I covered a “powdered plasma” ad from Michael Robinson just yesterday, but it turns out the he’s also flogging “cryogenic blood” separately, in different ads for his same Nova-X Report newsletter, so I thought I better follow up to get rid of any confusion. The Thinkolator concluded that yesterday’s ad, teasing a Pennsylvania company, was hinting at Teleflex (TFX), an interesting medical tech conglomerate with a new powdered plasma product that’s likely to get approved… but it’s pretty big, with lots of divisions, and is not even close to being a “pure play” investment in that freeze dried plasma.
But today’s is different — it’s not “powdered blood,” it’s “cryogenic blood” that we’re being teased with… though the hinted at huge impact on the health of soldiers, children and other patients is similar.
Here’s a little taste from the order form:
“The FDA has already approved a tiny $6 firm’s cryogenic blood technology for use in the U.S.
“And it’s about to enter into full-scale production.
“Over 20 of the nation’s largest blood centers will be supplying this technology across large parts of the country.
“Soon, major injuries that were practically a death sentence will be as easy to treat as a cold or fever.
“Scientists predict that over 800 children per day could be saved once they get access to this technology.
“That’s over 292,000 children per year.”
So that’s a little different than the ad we looked at yesterday, though the big picture claims are similar. Here’s a little more:
“It’s giving “superhuman” healing powers to American soldiers… dying cancer patients… even infants…
“It’s increasing their chances of survival by over 95%…
“And on September 30, the FDA is expected to make it the standard of care – with one tiny $6 firm holding the only FDA-approved patent.”
So who is this company?
“In 2014, they received FDA approval to produce a specialized cryogenic blood that only they can make.
“Once the FDA approves cryogenic blood as the new standard of care on an expected date of September 30, they will be set for complete domination….
“That’s Why Experts Call This Company ‘Essentially the Only Player in This Market.'”
“They also recently received a massive order from Germany for 580,000 units of their cryogenic blood.
“And France just adopted it as the standard of care throughout the entire country.
“And with their new cryogenic blood, this company’s revenues could skyrocket exponentially from its current $64 million.”
The catalyst that Robinson is hinting at is some new FDA guidelines for trauma care, expected in September…
“The FDA is expected to release guidelines later this year that could make cryogenic blood the new standard of care for traumatic injuries in hospitals across the United States.
“This would make it completely mandatory for cryogenic blood to be in every hospital, ambulance, trauma center, emergency room, and operating room across the United States.”
And that’s pretty much it — all those clues, plus it’s a “tiny California company” with a stock price near $6. So who is this one?
Thinkolator sez that Robinson here is teasing Cerus (CERS), so perhaps he’s got a special report or is building a portfolio of these blood-related companies.
Cerus is indeed focused on the blood supply, they are primarily known for their INTERCEPT system which is designed to reduce pathogens in both whole blood and plasma for transfusion. Here’s how they describe themselves:
“Cerus Corporation is dedicated solely to safeguarding the world’s blood supply and aims to become the preeminent global blood products company. Based in Concord, California, our employees are dedicated to deploying and suppling vital technologies and pathogen-protected blood components for blood centers, hospitals and ultimately patients who rely on safe blood. With the INTERCEPT Blood System, we are focused on protecting patients by delivering the full complement of reliable products and expertise for transfusion medicine. Cerus develops and markets the INTERCEPT Blood System, and remains the only company in the blood transfusion space to earn both CE Mark and FDA approval for pathogen reduction of both platelet and plasma components.”
There are potential FDA regulatory catalysts coming this year, though they may not have dramatic impact — and they don’t really have anything to do with the “cryogenic blood” product that Cerus is testing. The real driver for Cerus is the push to reduce pathogens in the blood supply, and the use of pathogen reduction as an alternative to testing the supply (ie, use a pathogen reduction technology like INTERCEPT on all the blood from an area where a particular infectious disease is common, rather than testing each unit of blood that has already been collected or discarding all the blood). So the next likely cause of growth is the final guidance from the FDA, which is expected to be released this fiscal year — and the fiscal year ends on September 30, so that’s likely the “deadline” hinted at in the ads.
There are also some products in FDA review that could increase revenue in the future for Cerus — they have a version of INTERCEPT for plasma and red blood cells, in addition to whole blood, and also a pathogen-reduced cryoprecipitate. That last one is the “cryogenic blood” mentioned in the tease, I suppose, it’s basically a special technique for freezing plasma that lets the thawed plasma have a longer shelf life (five days, as opposed to hours), and substantially improves clotting response. This is what they said about this cryoprecipitate product on their quarterly conference call last week:
“We believe the US market opportunity for pathogen reduced cryo could be north of $200 million annually and potentially growing with the increasing use of coagulation monitoring in the hospitals.
“Following our FDA Breakthrough Device designation, we have been engaging with the FDA and the agency has been responsive, timely and helpful. We’ve been encouraged by the recent feedback that could both allow for improved production efficiencies and a potential label that will allow final delivery dose specifications that are important to the transition physicians, given the timing criticality for transfusion of cryo. We’re in the process of generating additional data to support our anticipated product label, which we think will allow us to meaningfully differentiate ourselves from conventional cryo. They’re looking forward to our expected US product launch in 2020.”
So that’s going after a similar market to the “freeze dried” plasma that Teleflex is trying to commercialize, though Cerus is a far smaller company so their frozen plasma product will be of far more importance to them than will Teleflex’s powdered plasma, assuming both make it to market (and at least according to Cerus, the market size could be different — Teleflex is looking at $10 million by 2021, Cerus says the market potential, at some indeterminate date, is $200+ million).
Cerus is not yet profitable, but they do have revenue growth and see 15-20% compound annual growth for their revenue going out several years, so they should reach a scale that allows for profitability pretty soon if they’re right about increasing adoption of INTERCEPT… and it’s certainly an easier company to assess than Teleflex (mostly because they have only a few products).
Analysts don’t see them hitting profitability in the next few years, but that seems pretty conservative to me — they are currently expected to have $86 million in revenue this year, followed by $112 million in 2020 and $121 million in 2021, and I’d think that doubling of revenue over a few years ought to be enough to get them to break-even since they are not launching brand new products and they don’t really have any competition in the market for these pathogen-reduction kits for blood. Maybe there’s some competition I don’t know about, or perhaps they really do have to spend heavily on selling costs to build their markets, I’m not sure, but it would seem likely that their R&D budget should be able to drop pretty sharply once the current products are approved.
It’s been a long and uneven road for Cerus, though, with cost of goods staying steady but no real reduction to their SG&A or R&D expenses over the past couple years, so they’ve generally posted a loss of about 80 cents for each $1 in revenue (meaning that it costs them $1.80 each time they sell $1 worth of INTERCEPT). The question is really whether or not they can outgrow those high expenses, which depends in part on management but, probably more importantly, on the ramp-up in pathogen reduction investment on the part of major blood centers, the Red Cross, and local hospitals. Which will probably depend, to a great degree, on exactly what the FDA says in its final guidance on pathogen reduction in that report that’s expected to come within the next month or two.
And, yes, the “pathogen-reduced cryoprecipitate” product, likely to launch next year, might also provide a little jolt of revenue growth — though that’s presumably figured into those analyst projections. Given the pace of change and adoption of new technologies for the blood supply and for trauma centers and hospitals, I’d assume that growth of that product will be gradual… but I’m certainly no expert on it, and I don’t really know how excited physicians will be about this new trauma tool.
So I’ll be conservative and lean on those analyst estimates, which are not compelling enough to get me to buy the stock at 8X sales and without the likelihood of near-term profitability… but for those of you who want to read further, it might be that this little company has some big potential if they’re being conservative with their growth expectations or the FDA really lights the fire under the US blood supply managers to use INTERCEPT more heavily. Their balance sheet is fine, and they have more than $40 million in net cash, so they’ll probably continue raising money from time to time but they’re not currently in desperate need.
If you’re interested in a low-probability but also pretty low-cost bet on this one, by the way, the November call options would expire after their next earnings report and after the expected FDA guidance, and the current at-the-money options (Nov. $5 call) are “pricing in” less than a 10% jump in the share price… I haven’t speculated on those, and they’re low-volume so don’t go chasing them on my account, but that drew my eye.
I don’t know what will happen with Cerus, the income statement isn’t particularly compelling — but they do have a nice niche that might grow quickly, and it’s possible that a good management team could turn that into a profitable business… or that some excitement about the next blood-borne pathogen (like another Zika panic) could send a bunch of attention their way. Worth watching, but I’ll be watching from the sidelines.
What else is happening?
Berkshire Hathaway (BRK-B) released earnings last weekend… and there was really no news, other than the delay of Kraft Heinz (now resolved) and the lack of buybacks. For the second quarter, Berkshire bought back just over $400 million in stock, a sharp decline from the $1.7 billion the company spent in the first quarter. The company paid a weighted average of $306,933 for the 281 Class A shares it bought and $201.50 for the 1,766,140 Class B shares it repurchased during the period.
That surprised me… perhaps that’s a recognition that Warren Buffett thinks stocks in general are relatively expensive, or that he thinks better prices are coming? I don’t know — the stock barely dipped below $200 during the second quarter, so the option was there to buy back at roughly the same prices they paid in the first quarter, but they didn’t choose to do so. It could also perhaps be that Berkshire is seriously considering some truly gigantic acquisitions of $50+ billion and they want the cash, but I’d be surprised if that’s the case… and they could have bought back $10 billion worth of shares and still had plenty of breathing room for even a $80-100 billion acquisition if that was the case.
Berkshire now is trading at about 1.25X book value, the lowest it has been in a long time — partly that’s because the book value is from the end of June, so it’s artificially inflated when it comes to stock market valuations of the various major Berkshire holdings (Bank of America, Apple, Wells Fargo, Kraft Heinz are looking fairly weak since June 30… though all except Kraft Heinz have held up better than Berkshire Hathaway shares).
The worst news has been the KHC weakness, with Kraft Heinz reporting after Bekrshire and again disappointing. The KHC stake has dropped in value by about $25 billion for Berkshire, from the highs a couple years ago to this week’s lows. That’s a big deal… but for a $500 billion company like Berkshire, it’s not overwhelming, and it’s not news to Berkshire shareholders that Kraft Heinz was a mistake (either a mistake in all ways, or at least a “we overpaid” mistake, as Buffett has acknowledged). I’ve still made way more mistakes than Buffett, and I’m only about half his age, so I can live with Berkshire still holding Kraft Heinz, and I’d still add to my stake below $195.
Disney (DIS) shares dipped a little bit on earnings, giving up a sliver of the huge gain they made earlier this year when enthusiasm picked up for the Disney+ streaming service and the record-breaking success of the final Avengers movie (IBD article here). I added slightly on the dip below $140, boosting my holdings by about 10% — the stock is reasonably valued, though there is substantial risk in the next year or two as we see how the Fox integration works and, more importantly, how Disney+ does in its first year.
There was some chatter about the Star Wars attractions at Disneyland being disappointing, with crowds not materializing as expected, but that seems to have been a blip because of fears of overcrowding after the initial hype… along with the fact that the major ride attraction wasn’t actually open yet. I’m not at all worried about these new theme park extensions failing, but there is, of course, some concern that the next big Star Wars movie, coming late this year, could disappoint and drag everything down a little bit.
The cable networks seem to have stabilized a little bit, helped by the Fox channels (FX, National Geographic), but the numbers were also a bit depressed thanks to some writedowns of Fox assets — particularly the flop big-budget X-men movie Dark Phoenix that Disney inherited in the deal. With Disney, I err on the side of optimism — nobody markets and cross-markets like they do, and nobody develops compelling characters and storylines that appeal to global customers as well as the House of Mouse… my judgement is that the odds are pretty good that will continue to be the case in the future, and I think Disney+, particularly bundled with Hulu and ESPN+ at a price that competes directly with Netflix but has much better content, will be a huge hit… paying 15X earnings for that leadership and the power of their entertainment brands seems eminently reasonable to me, but November and December are going to be huge for them — it’s quite possible that a rough launch of Disney+ or a flop for Frozen 2 or Star Wars IX could bring the shares down by 20%.
Inseego (INSG) reported disappointing earnings, reminding us that there’s a very limited push for 5G just yet — so, a reminder that, hype aside, the early test markets for 5G are not enough yet to drive results, even for a pretty small company. Verizon is not selling enough Inseego “pucks” to create drama… though the revenue is, at least, climbing. I have a small speculative call option position on this one, which has been teased by a couple newsletters over the past few months (including Jon Markman’s “$5 stock will be the next Cisco” pitch), mostly as a way to bet on whether the hype will build for this first-stage 5G beneficiary (Verizon and AT&T are both starting 5G with a focus on “fixed mobile” broadband as they begin testing the networks, not actual mobile 5G through phones), but I don’t have any real confidence in the business long term… and so far, the hype is not building.
Innovative Industrial Properties (IIPR) released earnings, which didn’t really include anything new — just confirmation that the revenue is still growing quickly, adjusted funds from operations (AFFO) is still growing quickly and just about supports the high dividend (AFFO was 59 cents per share, the dividend was 60 cents), and they’re still issuing stock and buying new properties. No surprises, the only real reason to pay attention was to see if they say anything new about the trends in the industry or what they see in the future on the conference call. Going into the call, the shares were at about $104 after bouncing around a bit going into and coming out of the earnings release, and the call had no impact on the stock.
They did provide updates on most of the states in which they operate, and how those regulatory environments are changing.
Loosening of the tight medical marijuana restrictions for New York has helped their tenants there, with rapid growth in patients, but they did not pass an adult use recreational rule… though they’re moving in that direction, with continuing “decriminalization.” Minnesota is similar, with tight regulations and a very small number of licenses.
California is continuing to have challenges and delays in its adult use marijuana market, so the move from black market to legal market is slower than expected… but is still moving forward.
Most other states are still moving slowly — their newest state in terms of opening markets is Ohio, which just started legal sales this year and is really just getting underway, and the state they’ve entered most recently is Nevada, which has been building its adult use market since last year.
Michigan has operated with a “highly permissive” system since 2008, and is one of the largest medical cannabis markets, with accelerated licensing and hundreds of permits… and the license applications for adult use recreational marijuana should start soon. They did not mention how challenging this “highly permissive” regulatory environment is for the companies who have invested heavily into larger cultivation facilities, like some of IIPR’s tenants, so I take that as at least a small positive that they’re not seeing weakness that rises to the level of “we better tell the shareholders.”
The general story is “strong acceleration” of adult use and medical use in all the states, which should generally be a good thing for their tenants… though I’m sure that in some states there’s too much production and they’ll end up having trouble making money, so diversification is important.
They continue to be, as they say, “extremely excited” about the pipeline — they’re investing faster than they expected, which is why they raised more and think they can place the new funding in 6-9 months (the money they raised earlier in 2019 was expected to be invested within a year, and it’s almost all allocated already). And it’s still accelerating, the pipeline has increased since last quarter, with some “very exciting” entities like Trulieve. More companies that are more mature are getting interested, as the sale/leaseback model gets more recognition and IIPR is becoming more well-known in the industry… and the Canadian capital markets have slowed down a bit, giving some companies a second thought about whether an equity sale or a sale/leaseback makes more sense when they’re looking to raise growth or expansion capital.
And one of the analysts asked why they accepted a lower cap rate for the Massachusetts Trulieve deal (an 11% cap rate vs. the 14-15% they generally have gotten from others), which is what caught my eye last week and is the first question I would have asked… essentially, the answer was that better tenants have more financing options and are lower risk, and Trulieve is a better tenant.
They’re seeing more mature companies enter their pipeline now, which is good, and Trulieve is one of them — one of the strongest growers in the country, and a company that already has positive EBITDA. More mature companies can get capital from other sources, even if they can’t raise it as easily as non-marijuana companies, so it was a more competitive deal, and the reason that they were willing to take a lower yield for a lower-risk tenant. And it doesn’t hurt that now they’re “in” with a strong tenant, one who might also get them into the big Florida market where Trulieve has a strong position.
They were also asked about whether IIPR would consider taking on additional debt financing. The answer was that it is something they have looked at, and they have additional capacity for debt because they have raised so much equity… though the preference is still to use equity for their capital needs for now. I’d guess that will change as they mature, and that getting access to low-cost bond financing could be the next source of dividend growth for IIPR in a year or two, but the timing is anyone’s guess… and it sounds like they are not at all in a hurry to lever up, and they don’t need to go with debt at all if they don’t want to.
I come out of this still confident in IIPR, still acknowledging that it’s an expensive stock but that a 2.4% yielder with the potential to double that dividend again in the next couple years (or even faster, if they keep up this pace of acquisitions), is very appealing… especially in a world of falling interest rates. Regulation and tenant health remain the largest risks, so the stock could easily drop 30% if they have one of their bigger tenants default, or if there’s a federal crackdown on marijuana, but neither outcome seems highly likely.
The Trade Desk (TTD) released earnings last night, gracing us with yet another “beat and raise” quarter… though the stock had already climbed pretty sharply going into earnings, as ad-tech and streaming video ad competitors like RUBI and ROKU reported good quarters earlier in the week, so it wasn’t enough of a dramatic beat to send the price higher still… at least in the after market trading (we’ll see what happens later today as analyst comments come out and the market readjusts).
Probably some of the relative pessimism for TTD last night came from the fact that they didn’t dramatically boost their guidance — indeed, the increased guidance for the fiscal year was almost entirely to update the year for the big revenue beat in this second quarter, so they didn’t substantially increase expectations for the third or fourth quarters of 2019. I would assume that’s a conservative forecast now, if not a real sandbagging, but at 130X earnings they’re not necessarily motivated to get the stock up even higher in short order… sometimes it’s important to try to keep expectations somewhat muted.
TTD is a crazy one, for sure, trading at more than 50X 2021 earnings estimates… but also, at least in this quarter, accelerating revenue growth (meaning that the year-over-year revenue growth for the second quarter was higher, at 42%, than the 41% growth in the first quarter). Accelerating growth is a big, big deal… though it could also just be an odd quarter.
The Trade Desk has earned some confidence from me over the past couple years, so I’ve generally been patient with the volatility they have from quarter to quarter — remember that last quarter, they disappointed a bit and the stock dropped by 20%… but recovered within a month. I give it a lot of room — if you’re worried about risk reduction in this one, the two levels that I’m keeping an eye on now are $209 (a 25% stop los) and $164 (the VQ% stop loss from TradeStops.com)… I’m always tempted to shave off some profits from a huge performer like this, but, partly because they are still so small relative to the size of the digital advertising market, I haven’t yet done so with TTD.
And yes, The Trade Desk, though profitable, is ludicrously valued given their current financials… but that’s been true since it was at $65, and I didn’t see anything not to like in this quarter.
Activision Blizzard (ATVI) released earnings last night as well… and they beat on earnings and raised expectations for the full year, but the price fell a bit early in aftermarket trading, mostly because they guided analysts to expect a weak third quarter. They have done some strategic refocusing on their key franchises this year, in the wake of weak results, and they say that we’ll see the results toward the end of the year… which presumably means speeding up updates for Candy Crush, Warcraft, Hearthstone and Overwatch in addition to the huge Call of Duty franchise. They continue to see metrics like “hours played” improve for many of those titles, indicating continued strong engagement from players, and Call of Duty and Candy Crush are still generating a lot of sales inside those games.
The expectation now is for $2.02 in non-GAAP earnings per share for the calendar year, though the third quarter is expected to be a laggard with only 20 cents (half of what analysts had expected), so that’s below what analysts had been expecting but is, for the full year, above what Activision itself had guided for earlier in the year. Much depends, of course, on whether this year’s disappointing earnings in the wake of Fortnite’s ongoing popularity is a one-time drop, or they continue losing players to Fortnite… I’m expecting them to recover, and to continue to lead the eSports emergence with the Overwatch League, but we’ll see, this is a new position for me and this quarter doesn’t really change my long-term expectations.
And for those of you who missed my note about it earlier in the week, I did have one Trade Note — here’s the text of that:
8/7: At Home (HOME) hit my stop loss and I sold today, so that position is now cleared out of the portfolio — I do still have a small speculative call option position in HOME.
This is a stock that I thought could recover, based on the potential for rapid store expansion at the same time that they are recording decent same store sales — some of the best stories in retail are of regional players going national. Sadly, it doesn’t always work — there are still takeover rumors for HOME, and some hedge funds have taken sizable stakes (and Whitney Tilson drove a little attention their way last week), but this was a speculation on the company being able to begin turning the tide… and the stock price is telling me they aren’t doing that, so in the absence of any personal conviction about the company or the appeal of its stores, I’ll get out. No real impact on the portfolio, this was one of my smallest holdings.
Arista Networks (ANET) also hit a stop loss trigger price in the selloff this week, but I did not sell and, as you can probably tell from the thoughts I posted about the quarterly results last week, when I added to my position, I don’t intend to in the near future as long as I continue to like their prospects for the next wave of data center upgrades.
And that’s all I’ve got for you this week, dearest readers — expect more blatheration next week, and feel free to share your thoughts or questions with a comment below.