Victrelis by Merck (MRK) and Incivek by Vertex Pharmaceuticals (VRTX) have emerged as breakthrough hepatitis C therapies, creating all-oral combinations of direct antivirals with similar cure rates as previous cocktails, but safer and more convenient for patients, says Matthew Roden, Executive Director & Senior Analyst at UBS Investment Bank (UBS).
“It became clear that all-oral combinations of direct antivirals would perhaps give you at least as good cure rates as what the first-generation protease inhibitors were giving us, that the efficacy would at least be as good, but the safety, tolerability and convenience of all-oral combinations would be much more important for the hepatitis C community,” Roden said.
Roden also points to Gilead Sciences (GILD) as a leader in the development of next-generation hepatitis C drug development, and he says that’s been partially reflected in GILD shares this year. Roden also says GILD‘s therapies could represent net cost savings over time, and he says the company’s catalysts should further lead to equity upside.
“The key value driver here is the catalyst path in hepatitis C and in HIV. We’re positive on those, but also note that there is considerable upside to Street numbers over the next three years, which we think will protect investors from downside, while enabling relatively open-ended upside, up into the $80 range in our view,” Roden said.
In a recent Data Hosting Centers and Data Storage Report interview, Jonathan Atkin, an award-winning equity analyst at RBC Capital Markets (RY), describes the changing landscape for data hosting and cloud computing.
Atkin says Amazon Web Services, the cloud division of the online retailer Amazon.com (AMZN), has surpassed Rackspace Hosting (RAX) as the largest cloud offering and is now multiple times RAX‘s scale. Other online bellwethers like Microsoft Corporation (MSFT) and Google (GOOG) are now also in the cloud computing business.
Edward Parker of Lazard Capital Markets states that “new storage systems based on Flash technology” are developing quickly.
“I think that Flash technology has the potential to be extremely disruptive. Fusion-io (FIO) has been, by far, the most prominent emerging vendor to leverage Flash technology, but there are dozens of companies in Silicon Valley and elsewhere that have innovative products. ” This development has significant impact on storage media companies like EMC Corporation (EMC) and others Mr. Parker goes on to state: “as Flash emerges and pricing comes down, I think you’re going to see not only adoption of Flash in traditional systems, but you’re going to see newer systems as well as older parts of the IT stock being rearchitected to really take advantage of the performance properties of Flash media.”
A recent interview in the Data Hosting Centers and Data Storage Report describes trouble ahead for Symantec and Computer Associates. Raimo Lenschow, an award winning equity analyst with Barclays states:
“There’s also a clear divide in my space between the companies that are structurally exposed to new themes – like software as a service, Big Data or cloud – which have been working very well, and the more legacy software vendors, such as Symantec (SYMC) or Computer Associates (CA), who have struggled. Those companies that continue to produce the same products that they were selling 10, 15 years ago are seeing a slowdown, while those businesses selling next-generation products have been relatively well insulated so far.”
ARM Holdings plc (ARMH) specializes in the design of low-power chips and its designs are in currently 90% of the chips used in mobile devices, but ARMH now sees room for expansion in data centers and servers, says Deborah L. Koch, Co-Manager of the the Northern Trust’s (NTRS) Northern Technology Fund (NTCHX).
“ARM chips … don’t throw off as much heat and consume less energy. Not only is low power important in mobile devices, but it is also becoming more important in data centers, which consume a lot of electricity, and we expect ARM chips to be used in servers in the future,” Koch said.
Koch adds that low power servers are expected to become 10% to 15% of the overall server market, creating great room for expansion for ARM technology.
“We think that with the new workloads that demand these highly compute-intensive applications, whether it’s analytics or other cloud-enabled applications, ARM has an opportunity to expand their market in the future,” she said.
Cloud computing remains the main secular trend driving investment spending in technology, and it is enabling more secular trends in mobility, analytics and social computing, both in the consumer and enterprise worlds, says Deborah L. Koch, a Co-Manager at the Northern Technology Fund (NTCHX) and Senior Vice President at Northern Trust Corporation.
“You don’t really have the data or the logic of the applications stored on your computer, you’re accessing it through the Internet. What we’re seeing today is a broader adoption of that, not only by consumers to access digital content of all forms but also in the enterprise,” Koch said.
Koch’s largest holding is Google (GOOG), which she says has introduced more cloud technologies than any other vendor. GOOG‘s search-engine leadership has resulted in the company tackling difficult storage, computing and analytics problems in the enterprise and consumer side, and Koch also says the company’s open-source approach has helped its technologies become more widely adopted.
“We also think Google is very attractive because their advertising monetization engine is highly differentiated. Microsoft (MSFT) is a great example of a company that has thrown literally billions of dollars at Internet search and advertising, but Google continues to dominate that market.”
Despite attractive valuation plays among large-cap biotechnology companies — of which Gelgene (CELG) has emerged as a prospect trading roughly at 13 times forward earnings, with the ability to grow earnings long term at a rate of 20% to 25%, according to Dr. Jim Birchenough, Managing Director & Senior Biotechnology Analyst at BMO Capital Markets Corp. — innovation remains a way to parse through smaller companies with uncertain ways to determine true value.
On the large-cap side, Gilead Sciences(GILD) continues growing its legacy franchise in HIV, and it continues updating its life-extension products. Dr. Birchenough says “beyond that, we think that they are in the leadership position in terms of the next big area of antiviral therapy, and that is hepatitis C, and we think that they have the best-in-class direct antiviral for hepatitis C in their drug GS-7977. And ultimately, we think that that will be a significant growth driver for the company over the next decade, and where we’ll have Phase III data next year that we think will establish a substantial lead over other companies in the hepatitis C space.”
On the midcap side, he has Onyx Pharmaceuticals (ONXX) as his top pick, and he says its three cancer drugs give it an edge. Maxivar is already partnered with Bayer (BAYN.DE); carfilzomib, a “best-in-class” drug, has been approved for myeloma; and Regorafenib is expected to be approved by year’s end. “Onyx has a rare combination of product diversification, commercial-stage opportunity and the prospects for sustained earnings growth that should attract investment,” Dr. Birchenough says.
On the small-cap side, Dr. Birchenough mentions Synta Pharmaceuticals (SNTA) as a name that will do well over the next 12 months. “Synta is a development-stage company moving into Phase III with what’s called an Hsp90 inhibitor, and Hsp90 is a chaperone, essentially a bodyguard, for key oncogenic proteins in cancer cells, and by targeting Hsp90, you could get different drivers of cancer growth in different tumor types. And this is a highly leverageable platform where Synta is studying the drug in 20 different trials and where we think they’ve got a best-in-class drug in this Hsp90 space,” he says.
EMC Corporation (EMC) maintains the deepest and broadest portfolio in the data storage industry, ranging from the high end with its Symmetrix systems to the entry level with its VNXe systems, positioning itself to benefit from the ever-growing need for data hosting and data storage, says Edward Parker, Senior Analyst at Lazard Capital Markets.
“In general, storage remains a good business to be in. And that’s because data continues to grow, and because storage buyers tend to be very conservative group with a low appetite for risk. Storage vendors like EMC and NetApp (NTAP) exploit that relatively well,” Parker said. “Growth in storage generally outpaces most other areas of IT infrastructure spending.”
EMC also holds an 80% ownership of Vmware (VMW), which he says is an indispensable data center asset, and EMC also has a history of acquiring and growing some of the strongest emerging platforms in the market, including Isilon for its scale-out systems and Data Domain for its disk backup systems, a past trend Parker says will repeat.
“You saw EMC buy Isilon and Data Domain; Dell (DELL) buy Compellent andEqualLogic; HP (HPQ) buy 3PAR; HDS buy BlueArc, among other examples,” Parker said. He says now that Flash technology has become increasingly vital,“EMC and some of the other larger vendors have recognized the potential disruption from these newer platforms and rather than repeat the mistake of allowing these companies to gain meaningful momentum in the market and significant valuations, they are being more aggressive and have actually started consolidating these startup Flash companies much earlier in the cycle.”
The rapidly evolving oncology space offers interesting opportunities and potential growth for investors within the biotechnology sector, where new data is presented frequently, and studies often take a shorter period of time compared to some other indications, such as figuring out cholesterol, says Boris Peaker, an Executive Director and Senior Analyst at Oppenheimer & Co. Inc.
“Obviously, with each one, if we look individually, there is a risk with any one particular company and particular drug that’s unique to that specific drug. Obviously, a lot of these are development-stage drugs, so there’s obviously a risk that they will fail in clinical studies. That’s kind of global risk in the biotech space, so each one has its own profile,” he said.
Peaker has Celldex Therapeutics (CLDX) as a top pick among the smaller names in the oncology space. He says the company’s opportunity in the breast cancer space and the data it is going to present in December may be exciting for the biotech sector.
“So in the oncology space, some of the interesting new developments are Celldex as a new drug in breast cancer, which is targeting a completely novel target, which is certainly exciting with some of the early stages of development, but the initial data is very encouraging,” Peaker said.
Mid- and small-cap companies with innovation, acquisitions and geographic expansion at the core of their strategy are expected to see growth, as well as business with strong competitive advantage positions, says Paul Hogan, CFA, the Co-Manager of the FAM Equity-Income Fund at Fenimore Asset Management, Inc.
“Another indicator of competitive strength is the return on invested capital that a business is able to earn. Stronger companies earn significantly higher returns than weaker ones. We want them to be highly profitable so they can pay an ample dividend and grow that dividend over time,” he said.
Hogan likes Mattel (MAT), the toy maker, because of its strong brands, such as Barbie, American Girl and recently acquired Thomas the Tank Engine brand. He also points to the company’s 3.8% dividend yield and its global appeal as strengths. Hogan sees Mattel as well managed and having the potential for significant growth.
“Interestingly, when you think about the ‘graying of America,’ and then carry that onto the younger generation, it means that there are more grandparents. With more grandparents, that’s more people to buy toys for the grandchildren and Mattel should benefit,” he said.
