Thursday, August 30, 2012

Pharma Companies Switch Drugs to OTC Market

Global pharmaceutical company AstraZeneca Group PLC ADR (NYSE: AZN) has suffered since late last year thanks to both expiring patents on key drugs and several developmental drug failures. The company has a much more substantial patent cliff than many of its peers with about half of its $33 billion in annual revenues expected to disappear by 2016. On the experimental drug side, it recently ended a second stage trail of CytoFab, a potential blockbuster drug treatment for sepsis, because it was found to be ineffective. In December, the company took a $382 million writedown on two other drugs which failed in late-stage trials.
So AstraZeneca's management has to come up with different ways to generate revenues in order to remain a big player in the pharmaceutical sector.

One strategy management is now following was on display recently with its deal with Pfizer (NYSE: PFE). AstraZeneca sold the global rights for an over-the-counter version of its leading (with $4.4 billion in 2011 sales) heartburn drug Nexium – the little purple pill – to Pfizer. The OTC version may go on sale in 2014 if FDA approved. Pfizer will pay $250 million upfront and has committed to a series of future milestone and royalty payments to AstraZeneca. These future payouts are substantial enough that AstraZeneca raised its 2012 earnings guidance upward by 16 cents to between $6.00 and $6.30.

AstraZeneca retains the rights to the pharmaceutical version of the drug. But the Pfizer transaction should aid the company in realizing the full long-term value of Nexium and it may open the door to other similar deals for other drugs in its portfolio. Already there is talk of Pfizer paying for the OTC rights to the company's allergy medication Rhinocort Aqua.

This strategy adopted by AstraZeneca is hardly unique in the industry. Take a look at the French pharmaceutical company Sanofi ADR (NYSE: SNY). In 2009, it bought Chattem just to acquire that company's expertise in marketing OTC products in order for Sanofi to be able to successfully switch its blockbuster allergy drug Allegra from a prescription-only drug to now having an OTC version. And thanks to Chattem's expertise, it has done so successfully. Its OTC sales were up in excess of 100 percent in 2011, mainly due to Allegra.

The problem is that the strategy does not always work, either because the FDA will not approve an over-the-counter version of a drug or more widespread use of a drug across a broader population reveals previously unknown side effects. When it comes to lack of FDA approval, just ask Pfizer about the Food and Drug Administration's reluctance to approve an OTC version of Viagra.

As for the second problem, the prime example has to be the fiasco called Alli from GlaxoSmithKline PLC ADR (NYSE: GSK). Back in 2005, it bought the rights to the diet drug Xenical from Swiss pharmaceutical company Roche Holding AG ADR (NASDAQOTH: RHHBY.PK). Its plan was to alter it enough to comply with regulators (which it did) and then market it like heck over-the-counter to people globally who were looking to lose weight. It began to market Alli in the U.S. in 2007.

Two problems arose, one of which was limited efficacy. The other was embarrassing to both the company and the users of Alli. A major side effect was diarrhea and flatulence among users who did not limit their intake of fatty foods. No wonder then that sales disappointed and that GlaxoSmithKline is now trying to unload Alli, but as of yet no buyers have stepped up.

The trend toward switching drugs to OTC status is sure to continue. Consultancy Kline Group estimates that already more than a fourth of over-the-counter sales in the United States are switched products such as Advil, for instance.

What investors should look for in drug companies looking to switch some of their most popular drugs to OTC status is what type of drug it is the firms are looking to switch. The FDA seems reluctant to approve cholesterol, diabetes and blood pressure drugs. So far it has been much easier to obtain FDA approval for drugs that are used to treat pain, allergies and heartburn like Nexium. In fact, allergy-relief products were the fastest growing segment of the OTC drug market in 2011, with sales increasing by 16.3 percent. Companies sticking to those sectors should be successful in generating revenues from OTC versions of drugs coming off patent.

This article originally appeared on the Motley Fool Blog Network. Make sure to read all of my articles for the Motley Fool at

Tuesday, August 28, 2012

Rare Earths Poised for a Turnaround

Rare earths are 17 chemically similar metallic elements that have a wide variety of uses in today's high-tech world including in the defense, electronics and renewable energy industries. Many major firms such as Apple and Boeing rely on having access to rare earths.

That is why the politicians in the U.S. were such in an uproar a couple of years ago when prices for rare earths were skyrocketing due to export restrictions placed on them by China. It has about 30 percent of the world's rare earths deposits but accounts for well over 90 percent of production. Other countries such as the United States quit producing rare earths for a number of years because it is a highly polluting industry.

The political furor has died down somewhat as prices for rare earths have come back down to earth over the last year or so due to slackening demand brought on by the global economic slowdown. Prices are down more than half from the peak prices set in 2011. But now rare earths are back in the news as China continues to revamp its industry, shutting down about 20 percent of the country's production capacity, combining smaller firms into bigger ones and limiting the number of companies that can export rare earths in an effort to better control the industry.

But this news pales in comparison to what consumers of rare earths may be facing in a few years.....

China's consumption of rare earths has already quadrupled over the last decade thanks to its position as a leader in the magnet market which accounts for 30 percent of China's usage. Now it plans to develop their own downstream industries that use rare earths to manufacture value-added products. What does this mean? It means China will likely consume much of their rare earths production domestically. In fact, China may become a net importer of rare earths as soon as 2014. Here we go again...China as the 800 pound gorilla in a commodity market.

This is great news, however, for North American companies that are beginning to produce rare earths again and are already beginning to benefit from Chinese regulation of overproduction. These include the likes of Molycorp (NYSE: MCP), Rare Element Resources (NYSE MKT: REE), Avalon Rare Metals (NYSE MKT: AVL), Tasman Metals (NYSE MKT: TAS) and Quest Rare Minerals (NYSE MKT: QRM). In fact, Quest's CEO Peter Cashin said “They [the Chinese] are an unanticipated customer for us...The Chinese would be a huge market for us.”

Tasman Metals has rare earth properties in Scandinavia, Avalon has properties in the Northwest Territories of Canada, Quest has properties in Quebec and New Brunswick in Canada, Rare Element holds properties in Wyoming while the best-known name Molycorp is re-opening the Mountain Pass facility in California.

A caution here for investors...some of the companies – Tasman, Avalon and Quest – are low-priced stocks trading a little above $1 a share and thus are inherently volatile. Also rare earth production at these companies is still in the very early stages. Quest, for example, will not start production until 2017. The Government Accounting Office (GAO) says it may take many years for the North American industry to fully reboot itself and come onstream.

The Chinese becoming a net importer will exacerbate the supply situation in rare earths. Rarer heavy rare earths, used in mobile phones and magnets, are expected to remain in a supply deficit until 2025. While more common light rare earths are expected to, over the next five years, move from a surplus to supply balance and then to a supply deficit according to Mr. Cashin.

He may be right. As with other commodities China, for the first time ever, has begun building stockpiles of rare earths (according to China Securities Journal). That means, as with oil and many other commodities, Chinese authorities are anticipating a large increase in demand in future years.

That should mean good times are ahead for rare earth producers and time for investors to begin slowly accumulating these beaten down stocks like Molycorp.

This article originally appeared on the Motley Fool Blog Network. Make sure to read all of my articles for the Motley Fool at

Wednesday, August 22, 2012

US Drought Reignites Ethanol Debate

Once again economics and politics are colliding as the ongoing drought, the worst in 50 years in the United States, has reignited the debate about ethanol. The debate centers on whether is makes sense, at a time of food shortages globally, to turn corn into fuel. The U.S. ethanol industry uses roughly 5 billion bushels of corn annually, or about 40 percent of the U.S. crop.

Already strains in the industry are showing thanks to high corn prices in excess of $8 a bushel. Not to mention stagnant demand for fuel and the expiration of some subsidies which ended in December. Output of ethanol from producers has fallen to the lowest levels seen since October 2009.

The slowdown in the ethanol industry has already affected the producers. One of the largest producers of ethanol (with a capacity to refine 1.7 billion gallons a year), Archer Daniels Midland (NYSE: ADM), recently reported poor earnings. The company said it lost money on ethanol thanks to already-high inventory levels, weak fuel demand and low inventories of corn. Another large ethanol maker, Valero Energy (NYSE: VLO), also recently reported negative ethanol profit margins citing the same reasons as ADM. Both companies have shut down some ethanol producing plants in the Midwest.

Many organizations, including the United Nations, have asked the U.S. to waive government mandates for ethanol usage this year. The mandates will ensure that more than 13 billion gallons of ethanol will be used this year, no matter the price of corn. Also asking the government to suspend for a year its mandate for ethanol use are members of the U.S. livestock and poultry industry. Animal feed is the second biggest use for corn, behind ethanol. It accounts for about a third of corn usage, so the two industries are in competition for scarce, high-priced corn.

The livestock and poultry industry will suffer with falling profit margins because of the soaring price of corn for animal feed. Meat prices at the grocery store will rise, hitting consumers hard. Larry Pope, CEO of meat producer Smithfield Foods (NYSE: SFD), warned that U.S. meat prices will rise by “significant double digits” in the near future if nothing is done about the high corn prices.

But at least Smithfield Foods has done a decent job of hedging corn prices into 2013. Some of their peers such as chicken producer Sanderson Farms (Nasdaq: SAFM) have not done a good job of hedging corn. And this is important since animal feed makes up 55 percent of the company's cost of goods sold. Sanderson estimates that for every 30 cent jump in corn, it raises the cost of producing a pound of chicken by a penny. Doesn't sound like much, but it is important when you're working on the thinnest of profit margins. No wonder its stock has tumbled by about a fourth over the past few months.

The key question for meat producers and other consumers of corn is whether the government will waive, at least temporarily, its mandate for ethanol fuel. The answer is almost certainly no! In an election year, no politician in either party will want to risk losing votes in key Midwestern farm states where the ethanol program is very popular.

So other users of corn have best be prepared for even higher prices (unless the weather improves) by hedging as much corn as they can. For investors, it means continuing to invest into exchange traded funds (ETFs) such as the Teucrium Corn Fund (AMEX:CORN) which is up more than 40 percent since June. The ETF offers investors unleveraged direct exposure to futures for corn without having to open a futures trading account. The fund is set up in a unique way so as to reduce the effects of contango and backwardation. For specific information on how Teucrium does this using three different futures contracts, please visit Teucrium's website at   This article originally appeared on the Motley Fool Blog Network. Make sure to read all of my articles for the Motley Fool at

Tuesday, August 14, 2012

Can Apple Replicate Its Success in Emerging Markets?

The success of the iPhone from Apple (Nasdaq: AAPL) in the United States is well known to nearly every investor. The iPhone and the iPad are the reasons why the stock has performed so well for so long. But what about the future? At least as far as the smartphone market goes, the future seems to lie in the emerging markets and cheaper smartphones.

The number of entry-level smartphones, according to Deliotte, sold this year (mainly in emerging markets) is expected to soar to 300 million units. This will more than double the total number in use globally to in excess of 500 million units.

Emerging markets, especially China, are key to Apple's future growth. It is expected that in excess of 150 million smartphones will be sold in China alone this year. Apple's CEO Tim Cook has said numerous times that demand there is “mind-boggling”. China, which has surpassed the United States as the world's biggest smartphone market, is already Apple's second-largest market after the U.S. Some analysts are worried that it may be losing its touch in China since its revenues in the region for the second quarter fell by 28 percent to $5.7 billion. The same quarter in 2011 had seen revenues jump sixfold. On the bright side, iPhone sales in the quarter still doubled year-on-year.

The main reason for the drop in Apple's China region revenues is simply competition for market share in the world's biggest smartphone market. The company's main competitor right now has to be Samsung with its Android-powered phones. Android is the smartphone operating system developed by Google (Nasdaq: GOOG). Samsung's smartphones currently have 30 percent of the Chinese market compared to only 10 percent for Apple. That is due to Samsung's strong retail presence in the country, even in the hinterlands.

In fact, Android phones have been so successful in China and other emerging markets that it led analyst Benedict Evans of Enders Analysis to recently tell the Financial Times that “It is very clear that Android is hoovering up market share in emerging markets”. This includes India where Apple is actually struggling, selling less phones there than in Norway. Its market share there is about 3 percent, versus 45 percent for Android-powered phones.

Apple has more to worry about than Samsung too. Microsoft (Nasdaq: MSFT) and its partner Nokia ADR (NYSE: NOK) are placing a definite emphasis on China and other emerging markets as a growth engine. Microsoft believes that the only reason Android is so successful in China is that it happens to be on the cheaper smartphones. It and Nokia plan to match the low prices ($100-$150) while at the same time offering users a better experience with its Windows-powered phones such as Nokia's Lumia, a prototype of which was spotted in China this week.

The major plus for Microsoft's push into emerging markets with its phones later this year is that Nokia, unlike in the United States, has an almost unmatched reputation in the emerging world for producing quality products. But in China, Microsoft is covering its bases by also partnering with Samsung, HTC and ZTE.
Will Apple decide to compete on the low-end of the smartphone market? They may have to do something as the developed markets where they are so successful are becoming saturated. Most likely Apple will decide to the lower the price of their older 3G iPhone in order to make it more affordable to people in emerging markets. If they do this, these phones should sell well due to Apple's reputation. And don't forget that in China later this year Apple will, for the first time, release Siri in Mandarin.   This article was originally written for the Motley Fool Blog Network. Please read all of my articles for the Motley Fool at

Thursday, August 9, 2012

The Battle for Leadership in Network Virtualization

There is perhaps no hotter area in the technology space than cloud computing and network virtualization. Two recent deals put the spotlight on that fact: the $1.26 billion acquisition of Nicira by VMware (NYSE: VMW) and the purchase of Xsigo by Oracle (Nasdaq: ORCL) for an undisclosed sum. Xsigo's software simplifies cloud infrastructure and data center operations. Oracle now can offer clients a full set of virtualization capabilities for cloud-based computing.

Both Nicira and Xsigo have some of the world's biggest companies among their customers and the deals highlight how fast the market for virtualization software is consolidating. It also shows the growing conflict coming between virtualization software firms and the network equipment companies.

The move by VMware, 80 percent-owned by EMC Corporation (NYSE: EMC), is particularly interesting. It already has a leading position in the market for virtualizing servers in data centers. Now VMware will be able to add a leader in virtualized networks products to its portfolio. Its chief technology officer, Steve Herrod, said that Nicira software-defined network virtualization will provide “the architecture for the cloud” to its users. Its main benefit is that it will provide corporate users the ability to cut hardware costs, offer lots of flexibility and speedy deployment.

In effect, this purchase by VMware fired a close shot across the bow of network equipment companies like Cisco Systems (Nasdaq: CSCO) and Juniper Networks (Nasdaq: JNPR), whose stocks initially lost 6 percent and 3 percent respectively on the day of the announcement of the Nicira deal by VMware. Israel Hernandez of MKM Partners said that there are “significant negative implications for Cisco and Juniper” from the Nicira-VMware deal. Both Cisco and Juniper have pushing into the nascent network virtualization market with their own technologies, albeit slowly. The overall global data networking market is currently valued at $37 billion.

Many Wall Street analysts believe that Cisco has the most to lose from VMware's push into this sector. The fear is that what VMware did to the server hardware industry – allowing companies to share servers in data centers – it will now do the same thing in networking routers and switches. Cisco does have a strategic partnership with EMC and VMware in virtual computing.

There is a real question out there as to whether Cisco has missed the market. That would be a difficult pill to swallow for Cisco, whose chairman and CEO John Chambers has always said that he was proudest of his company's “ability to capture market transitions that matter most”. It did lay off 1,300 employees due to slowing demand for IT equipment. But competitors like Alcatel also struggled due the weak global economy. And don't forget that Cisco it does have a $100 million investment in a Nicira competitor, Insieme.

Both Cisco and Juniper had better speed up their move into the network virtualization market, through acquisitions if necessary. Or else someday companies like AT&T and many others will wake up, slap themselves in the head and ask 'why have we been buying all this expensive gear from Cisco and Juniper?'. It will dawn on them that they no longer have to do so.

This article was originally written for theMotley Fool Blog Network. Please read all of my articles for the Motley Fool at

Monday, August 6, 2012

Electric Cars Looking for a Spark

The idea of electric cars has been around for more than a century. In fact, an electric vehicle held the vehicular land speed record until 1900. Henry Ford bought his wife two electric vehicles in the early 1900s. But the costs and the technology have never been just right in order to produce electric vehicles for the mass market.

That was all supposed to change with the introduction of the latest generation of electric vehicles and hybrids. After billions of dollars worth of investments by the auto industry and subsidies from many governments around the world, these vehicles are hitting the showrooms in mass. The only problem is that consumers are steering away from them, particularly all-electric vehicles, in droves.

According to LMC Automotive, roughly 50,000 electric vehicles and hybrids have been sold in the first half of 2012 in the world's major automotive markets. Those markets tracked by LMC include the United States, China and Europe. That figure is well below expectations the industry had for these type of vehicles.

Pure electric vehicle sales seem to need a spark. For example, General Motors (NYSE: GM) had expected to sell about 45,000 of its Chevy Volts this year. But bad publicity has kept sales down, with GM selling a mere 8,817 Volts (a gain of 22% from last year) in the first half of 2012. Sales for the all-electric Leaf from Nissan ADR (NASDAQOTH: NSANY) have been disappointing this year too and have trailed those of the Volt the past several months in the U.S.

On the plus side, hybrids seem to be doing better. The Prius from Toyota Motor ADR (NYSE: TM) have moved away from being a niche car. In the first quarter of 2012 it became the world's third best-selling car with sales of 247,230 cars trailing only the Toyota Corolla at 300,800 vehicles and the Focus from Ford Motor (NYSE: F) at 277,000 vehicles. Sales for even the Prius, however, have fallen back since. By the way, Ford says it will launch this fall the C-MAX Energi to compete directly with Toyota's Prius on price and performance.

So the main problem with the next generation of personal transportation seems to be centered in the all-electric vehicles segment. Why? Most industry analysts point to several factors including performance, comfort levels, improved mileage by internal combustion engine vehicles (Ford's EcoBoost, for example) and most importantly, price. Despite generous government subsidies, electric cars still cost much more than their hydrocarbon-fueled counterparts.

Even some of the major car companies remain skeptical of all-electric cars. Bill Reinert, Toyota's U.S. manager for advanced technology told Reuters “The expectations have always too high for electric cars.” Chrysler, now 61.8 percent owned by Italy's Fiat S.p.A. ADR (NASDAQOTH: FIATY), is another skeptic. Its head Sergio Marchionne has killed plans for a Chrysler electric car. He said a year ago that his company loses $10,000 or more on every Fiat 500 Electric it produces.

Auto industry analysts also remain downbeat on the future of the electric car. PricewaterhouseCoopers Autofacts estimates pure electric vehicles will make up only 1 percent of of the global car market by 2017. says electric vehicles and hybrids will make up a mere 1.5 percent of the U.S. market by 2017. Its senior green car editor, John O'Dell, describes conditions for electric vehicles this way “It's going to be a slow slog”.

Of course, for every pessimist there is an optimist. GM has made the Volt the centerpiece of its efforts to take the title away from Toyota as the world's greenest automaker. Nissan's CEO Carlos Ghosn is unabashedly the most outspoken proponent of the electric car. He estimates that pure electric vehicle sales (including Nissan's Leaf) will make up 10 percent of the industry's global sales by 2020. It remains to be seen whether he and GM will be proved to be correct or the more cautious approach taken by Toyota and Fiat is the proper one.

This article was originally written for the Motley Fool Blog Network. Make sure to read mt daily articles for the Motley Fool at