Macro Tsimmis

intelligently hedged investment

Archive for October, 2007

Vertex (VRTX) update #3

Posted by intelledgement on Tue, 30 Oct 07

Vertex (VRTX) released their 3Q07 numbers yesterday and hosted a teleconference for investors. Here is a link to a transcript:

Their R&D expenses were up but they still expect to hit their overall FY numbers. The only new news on Telaprevir was that—as expected—they are in discussion with the FDA concerning the definition of their phase 3 study, but disappointingly, management were unwilling to discuss any sort of time frame at this stage. Given that it is practically November, it is now evident that there will be no phase 3 launch this year, as previously hoped…and management’s sudden reticence to discuss timing gives one pause as to the likelihood of a launch early in 2008. A substantial delay translates into a delay in potential approval, which in turn means a delay in potential revenue and black ink, which in turn translates into a lower present day valuation, given the need to discount the risk over a longer time frame.

Meantime, new Phase II interim efficacy data are due out in the next week (to be presented at the 2007 American Association for the Study of Liver Diseases conference in Boston starting this Friday). Final efficacy and safety data are expected sometime in 2008; if the FDA want to see those before settling on a plan for the phase 3 study—which normally would make sense but expectations here were that we could speed things up given the robustness (1000 patients) and stellar interim results of the phase 2 trials—we are probably looking at a delay of a year or more here.

There was some discussion of a new anti-HCV compound and also a potential anti-cystic fibrosis compound, but both of those are very early days.

Posted in B.2 Spec Equity Updates | Leave a Comment »

Beazer Homes (BZH) update #4

Posted by intelledgement on Mon, 29 Oct 07

The results are in and vultures, while lacking in teeth, do apparently have a sweet tooth.

Bondholders of Beazer Homes’ (BZH’s) $1.525B debt instruments overwhelmingly consented last week to management’s offer to waive default claims attendant to the company’s failure to file their 10-Q reports, the company reported this morning. There are six classes of debt and bondholders in five of the six consented nearly unanimously; 83% of the April 2012 8 3/8% Senior Notes class bondholders consented. In their press release, the company stated, “In accordance with the Indentures, the amendments are binding on all holders, including non-consenting holders.”

Beazer’s settlement with their bondholders eliminates the threat of a demand for immediate repayment, which would bankrupt the company (and presumably not be in the interest of the bondholders anyway, aside from a few who may be short the stock). It also appears to moot the court case the company had initiated to preempt the bondholders from declaring default on the grounds that the company failed to file their 3Q07 10-Q with the SEC. The bondholders have now agreed to allow Beazer until 15 May 2008 to file and if the company misses subsequent deadlines, they only have to pay the bondholders an additional 50 basis points per year.

BZH shareholders are giddy at this settlement; the stock is up 31% since a week ago Friday and we are now in the red on the position—the stock closed today at $11.87 and we shorted in September at $11.18. Well, we shorted because the fundamentals are terrible and Beazer management appears to have made some grievous errors that has made matters worse still…not because we thought the bondholders were likely to cut off their own noses to spite their faces and drive the company into immediate bankruptcy. If we were smarter, we might have predicted the market would react this way—housing industry investments are extremely volatile here—and cashed in when we were ahead 25% earlier this month and be shorting again here. Well, we didn’t think of that, but we are thinking that if you agree with our thesis and are not short Beazer, this would be a good entry point.

Posted in B.2 Spec Equity Updates | Leave a Comment »

Élan (ELN) update #5

Posted by intelledgement on Thu, 25 Oct 07

Élan (ELN) announced their 3Q07 results today and as usual, they lost money…although they lost two-thirds less money than a year ago and revenues were up 43% as Tysabri income begins to kick in ($100MM in revenues worldwide in the quarter split between ELN and partner BIIB)…but the most interesting point was this statement by CFO Shane Cooke: “We were particularly pleased that during the quarter we exceeded the 15,000 patient target which we need for Tysabri to breakeven in the commercial setting for the MS indication. At the end of the quarter, there were about 17,000 patients on therapy, including about 1,000 in clinical trials.”

We (Intelledgement) are projecting 17,500 paying customers by year end (not counting those in clinical trials), so things are nicely on track here. But wait, there’s more…Cooke also said, “We are optimistic that we will better our previous target of reporting Adjusted EBITDA losses of about $50 million for the full year. In the longer term, the continued growth in revenue from Tysabri will drive our return to profitability and, with Biogen Idec, we are targeting to have 100,000 patients on therapy by the end of 2010.”

LOL that is a very fine number…we have been projecting 101,000 patients and $58/shr by the end of 2010…this is not including any AAB-001 revenue, although the scenario presumes the pipeline remains healthy…if ELN succeed in launching AAB-001 Phase 3 testing by early 2008, results could be available by the end of 2009 which means—if the results are good—the product could be approved before the end of 2010, in which case we should have to revise our revenue and valuation projections upwards.

True, tough work, but someone has to do it. 🙂

Posted in B.2 Spec Equity Updates | Leave a Comment »

Golden Star Resources (GSS) update #7

Posted by intelledgement on Wed, 24 Oct 07

Golden Star Resources (GSS) shares took a hit today, down 8% on the day to close at $3.53 on the unexpected news that the company is selling US$125MM of convertible senior unsecured debentures. Each $1000 debenture bears 4% interest and is convertible into 200 shares of GSS common. In effect, GSS shares are being diluted by close to 11%, so on the face of it, the drop in the price of the stock makes sense. We are a tad disappointed to see management going back to the dilution well here after stating that they did not need more cash, but on balance, this deal is not that bad for existing shareholders, and we think the drop in the price of the stock is overdone here.

First of all, none of these new shares are going to be flooding the market anytime soon, as the conversion price is US$5. The debentures mature in 2012, by which time $5/share for GSS should be a bargain, but right now, the holders will be content to sit back and collect the 4% interest. In effect, the company just scored a low-interest loan.

Second of all, half the money is being used to retire “existing $50 million aggregate principal amount 6.85% senior convertible notes due April 15, 2009,” which will save the company nearly $2MM in interest charges, which drops right to the bottom line. For a company with $5MM in TTM EBITA, that ain’t hay.

Third of all, while management had previously stated that cash on hand was sufficient to fund operations and scheduled exploration activities until the rampup of BIOX® plant operations and other capital projects result in increased production—and concomitantly improved revenue and profits numbers—through the next twelve months, it doesnt’t hurt to have some flexibility to cope with setbacks or take advantage of opportunities.

In a separate press release, the company also announced disappointing preliminary 3Q07 numbers—a loss of $13.4MM as compared to a loss of $2.3MM in 2Q07. The main culprit was continued delays in bringing the new Bogoso sulfide processing plant up to speed. As of 1 Jul 07, the plant is considered to be in commercial production—and thus, operating and interest costs, which were capitalized in previous quarters, were expensed and depreciation also ensued. The lower production figures therefore resulted in higher overall cash operating costs per ounce. In addition, management decided to discontinue exploration of the Pampana property in Sierra Leone and return it to the joint venture partner, resulting in a writeoff of the $1.9MM spent evaluating the property.

Thus, our redemption here is delayed for at least another quarter. Never-the-less we remain confident that these teething problems will pass and that the company will report increased production and lower costs-per-ounce for 4Q07, that there will be a significant increase in reserves estimates (currently 4.89MM ounces) for year-end 2007, and that production in 2008 will top 400,000 ounces of gold. We consider GSS a bargain here and might buy more ourselves if the portfolio were not already overweighted with the stock.

Posted in B.2 Spec Equity Updates | Leave a Comment »

Beazer Homes (BZH) update #3

Posted by intelledgement on Tue, 23 Oct 07

Tentative conclusion: vultures might like sugar, but not in so limited quantities.

Beazer Homes (BZH) management significantly sweetened their offer to investors holding $1.525B of the company’s debt today, increasing the consent fee from up to $5/thousand to up to $12.50/thousand (exact amount to be paid depends on how many bondholders accept the offer) and adding limitations on corporate borrowing until the compay’s finances improve. In return, management want the bondholders—whom they termed “vulture investors” in court papers filed last August in a related case—to agree to waive any claims of default against Beazer stemming from the company’s failure to file their quarterly reports with the SEC.

Management have stated they cannot file the reports due to the uncertainly attendant to ongoing internal, SEC, and DOJ investigations concerning certain business practices and transactions.

The waiver management are asking for runs until 15 May 2008, but after that the bondholders’ recourse should the company fail to file “in a timely fashion” would be limited to annual penalties of 50 basis points.

The deadline for bondholders to respond has been extended two days to Friday.

Posted in B.2 Spec Equity Updates | Leave a Comment »

Vertex (VRTX) update #2

Posted by intelledgement on Thu, 18 Oct 07

Vertex (VRTX) shares took a big hit today, down 13% on nearly 9x normal volume. The fuss was over a press release by Shering-Plough (SGP) providing preliminary data on phase 2 of their HCV protease inhibitor, boceprevir. The results indicated that 79% of boceprevir patients—who took boceprevir, interferon, and ribavirin—had an undetectable level of HCV after 12 weeks of treatment compared with 34% of a control group on the current standard of care (SOC) regimen of interferon plus ribavirin. Also, there were no incidents of skin rash among the boceprevir patients (significant because in the Vertex studies, this is a notable side effect among telaprevir patients, increasing the dropout rate among them).

This was a surprise because the phase 1 numbers for boceprevir were significantly inferior to telaprevir, so most had written it off as a potential competitor. To have it roar back with phase 2 numbers apparently comparable to telaprevir’s—and apparently less noisome side effects— is disquieting.

Having said that, it is difficult to compare the studies. In the boceprevir study, patients are treated with ribavirin and interferon for four weeks prior to taking any boceprevir, which they then take in combination with ribavirin and interferon for either 24 or 44 additional weeks. There is no pretreatment in the telaprevir studies; maybe the Schering-Plough guys were smarter to think of it but one wonders how much better telaprevir’s results might have been in a similar circumstance. In the event, the shortest proposed boceprevir course of treatment is 28 weeks including four weeks of just interferon and ribavirin followed by 24 weeks of all three drugs. The shortest telaprevir course of treatment is 24 weeks including 12 weeks of all three followed by 12 weeks of interferon and ribavirin. Some telaprevir patients dropped out because of the rash; likely some boceprevir patients will drop out because of the extra month of debilitating interferon injections…we will have to await the final numbers to see which is worse.

Vertex were very aggressive in designing the parameters for the phase 2 trials; there was some hope at the time that with outstanding results, these might suffice for approval. For example, in measuring sustained virologic response (SVR—that is, the lack of detectable levels of HCV in the patient’s blood as time goes by), Vertex used a standard of HCV RNA <10 IU/ml. while Schering-Plough were content with a measure of HCV RNA <15 IU/ml. It would be interesting to know how many patients in the respective studies fell into this gap, but clearly to compare them either the telaprevir rates should be adjusted up or the boceprevir rates down.

In the event, the main point is that Vertex are moving faster with their studies. Their phase 2 studies were bigger with more rigorous standards and they expect to start their phase 3 study by the end of 2007. SGP are still just getting preliminary results from phase 2 and have not yet announced plans for phase 3 testing of boceprevir. Unless there is an unanticipated problem with telaprevir, it is still likely to beat boceprevir to market by at least six months.

And speaking of progress, soon we will have more telaprevir data to kick around—the company has promised to release more interim phase 2 data early next month at the annual American Association for the Study of the Liver meeting in Boston.

Bottom line: we need to pay more attention to boceprevir that we thought, but telaprevir still has the inside track to the lion’s share of a huge market. Looks as if this selloff—which has brought the stock back down to where we bought it—is overdone. LOL welcome to the wonderful world of stock speculation, not to be confused with investing.

Posted in B.2 Spec Equity Updates | 1 Comment »

Beazer Homes (BZH) update #2

Posted by intelledgement on Mon, 15 Oct 07

Beazer Homes (BZH) management announced today that they had decided to throw the “vulture investors” who own $1.53B of their corporate debt some raw meat. After filing suit in August to preempt the bondholders from declaring Beazer in default for not filing their 10-Q with the SEC—BZH management have said that a series of investigations that have turned up problems prevent them from doing so—the company is now offering the bondholders a “consent fee” if they agree to an amendment to the terms of the debt. Said amendment spells out that failure by Beazer to file their 10-Qs with the SEC does not constitute grounds for default on the bonds, although Beazer would be subject to annual penalties of 50 basis points if after 15 May 2008, they don’t file with the SEC and deliver copies to the bondholders “on a timely basis,” according to today’s press release.

Beazer claimed in their preemptive suit that the debt intstruments as presently written do not obligate them to file with the SEC, merely to provide the bondholders with copies of the filings within 15 days should they do so. As conceptually the corporate paper market would be a very different place without the built-in presumption on the part of investors that the SEC filing requirements provide critical transparency, this “vinegar” tactic by Beazer seems quixotic at best. Credit Beazer management for engaging in this “sugar” maneuver. We’ve always wondered if vultures like sugar; there should be some good data on the hypothesis that they do by around 24 October, when the Beazer offer expires.

Posted in B.2 Spec Equity Updates | Leave a Comment »

Élan (ELN) update #4

Posted by intelledgement on Mon, 15 Oct 07

Élan (ELN) and Biogen Idec (BIIB) jointly announced today that the FDA have informed them that regulators have decided to take up to another three months to review the companies’ application to market Tysabri to Crohn’s disease (CD) patients in the USA. According to the press release, “The companies have been informed by the FDA that the Agency requires additional time to review information regarding the proposed TYSABRI risk management plan for Crohn’s disease. Under this revised timeline, the companies anticipate action from FDA on or before January 13, 2008.”

Despite the 12-3 endorsement of the companies’s application by the FDA’s advisory committee in July, The Street had apparently been anticipating an FDA rejection in the wake of the rejection of a similar application by EU regulators, also in July. However, this delay is an indication that the application is being taken seriously and apparently the market calculus has shifted in favor of eventual approval, as ELN closed up 8% today on heavy volume.

Posted in B.2 Spec Equity Updates | Leave a Comment »

Jim Rogers, our hero

Posted by intelledgement on Fri, 12 Oct 07

When “investment biker” Jim Rogers speaks, macro hedge fund managers listen. Rogers is the co-founder—along with George Soros—of one of the first and most successful macro hedge funds of all time, the Quantum Fund, back in 1970. Soros is the guy who infamously broke the pound in 1992, although by then Rogers, after a decade of 40%+ CAGR, had long since retired from Quantum.

In this interview, Rogers says (among other things):

• Dollar is due for a rally
• After that, it still has 50% more to fall
• Fed screwed up big time with the rate cut
• China is undervalued here, particularly Hong Kong
• Commodities, other than agri and gold, are fairly valued

…definitely worth a read.

Posted in A. Investment Strategy | Leave a Comment »

Beazer Homes (BZH) update

Posted by intelledgement on Thu, 11 Oct 07

Beazer Homes (BZH) management issued a press release today and there was a lot of interesting stuff therein. First, they released preliminary data on their 4Q07 numbers (which ended 30 Sep) and while the news was generally bad—home closings down 39% Y-O-Y, new home starts down 52% “driven largely by an unusually high cancellation rate (68%), which the Company attributes in large part to the pronounced tightening in the mortgage markets in August and September”—there was one bit of good news. Beazer’s cash on hand improved from $123MM to over $400MM.

The company also converted a $500MM unsecured line of credit—which was unusable as by failing to file their quarterly reports with the SEC, they were in default—into a secured line of credit by pledging properties as collateral and now can access that cash as well. This is good in the tactical sense that it gives management more leeway to maneuver in tough times but (potentially) bad strategically in that it means less assets available for shareholders should things come unglued.

Management also announced preliminary result of the internal investigation into the accounting issues that are preventing them from filing. Essentially, the company improperly booked revenue that should not have been. The exact numbers are not known yet, but it looks as if they will have to restate their financials going back as far as 1999. The biggest adjustment looks as if it will be to 2006, where income will be decreased $20MM (and increased by that amount in future time periods). BZH expect to handle restatements from 1999 to 2003 with a single number adjustment; it is not clear how big the adjustments will need to be for the 2004 and 2005 financials. All-in-all, this is noisome, but does not appear to be all that big a deal.

Their internal investigation uncovered another set of potentially more serious problems, however. “The internal investigation found evidence that employees of the Company’s Beazer Mortgage Corporation subsidiary violated certain U.S. Department of Housing and Urban Development (“HUD”) regulations, particularly in relation to Down Payment Assistance programs, in certain Federal Housing Administration (“FHA”) insured loans originated by Beazer Mortgage Corporation dating back to at least 2000.… The Company’s potential future liability relates, in part, to the impact of providing reimbursement of losses arising from mortgage defaults in circumstances in which the Company’s FHA-insured mortgage origination activities would have violated standard representations made to mortgage purchasers. In the event of fraud or certain misrepresentations at the time of the sale of such FHA-insured loans, the Company may be liable for losses suffered either by the mortgage purchaser, or HUD if any payment was made pursuant to an FHA loan guarantee. The factors influencing the extent of such potential future liability include, among other things, the number of FHA-insured loans originated by Beazer Mortgage Corporation, the percentage of such loans in which misrepresentations or fraud may have occurred, and the default rate, principal amount and losses associated with such loans.”

Of course the problem here is not the internal findings per se, but the potential impact of the ongoing external investigations, currently being conducted by the US Department of Justice and the SEC. BZH management intend to attempt to settle any resultant liabilities and they stated: “Based on an analysis of the factors described above and available precedents, the Company currently believes that an aggregate settlement with regulatory authorities in a range of $8 – $15 million may be attainable. ”

It was this rosy assessment that drove the stock price northwards today, up as high as $10.75 (+8%) before closing at $10.13 (+2%, up twenty cents from yesterday’s close). Seems pretty optimistic to us; there is an awful lot of blood in the water. If we had not already shorted north of $11, we might be tempted to do so here. As things stand, we are content to wait and see.

Posted in B.2 Spec Equity Updates | 1 Comment »