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To: wlheatmoon who wrote (1171)5/31/2000 11:23:00 AM
From: John Pitera  Respond to of 2850
 
Thanks Mike, a bit more on FLEX and the contract manufacturers from the 5-22 issue of Barron's

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MAY 22, 2000


What's Contract Manufacturers' Best Product? Black Ink
By MARK VEVERKA

With the Federal Reserve and the Department of Justice seemingly doing a tag-team number on the Nasdaq, tech investors continue to stay on the sidelines wondering whether they've hit bottom or the floor will give way to yet another 1,000-or-so-point tumble.

But not all the news was glum. The red-hot contract-manufacturer market continues to boom while its shares suffer from much of the same malaise that besets Silicon Valley. Case in point: At their annual analyst meeting in New York last week, Flextronics International executives continued to paint a positive picture for their company, which many contract-manufacturing fans think is the pick of the litter.

Paul Meeks, senior manager of the Merrill Lynch Global Technology Fund and an attendee at the Flextronics confab, says the company has identified yet another area for expansion. Company officials indicated that not only can they make a ton of dough by building high-quality gear to precise specification for the likes of Cisco Systems and Ericsson, it also may someday start installing the stuff too.

Over the next couple of years, Flextronics thinks it can rack up another $1 billion in revenues from installing equipment for original-equipment makers, mostly in the telecom segment. Another positive nugget disclosed at the Flextronics meeting was a plan by German industrial giant Siemens, which traditionally makes most of its own gear, to join the outsourcing fray, spurring even more growth in this already torrid segment.

For its part, Flextronics remains one of the fastest-growing companies in this bunch. It has vaulted from being a third tier player with $131 million in revenues in 1994 to big dog; this year's sales will flirt with $9 billion, estimates analyst Jerry Labowitz of Merrill Lynch. Labowitz, who rates the stock a buy, has a $90 price target, assuming it trades at 47 times projected 2001 earnings of $1.92 a share. The stock closed Friday at 51 3/16.

We have chronicled Meeks' enthusiasm for this segment before. He has been an unabashed fan of contract manufacturing for some time. And for the most part, his vision for this group is holding true. His primary premise? Major global makers of telecom gear will continue to outsource more and more of their production because it is cheaper and more efficient, fueling the growth of their outsource clients.

What's more, these companies boast historical top-line growth of more than 30%, and those rates are expected to crank up to more than 50% a year -- at some companies, upwards of 100% a year. Their long-term contracts provide relatively clear visibility, the companies are hugely profitable at a time when black ink is in vogue, and they are trading at a discount to growth. In short, they are booming businesses with fundamentally sound financials. Heavens, profits and revenue growth! What's a self-respecting tech speculator to do?

"All of the [original-equipment makers] have long taken note that one of the reasons Cisco has been so successful is that it had essentially pioneered this virtual business model" that stresses the outsourcing of production, Meeks says.

As many a tech-fund manager moped around the recent Chase H&Q stock conference at San Francisco's St. Francis Hotel, one of the most avidly supported ideas for the current tech slump was the contract-manufacturing group. Hence, we looked up Meeks and glanced at his report card.

Since June 1, which is shortly before we last featured Meeks in this column, the unweighted value of the contract-equipment manufacturers that he holds had risen about 80%. That compares with a 12% increase for the S&P 500 and a 1.6% jump for the Dow Jones Industrials for the same period.

His favorite name in this category, if you haven't already guessed, is Flextronics, which is up a 121% for the same time frame. Jabil Circuit jumped about 59%, while Celestica soared about 125%. In the meantime, shares of Solectron, the 800-pound gorilla in this category, climbed about 32%, and Sanmina rose about 62%.

Naturally, like most Nasdaq stocks, this group has taken a hit since the tech market began to crater in March. As of March 10, Flextronics' shares have tumbled about 25%, Jabil is down about 15%, Celestica is down about 15%, Solectron has been trimmed by about 4% and Sanmina shares have fallen about 9%.

On average, Meeks' stocks have suffered an unweighted haircut of about 14%. Meanwhile, the S&P is up about 4% since March 10 and the Dow has gained about 9%.

Meeks is confident that revenues are going to soar and that sell-side analysts have been low-balled by management. "I think the models are pretty conservative, except for Selectron," he says.

Solectron made a pre-announcement earlier this year that it would miss its numbers. "They gave investor guidance that was too bullish, which was an investor-relations faux pas," Meeks says. Essentially, Solectron officials expected to realize revenues from acquisitions that didn't close on time, he says. Despite the stumble, "even that company should still be absolutely dynamite over time," he insists.

Adding fuel to the fire, the fund manager also expects that Celestica will unveil some big contract wins in the near future, and that Lucent Technologies will announce another tranch of contracts that will increase business for his favorite companies.

Joining Meeks in his affection for the sector is Jim Savage, a financial analyst with Thomas Weisel Partners. Savage last week released a bullish report on contract manufacturers, calling their recent selloff a buying opportunity.

Savage says Selectron's earnings miss combined with the general tech wreck had wrung about 28% in value from contract manufacturers' shares since the beginning of April. "The Selectron news in particular spooked some people," Savage says.

He attributes Selectron's woes to its dependence on making cell phones, which is a slim-margin business. Investors first became skittish on this group because it was beholden to personal-computer makers, such as Dell Computer, and their skimpy margins. But a shift toward telecom gear has brought mostly fatter margins, with the exception of making the phones themselves, Savage notes.

"It's continuing to be an issue for Selectron because a large percentage of their business is from cell phones," he says, adding that Solectron's dependence on cell-phone outsourcing swelled to 16% in February from 12% in November.

Of course, there are risks. And with this group, there are two major concerns. First, there continues to be a component shortage for certain telecommunications parts, but Savage contends that big contract manufacturers will be able to manage their way though shortages because of their volume purchasing power and the might of their clients: Cisco, Lucent, Nortel, Motorola and others.

The other fly in the ointment is consolidation. Big contract manufacturers are expanding their capacity through buyouts. And if they fail to integrate these acquisitions smoothly, the mistakes will hurt revenue and earnings performance. But, thus far, Savage isn't sweating it. "Generally, the contract manufacturers have been meeting and beating their numbers and we don't see that changing," Savage says.



To: wlheatmoon who wrote (1171)6/1/2000 7:51:00 AM
From: wlheatmoon  Respond to of 2850
 
NYTIMES
June 1, 2000
Biotechnology Is Taking Aim at Psoriasis With New Drugs
By ANDREW POLLACK
Nancy Wegard for The New York Times
Dr. Alice B. Gottlieb is a research director at Robert Wood Johnson Medical School.

When his psoriasis is at its worst, David G. Metz has a silvery scale covering his entire body except the soles of his feet. "You leave a trail behind you where you've been -- the skin cells just fall off," he said, adding that this makes him very self-conscious and reclusive.
But last Christmas, Mr. Metz, a 27-year-old Wal-Mart sales clerk from Columbia, Ill., visited his girlfriend's family in Chicago without worry. An experimental drug being developed by Genentech and Xoma, he said, left him "as normal looking as a person could look."

The biotechnology industry is taking aim at psoriasis, a chronic disease that affects an estimated seven million Americans and, in its more serious forms, is far more physically and psychologically devastating than the mere cosmetic disease it is often thought to be.

About 30 companies, mainly biotechnology concerns, have psoriasis drugs in clinical trials, according to the National Psoriasis Foundation. In a race for the lead are two industry giants and longtime rivals -- Biogen and Genentech, both of which have drugs that could reach the market in two or three years.

While none of the drugs are expected to cure the disease permanently, early test results show that some of them could be safer and effective for longer periods than is the case with existing drugs.

"We're looking at several drugs that are almost sure things at this point," said Dr. Mark Lebwohl, chairman of the dermatology department at Mount Sinai Medical Center in New York, who is participating in several clinical trials. "So far, they have been remarkably benign."

The new drugs are not expected to greatly affect makers of existing products -- at least not right away -- in part because many products on the market have other primary uses, like preventing transplant rejection. "I don't think anybody necessarily loses business," said Elise Wang, an analyst with PaineWebber.

"These drugs will expand the market."

Though no one knows precisely what causes psoriasis, it is assumed to be an autoimmune disease, in which the body's defenses against infection attack the body's own tissues. It has, in some sense, become a proof-of-principle disease, one used to test drugs that companies hope will also be useful for other autoimmune diseases like rheumatoid arthritis and lupus.

"In psoriasis, you get a pretty easy readout -- you look at the skin," said Gisela Schwab, vice president for clinical development for Abgenix, which has chosen psoriasis as the first disease to try to attack with its antibody technology.

But some analysts caution that psoriasis is deceptively hard to treat and that one company after another has failed in its treatment efforts.

"They think it's going to be a short-cut way to test out their new drug, and it never works out," said Cynthia Robbins-Roth, an industry consultant and the author of "From Alchemy to IPO" (Perseus Books), a new book about the biotechnology business. "It's just a running joke in the biotechnology industry."

Still, hope for better psoriasis treatments is rising anew, in part because of the identification of the cells involved in the attack on the skin by scientists at Rockefeller University in 1995. Moreover, biotechnology companies in recent years have had dramatic success with drugs for other autoimmune diseases like rheumatoid arthritis and Crohn's disease.

"There's been a renaissance in drug development," said Dr. Alice B. Gottlieb, director of clinical research at the Robert Wood Johnson Medical School in New Brunswick, N.J. Most of the exciting new drugs, she said, are from biotechnology companies.

But most must be injected, limiting their appeal.

Still, there are an estimated 200,000 to one million Americans with serious cases of psoriasis.

This could mean annual sales of hundreds of millions of dollars for a successful drug. And for some companies, the stakes are high. The psoriasis drug Amevive is now Biogen's best hope for diversifying beyond its first drug, Avonex, for multiple sclerosis. James C. Mullen, Biogen's chief operating officer, said the market potential of Amevive was similar to that of Avonex, which had sales of $621 million last year.

For patients with severe symptoms of the disease, psoriasis can be debilitating. The red swollen skin covered with the silvery scale, the most common manifestation, can be itchy and can hurt. About 10 to 20 percent of psoriasis patients also develop a painful form of arthritis. Each year, said the psoriasis foundation's Web site, "many people with psoriasis are hospitalized, and a few hundred die from complications of psoriasis or its therapies."

The psychological effects can also be a problem.

Marge Harris, a 46-year-old meeting planner from St. Louis, still recalls being ordered to leave a public swimming pool a decade ago because the lifeguard thought her condition was contagious. (It is not.) "I haven't gone swimming for 10 years now in a public place where I can be humiliated like that again."

Dr. Steven R. Feldman, associate professor of dermatology at Wake Forest University School of Medicine, said that 25 percent of the 317 psoriasis patients responding to a survey by his department said they had considered suicide because of their disease. The paper on the study was published in September.

In psoriasis, infection-fighting blood cells known as T cells swarm into the skin cells. They release chemicals known as cytokines that cause the skin to go into overdrive. New skin cells proliferate as if trying to heal a wound that is not there.

Existing treatments can often clear the skin but either lose their effectiveness over time or have severe side effects that force patients to stop using them.

Exposure to ultraviolet light slows the proliferation of skin cells but raises the risk of skin cancer. Drugs called retinoids can cause birth defects; women using Roche Pharmaceuticals' Soriatane, the newest such drug and one safer than its predecessors, are still cautioned not to become pregnant for three years after treatment stops.

Steroidal creams can cause deterioration of the skin.

Cyclosporine, made by Novartis under the name Neoral (some generics of older forms are also available) and used primarily to suppress rejection of transplanted organs, can cause kidney disease. Methotrexate, basically a generic product and originally a cancer chemotherapy drug, can cause liver toxicity. Both drugs take a sledgehammer approach, suppressing the entire immune system to stop the immune attack on the skin.

The biotechnology drugs aim to interfere with the immune reaction that is responsible for the attack on the skin without affecting the functioning of the rest of the immune system -- an exceedingly difficult balancing act. The immune system has multiple pathways, so blocking just one might not blunt the undesired immune attack. If a drug is too general in depressing the immune system, however, the patient becomes susceptible to infections or an increased risk of cancer.

Biogen's Amevive, for instance, depleted the number of active T cells in some patients, forcing the company to stop giving the highest dose. Dr. Burt Adelman, vice president for medical research, said there was no evidence that patients actually suffered more infections or cancer. A lower dose, he said, should solve the problem and still be as effective, though analysts cautioned that this remained to be seen.

Amevive is designed to prevent T cells from being activated, which occurs when so-called antigen-presenting cells display a protein that the T cell recognizes as foreign. The drug disrupts the mating of the T cell and antigen-presenting cell. The problem is that this can also affect other T cells, not just the ones aimed at the skin.

In Phase 2 trials, an intravenous infusion once a week for 12 weeks completely cleared the skin of 30 percent of the patients, with the improvements lasting six to eight months, Dr. Adelman said. He said the company hoped to apply for approval of Amevive, now in Phase 3 trials, by the end of 2001, which would mean an approval could come by the end of the following year.

Genentech and Xoma are just entering Phase 3 trials and appear to be some months behind Biogen. Their drug is a monoclonal antibody that neutralizes CD-11a, a molecule that is instrumental in helping the T cells leave the bloodstream and enter the skin. The idea is to keep the T cells from getting to the skin but to allow them to survive in the blood, where they fight infections.

The drug, for now being called Anti-CD11a, has not had the same problem with T cell depletion that Amevive has had, but some patients did experience an immune system reaction called cytokine release syndrome, which produces flu-like symptoms.

In an early clinical trial, 48 percent of patients who got an intravenous infusion once a week for eight weeks had at least a 50 percent improvement compared with 15 percent for a placebo. Mrs. Harris of St. Louis, who tried the drug, marveled at its lack of side effects. But she relapsed within a month after she stopped taking it.

Many other drugs are in Phase 1 or Phase 2 clinical trials, with less evidence of their safety and effectiveness. Abgenix, which is based in Fremont, Calif., has an antibody that is intended to neutralize IL-8, one of the immune chemicals that are found in elevated levels in the skin lesions. The Immune Response Corporation of Carlsbad, Calif., is working on a therapy that uses the immune system to attack the T cells specifically involved in the skin inflammation.

Corixa of Seattle is basing its approach on the fact that there are two types of T cell responses, TH1 and TH2. It is in early tests of an immune stimulator that elicits a TH2 response, which tends to shut down the TH1 response that is prevalent in inflammatory diseases.

Others are developing drugs that can be swallowed or spread on the skin, hoping to reach a broader market. Isis Pharmaceuticals of Carlsbad is testing a topical drug. Ligand Pharmaceuticals of San Diego is trying to develop a safer version of retinoids.

Also being tested for psoriasis are two drugs that have already proved successful in other autoimmune diseases: Enbrel, an arthritis drug made by Immunex, and Remicade, which is used for arthritis and Crohn's disease and is made by the Centocor unit of Johnson & Johnson. Dr. Gottlieb said there would be room for several drugs because each one produces a "socko" response in only about 20 percent of the patients.

Longer term, scientists around the world are trying to find genes involved in the disease. That is the best hope for a real cure.

For now, though, doctors are just hoping for better treatments.

Dr. Craig L. Leonardi, a dermatologist in St. Louis, said, "This is a disease that's been waiting for a new approach for a long, long time."