Tag Archives: diabetes

Sugar Highs

Having just recently returned from a trip to the Southern US, I was really struck by the poor food quality and, in particular, the amount of sugary drinks and foods that were being consumed by adults and children alike. As somebody who must watch their sugar intake, I took a trip around a supermarket in a relatively affluent area and I was dumbfounded by the amount of food advertised as low fat or healthy which were just stuffed with sugar. The labelling of many products did nothing to highlight the high sugar levels.

Dr Margaret Chan, the then Director-General of the World Health Organization (WHO), said in a speech in October that “in just a few decades, the world has moved from a nutrition profile in which the prevalence of underweight was more than double that of obesity, to the current situation in which more people worldwide are obese than underweight”. The role of adiposity (a fancy word for fatty body tissue) as an independent risk factor is strongest for diabetes, defined by WHO as fasting blood glucose equal to or higher than 7 mmol/L, or on medication for raised blood glucose, or with a history of diagnosis of diabetes. The global prevalence of diabetes in the adult population has increased dramatically in recent decades, nearly doubling from 4.7% in 1980 to 8.5% in 2014. The increase in the US is frightening, as the graphs below show.

click to enlarge

click to enlarge

The increase in obesity and diabetes has not been confined to developed countries (where the prevalence is highest amongst urban dwellers and lower-income groups) with increases been seen globally, including sub-Saharan Africa and developing countries such as India and Mexico. China, with the world’s second largest economy, now vies with the US as the nation with the largest number of overweight citizens. In 2013, the Journal of the American Medical Association published a report by Chinese researchers where the authors estimated a prevalence in the adult Chinese population of nearly 12% living with diabetes, and in its most shocking finding, the study estimated that nearly half of the entire adult Chinese population has pre-diabetes, amounting to nearly half a billion people.

Now that’s just mad.

Trinity Meltdown

In May last year I posted on an undisciplined investment, Trinity Biotech (TRIB), which I bought at $21 per share and, after ignoring some basic investing rules, didn’t sell until it hit $16. I had thought that the underlying metrics of TRIB existing business would improve, with a big upside potential with the FDA approval of its Meritas Troponin Point-of-Care test (as outlined in this post). Since last year, I have kept an eye on the firm as their operating results continued to be uninspiring, as per the graph below.

click to enlargetrinity-biotech-2011-to-q22016-revenue-operating-profit

I continued to monitor the firm from afar to see how the FDA approval was progressing, for curiosity sake more than anything else (the investment case was similar a coin toss given the operating results and I have, thankfully, grown out of such gambles). The timing of any final approval was dependent upon FDA queries but Q4 was been talked of as a possible time for a final FDA decision.

It has therefore come as a considerable shock to all stakeholders, and a 50% collapse in the share price, when TRIB announced early on Tuesday that it has withdrawn its FDA application for the Troponin test on the advice of the FDA itself. Analysts representing investors vented their anger at the company’s management on the conference call on the news (worth a listen if you are so inclined).

I genuinely felt sorry for management as they tried to explain the “devastating news” about how they could have got the FDA approval so wrong. Although the FDA would not go into the gritty details on a 30 minute call communicating the news to management behind their “minded to refuse” position, TRIB’s management were restrained in expressing their (obviously very disappointed) view that the FDA had moved the goal posts in their assessment criteria. The FDA will give TRIB more detail on their decision over the coming months (strangely only on the condition that TRIB withdrew their application).

Management expressed their view, based upon the information from the FDA call, that any new application was unlikely given the large R&D expenses needed to address the issues raised and announced they would shutter the programme, reducing their annual capitalised expenses from $9 million to $1.5 million including the closure of their Swedish facility. Given they capitalise most of these expenses, the impact will primarily be on cash-flow rather than on the P&L (they may manage to be cash-flow neutral on a pro-forma basis).  Insight into future operating results and what the balance sheet will look like after the write-offs needed on this withdrawal may come with the Q3 results.

At a share price of approx $6.50, TRIB indicated that their Board would likely instigate a large buy-back programme after the early release of their Q3 results (likely due by mid October). With $85 million of cash left from their $100 million convertible debt, TRIB has the firepower if it can get to positive cash-flow on an operating basis in the near term. Analysts were very blunt in their reaction, stating that management now had a major credibility issue and that a sale of the firm should now be the priority.

All in all, a sad day for TRIB, its employees and its future prospects. And, of course, for its shareholders.

Disappointing TRIB

Every investor knows the feeling of wondering what to do when a stock they have invested in falls unexpectedly in value. Although some may not be aware of the term “disposition effect” in behavioural economics, it reflects the widely observed tendency of investors to ride losses and lock in gains (a previous post touched on more behaviour economic concepts). I have been guilty in the past of just such a tendency, all too often I’m afraid! Bitter experience, maturity and the advice of many successful professional investors has caused me to now try to proactively act against such instincts. [On the latter point, the books of Jack Schwager and Steven Drobny with wide ranging professional investor interviews are must reads.]

Averaging down when a stock you hold falls, particularly when there is no obvious explanation, is another strategy that rarely ends well. Instead of looking at the situation as an opportunity to buy more of a stock at a reduced price, I now question why I would invest more in a situation that I have clearly misread. I only allow myself to consider averaging down where I clearly understand the reason behind any decrease and where the market itself has reduced (for the sector or as a whole). Experience has taught me that focusing on reducing the losers is critical to longer term success. Paul Tudor Jones put it well when he said: “I am always thinking about losing money as opposed to making money”.

This brings me to the case in point of my investment in Trinity Biotech (TRIB). I first posted about TRIB in September 2013 (here) where I looked at the history of the firm and concluded that “TRIB is a quality company with hard won experiences and an exciting product pipeline” but “it’s a pity about the frothy valuation” (the stock was trading around $19 at the time). The exciting pipeline included autoimmune products from the Immco acquisition, the launch of the new Premier diabetes instruments from the Primus acquisition, and the blockbuster potential of Troponin point-of-care cardiac tests going through FDA trials from the Fiomi deal.

Almost immediately after the September 2013 post, the stock climbed to a high of over $27 in Q1 2014, amidst some volatility. Fidelity built its position to over 12% during this time (I don’t know if that was on its own behalf or for an investor) before proceeding to dump its position over the remainder of 2014. This may simply have been a build up and a subsequent unwinding of an inverse tax play which was in, and then out, of vogue at the time. The rise of the stock after my over-valued call may have had a subconscious impact on my future actions.

By August 2014, the stock traded around the low $20s after results showed a slightly reduced EPS on lower Lyme sales and reduced gross margins on higher Premier instrument sales and lagging higher margin reagent sales. Thinking that the selling pressure had stopped after a drop by TRIB from the high $20 level to the low $20s, I revised my assessment (here) and established an initial position in TRIB around $21 on the basis of a pick-up in operating results from the acquisitions in future quarters plus the $8-$10 a share embedded option estimated by analysts on a successful outcome of the Troponin trials. As a follow-on post in October admitted, my timing in August was way off as the stock continued its downward path through September and October.

With the announcement of a suspension of the FDA Troponin trials in late October due to unreliable chemical agent supplied by a 3rd party, the stock headed towards $16 at the end of October. Despite my public admission of mistiming on TRIB in the October post and my proclamations of discipline in the introduction to this post, I made a classic investing mistake at this point: I did nothing. As the trading psychologist Dr Van Tharp put it: “a common decision that people make under stress is not to decide”. After a period of indecision, some positive news on a CLIA waiver of rapid syphilis test in December combined with the strength of the dollar cut my losses on paper so I eventually sold half my position at a small loss at the end of January. I would like to claim this was due to my disciplined approach but, in reality, it was primarily due to luck given the dollar move.

Further positive news on the resumption of the Troponin trials in February, despite pushing out the timing of any FDA approval, was damped by disappointing Q4 results with lacklustre operating results (GM reduction, revenue pressures on legacy products). The continued rise in the dollar again cushioned my paper loss.  It wasn’t until TRIB announced and closed a $115 million exchangeable debt offering in April that I started to get really concerned (my thoughts on convertible debt are in this post) about the impact such debt can have on shareholder value. I decided to wait until the Q1 call at the end of April to see what TRIB’s rationale was for the debt issuance (both the timing and the debt type). I was dissatisfied with the firm’s explanation on the use of funds (no M&A target has been yet identified) and when TRIB traded sharply down last week, I eventually acted and sold all of my remaining position around $16 per share, an approximate 15% loss in € terms after the benefits on the dollar strength. The graph below illustrates the events of the recent past.

click to enlargeTRIB Share Price + Short Interest

My experience with TRIB only re-enforces the need to be disciplined in cutting losses early. On the positive side, I did scale into the position (I only initially invested a third of my allocation) and avoided the pitfall of averaging down. Joe Vidich of Manalapan Oracle Capital Management puts it well by highlighting the need for strong risk management in relation to the importance of position sizing and scaling into and out of positions when he said “the idea is don’t try to be 100% right”. Although my inaction was tempered by the dollar strength, the reality is that I should have cut my losses at the time of the October post. Eventually, I forced myself into action by strict portfolio management when faced with a market currently stretched valuation wise, as my previous post hightlights.

As for TRIB, I can now look at its development from a detached perspective without the emotional baggage of trying to justify an investment mistake. The analysts have being progressively downgrading their EPS estimates over recent months with the average EPS estimates now at $0.16 and $0.69 for Q2 and FY2015 respectively. My estimates (excluding and including the P&L cost of the new debt of $6.3 million per year, as per the management estimate on the Q1 call) are in the graph below.

click to enlargeTRIB Quarterly Revenue+EPS 2011 to Q42015

In terms of the prospects for TRIB in the short term, I am concerned about the lack of progress on the operational results from the acquisitions of recent years and the risks (timing and costs) associated with the Troponin approval. I also do not believe management should be looking at further M&A until they address the current issues (unless they have a compelling target). The cost of the debt will negatively impact EPS in 2015. One cynical explanation for the timing on the debt issuance is that management need to find new revenues to counter weakness in legacy products that can no longer be ignored. Longer term TRIB may have a positive future, it may even climb from last week’s low over the coming weeks. That’s not my concern anymore, I am much happier to take my loss and watch it from the side-lines for now.

Ray Dalio of Brightwater has consistently stressed the need to learn from investing mistakes: “whilst most others seem to believe that mistakes are bad things, I believe mistakes are good things because I believe that most learning comes via making mistakes and reflecting on them”. This post is my reflection on my timing on TRIB, my inaction in the face of a falling position, and my current perspective on TRIB as an investment (now hopefully free of any emotive bias!).

TRIB Follow-up: D’OH!

Well, I have to put my hands up on this one, my timing couldn’t have been worse with TRIB off about 20% since this post. Reading it back, you can see that I knew I was going against my instincts and it shows the result of indiscipline on my part.

The analysts all revised their estimates in early September to take account of delays in product take-up – revenue and EPS are estimated at a tad over $27M and 0.19 respectively for Q3. Although my estimates agree on EPS, I think revenue could miss & come in below $26.5M. Add in the uncertainty on the impact of Ebola on African revenues (approx. 12% of total revenues are from Africa in HIV segment), the push out to H2 2015 for the target commercial launch of the cardiac troponin test (assuming FDA approval), the continued selling by the shareholder(s) who has been selling down through the 20’s and beyond.

All in all, this is one to own up to as a badly timed call. My risk management allowed me to only establish a small position so it’s not a disaster and I’m not beating myself up (too much!!). Ironically, TRIB is trading now around where the level my original post targeted. However, I don’t have the conviction to follow this one down. I’ll see what is said at the earnings call next week before I decide what to do but I’m not positive short term in today’s market (which I welcome as a dose of reality is needed).

Longer term TRIB may still be interesting as the main points of my assessment still hold. But as Yra Harris said “if you’re right at the wrong time, you’re wrong“. Well, hands up, I was wrong on TRIB.

Trinity Biotech looks interesting here

The bull market is raging ahead with the S&P500 and the Dow both less than 1% away from key levels and Apple breaking $100 yesterday. Given my cautious stance on the market, as articulated in multiple posts for over a year now, it is therefore uncharacteristic of me to be talking about establishing a new position. After having watched Trinity Biotech, ticker TRIB, for nearly a year now (I previously posted on the firm last year here), I have been doing some more research and modelling on the firm.

Last September, when the stock was trading around $19, I concluded that despite an attractive pipeline of new products following a number of acquisitions by TRIB, the stock was overvalued given the execution risks involved. Since that time, the stock climbed steadily to over $27 after Q3 and Q4 results last year before falling to trade around $23 since March before dropping to around $21 for the past few weeks. The graph below shows the quarterly EPS for the past 14 quarters.

click to enlargeTRIB Quarterly EPS 2011 to Q2 2014

The past two quarters have been hit by subdued revenues, due to timing delays on Premier reagent income and lower lyme sales, and higher expenses from consolidating manufacturing costs and trial expenses on the Meritas Troponin cardiac test. In addition to the EPS misses, the recent drop may be as a result of cooling off on the tax inversion restructuring craze by US firms. There is always the possibility that it’s a result of some as yet unknown development (the impact of the Ebola outbreak on HIV test product sales in Africa is an example)!! Notwithstanding such a development, I spent some time going through TRIB’s releases and calls. The graph below represents my best efforts at a forecast.

click to enlargeTRIB Revenue Split & EPS Projections August 2014

My revenue and EPS estimates for 2014 are slightly below estimates. My revenue and EPS estimates for 2015 are 10% and 15% below consensus respectively. Using my EPA estimates with the consensus estimates for TRIB’s competitors from yahoo-finance, the graph below shows the relative valuations of TRIB and selected competitors.

click to enlargeTRIB PE Multiples August 2014

This analysis shows a stock with good growth potential but one which is trading at 22 times forward earnings. Add in that TRIB have spent their cash-pile and have intangibles of $138 million making up 58% of assets (with a history of having to write-off intangibles, see previous post). Not exactly a cause to jump up and down. Indeed there are many similar growth stocks trading at lower multiples (such as SIRO as per a previous post). So, what’s the reason for my change in heart on TRIB?

Well, it’s really all about the aforementioned Meritas Troponin cardiac tests, the high sensitivity quantitative point-of-care immunoassay platform TRIB purchased in the Fiomi deal (Note – the financial projections above exclude any assumed benefit from these products). The worldwide market for point-of-care cardiac testing currently stands at about $650 million (with a larger potential for other related add-on tests) and is heavily U.S. centric. The market is dominated by three firms – Alere, Roche and Abbott – and will be a tough one to break into. However, new guidelines in the US mean that the existing products are no longer fit for purpose. A letter, dated the 25th of June 2014, from the FDA stated that “laboratories and clinicians using these troponin test results are not generally aware that the performance data listed in the device labeling is obsolete.” The letter further states the following:

“To address these concerns while improving patient care, FDA has started working with troponin assay manufacturers to modernize the performance evaluation and regulatory review of these critical tests. Our main interest is to ensure that laboratories and clinicians are informed of the true performance of troponin assays to help in result interpretation and laboratory verification of performance parameters. This is particularly important for newer, more sensitive troponin tests which may render values that can be difficult to interpret if sufficient information is not available in the device labelling. These recommendations solidified troponin’s importance in MI diagnosis and triage; at the same time, they formalized an adjustment in the clinical cutoffs and changed the way troponin results were interpreted and used.”

TRIB have obtained a European CE certificate for one of their Troponin tests and hope to gain another shortly (end of August was mentioned). However, Europe generally follows the US and the real approval required is from the FDA in the US. Studies conducted for the CE certificate show very positive results albeit with approximately 20% of the sample size required in the US, on US patients. The size of the studies required in the US has been the reason behind recent delays although TRIB hope to complete the studies and submit the results to the FDA by year end. FDA approval could then take up to 6 months so mid-year 2015 is a reasonable target date. However, these studies are dependent upon getting enough targeted patients into the study and that can be uncertain.

So, TRIB have a market opportunity for a new product line which they say has been proven in trails (albeit smaller than the FDA mandated sample sizes) to exceed the new guidelines. The opportunity is significant and will pit TRIB against some big names competitors (although Alere seems to be in a bit of a mess right now). Analysts estimate the option value of the cardiac products at between $8 to $10 per share depending upon the underlying assumptions of probability of the FDA approval and subsequent market penetration for Meritas.

I like the potential risk dynamic here as I see TRIB’s core business improve its performance over the coming quarters. News flow on the Troponin trials will likely drive share volatility but if future profits on the stock over the coming quarters from improving operating results could be used to buy options to play the embedded call in TRIB share price on the Troponin products, I can see a win:win situation arising. That does require taking a risk today however with the share price around $21. Although it is against the grain of where I believe the overall market is headed, I therefore established a small position in the stock earlier this week. Maybe I am just getting bored of the sidelines and being reckless!! Time will tell whether I am timing this really badly or not.