Gnostam March 26 2011 1


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Gnostam March 26 2011 1

  1. 1. Gnostam  LLC     March  26th,  2011   PO  Box  960     Inverness,  CA  94937   Newsletter     Independent Investment Advisor STOCKS TO OWN NOW: gas pipeline franchise as measured not only by mileage, but more importantly, In short three main areas: by access to key supply regions and major consuming markets as well as by Energy [Gas producing & pipelines]; unparalleled connectivity to those Semiconductor; PLAB markets. EP transports more than a Biomedical. CELG, GILD quarter of the natural gas consumed in the US each day through our 42,000 ENERGY AND GAS PIPELINES: mile interstate natural gas pipeline system. EL PASO, [EP] El Paso Exploration & Production Company El Paso’s Pipeline Group is the is a leading domestic natural, nation’s leading interstate natural [Continued on page 3] Figure  1.    El  Paso  Underground  gas  storage  plant,  Arizona.     1  
  2. 2. Gnostam  LLC     March  26th,  2011   PO  Box  960     Inverness,  CA  94937   Newsletter   Gnostam LLC performance Graphs Chart  1  Gnostam  Performance   Gnostam  was  established  in  February  2004.   Since  inception  the  annualized  rate  for  return  for  a  client  portfolio  managed  by  Gnostam   LLC  has  returned  a  total  9.56%.   For  the  period  from  January  2007  to  date,  the  managed  portfolio  has  returned  an  average  of   1.53%  vs.  -­‐2.55%  of  the  S&P  500.    Please  see  table  below.       2  
  3. 3. Gnostam  LLC     March  26th,  2011   PO  Box  960     Inverness,  CA  94937   Newsletter   gas producer with a substantial footprint 56,000 miles of natural gas pipeline on more in the emerging shale plays across the than 66 intrastate natural gas pipeline systems United States and international (including offshore-to-onshore and offshore developments in Brazil and Egypt. EP is Gulf of Mexico pipelines) deliver natural gas to active in all phases of the E&P value the regions local natural gas distribution chain: exploring for, acquiring, developing companies and municipalities and to the many and producing natural gas and oil. large industrial and electric power facilities located in the region. El Paso’s pipeline network has its origin in the South and South West regions of The profitability of pipeline business given its the USA. Most of the major onshore natural oligopoly status is subject to interstate natural gas pipeline companies regulation. EP has been very aggressive in its (see Table below) operating in the penetration of the FERC and has many former Southwest Region (Arkansas, Louisiana, FERC employees on its pay. New Mexico, Oklahoma, and Texas) are primarily exporters of the regions natural Main Operating Statistics for EP: gas production to other parts of the country and Mexico, while an extensive 26 Bcf/day capacity ~ 12% of US; Gulf of Mexico and intrastate natural gas 18 Bcf/day throughput [28% of gas delivered pipeline network is the main conduit for to US consumers which is by far the most deliveries within the region. More than profitable part of the business]; Chart  2.    El  Paso  Piplelines  in  US     3  
  4. 4. Gnostam  LLC     March  26th,  2011   PO  Box  960     Inverness,  CA  94937   Newsletter   Portfolio  Changes  and  Recommendations  for     February  15th  2011   2011 will be a difficult year for investors. Too The following is a table of our best much money has come into the market, buys: especially money that chases returns, such as mutual find money. There is almost no chance • Photronics [PLAB] 12.2 x in my mind that the market will go much higher multiple; than it is at the moment. I would sell most • Kulike & Soffa [KLIC] 11.9 stocks that are financial and related to housing, multiple; and retail. Instead, buy rare metal miners, gas In Pharma: pipelines and gas producers. Once the value of solar stocks has come down, they may be a • Gilead, [GILD] 11.55 multiple; place to look. • Celgene, [CELG] 18.96 multiple. Gas pipeline strong buys are as follows: Gilead is a straight up buy. Kinder Morgan, [KMI] In Oil and Gas exploration, valuations El Paso, [EP] of the deep-sea drillers [<4,000 feet] Williams Partners, [WPZ] are attractive. With the new Petrobras Plains All America, [PAA] find, there has been a re-deployment from the GoM to the deep offshore Most of these will be subject to consolidation in drilling areas off the coast of Brazil, my view. I would add the following utility, UGI, and rates are expected to climb by which is a liquefied natural gas play. 11% in 2011. Best choices are: In genomic equipment and services, Life • Helix Energy, [HLX] 12.7 x technologies, [LIFE] while expensive has an multiple; almost unique exposure to the high quality • Diamond Offshore [DO] 11.33 x earnings from genomic research and genomic multiple; tools. If I were a Pfizer, this is the type of company I would want to acquire. Solar Plays that may be of interest: Semiconductor Equipment has great potential LDK SOLAR, [LDK] $14.45 for producing superior returns in the first quarter MEMC [WFR] is a buy of 2011. FSLR is a short.   4  
  5. 5. Gnostam  LLC     March  26th,  2011   PO  Box  960     Inverness,  CA  94937   Newsletter   EP also has the best-positioned gas July. Also in the works are the expansions of franchise in the US pipeline market for the existing TGP, SNG, and FGT pipelines. supplying growth markets, namely NE, SE, Finally, a new Gulf liquid natural gas re-gas Rockies and SW. plant is on track and it is al- ready fully subscribed under 20-year contracts. From 2007-2010 EP has grown its reserved by 30% CAGR, with 3.4 Tcfe of proven Earnings are estimated at $1.15/share for reserves. 2011, or 16 x valuation. Cash flow per share is approx $2.55/share or 7 x which is a good EP has hedged its gas exposure as follows: value for a cash flow stream which should grow by approx 6.6% over next 3 years. 75% of gas production @$5.95~ 2011; 45% of gas production @$6.01 ~ 2012. Assuming everything goes as planned, these developments should be accretive to 2011’s Current price is approx $4 tcf. earnings. However, there’s a risk of delays due to the time needed to receive all EP’s crude oil hedges have not been as necessary permits, as well as ongoing successful, with 85% of crude production for restrictions related to fish and game habitat 2011 hedged at between $86-$91/bbl, and nesting in production sites. against current price of $105.45. EP has capex requirements for pipelines of GILEAD SCIENCES: [GILD] $8bn, and $13.7 bn debt, with an operating cash flow of $1.8 bn in 2010, lower than in In approx 20 years, Gilead has 2009 because of lower commodity prices. become a leading biopharmaceutical However cash costs $/Mcfe, were $1.78 company with a portfolio of 13 which is a truly low cost of raw material, marketed products, a growing pipeline [sold at $5.95] or a gross margin of 234%. of investigational drugs and more than 4,000 employees in offices across four Given the concerns over nuclear safety, this continents. is a stock to own for the long term, even if it does not offer high immediate capital Gilead’s primary areas of focus include appreciation. HIV/AIDS, liver disease and serious cardiovascular/metabolic and respiratory Revenue and earnings should rebound this conditions. year. Declining contributions from the El Paso Natural Gas and Tennessee Gas The most profitable drugs in the world, are of pipeline systems led to slightly lower top-line course those which do NOT cure patients, volumes for 2010. Meanwhile, rising costs but alleviate if not prevent the symptoms of weighed on profit- ability and sent the the diseases they are indicated for, such as bottom line down 24% on a year-to-year for HIV, and multiple sclerosis for example, basis. However, at this point, El Paso’s [MS]. pipeline division has largely completed its $8 billion multiyear growth projects, and we The magic of the these retroviral drugs for the look for those deals to begin bearing fruit in companies who commercialize them is that 2011. Multiple capital projects are expected they are used un a combination of to go into service this year. The 680- mile approximately 2-3 drug combinations, and Ruby Pipeline is slated for completion in that, as they do NOT provide a cure, but slow   5  
  6. 6. Gnostam  LLC     March  26th,  2011   PO  Box  960     Inverness,  CA  94937   Newsletter   Table  1:  Current  retroviral  drugs  on  Market  and  patent  expriry   Figure  3.    How  a  retrovirus  affects  a  living  cell     6  
  7. 7. Gnostam  LLC     March  26th,  2011   PO  Box  960     Inverness,  CA  94937   Newsletter   down the symptoms, they have to be taken by integration of viral DNA into the patients pretty much for the rest of their lives, DNA of the infected cell. There are thus offering far more profit potential than several integrase inhibitors cures or vaccines. currently under clinical trial, and raltegravir became the first to WHAT ARE Antiretroviral Drugs? receive FDA approval in October 2007. Medications for the treatment of infection by ▪ Entry inhibitors (or fusion inhibitors) retroviruses, primarily HIV. When several such interfere with binding, fusion and drugs, typically three or four, are taken in entry of HIV-1 to the host cell by combination, the approach is known as Highly blocking one of several targets. Active Antiretroviral Therapy, or HAART. Maraviroc and enfuvirtide are the The American National Institutes of Health and two currently available agents in other organizations recommend offering this class. antiretroviral treatment to all patients with ▪ CCR5 receptor antagonists are the first AIDS. Because of the complexity of selecting antiretroviral drugs which do not and following a regimen, the severity of the target the virus directly. Instead, side effects and the importance of compliance they bind to the CCR5 receptor on to prevent viral resistance, such organizations the surface of the T-Cell and block emphasize the importance of involving patients viral attachment to the cell. Most in therapy choices, and recommend analyzing strains of HIV attach to T-Cells the risks and the potential benefits to patients using the CCR5 receptor. If HIV with low viral loads. cannot attach to the cell, it cannot gain entry to replicate. TYPES OF DRUGS: Maturation inhibitors inhibit the last step in gag processing in which the viral Antiretroviral (ARV) drugs are broadly capsid polyprotein is cleaved, thereby classified by the phase of the retrovirus life- blocking the conversion of the cycle that the drug inhibits. polyprotein into the mature capsid protein (p24). Because these viral particles have ▪ Nucleoside and nucleotide reverse a defective core, the virions released transcriptase inhibitors (NRTI) inhibit consist mainly of non-infectious particles. reverse transcription by being Alpha interferon is a currently available incorporated into the newly synthesized agent in this class.[2] Two additional viral DNA strand as a faulty nucleotide. ones under investigation are bevirimat [3] This causes a chemical reaction and Vivecon. resulting in DNA chain termination. ▪ Non-nucleoside reverse transcriptase inhibitors (NNRTI) inhibit reverse transcriptase directly by binding to the GILEAD FINANCIALS: enzyme and interfering with its function. ▪ Protease inhibitors (PIs) target viral Revenues for 2010 were $7.95 bn. Q4 assembly by inhibiting the activity of 2010 revenues were $1.998 bn. The protease, an enzyme used by HIV to main drugs that are under patent and cleave nascent proteins for final marketed are: assembly of new virons. ▪ Integrase inhibitors inhibit the enzyme Triple, [HIV], Vireo [HIV, Hepatitis], Let integrase, which is responsible for iris [Pulmonary-arterial hypertension], Tami flu, [influenza], Arena, [angina],   7  
  8. 8. Gnostam  LLC     March  26th,  2011   PO  Box  960     Inverness,  CA  94937   Newsletter   Embosomed [fungal infection], Cays ton Novartis. [Cystic Fibrosis]. GILEAD AS AN INVESTMENT: The current market size of the HIV market is, $12 bn. The current share of Still a buy at these prices. Huge cash flow, this market by Gilead’s patented drugs is 2.8 billion in cash from operations, with a around 54%, and rising as in the US 64% deep intelligence of where to use this cash of all diagnosed HIV patients are on to buy the next generation of block buster Gilead products. drugs. The market size will decline from 2012 as Today Viread is taken by eight out of 10 some of the drugs will come off patent newly diagnosed AIDS patients, usually as and will be available generically. part of two combo pills that Gilead sells. Its combined sales last year were $4 billion. Gilead continues to develop its drug Gilead didnt introduce a totally new drug pipeline, especially in the area of class based on stunning biological insight, Hepatitis, HIV and Cystic Fibrosis. as Glaxo did with AZT (the first AIDS drug), Merck with its cholesterol drug Mevacor or RECENT DEVELOPMENTS: Genentech with Avastin for cancer. But it made HIV drugs more convenient and less On March 22nd, GILD’s potential HIV horrible to take. Gilead liberated patients treatment elvitegravir met its key goals in who once had to take as many as a dozen a late-stage study. pills scattered throughout the day. Now some can take one daily pill that contains all Patients received once-daily doses of the three of the drugs needed to control the drug candidate over a 48-week period or virus. a twice daily dose of raltegravir, which is made by Merck & Co. under the name This has given Gilead a $40 billion market Isentress. Elvitegravir met the primary capitalization, bigger than that of Eli Lilly goal of "non-inferiority", or working as (nyse: LLY - news - people ), whose sales well as Isentress. are four times greater. Over five years its stock has outperformed those of Google In short GILEAD has an amazing product Exxon and every big drug company except pipleline and has proven to be able to for Celgene Whats still unappreciated, truly innovate in the area of high value says Gilead Chief Executive John Martin, is added drug development. that you want to simplify therapy so people take all the pills. If you take a partial dose, The market value of the HIV retrovir the virus develops resistance and comes market is expected to shrink, as the early back. Glaxo and Abbott drugs come off patent. It costs on average $10,000-$15,000 per patient per annum. This is well below the cost of interferon and Copaxone [MS drugs] which can cost between $30,000 - $50,000 per patient per annum, and which have long patent protection cycles for TEVA and the other drug companies in the MS space, namely Biogen and   8  
  9. 9. Gnostam  LLC     March  26th,  2011   PO  Box  960     Inverness,  CA  94937   Newsletter    Disclaimer:The information and any statistical data contained herein have been obtained from sources which webelieve to be reliable, but we do not represent that they are accurate or complete, and they should not berelied upon as such. All opinions expressed and data provided herein are subject to change without notice.Gnostam LLC and/or its shareholders, directors, officers and/or employees, may have long or shortpositions or deal as principal in the securities discussed herein, related securities or in options, futures orother derivative instruments based thereon. The securities mentioned in this report may not be suitable forall types of investors. ALL investments involve different degrees of risk. You should be aware of your risktolerance level and financial situations at all times. Furthermore, you should read all transactionconfirmations, monthly, and year-end statements. Read any and all prospectuses carefully before makingany investment decisions. You are free at all times to accept or reject all investment recommendationsmade by the Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is nota guarantee for the successful performance of an investment and we are expressly prohibited fromguaranteeing accounts against losses arising from market conditions.Past performance is no guarantee of future results, and current performance may be lower or higher thanthe performance data quoted.Investment Disclaimer All investments involve different degrees of risk. You should be aware of yourrisk tolerance level and financial situations at all times. Furthermore, you should read all transactionconfirmations, monthly, and year-end statements. Read any and all prospectuses carefully before makingany investment decisions. You are free at all times to accept or reject all investment recommendationsmade. All products sold are subject to market risk and may result in the entire loss to the clientsinvestment. (For example: excessive withdrawals may result in the depletion of your account). Pleaseunderstand that any losses are attributed to market forces beyond the control or prediction of GnostamLLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for thesuccessful performance of an investment and we are expressly prohibited from guaranteeing accounts Gnostam  LLC   5731  Kirkwood  Place  N   Seattle,  WA  98103  USA     E-­‐mail:     9