Mid-Year Report

 

This month's report will be dedicated to very important developments on companies we own.  First, the bad news:

 

 Guidant (GDT 28) went before an FDA review panel with its "Contak CD®" implantible cardiac device to prevent Congestive Heart Failure (CHF).  CHF is the most expensive cause of hospitalization in this country.  The "primary endpoint" of the clinical results did not prove the benefit of Contak CD with statistical significance.  "Secondary endpoints" were reached successfully, in particular for seriously at-risk patients.  A contributor to the failure to reach the primary endpoint was that a portion of the treatment received by the control group and therapy group was the same, due to ethical reasons.  Basically, if Contak CD's defibrillation capability were denied to the control group, up to 15% of them would have died.  However, this would have made the device look more effective, and assisted in reaching the primary endpoint.  Guidant assumed incorrectly that the review panel would look at the secondary endpoints, also.  But that was not to be, and the panel recommended that the FDA not approve Contak CD at this time.  The FDA usually follows the panel's recommendation when it makes the final decision to approve or disapprove.  Guidant intends to meet with the FDA in the next few days and will try to find out what the FDA needs to approve the device.

 

On the same day, Medtronic (MDT 46) received a recommendation for approval for its "InSync®" CHF device.  Medtronic designed its clinical study more cleverly, selecting a primary endpoint that was similar to Guidant's easier to reach secondary endpoints.  The InSync successfully met its endpoints, and the presentation was typical Medtronic - a great presentation by a great company.  Insync does not offer defibrillation capability like Contak CD.  If the FDA issues final approval to Insync, but not to Contak CD, Guidant will surrender its technology lead to Medtronic.

 

The CHF business is the next great growth area for the implantible device companies, so developments here will impact the stock price of both companies.  With one-third Medtronic's revenues, Guidant is a more efficacious investment in cardiac device companies.  Guidant is down from a high of $75 last year and is now selling at a 17.5 P/E ratio on trailing earnings, the lowest in seven years.  It is exceptionally cheap at the current price.  Although we are not off to a good start with Guidant, I believe the higher price we paid was still a very cheap price and that it will prove to be a profitable holding for us.  In comparison, Medtronic's P/E is 45.

 

Now the good news:

 

QUALCOMM's (QCOM 63) ownership of the intellectual property rights required to make 3G CDMA work is now virtually undisputed.  Nokia has finally capitulated.  Nokia has signed an agreement that it will pay royalties at the industry standard rate for access to all of QUALCOMM's CDMA intellectual property rights.  This is a momentous occasion, akin to the settlement of the Ericsson litigation two years ago, a victory to be savored by patient QUALCOMM shareholders.  Wireless phone and device owners the world over should also celebrate, because the world's largest cell phone manufacturer now will be able to build the best CDMA technology, participating in, rather than opposing, innovation that benefits the end user.

 

The capitulation is based on three factors: 1) the failure of repeated efforts by Nokia to manufacture a CDMA chipset that works reliably, 2) the failure to date of GPRS, with Nokia announcing another delay in their GPRS handsets, and 3) the failures of European and Japanese WCDMA efforts.  Nokia's loyal European clients, such as British Telecom and Deutsche Telecom, made enormous investments in 3G spectrum, but have nothing to build on it.  They face potential bankruptcy while their customers get angry about the wonderful broadband wireless systems promoted to them that have failed to materialize.  Now, Nokia can sell them 3G CDMA that works.  Nokia will need to, because it has loaned and committed to loan its customers $3 billion for 3G networks.  Nokia is not likely to get paid if the networks do not work.

 

An interesting part of the agreement is that it gives QUALCOMM access to all Nokia IPR's for the purpose of producing chipsets for "multi-mode" handsets.  This opens the door to QUALCOMM's soon to be available chipsets enable cell phones to work seamlessly both in CDMA systems and GSM/GPRS/WCDMA systems.  At this time, it appears QUALCOMM has no competition in multi-mode chipsets.

 

Meanwhile, China Unicom, builder of CDMA in China, has pulled off an incredible feat.  For all the talk of global roaming, it really does not yet exist.  In the article below, China Unicom drew 12 worldwide mobile phone operators into a roaming agreement.  This is important to QUALCOMM holders, because this pretty much covers the world with contiguous CDMA, with the exception of Europe.  When Europe falls in line, the world coverage of CDMA will be fulfilled.

 

 

From the South China Morning Post:

 

 

 

 

 

Steven L. Ré, CFA                                                                                                        July 12, 2001

 

The above is for information purposes only and is not to be construed as a recommendation to purchase or sell securities.  The above information is from sources deemed reliable but is not guaranteed.  It should not be assumed that investments in any of the above-mentioned securities will be profitable, and past performance is not a guarantee of future results.  Earnings projections often miss, and markets don’t always go up.  The employees and families of Quality Growth Management, Inc. may own the above-mentioned securities in their own accounts, and may trade them at any time without notice.