for a new drug.

Don’t despair quite yet.  The scientific community is nothing if not encouraged by Provenge’s approval.  A particularly reassuring statement was made by Dr. Kantoff, one of the lead researchers in the phase 3 trial: “people will be jumping in and trying to improve on this in a lot of cancers…over the next 5 to 10 years I think we’re going to see a lot of movement in this area”.  Still, one cannot ignore Dr. Kantoff’s timeline.

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