Zacks - Investment Ideas

KRN5500 Data Looks Strong

On September 8, 2010, DARA BioSciences (DARA) presented positive study results from its phase II dose escalation study with KRN5500 at the 13th World Congress on Pain. The multicenter, placebo-controlled phase II study was designed to evaluate the safety and efficacy of KRN5500 for treatment of neuropathic pain in patients with cancer.

Management used the Wilcoxon Rank Sum test to compare treatment differences in median changes from baseline in pain scores recorded by patients in a daily diary. Results show:

• KRN5500 significantly reduced neuropathic pain when compared to placebo (27% vs. 0%; p = 0.03) when looking at best response to treatment regardless of dose or timing.
• For the best response within 7 days of last treatment given, the difference was in favor of KRN5500, but was not statistically significant (16% vs. 0%; p=0.19).
• In addition, regression analysis of the best response for each patient over doses showed a significant linear decrease in pain intensity with increase in dose (slope = -18.2; p = 0.009).

These results indicate that KRN5500 was effective in reducing pain in patients with chemotherapy induced peripheral neuropathy (CIPN) in a dose-response relationship. The data show that higher doses of KRN5500 result in greater reductions in pain over time. In addition, KRN5500 was generally well tolerated with adverse reactions limited to nausea and vomiting.

In April 2010, DARA Bio announced that it has entered into a clinical trial agreement on KRN5500 with the Division of Cancer Prevention (DCP), National Cancer Institute (NCI), National Institutes of Health (NIH), for the treatment of Chemotherapy Induced Peripheral Neuropathy (CIPN) in patients with cancer. Under the terms of the collaboration, NCI will fund the studies and DARA will supply KRN5500 and placebo at costs plus expenses.

We note that DARA will supply (at cost) DCP-NCI with a new improved nano-emulsion formulation of KRN5500. The new formulation has been proved equivalent and is that is lyophilized to provide for easier dosing administration. The NCI will utilize its established national network of investigators (Community Clinical Oncology Program -- CCOP) to conduct the planed phase IIb study. We expect this program will begin in the second half of 2010.

With DCP-NCI handling the costs and expenses for the planned phase II program in CIPN, DARA is now free to explore additional indications with KRN5500, including post-herpetic neuralgia (PHN), diabetic peripheral neuropathy (DPN), and HIV-associated distal neuropathy (HIV-DSP). Management plans to use the proceeds from the SurgiVision IPO to fund the phase IIa proof-of-concept data on the next wave of indications for KRN5500.

We expect that these phase IIa programs will be similar to the phase IIa conducted in CIPN. That program was a 14-week (multi-center/double-blind) placebo-controlled dose escalation study that randomized 19 terminally ill cancer patients to receive treatment with either KRN5500 (n=12) or placebo (n=7) in doses ranging from 0.6 to 2.2 mg/m2.

DB959 Moving Forward

In March 2009, the U.S. FDA cleared DARA’s investigational new drug (IND) application allowing management to commence phase I clinical testing of DB959 in humans. The phase I study will enroll approximately 75 volunteers and will be conducted at Quintiles' Overland Park facility. The main objectives are to determine the safety (maximum tolerated dose) and pharmacokinetics (pk) of single ascending oral doses of DB959. The company expects to report the results of the study during the second half of 2010 -- our best guess is September / October 2010.

DARA will also conduct a food-effect study in a sub-set of the 75 patients looking at the effects of taking dosing DB959 at mealtimes. We expect the trial to cost DARA roughly $1 million. The next step would be a phase Ib multiple ascending dose program to begin in late 2010 or early 2011. After that, a larger-scale phase II study in which DARA plans to study DB959 as both monotherapy and in combination with other standard glucose lowering agents such as metformin, dipeptidyl-peptidase IV (DPP-4) inhibitors and sulphonylureas (SU).

DARA is also conducting a 2-year carcinogenicity program on DB959, as well as a 29-day toxicology study so that all the preclinical data can be analyzed and in hand by the time the company is ready to seek a development or out-license partner on DB959 in 2012. Management plans to use the proceeds from the SurgiVision IPO to fund these programs.

Stock Undervalued

DARA is currently trading with a market capitalization of only $7 million. We believe the company can secure a licensing and development partner on KRN5500 in the area of $25 million, with backend milestones totaling $250 to $300 million. We base this on historical deals for phase II molecules in neuropathic pain. We base this on three previous deals between large pharmaceutical companies and small biotech firms with similar stage molecules for neuropathic pain. These deals are outlined in our report.

Additionally, we believe that the company is progressing toward proof-of-concept data with phase I candidate, DB959, for type 2 diabetes. It’s our belief that DARA should be able to fetch $25 to $40 million as an upfront payment for KRN5500 sometime in the next several quarters.
 
DARA BIOSCIENCS (DARA): Free Stock Analysis Report
 
Zacks Investment Research

We are maintaining our Neutral recommendation on Alnylam Pharmaceuticals (ALNY) with a target price of $15.

Alnylam, founded in 2002 and headquartered in Cambridge, Massachusetts, focuses on developing novel therapeutics based on a biological breakthrough known as RNA (Ribo Nucleic Acid) interference (RNAi). Alnylam’s founders pioneered the discovery of RNAi, and the company is currently utilizing this technology to build a pipeline of drug candidates for the treatment of a wide array of diseases.

Key programs in the areas of respiratory syncytial virus (RSV), Parkinson’s disease (PD), cystic fibrosis (CF) and spinal cord injury round out the company’s core focus. Alnylam generates revenues from research collaborations, grants and licensing of the RNAi technology outside its core focus area.

Alnylam has partnerships with several large pharmaceutical companies, such as Novartis (NVS), Biogen Idec (BIIB), Roche (RHHBY), Takeda, Kyowa Hakko Kirin, Cubist (CBST) and Isis Pharmaceuticals (ISIS), to help fund preclinical and clinical development. The company went public in the second quarter of 2004.

Alnylam reported a lower loss in the most recent quarter primarily because of the lower spending on research and development during the quarter. The second-quarter net loss of $0.35 per share was $0.20 below the loss per share in the second quarter of 2009. The Zacks Consensus Estimate indicated a loss of $0.30 per share for the reported quarter.

(Read our full coverage on this earnings report: "ALNY 2Q Loss Down on Lower Costs")

We are pleased with the company’s partnerships with the large pharmaceutical companies that provide it with financial muscle. The company boasts of a strong balance sheet. At the end of the most recent quarter, Alnylam had cash, cash equivalents and marketable securities of $396.9 million and zero debt. We are comfortable with the company’s current cash position, which allays concerns regarding its cash-burn rate.

However, we remain cautious about the success of Alnylam’s core RNA interference technology in drug development application. A very limited number of drug candidates based on RNAi discovery have been tested in animals or humans. This increases the uncertainty of any drug program using this technology.

We are also concerned about the slow pipeline progress, which leads us to believe that the company is not using its resources efficiently. Furthermore, the early stage of development also bothers us.

We believe that Alnylam’s current valuation adequately reflects its fairly balanced risk/reward profile. We see limited upside from current levels.

We have a Zacks #3 Rank (short-term Hold recommendation) on Alnylam’s shares. This implies that Alnylam is expected to perform in line with the broader US equity market over the next 1 - 3 months. We are Neutral on the stock in the long-term, which indicates that Alnylam’s shares are expected to replicate its short-term performance, but over 6+ months. Consequently, we advise investors to retain the stock over the time-period.

 
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Zacks Investment Research

Computer Science Corporation (CSC) maintains its habit of winning deals at regular intervals. The company recently clinched a deal with an intelligence community agency, whereby it is expected to provide a delivery order to provide information technology (IT) services for two new sites in San Antonio, Texas and Augusta.

As per the terms of the agreement, the delivery order has a one-year base period and four one-year options, with the total value amounting to $228.0 million. The company will provide secure and non-secure networks, data centers, desktops, multimedia and telephony. Computer Science Corp. is a trusted government contractor and subcontracting is expanding the company’s market, enabling it to serve new segments.

Moreover, the company has won another task order with an estimated total value of $42.0 million from the U.S. Navy. Under this agreement, the company will provide system software maintenance and engineering jobs at Navy units and commands at the Naval Surface Warfare Center. The order has a one-year base period, with a one-year renewal option.

The company is enjoying good business flow from the mainstream industry, but the outsourcing industry looks disappointing. Sluggish IT outsourcing bookings and weak order renewal rates suggest relatively slower growth for this segment in 2011.

Computer Science is also concerned about lower bookings and delays in government order placement. On the other hand, the company continues to see a steady flow of business from mainstream segments such as healthcare, hospitality, logistics systems, intelligence and IT security markets.

This apart, some analysts are concerned about pressures in the U.S. federal business, which accounts for about 40% of total revenue. The analysts are of the opinion that revenues may be impacted by tighter U.S. government budgets, which are increasingly being set aside to finance the fiscal deficit. Moreover, funding for defense expenditure and a more stringent order procurement procedure implemented by the Obama government makes business flow a little uncertain.

The company is also targeting the cloud computing market and expanding through acquisitions. Computer Science has enhanced its product portfolio, and increased its customer base. Therefore, it should be able to grow its business in line with the economic recovery.

Consequently, we have a Neutral rating on Computer Science. We also have a short-term Hold rating on the shares, as indicated by the Zacks #3 Rank.

 
COMP SCIENCE (CSC): Free Stock Analysis Report
 
Zacks Investment Research

Defense contractor Raytheon Company (RTN) announced that its unit Raytheon Missile Systems Co. has won a contract worth $165.3 million from the U.S. Department of Defense.

As per the contract, the Missile Systems wing of Raytheon will be involved in the development of Standard Missile-3 Block IIA missile. The company will provide engineering services and material for systems engineering, and will also be involved in the design and initial hardware fabrication for the missile program.

Raytheon Missile Systems is working with Japan's Ministry of Defense, Mitsubishi Heavy Industries and the Missile Defense Agency to develop Standard Missile-3 Block IIA. The new missile will provide the army a greater engagement capability against a wider variety of ballistic missile threats and more flexibility in protecting U.S. and allied forces.

The Standard Missile-3 (SM-3) is being developed as a part of the Missile Defense Agency and the U.S. Navy's sea-based Aegis Ballistic Missile Defense System. The SM-3 Block IIA is an upgraded version, an outcome of the U.S. and Japanese cooperative research program.

During the second quarter 2010, the Missile Systems unit notched almost 24% or $1,415 million of Raytheon’s total sales of $5,973 million. During the said quarter, the unit received orders worth $895 million from various agencies. The total backlog of this Raytheon unit at second-quarter end was $7,838 million, of which $6,296 million comprised funded backlog.

Raytheon currently retains a Zacks #3 Rank (short-term Hold rating). We presently maintain a Neutral rating on the stock.

Based in Waltham, Massachusetts, Raytheon Company, along with its subsidiaries, provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as mission support services to its global customers.

 
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Houston-based merchant generator, Dynegy Inc. (DYN) is moving towards being acquired by an affiliate of The Blackstone Group L.P. (BX). Post-acquisition, Blackstone will sell a portion of Dynegy’s generation assets to NRG Energy Inc. (NRG), which is proactively looking at increasing its presence in California. Blackstone plans to close the transaction by the end of 2010.

Federal Trade Commission Approval

On Wednesday, the Federal Trade Commission, in an early termination notice under the Hart-Scott-Rodino Antitrust Improvement Act, approved the deals and said that neither the acquisition deal nor the intended asset sales to NRG Energy presents any breach of antitrust regulations.

Background

On August 13, 2010, Blackstone announced that it would acquire Dynegy for $4.7 billion (including debt). Under the deal, Blackstone will pay $4.50 per share (a 62% premium on the closing price of $2.78 on August 12) in cash for about 120.6 million outstanding shares of Dynegy. In addition, Dynegy will get a 40-day period to solicit better bids for its shareholders.

Blackstone also declared that concurrently and contingent upon the agreement, it plans to sell four natural gas plants of Dynegy to NRG Energy for $1.36 billion. The four gas plants include the Casco Bay facility in Maine and the Moss Landing, Marro Bay and Oakland facilities in California.

Bourses on Fire

Dynegy’s proposed acquisition by Blackstone set the stock price heating up; it has spiked 40% over the past month. The deal is a win-win for both parties, with Dynegy’s shareholders hit hard by mark-to-market losses from forward power sales, enjoying near-term valuation upside.

 

On the other hand, Blackstone is eyeing Dynegy’s generation assets a portion of which would be sold to NRG Energy while the rest would be margin-accretive once the Midwest power market improves.

Dynegy, after having a dream run on the markets in August, seems to have run out of steam. The acquisition offer from Blackstone had given a 40-day time frame to solicit alternative bids, which ends on September 21, 2010.

 

The bullishness is reflected with the stock closing at $5.03 on September 8,2010, or at 11.8% premium over a market apprehension of another bid as it seems that the present bid values Dynegy at a discount. However, to date no alternative bids have come.

A Premature Ode to Dynegy

Dynegy’s wholesale electric power -- which is supplied to utilities, cooperatives, municipalities and other energy companies in the Midwest, the Northeast and the West Coast -- provides a relatively stable and growing earnings stream. Geographic disparity in the target markets of Dynegy has resulted in a portfolio that is well-positioned for capitalizing on regional differences in power prices and weather-driven demand.

Dynegy’s low-cost, well-operated power generation portfolio, which spreads across six U.S. states, is a diverse mix of coal, oil and natural gas. Diversified generation assets give the company’s cost structure a natural hedge against the impact of volatile commodity prices.

Dynegy’s prudent financial management has helped minimize generation dispatch costs. To cater to its coal-based generation assets, the company has contracted substantially all its coal requirements until 2012. Also, in a smart move, it inserted a non-fuel price escalator until 2013 for its coal transportation contract through rail.

Recent Trepidations in Financial Performance

In the second quarter of 2010, Dynegy on the revenue front witnessed a slide to $239 million from $450 million in the year-ago period, compared with the Zacks Consensus Estimate of $494 million. The company digested mark-to-market losses associated with forward power sales of $262 million in the quarter.

In the near-term, the Zacks #3 Rank (Hold) stock is expected to digest losses due to weak forward natural gas prices and tepid forward Midwest power prices. The company expects net loss in the range of $165 to $205 million in fiscal 2010.

The near-term outlook is no different for other Zacks #3 Rank (Hold) U.S. based independent power producers like RRI Energy Inc. (RRI), Calpine Corporation (CPN) and Mirant Corporation (MIR).
 

 
DYNEGY INC (DYN): Free Stock Analysis Report
 
Zacks Investment Research

Abbott Labs (ABT) recently completed its acquisition of Indian company Piramal Healthcare Ltd.’s Healthcare Solutions business (Domestic Formulations) for $3.8 billion. In addition to an upfront payment of $2.2 billion, Abbott Labs will pay $400 million annually over the next 4 years.

Position Strengthened in Indian Pharma Market

The acquisition of Piramal’s Healthcare Solutions business should catapult Abbott Labs to the top position in the Indian pharmaceutical market, which is one of the world's fastest-growing. The Healthcare Solutions business, which is now a part of Abbott Labs’ Established Products Division, grew 23% in fiscal 2010 and has a presence in several therapeutic areas including antibiotics, respiratory, cardiovascular, pain and neuroscience.

The Established Products Division focuses on branded generics especially in emerging markets.

Abbott Labs estimates that the Indian pharma market will generate $8 billion in sales this year – this amount is expected to more than double in the next five years. With this acquisition, the company expects its Indian pharmaceutical business to grow 20% annually, with sales slated to exceed $2.5 billion by 2020. The combined Abbott Labs and Piramal business should have a 7% share of the market.

Emerging Markets a Focus Area

This acquisition, which is not expected to affect Abbott Labs' earnings per share guidance for 2010, is in line with the company’s goal of strengthening its presence in the generics business as well as emerging markets. The company is looking to double its presence in emerging markets, which currently account for 20% of the company’s revenues.

A few months back, Abbott Labs acquired the pharmaceuticals business of Belgian company Solvay Group. This deal has not only helped expand Abbott’s product portfolio, it has also allowed the company to expand its presence in the European market as well as emerging markets where Solvay has a strong presence.

Besides this, Abbott also signed a licensing and supply agreement with another Indian company, Zydus Cadila, for the commercialization of at least 24 Zydus products in 15 emerging markets.

Abbott Labs’ deal with Piramal is the latest in a series of deals signed by global pharma companies to expand their generics portfolio and strengthen their presence in emerging markets. While Pfizer (PFE) has agreements with two Indian companies, Aurobindo Pharma and Strides Arcolab, for the manufacture of several generic drugs, GlaxoSmithKline (GSK) has an agreement with Dr. Reddy’s Laboratories (RDY) for the development and marketing of select products in various emerging markets. Meanwhile, AstraZeneca (AZN) recently entered into a licensing and supply agreement with Aurobindo Pharma.

Neutral on Abbott Labs

We currently have a Neutral recommendation on Abbott Labs, which is supported by a Zacks #3 Rank (short-term Hold rating). Abbott has some very strong business segments and a great late-stage pipeline. We believe Humira will continue to be a strong growth driver in the years to come.
 

 
Zacks Investment Research

Shuffle Master Inc.’s (SHFL) fiscal 2010 third-quarter GAAP earnings grew 4.1% to $5.8 million from $5.6 million in the year-ago period. Excluding special items, earnings per share came in at 13 cents, which edged past the Zacks Consensus Estimate of 12 cents. The better-than-expected quarterly results were mainly attributable to higher revenues and improved gross margin.

Shuffle Master develops, manufactures and markets automatic card shuffling equipment and gaming products such as table games and slot machine software for the gaming industry. The company, which has manufacturing facilities in Las Vegas and at New South Wales, Australia, also distributes casino chip sorting machines and accessories.

During the quarter, Shuffle Master’s total revenue rose 14.4% to $51.5 million from $45.1 million in the year-ago period. The growth was driven by product leases and royalty revenue, which grew 15.1% to $22.0 million coupled with a 13.9% growth in product sales and service revenue to $29.5 million.

Shuffle Master’s gross profit increased 15.7% year-over-year to $31.7 million, while gross margin grew 70 basis points (bps) to 61.4%, primarily due to increased lease and royalty revenue, which carries a higher margin, compared to sales and service revenue. Total operating expenses increased 24.3% to $23.2 million, mainly due to higher severance costs, compensation and R&D expenses. Accordingly, the company’s operating profit declined 2.9% to $8.4 million from $8.7 million in the year-ago period.

Shuffle Master exited the quarter with cash and cash equivalents of $26.5 million, compared to $17.2 million of cash in the year-ago quarter. Long-term debt (including current portion) at the end of the quarter was $90.4 million, reflecting a long-term debt-to-capitalization of 34.9%. During the first nine months of fiscal 2010, the company generated $38.6 million of cash from operations and deployed $14.9 million towards debt repayment and $4.3 million towards capital expenditure.

Shuffle Master has a short-term Zacks #3 Rank (Hold) and a long-term Neutral recommendation.

 
SHUFFLE MASTER (SHFL): Free Stock Analysis Report
 
Zacks Investment Research

CrowdGather, Inc. (CRWG) is an Internet company that specializes in the development and hosting of forum-based websites. The firm endeavors to monetize a network of online forums and message boards. Forums remain a much undervalued part of the Internet pie with $4.8 billion, and CrowdGather is the only public company dedicated to monetizing this area.

More page results equate to more revenue, as page views have jumped from 12 million to 80 million through several mergers. CRWG is now in acquisition mode. We see value in the shares and initiate our Outperform rating on CRWG.

Forums are Unique

People are there precisely to discuss products or services, even specific brands. They pose questions to the community, ask for guidance or simply look to connect with people who share their passions. The audience is primed and ready for -- even actively seeking -- product-specific messages.

Forums remain a much undervalued piece of the Internet advertising sales puzzle partly because advertisers in the past have been fearful of hate speech or other noise emanating from a few negative posts. CrowdGather reduces this risk by bringing enthusiasts together in narrowed-down niche markets in the Gaming and Entertainment, Technology, and Leisure and Lifestyle areas.

For instance, members of Ironmass.com, a body building forum, are more likely to talk about training, nutrition and equipment than engage in hate speech or other noise. CrowdGather then uses Google Ad Sense to sell advertising to members of the forum.

With the acquisition of Adisn and Lefora the firm essentially leveraged $6.5 million in equity in exchange for an increase in revenues and page views. That stake will not be dilutive given the cancellation of 5 million shares of CEO Sanjay Sabnani’s beneficial holdings in CrowdGather.

Investors who buy the stock today are essentially getting a firm that is debt-free, growing page views at 750% (12 million to 90 million), revenues at over 400%, and has not suffered dilution.

Forum discussion topics reveal that consumers are in the middle of the research process and are seeking more information to help them make purchase decisions, and CrowdGather remains the only public company dedicated to monetizing this area. Forum contributors are simply more active on and off-line. We see value in the shares and set our price target at $2.00.
 
CROWDGATHER INC (CRWG): Free Stock Analysis Report
 
Zacks Investment Research

Defense contractor Alliant Techsystems Inc. (ATK) continues to prudently manage its balance sheet by announcing plans to further enhance its liquidity position. Yesterday, Alliant Techsystems put forth plans to refinance its existing senior credit facilities.

Alliant is in talks with a group of lenders to replace its existing credit facilities to strengthen its liquidity. Currently, the company has $500 million of revolving credit facility and $257.8 million in term loans. The company expects to replace these facilities with a new five-year senior credit facility of up to $1.0 billion. The new facility will comprise a $600 million revolving credit facility and a $400 million term loan.

We believe the proposed $1.0 billion refinancing will provide the company with ample finances to fund future growth and meet its debt obligations as well as its capital expenditures.

In another release, the company announced plans to sell $300 million worth of senior notes maturing in 2020. Alliant intends to use roughly $280 million of the net $300 million proceeds to redeem all of its outstanding 2.75% convertible notes due 2024. Remaining proceeds will be used for general corporate purposes.

As of the end of the first quarter of fiscal 2011, Alliant’s cash and cash equivalents were $91.9 million and long-term debt was $1.4 billion. During the quarter, the company spent nearly $35 million towards capital expenditure.

Going forward, the company expects to generate free cash flows in the range of $275 - $300 million, with capital expenditures of roughly $120 million.

Alliant Techsystems is a premier aerospace and defense company with more than 18,000 employees in 22 states, Puerto Rico and internationally, and revenues of approximately $4.8 billion. The company supplies aerospace and defense products to the U.S. government agencies, and its prime contractors and sub-contractors. The company also supplies ammunition and related accessories to law enforcement agencies and commercial customers.

Currently, we have a short-term Zacks #3 Rank (Hold) on the stock. We also have a long-term Neutral recommendation on Alliant.

 
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Zacks Investment Research

Forest Laboratories, Inc. (FRX) recently received a boost with an advisory panel of the US Food and Drug Administration (FDA) voting in favor of approving its antibiotic candidate, ceftaroline.

Committee Unanimously in Favor of Approval

The FDA’s Anti-Infective Drugs Advisory Committee voted unanimously (21-0) in favor of approving the candidate for the treatment of community-acquired bacterial pneumonia (CABP). The committee also voted unanimously (18-0) in favor of approving ceftaroline for complicated skin and skin structure infections (cSSSI).

Final Decision in October

The favorable recommendation from the advisory panel is a major positive for Forest Labs. Although the FDA is not required to follow the panel’s recommendation, it usually does so. A final decision regarding the approvability of ceftaroline should be out in late October.

The approval of ceftaroline will be a huge boost for Forest Labs, which is facing a major patent cliff from 2012 when anti-depressant Lexapro loses exclusivity. Another key drug, Namenda, is slated to lose exclusivity in 2015. Forest Labs, therefore, needs new products in its portfolio which will help compensate the loss of revenues that will take place once these key drugs start facing generic competition.

Ceftaroline became a part of Forest Labs’ pipeline with its acquisition of Cerexa Inc. in Jan 2007. In addition to developing ceftaroline on its own, Forest Labs has an agreement with AstraZeneca (AZN) for the development of a ceftaroline in combination with a novel intravenous beta-lactamase inhibitor, NXL104.

Neutral on Forest Labs

We currently have a Neutral recommendation on Forest Labs, which is supported by a Zacks #3 Rank (short-term Hold rating). We remain concerned about the strength of the company’s pipeline relative to the loss in sales that will come with the Lexapro (2012) and Namenda (2015) patent expirations. With Lexapro losing patent protection in March 2012, roughly half the company’s top-line will be at risk to generic competition.

While Bystolic and Savella should be very meaningful contributors by that time, we believe that their combined sales will not be enough to compensate for the loss of Lexapro sales. Namenda will face generic competition in early 2015 -- this puts another $1+ billion at risk.

Given the situation, we believe that Forest will continue to seek in-licensing and acquisition activities to grow its pipeline. In fact, the company’s goal is to double the commercial value of its late-stage pipeline by 2012 through in-licensing deals and acquisitions. Forest has made significant progress in this regard and should be on the lookout for additional deals in the next couple of years.

 
FOREST LABS A (FRX): Free Stock Analysis Report
 
Zacks Investment Research

The Beige Book is a collection of mostly anecdotal information from around the country collected by the twelve Federal Reserve districts. In general, it pointed to growth that was continuing but at a slower pace than the already anemic level of the previous months.

No signs of a double-dip, but not a lot of evidence that we are about to start a vigorous uptrend in the economy either. For the most part, the report confirmed what we already knew from other economic reports. Here are some of the key passages from the report, along with some of my thoughts mixed in:

“…Continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods. Economic growth at a modest pace was the most common characterization of overall conditions...”

Economic growth at a modest pace seems to be a phrase the Fed is using a lot these days. The questions is, should we expect better than that?

There are two schools of thought. In most of the cases where the economy goes into a deep recession, the path out of it is usually very vigorous. However, recovery that happens after recessions that are caused by financial crises tend to be very slow and lackluster. There are not a lot of data points on U.S. recessions caused by financial panics, but there are plenty of examples from other advanced economies.

This case is a bit unique in that is was a very deep recession that was caused by a financial panic. So far the financial panic side seems to be outweighing the deep side.

“Reports on consumer spending were mixed but suggested a slight increase on balance. Most Districts reported that non-automotive retail sales rose compared with the previous reporting period or were above their levels from 12 months earlier.”

Being above a year ago is not a huge feat, since that was near the bottom of the recession, making it a very easy comp. Sequential growth is harder to achieve. There's not a lot of it, but at least it is still positive.

“Most Districts also reported that sales of new automobiles and light trucks were largely stable or up slightly during the reporting period, and contacts were optimistic for stable sales or slight growth over the balance of the year. A few reports indicated that inventories for various goods remained near desired levels despite slower sales in some cases, as retailers have been practicing very tight inventory management.”

That is probably very good news for companies like Ford (F), since they have made great strides in bringing their costs under control. They are solidly profitable now with sales running at under a 12 million a year pace, down from well over 16 million a year before the recession started.

The tight inventory management probably means that we will get no contribution from increasing inventories for third quarter GDP growth. That has been a major -- but diminishing -- contributor to growth in the last three quarters.

“Reports from most Districts pointed to consistent gains in travel and tourist activity, with pickups evident in the business and leisure segments alike.”

This is a good sign since leisure travel is a highly discretionary item, and shows more confidence on the part of consumers. If you are afraid you are going to lose your job, you don’t go on a vacation. Also, travel and tourism is a very labor intensive business, so a pick up in hotel occupancy is likely to lead to more jobs. When on vacation, people tend to eat out, and that will also spur more jobs.

“Manufacturing activity expanded further on balance, although the pace of growth appeared to be slower than earlier in the year. Most Districts reported further gains in production activity and sales across a broad spectrum of manufacturing industries.”

Manufacturing has been one of the real bright spots in this recovery, particularly when compared to the last two recoveries. I suspect that some of the slowdown in growth there is related to the stronger dollar hurting exports and making imports more competitive here.

“Reports on capacity utilization were mixed. Manufacturers of high-tech products have been operating near maximum capacity of late, although this partly reflects a substantial decline in industry-wide capacity over the past three years.”

That should be good news for the semiconductor industry, where there is a high degree of operating leverage. If the plants are running at near-maximum capacity, it is likely that they are making a lot of money. That would also favor the firms that have the manufacturing capacity like Intel (INTC) and Analog Devices (ADI) versus some of the smaller “fabless semiconductor” firms.

“Capital spending plans for manufacturers and firms in other industries generally indicate little change or modest increases in coming months.”

That is a bit on the disappointing side. We need strong capital investment if the economy is going to pick up steam. Obama’s new proposal to allow companies to expense equipment purchases rather than depreciate them over their useful lives might help this part of the economy pick up a bit more steam.

“Activity in residential real estate markets declined further. Most District reports highlighted evidence of very low or declining home sales, which many attributed to a sustained lull following the expiration of the homebuyer tax credit at the end of June...Residential construction activity declined in most areas in response to weak demand.”

The real estate market, especially the residential real estate market, has been the millstone around the neck of the economy, and it does not look like that is changing. We had a bit of a temporary respite due to the tax credit, but that simply pulled sales that would have been made in the summer into the spring.

We had a bit of a party; now it is hangover time. Historically, residential investment is the key locomotive pulling the economy out of a recession. The locomotive is derailed this time around.

“Demand for commercial, industrial and retail space generally remained depressed. Vacancy rates stayed at elevated levels in general and rose further in a few Districts, placing substantial downward pressure on rents.”

Don’t look for non-residential construction to take the place of residential construction. Normally non-residential construction kicks in much later in the economic cycle, so it is not that unusual that it is weak (residential construction is classic early cycle), but its weakness is not helping matters.

“Lending activity was stable to down slightly on net. Most Districts reported little or no change from existing low levels of commercial and industrial lending, as businesses remained quite cautious about expansion plans...with declines driven by weak business lending stemming in large part from uncertainty about future economic conditions. Consumer lending remained sluggish in general...the role of households' ongoing efforts to reduce their debt burdens. A recent flurry of refinancing activity spurred increased demand for residential mortgages, but new-purchase mortgage originations remained quite sluggish in general.”

Mortgage refinancing is providing an important boost to the economy, as mortgage rates are at levels not seen for decades. However, a very large number of people are not able to participate in it since they owe more on their current mortgage than the house is worth, or have only a small sliver of positive equity.

For those who have the ability to refinance, it can save people hundreds of dollars a month, money that can be spent elsewhere. It is an open question of how much the decline in lending is from banks not wanting to lend and how much is from businesses not wanting to borrow. Clearly both factors are at play.

“Demand for agricultural products continued to expand, and producers benefited from relatively tranquil supply conditions. Crops and livestock generally sold well in Districts with extensive agricultural sectors, including Chicago, Minneapolis, Kansas City, Dallas and San Francisco. Domestic growers have seen increased demand for grains and other commodities as a result of shortages overseas. Growing conditions were supportive of relatively high yields in most areas.”

Things are going well down on the farm, as U.S. farmers are benefiting from crop failures elsewhere in the world, most notably the drought and heat wave in Russia. It is noteworthy that the lowest unemployment rates in the country are in places like the Dakotas and Nebraska, which have very large farm economies.

“Upward price pressures were very limited during the reporting period, with the exception of selected food commodities and industrial materials.”

Deflation is probably a bigger threat right now than runaway inflation. The bond market is practically screaming that inflation is not a big worry right now.

“Wage pressures remained modest overall. Of Districts commenting on wages, most identified little or no upward pressures or increases.”

With 9.6% unemployment, that is hardly a surprise.

Overall, the tone of this Beige Book was a bit softer than the tone we were seeing a few months ago. Nothing disastrous, but not enough growth to make much of a dent in the huge army or the unemployed. Maybe that is why the call it the Beige book and not the neon orange book; at least this time around beige seems to be a very appropriate color.

 
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Onyx Pharmaceuticals Inc. (ONXX) recently announced that it has entered into an agreement with a Japanese company, Ono Pharmaceutical Co. Ltd., for the development and commercialization of two of Onyx Pharma’s compounds, carfilzomib and ONX 0912, in Japan.

Carfilzomib is currently in multiple trials for the treatment of patients with multiple myeloma and other cancers, and Onyx Pharma plans to file a New Drug Application with the US Food and Drug Administration (FDA) by the end of 2010 for accelerated approval of the candidate. ONX 0912, which is a follow-on drug of carfilzomib, is currently in phase I testing.

As per the terms of the agreement, Ono Pharma will have full rights to develop and market both the compounds for all oncology indications in Japan, while Onyx Pharma retains the marketing rights for the rest of the world.

For the deal, Ono Pharma will make an upfront payment of ¥5 billion ($59 million) to Onyx Pharma and the company will also be entitled to receive up to $280 million on the achievement of certain development and sales milestones. Onyx Pharma will also receive double-digit royalty payments on the sales of these drugs, when approved and marketed in Japan.

Japan-based Ono Pharmaceutical Co. Ltd. is primarily engaged in the manufacture and sale of pharmaceutical products. The company’s products include oral medications for the treatment of bronchial asthma, disturbances of peripheral circulation, chronic pancreatitis and overactive bladder, as well as injectable drugs for the treatment of acute lung injury, generalized intravascular coagulation syndrome, acute phase cerebral thrombosis and blood pressure regulators used during surgical operations.

We currently have a Neutral recommendation on Onyx Pharma, which is supported by a Zacks #3 Rank (short-term Hold rating). We view this deal as a positive for Onyx Pharma, as this partnership allows the company to benefit from Ono Pharma's drug development experience in Japan.

Moreover, the agreement has brought in cash, which should come in good use as Onyx Pharma conducts pre-launch activities for carfilzomib. Carfilzomib could hit the US market as early as 2011 if it is granted accelerated approval by the FDA.
 
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Varian Medical Systems (VAR) recently brought to market a new X-Ray tube geared for functioning in security systems requiring high resolution and detailed images. Such powerful security systems may be deployed in prisons, airports, military bases, and other sensitive or highly supervised operations. The Varian MCS-80 tube enables the discovery of even non-metallic items such as plastic explosives, liquids, narcotics, ceramic weapons, as well as concealed and contraband substances.   Varian believes that its new X-Ray product empowers the security industry with a system that is both customized as well as cost effective. This tube can be used to unearth both threats and banned substances that may be concealed within a person's body or inside a package.   The new X-Ray product, functioning at 80 Kilovolts (kV), uses specialized anode technology and a miniature focal point to optimize resolution and produce detailed images for the bare human eye. The tube, which utilizes Varian's air-cooled stagnant anode metallic ceramic design, joins its extended line-up of industrial-grade X-Ray tubes. Various industrial applications include non-destructive imaging, food inspection, and security applications that require several target angles and focal spots.   Varian's X-Ray Products segment is a distinct business unit, set apart from its oncology products. The company offers over 400 categories of medical and industrial X-Ray tubes, besides its PaxScan series of silicon flat-panel X-Ray image detectors for digital radiography or imaging without using films. This strategic business unit has its manufacturing headquarters in Salt Lake City, Utah with sales centers in Beijing, China; Willich, Germany; and Charleston, South Carolina.   In addition, Varian is a leading global player and manufacturer of medical devices for treating cancer with radiotherapy, proton therapy, and brachytherapy. We currently have a Neutral rating on the stock.
 
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The new $5.5 billion buyout offer from Air Products and Chemicals Inc. (APD) failed to impress the board of directors of Airgas Inc. (ARG). The directors of Airgas have again collectively rejected the revised offer of $65.50 per share, citing that the new offer still grossly undervalues the company.

The Airgas board asserts that the $2 per share hike from the preceding offer of $63.50 per share also fails to gauge the inherent value, excellent prospects and impressive economic performance of the company. In a process to stop the persistent takeover bid from Air Products, the shareholders of Airgas are also advised to reject some director candidates and bylaw amendment proposals from Air Products, in the annual general meeting scheduled to be held in September 15, 2010.

As of Thursday afternoon, shares of Airgas stood at $64.11, losing $1.16 a share in Wednesday trading and an additional 48 cents per share thus far Thursday. The latest offer was made by Air Products on Monday, September 6, 2010.

The acquisition story dates back to October 2009 when Air Products proposed to acquire Airgas in an all-cash transaction of $60 per share. Air Products increased the offer price three separate times to settle at the current level of $65.50 per share to win over Airgas shareholders.

Since the board of directors of Airgas spurned all four bids, Air Products admitted that if the shareholders of Airgas reject the latest offer yet again, the acquisition deal will fall flat, leaving no space for further consideration.

Airgas currently retains a Zacks #3 Rank (short-term Hold rating). Based in Radnor, Pennsylvania, Airgas Inc., through its subsidiaries, is the leading U.S. distributor of industrial, medical, and specialty gases, and hard goods, such as welding equipment and supplies.

 
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Chilean airlines, LANAirlines S.A. (LFL) released its passenger traffic data for August 2010. Total passenger traffic grew significantly by 13.7% year over year, with a 15.1% increase in domestic traffic and 13.1% in international traffic. International passenger traffic accounted for approximately 70% of the total passenger traffic.   Cargo traffic increased 16.0% year over year based on higher imports into Latin America and increased operations to Europewith the Boeing 777-200 freighter fleet.   During July 2010 as well, LAN recorded a 14.5% increase in its passenger traffic with domestic traffic increasing 17.6% and international traffic rising 13.3%. Cargo traffic increased 20.7% year over year   LAN recorded a 9.7% year-over-year increase in total passenger traffic in the second quarter of fiscal 2010 with increases of 12.5% and 8.4% in domestic and international traffic, respectively. Thus, passenger revenues grew 24.5%. Cargo traffic increased 37.9% year over year based on the recovery in the global cargo market and hence cargo revenues went up by 30.6%.   The primary reasons for this increase were the World Cup 2010 and new routes to United States, Europe, Mexicoand the Caribbeantogether with improving economic conditions.   An increase in passenger traffic during the first two months of the third quarter of fiscal 2010 signifies a jump in traffic during the third quarter. We also expect a considerable increase in passenger traffic both domestically and internationally during the third quarter of 2010 based on market recovery. Moreover, LAN’s continuous fleet expansion and renewal program are expected to fetch profitable returns in future.   Recently, LAN signed a memorandum of understanding for buying 50 modern Airbus A320 family aircraft to be delivered between 2012 and 2016. It has also signed an agreement with The Boeing Co. (BA) for five 787-8 Dreamliner aircraft in 2012 in addition to ten Boeing 787-8 Dreamliners announced in March 2010.   Moreover, we remain optimistic about the proposed merger of LAN and TAMS.A. (TAM), which is to be christened LATAM Airlines Group S.A. (LATAM). According to the agreement, LAN will become the parent company with a 73% stake in TAM and shareholders of TAM will receive 0.9 shares of LATAM for each share of TAM. It will be an all-stock transaction of approximately $2.7 billion.   The merger is expected to provide annual synergies of approximately $400 million, out of which approximately $133 million will be realized in the first year of the close of transaction and $267 million in the next two years. Passengers and cargo customers of both companies will stand to benefit from the increase in the number of flights, destinations and connections.   Moreover, LAN is well positioned to benefit from the global economic recovery, particularly from the emerging economies in Latin America. The economic growth in emerging markets will be higher than the developed markets. Until the merger materializes, we reiterate our Neutral recommendation on the ADR and the stock retains its short term “Hold” rating (Zacks #3 Rank).
 
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Defense contractor Goodrich Corporation (GR) sold $600 million unsecured notes, which will mature on 2021 and have an interest rate of 3.6%. The company initially decided to issue $500 million in notes, which was later increased by $100 million.   Goodrich offered the notes at 99.788% of face value and will yield 3.625% when held till maturity. The company intends to use the net proceeds from the note offering to redeem all of $257.5 million debt due 2012, make contribution to pension plans and also use it for general corporate purposes.   Goodrich's total long-term debt at the end of second-quarter 2010 was $2,007.9 million versus $2,008.1 million at the end of 2009. The debt-to-capital ratio of the company at the end of the second quarter 2010 was 40.6%, and with the issue of new notes the present debt-to-capital ratio of the company will rise to 52.6%.   Interest expenses of Goodrich at the end of second-quarter 2010 were $33.6 million versus $30.7 million at the end of the year-ago quarter. With the issue of new notes, the company will have to incur additional interest expenses to service its debts.   As of June 30, 2010, Goodrich's liquidity consisted of $866 million in cash and $435.9 million in borrowing capacity under a $500 million revolving credit facility, with total liquidity amounting to $1.3 billion. The adjusted earnings of the company at the end of second-quarter 2010 were $1.24 per share compared with $1.15 per share in the year-ago comparable period. Goodrich expects adjusted earnings per share in the range of $4.30 to $4.45 for 2010.   The Zacks Consensus Estimates for third quarter fiscal 2010, fiscal year 2010 and fiscal year 2011 are $1.13 per share, $4.47 per share and $5.19 per share, respectively.   Goodrich currently retains a Zacks #3 Rank (short-term Hold rating). We also maintain a Neutral rating on the stock.   Based in Charlotte, North Carolina, Goodrich Corporation supplies aerospace components, systems, and services to its worldwide customers.
 
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Illinois Tool Works Inc. (ITW) disposed of its wholly-owned subsidiary, Meyercord Revenue Inc. to SICPA Product Security LLC for an undisclosed amount. The business was stated to be unfit for Illinois Tool's long-term growth platform. SICPA Product Security is a private company specializing in security technology for currency and tax collection.   Meyercord Revenue, acquired by Illinois Tool in the late 1990s, primarily produced tobacco tax stamps for U.S. states and municipalities. With annual sales of roughly $30 million, Meyercord Revenue provides 250 different tax stamps to 47 states and about 147 municipalities and Native American tribes.   Illinois Tool follows a strategy to grow its presence in sectors like industrial packaging, fasteners, welding machinery and commercial kitchen equipment. Selling off Meyercord Revenue will enable the company to concentrate on its expansion program in these sectors. However, Illinois Tool has retained a related business that manufactures and services tax stamp application equipment.   Illinois Tool Works, operating through 840 business units in 57 countries, is one of the leading manufacturers of industrial products and equipment.
For the third quarter of 2010, management offers its guidance for earnings per share from continuing operations which comes to approximately 72-84 cents based on total revenue growth assumption of 9%-13%. For full-year 2010, the company expects EPS to be within the $2.82-$3.08 range based on revenue growth expectations of 11%-13%.  
We believe that the company's growth stems from its ability to develop new and improved products as well as broadening the range of application of established products. Developing new methods, processes and equipment along with acquisitions give the company a big push.  
Moreover, new products are designed to be more cost effective with the manufacturing processes made simpler, by reducing the number of parts in an assembly or improving the quality of customers' assembled products.   Prime competitors of Tool Works include Cooper Industries plc (CBE), General Electric Co. (GE), and Manitowoc Co. Inc. (MTW). We currently maintain our Neutral recommendation on the stock, which is in line with the Zacks #3 Rank (Hold).
 
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Vale S.A. (VALE), the Brazilian miner, disposed of its $1.75 billion of global bonds due 2039 at 110.87% for a yield to maturity of 6.07%, and priced its $1 billion 10-year debt issue at 99.03% of face value for a yield to maturity of 4.748%. The proceeds from the above are to be used for general corporate purposes.   The transaction would help increase cash and near-cash assets for the immediate quarter, which dropped to $6,235 million in the second quarter of fiscal 2010 from $11,136 million in the previous quarter on account of various small acquisitions. This might indirectly decrease $17.7 billion of debt the company had at the end of the second quarter of fiscal 2010.   Vale will also be able to undertake various small acquisitions, which is its key growth strategy. Recently, it acquired the Corumbá iron ore mining operations from Rio Tinto (RTP) for $750 million in cash, and mines at Simandou, site of a large underdeveloped high quality iron ore deposit at low cost. Through Simandou, Vale is expected to produce 450 million tons of iron ore by 2014.   Vale acquired potash projects in Argentina and Canada, and two assets in Brazil, the Bunge phosphates operations for $1.7 billion and 72.6% of Fosfertil, the largest producer of fertilizer nutrients, for $3.0 billion. These acquisitions are likely to benefit the company in the long term.   The company has also signed agreements with Companhia Siderurgica do Pecem, the state government of Ceara, and Korean steelmaker Dongkuk, to build a steel mill in Brazil’s northeastern state of Ceara and with Norsk Hydro (NHY) to sell its aluminum business for $4.9 billion.   The steel mill is expected to produce 6 million tons of steel slabs per year, which will require a huge amount of iron ore. Thus, Vale will rely less on market demand and more on in-house consumption.   However, we are concerned about the instability in the Chinese market, the largest iron ore importer, with regard to carbon emissions, which are almost, double that of the U.S. and triple that of Europe. On the other hand, we believe that once the inventory in the Chinese market exhausts, the demand for iron ore will rebound.   Further, we expect a recovery in global steel demand in 2010 and beyond. However, a strong exposure to the international markets puts it in a disadvantageous position in terms of exchange rate fluctuations. Thus, we reiterate our Neutral recommendation and the stock currently retains its Zacks #3 Rank (short term “Hold” rating).
 
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Vale S.A. (VALE), the Brazilian miner, disposed of its $1.75 billion of global bonds due 2039 at 110.87% for a yield to maturity of 6.07%, and priced its $1 billion 10-year debt issue at 99.03% of face value for a yield to maturity of 4.748%. The proceeds from the above are to be used for general corporate purposes.   The transaction would help increase cash and near-cash assets for the immediate quarter, which dropped to $6,235 million in the second quarter of fiscal 2010 from $11,136 million in the previous quarter on account of various small acquisitions. This might indirectly decrease $17.7 billion of debt the company had at the end of the second quarter of fiscal 2010.   Vale will also be able to undertake various small acquisitions, which is its key growth strategy. Recently, it acquired the Corumbá iron ore mining operations from Rio Tinto (RTP) for $750 million in cash, and mines at Simandou, site of a large underdeveloped high quality iron ore deposit at low cost. Through Simandou, Vale is expected to produce 450 million tons of iron ore by 2014.   Vale acquired potash projects in Argentina and Canada, and two assets in Brazil, the Bunge phosphates operations for $1.7 billion and 72.6% of Fosfertil, the largest producer of fertilizer nutrients, for $3.0 billion. These acquisitions are likely to benefit the company in the long term.   The company has also signed agreements with Companhia Siderurgica do Pecem, the state government of Ceara, and Korean steelmaker Dongkuk, to build a steel mill in Brazil’s northeastern state of Ceara and with Norsk Hydro (NHY) to sell its aluminum business for $4.9 billion.   The steel mill is expected to produce 6 million tons of steel slabs per year, which will require a huge amount of iron ore. Thus, Vale will rely less on market demand and more on in-house consumption.   However, we are concerned about the instability in the Chinese market, the largest iron ore importer, with regard to carbon emissions, which are almost, double that of the U.S. and triple that of Europe. On the other hand, we believe that once the inventory in the Chinese market exhausts, the demand for iron ore will rebound.   Further, we expect a recovery in global steel demand in 2010 and beyond. However, a strong exposure to the international markets puts it in a disadvantageous position in terms of exchange rate fluctuations. Thus, we reiterate our Neutral recommendation and the stock currently retains its Zacks #3 Rank (short term “Hold” rating).
 
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j2 Global Communications Inc. (JCOM) has acquired Venali Inc., for approximately $17 million. Venali is a provider of Web-based business fax services. Venali takes pride in its impressive list of clientele and its messaging business alone generated nearly $10 million revenues in the last one year. All pending patent litigation between j2 Global and Venali has also been dismissed.    j2 Global provides a diverse array of services from Internet fax to emails and now has 70 top-tier customers. Large customers are defined by the company as accounts with a contract size of 1,000+ DID (Direct Inward Dial) numbers. To date, the company has deployed 1,400,000 million paid DID accounts globally. Additional offerings provided by the company remain firm as j2 Global has 66 active solutions awaiting market launch. The company holds 57 U.S. and foreign patents with another 49 pending approval.   In August, j2 Global announced the availability of its flagship eFax line of products in 3,300 cities across 46 countries, indicating a growth of around 62% in the last three years. eFax offers free, professional, enterprise and back-office Internet fax services. Recently, South Korea also made its way to the list of countries in j2 Global's global network   We believe management is effectively executing the company's businesses, especially in a sluggish economic environment. j2 Global's business is extremely sensitive to overall macroeconomic factors, particularly weakness in credit markets. The company has a vast majority of credit-sensitive customers from lending and mortgage industries and other financial institutions. Despite all these odds, revenues during the second quarter 2010 inched up 3% year over year, while customer churn rate declined 0.2% sequentially and ARPU (Average Revenue per User) increased marginally for the first time in previous six quarters.   j2 Global faces stiff competition from EasyLink Services International Corporation (ESIC), Open Text Corp. (OTEX) and Premiere Global Services Inc. (PGI).   According to our view, the company's strong financial position ($4.33 per share of net cash) and diversified products/services pipeline, in synergy with the long-term growth prospects for outsourced value-added messaging services, may drive valuation levels higher in the near future.   We maintain our long-term Neutral recommendation for j2 Global. Currently, it is a short-term Zacks #3 Rank (Hold).
 
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