Medidata Solutions: The One Healthcare Stock That’s Not Sucking Up to Washington

by Louis Basenese, Advisory Panelist
Friday, September 25, 2009: Issue #1102

When it comes to the healthcare debate, let’s keep one obvious fact in mind: Expenses are out of control and must be reined in. That’s true with or without a massive reform bill.

And that plays right into the hands of Medidata Solutions Inc. (Nasdaq: MDSO).

The company is a leading provider of electronic data capture (EDC) and clinical data management systems (CDMS). In laymen’s terms, it helps drug companies go from the Dark Age into the Digital Age.

And it’s a transformation that we desperately need. Here’s why…

Anyone For a Tedious, Time-Consuming Paper Trail?

Roughly 75% of all clinical trials – the most critical function of drug companies, yet also the biggest drain on resources ($45 billion, annually) – are done on paper.

That’s right. Even in today’s high-tech world, in three out of four clinical trials, information for each patient is literally recorded on pre-printed paper, specifically a case report form (CRF). Ugh.

To make matters worse, each CRF isn’t typically uploaded to the main database for weeks. And it’s entered twice and screened for inconsistencies, which, ironically, only causes more data-entry errors.

From start to finish, it’s a cumbersome and antiquated process, with data taking four months to make it from observation into a database for screening and analysis.

Obviously, such a paper-intensive process results in significant complexity and cost. It’s a process long past due for an overhaul. And that’s where Medidata comes in…

Five Benefits of “Going Digital”

The company’s flagship product, Rave, allows customers to design testing protocols, in addition to capturing, managing and reporting clinical trial data through an easy-to-use, Internet-enabled platform.

So instead of the tedious (and error-prone) pen-and-paper rituals, researchers can enter data directly into any Internet-ready computer. Bingo. No waiting.

And as you probably suspect, going digital provides notable benefits:

• The data is instantly uploaded, screened, and available for analysis and even reporting to the FDA.
• Forrester estimates that EDC reduces the cost of Phase II trials by an average of 47% and Phase III trials by 54%.
• Data entry errors plummet 93% to 3.1 errors per 1,000 data points.
• Staffing requirements drop by 18%.
• The time in which data can be recorded, verified and analyzed sinks from an average of 10 weeks to just four days.

The last point is most crucial.

A Safe Way to Fast-Track Clinical Trials

With researchers able to gain almost real-time access to data, they can monitor interim results and abort clinical trials at the first sign that a patient’s health might be at risk. It also provides mid-trial leeway to alter the parameters – like dosage – to improve overall results.

Bottom line: Having data captured electronically safely accelerates the clinical development process and maximizes the commercial life of each drug. And in the process, it dramatically cuts costs and leads to safer drugs.

So it’s no wonder the market for such products is expected to triple in size in the next three years.

And the reason I’m so bullish on Medidata is simple: It’s already capitalizing on this growth potential…

Buy Now While Wall Street Snoozes

Medidata’s net second quarter revenue jumped by 32% to $8.3 million, compared to Q2 2008. That makes Medidata the fastest growing company in the EDC space. The company also reported a profit, compared to a loss last year.

In addition, it keeps adding customers to its existing blue chip and international client base, including Switzerland-based Roche.

Of course, few investors even know the stock exists, as it only went public in June. Fewer still understand its business enough to know that healthcare reform won’t impact it.

So before the rest of Wall Street catches on, now is an ideal time to buy.

Because rest assured, Wall Street will buy. Companies tapping into under-penetrated multi-billion markets, increasing profits, with a rock-solid balance sheet ($94 million in cash) don’t fly under the radar for long.

And this one is primed for more growth. As Medidata CFO, Bruce Dalziel, explains: “As a private company for nearly a decade, we have focused on building quality solutions for our customers, a global sales and services presence and, more recently, a robust public company infrastructure. Now that the majority of this scalable infrastructure is in place, we are focused on profitable growth.”

I recommend you position your portfolio to profit as Medidata helps rid the clinical trial process of wasteful spending. It’s just too bad it can’t do the same for Washington!

Good investing,

Louis Basenese

Healthcare Stocks, Medidata Solutions, Nasdaq: MDSO Hide

E*Trade (Nasdaq: ETFC): Why You Should Buy This Stock Before It’s Too Late

by Louis Basenese, Advisory Panelist
Thursday, September 17, 2009: Issue #1095

Ask most investors about E*Trade and you’ll get a mouthful about why the company is a toxic asset to be avoided at all costs.

I can’t say I blame them. After all, the company did make a foolish foray into the real estate lending business. And it did so at precisely the wrong time – the top of the market. In turn, like many banks, it got sacked as loan losses mounted.

At that point, forget a takeover. Bankruptcy appeared more imminent. And the stock quickly reflected this widely held belief, plunging by 95% from its 2007 high to trade below $1.

Unsurprisingly, many investors sprinted away from the company. But here’s what most of them don’t understand: Beneath the muck of E*Trade’s real estate operations, it possesses a valuable asset – its brokerage business…

For example, even during aterrible year for stocks in 2008, E*Trade still managed to grow its account base by 6% and added $6.4 billion in customer assets.

It wasn’t a fluke either. E*Trade has continued to grow its brokerage business in 2009.

CEO, Donald Layton, sums it up: “Our online brokerage business is thriving… volumes are up versus last quarter, our average commission per trade is higher, and interest spreads are much improved.”

If it weren’t for the company’s real estate operations, shares would be soaring based on such comments. But therein lies the opportunity.

A Risk Worth Taking for E*Trade’s Rivals

With real estate operations weighing down its share price, suitors like TD Ameritrade (Nasdaq: AMTD) and Charles Schwab (Nasdaq: SCHW) can scoop up E*Trade’s most valuable asset at a steep discount. Both companies certainly possess the stability and financial resources to pull off a deal.

So what’s the holdup? Nothing… anymore.

I’m convinced that the only thing holding up a takeover is the uncertainty surrounding E*Trade’s real-estate loan portfolio. But that obstacle is quickly disappearing.

On Monday, E*Trade revealed that delinquencies continue to drop. In fact, over the past two months, delinquencies for its home-equity portfolio (its largest exposure) fell by another 7%, having fallen by 10% in the prior period.

Meanwhile, overall delinquencies remained flat, clearly indicating that E*Trade’s real-estate portfolio is stabilizing.

When we factor in all the capital the company raised to insulate itself from further losses, the risk to potential suitors appears manageable. And if suitors don’t act quickly, they’ll miss out on the opportunity to buy E*Trade’s brokerage assets at a discount. Shares have already tacked on 11% this week.

Here’s why I’m believe the situation is even more urgent for us…

Why You Should Buy E*Trade Today

A few weeks ago, E*Trade’s largest shareholder, Citadel Investment Group, scrapped plans to start unwinding its position. The move suggests a deal is in the works. Why else would the firm have such a sudden change of heart?

The rumor mill continues to heat up about the possibility of deal. And a strong uptick in call options trading adds credibility to the rumors. In fact, a Yale University study confirms that heavy spikes in options trading precede takeover announcements.

Most compelling of all, TD Ameritrade CEO, Fredric J. Tomczyk, said on Monday that he expects more consolidation to come in the industry.

Since his company is one of the most obvious buyers, he could be foreshadowing a deal. And at such an attractive price, E*Trade represents a risk worth taking for him… and us.

Bottom line: With the real estate risks subsiding, a takeover offer could come any day now for E*Trade. And if you don’t buy shares today, you might not get another chance.

Good investing,

Louis Basenese

E*Trade, e*trade takeover, Nasdaq: ETFC Hide

M&A Activity: Discover Which Sector is Primed for M&A Action

by Louis Basenese, Advisory Panelist
Friday, September 11, 2009: Issue #1090

Trying to call market tops and bottoms is a foolish and fatally flawed endeavor.

However, we all know the mergers and acquisitions (M&A) market is notoriously cyclical. And deal volume picks up coming out of recessions.

And if the last 10 days are any indication, we might have hit the turning point. Let me tell you why. And more importantly, the best way to play it…

Corporate America is Finally Dipping into its Massive Wad of Cash

The economic slowdown and credit freeze prompted many companies to horde cash. Some wanted it as a buffer. Others simply refused to reinvest their profits until they could use leverage to effectively buy more.

Regardless of the reason, an arsenal of cash sits on the balance sheet of corporate America.

In fact, the latest tally of corporate cash available pegs it at roughly $700 billion, according to S&P analyst, Howard Silverblatt.

Keep in mind that this figure excludes the financials, utilities and transportation sectors. These companies generally carry lots of cash as a normal part of business. And it also doesn’t include the nearly $1 trillion in cash in private equity funds, according to London-based research house Preqin.

Here’s the big whoop: That much cash doesn’t sit idle forever. Not when it earns a paltry 1% interest in a bank account.

In fact, the longer it sits, the more executives will be itching to put it to work to earn higher returns. After all, it’s their responsibility to maximize shareholder wealth.

Well, last Monday, they started scratching…

August 31 Was “Merger Monday”… and the Trend is Continuing

On Monday, August 31, the newswires lit up with merger activity.

• Baker Hughes and BJ Services….
• Disney and Marvel Entertainment….
• Kinder Morgan and Crosstex….
• And of course, the credible rumors that materialized involving E*Trade Financial.

In the end, it was the busiest day of deal making in almost three months.

But it wasn’t a fluke. It happened again this week!

Despite the market holiday, Kraft Foods went public with its $16.7 billion takeover offer for British candy maker Cadbury PLC. And Deutsche Telekom’s T-Mobile announced plans to merge with France Telecom’s Orange subsidiary.

All told, more than $40 billion worth of deals were announced over the past 10 days.

So is this just a short-term spike that won’t be sustained?

Loads of Cash + Cheap Takeover Targets = A Boost in M&A Activity

Not according to investment bankers and M&A attorneys. They confirm that more deals are in the pipeline. For example…

• “There is a lot of activity behind the scenes,” says Andy Levine, a partner at M&A law firm Jones Day.
• Paul Parker, head of global mergers and acquisitions at Barclays Capital concurs: “Given that this down period was an extended one, there is a lot of pent up demand.” He adds, “They [CEOs] are no longer worried about catching a falling knife and are now worried about getting left behind.”

Clearly, the stage is set for a revival. There’s ample cash to fuel it. And the longer we go without a market correction, which would put buyers on guard again, the quicker I expect M&A activity to perk up.

If you want to capitalize on it, focus on the sector chock-full of cheap targets and buyers flush with cash.

A Perfect Storm for Technology Takeovers

Even after this year’s rally, prices for many small technology firms are down significantly, below cash in some instances.

Meanwhile, the titans of technology are cash heavy. If you take the collective balance sheets of Oracle, Cisco, Microsoft, IBM, Google, Apple, Intel and Hewlett-Packard, these big boys are sitting on $158.1 billion in cash.

And since they don’t suffer from huge debt burdens or enormously unfunded pensions, get ready for them to spend it. But don’t just take my word for it…

• Over the past 18 months, Oracle made several impulse buys, scooping up 10 smaller firms for a combined $750 million. CEO Larry Ellison is an unashamed takeover addict, not interested in quitting, even after gobbling up Sun Microsystems for $7.4 billion.
• Over at Cisco, CEO John Chambers believes, “Cash is king, queen and the royal family” in a recession. By his own admission, he doesn’t intend to let the company’s $36 billion sit idly on the throne.
• Then there’s Microsoft executive Chris Liddell. He thinks the buying opportunities have “probably never been better.” Not a comment one makes unless they’re out shopping.

Bottom line: Thanks to low prices for takeover target companies and historically high cash balances, the deal machine in the technology sector is well greased and primed for action.

Here’s how to tilt the odds in your favor…

Let the $2 Billion Mark Be Your M&A Yardstick

Although the M&A pace is quickening, the credit markets haven’t completely thawed. So we shouldn’t expect the mega deals we witnessed in 2007. In fact, July marked the first month in six years without an announcement of a deal worth $5 billion or more.

Deals for small companies, however, are plentiful. The bulk of all announced transactions in the last two months were for $500 million or less.

So I recommend that you focus on all-cash deals – takeover targets with valuable assets that can be purchased for $2 billion or less.

Once such opportunity is Trident Microsystems (Nasdaq: TRID), which I’ve covered in Investment U issue #1076, Buying Low Density Stocks.

And if you want more, I’ve revealed two others in the latest issue of The Oxford Club Communiqué.

• One is a $110 million high-speed networking specialist whose technology is used in almost 25% of the fastest 500 computers in the world.
• The other is a $444 million data storage provider with a valuable niche focus on small- to medium-sized businesses

To learn more about The Communiqué, click here.

Good investing,

Louis Basenese

M&A activity, M&A market action, mergers and acquisitions Hide