Value Vs Price

We all know the old saying "Price is what you pay, Value is what you receive".

Cellestis is the absolute demonstration of this.

We have been offered the justification for this lowball offer that the price is 24% above the one month Volume Weighted Average Price. 

That is simply a failure of logic.

As investors, we want a recognition of the Value of our investment, not a comparison price to a market price. We all know that the market rarely prices value correctly. A mere few weeks ago Cellestis was trading at $2.40. Immediately before the takeover the shares were trading at $3. Had the value of Cellestis shares really changed by 25% in those few short weeks? Of course not. 

So many things that have nothing whatsoever to do with Company value can impact the price of a share. We are all familiar with Companies that are adept at driving their share price to spectacular levels with aggresive announcements. (I certainly do not criticise our Directors for not having gone down this path). 

It is, however, worth considering how the share price might have been affected had the Company paid a larger dividend in the half year from cash profits earned in that half year for which (it is now clear) they had no purpose. 

Price does not equate to value.

I might value my ride-on mower at $5,000. If I was offered a price of $1000 for it last week then the fact that somebody offers me $1240 this week is not going to make me sell on the basis that the offer is 24% more than last weeks "price". This is all particlularly true if I had no plans to sell the mower in the first place. 

In our situation it is particularly galling when the Scheme calls for an Independant Expert to decide what is best for us. I have managed my investment in Cellestis for ten years now - I don't need somebody else to tell me that I am to be forced to sell my shares at a particular price.

But, guess what? The Independent Expert, The Cellestis Directors, other shareholders, Qiagen ... nobody ... can tell us to sell our shares at $3.55 if, together, we vote this Scheme down. 

If we demand that the value that we see in Cellestis be retrieved for us then it will be so.

(Don't forget to skip across to Cellestis Shareholders Action Group Blog and don't forget to REGISTER )

Where am I?

I know that you would have expected much comment here from me regarding the proposed takeover of Cellestis. No doubt there will be.


However, in the meantime, may I suggest that you take the short hop across to the Cellestis Shareholders Action Group Website to keep abreast of all matters regarding this takeover.


If, like me, you want a better outcome than this then I also suggest that you REGISTER HERE


See you over there.

Action.

Firstly let me make a statement.

"I reject the offer of $3.55 for my shares in Cellestis"

Now.

If we are to achieve a better outcome for ourselves then we must work together towards that. There are probably only a handful of times in most persons lives where they need to stand up and be counted. This is one of those times for us.

Over the coming days we will need to better define our final objectives and put together an action plan. Regardless of what these may be, our first step is to build a communication structure. To that end, I have put in place a simple mechanism to collect details of shareholders who wish to support this fight. At this stage I am not asking anybody to commit to any action or outcome - simply a desire to act to achieve a better outcome than that currently being proposed.


It is vitally important that we have as many people as possible register on the form linked below. It doesn't matter how many shares you have - every vote is vitally important. Whatever action we, as a group, decide to take it will only succeed ifeach and every one of you registers. Furthermore, there are many shareholders that will not see this post. I am relying on you to spread this word. Email it to every person that you know that is a CST shareholder. Speak to everybody that you know is a CST Shareholder. Repost this on every forum, blog, website that you have access to. 

At this stage I am only asking for very basic information from you. I do, however, know that we all value our privacy. I promise to you that the personal information that you provide will not be made available publicly and will only be used for the purpose of this action. At the end of this action all information provided will be destroyed. I think that everybody here knows that I am a man of my word.

As a show of good faith I am willing to do something that I have never done before.

My name is Vic Bula and I can be contacted at forrestthinks@gmail.com.

Make no mistake. This is a battle that we can win.


Please Register Here.

Good Morning.

Good Morning Everybody,

Just a pre alert.

I have rearranged my personal life (yes, I do have one) in anticipation of dedicating myself to the battle for the next few months.

Today I hope to take the first steps to putting an organization into place. I am not by any means placing myself in control of the organization. Just putting the first steps in place that will benefit us as we move forward.

We have many good people on our side.

Please everybody, maintain your enthusiasm and cohesion. Together we WILL win this. (I have a feeling that I am going to be saying this a lot - it's important). 

What to do?

I have been asked by many people why I have not yet commented more on this issue. The reason is simply that we (the shareholders) have a number of courses open to us to achieve a number of different outcomes and I want to be sure in my mind that my actions achieve the best possible outcome for us, the shareholders.


One of those options is to sell the Company into the takeover. I can say that, clearly, the current offer of $3.55 per share is insulting and a long way lower than a price that I would want before I was to accept the option of selling the Company.


I can also confidently state that we now have well in excess of the required 25% of shares to stop this takeover, if, in the end, we determine that that is the best course of action to take.


All I ask of everybody is that we work together towards achieving a better outcome for ourselves than has been proposed. Please maintain your interest and convictions - don't roll over to this deal. Together we can improve the position of every one of us.


I have been pretty much strapped to my computer for the last two days. I am now going to take a break and play with my dogs. I need the reassurance that they provide.

Trying to make sense of this.

Where do we go from here?


Rather than jump in immediately with an emotive response to this takeover offer, I have tried to take a little time, allow my emotions to settle down and try to reach some conclusions.


It is clear that whatever happens now, we cannot go back to the situation we had before this bombshell was dropped on us. In actuality, we need to establish and find our way to, the "least worst" outcome for ourselves. We probably cannot "unscramble the egg".


As you might imagine, I, perhaps more than many, feel personally betrayed. However, my hurt feelings actually have no place in this discussion so I will try my hardest to put them aside in favour of a dispassionate discussion of our situation.


Many of us began our investment in CST anything up to 10 years ago. CST was a speculative investment but the research that many of us did allowed us to believe that this investment had a very good chance of bearing fruit. As investors in a business we accepted the difficulties encountered along the way and were content to exchange immediate rewards for the potential future rewards. 


Of course, like any speculative investment, there was always the possibility of the business failing - that has always been acknowledged but still allowed a risk/reward position that was acceptable.


We were right. As time went on, the business did succeed and the risks of failure diminished, even though the rewards to us only reached a trickle. That was an acceptable position at this point in time because it was possible to see the potential for those rewards to increase in time. 


At any point during our investment we had the choice of whether to "stay or go". Based upon what we saw and what we were told, most of us made the choice to stay. As of last Friday, everybody had used their right to make that choice. This is an important point. As of Monday, that choice has largely been taken away from us. We have now pretty much been been told that regardless of what we think about the future we must sell our shares in the Company at a specific price.


Bear in mind that  the Directors number one priority is to run the Company to the maximum benefit of the shareholders. All other considerations, even curing the world of TB, are of a lower priority. 


Now, maybe the Directors have some good reasons as to why they feel that the future of QFT is enhanced by it being snuggled between the buttocks of a giant International Company. That may even be true - I don't know. More importantly, I don't care - this deal excises me from the story. However, as stated above, the advancement of QFT, per se, should not be the number one priority of the Directors. 


The priority of the Directors to run the Company to the maximum benefit of the shareholders is the direct outcome of their decision to float the Company some ten years ago. Just as we as investors accept that investing in a publicly listed company rather than some other investment comes with some advantages and some disadvantages, the decision of the Directors to float the Company ten years ago comes with some advantages and disadvantages for them. They gain the advantage of using our capital to build the company but they have the "disadvantage" of being answerable to the shareholders and some very specific legal requirements.


For this "deal" to be "fair" to the shareholders they must prove that selling our shares at $3.55 is a better financial outcome for us than continuing to run the Company as it is - even if that would mean that sales of QFT might be larger with CST operating as a subsidiary of a giant International Company (which is irrelevant to us). 


I will be most interested to see both the Independent Valuation and the assumptions that lie behind that valuation. This is crucial. I might say that statements such as "x% above VWAP" are nonsense. For we investors this is not about a premium to the share price. It is about receiving true value for our shares and being able to make an appropriate decision for ourselves. You cannot validate an offer price by comparing it to the Share Price. The Share Price rarely reflects the true value of a Company. Nobody can convince me that the "value" of the Company has changed from $2.40 to $3.00 in the matter of a couple of months. 


If nothing changes, I will vote NO on this deal. 


I will, no doubt, have much more to say on this.

CST Takeover

Just in case some of you haven't caught up with the news, there has been a takeover of CST announced at $3.55. The Directors are recommending acceptance.


I won't make any comment at this stage, until I have absorbed all the facts and information.

http://www.cellestis.com/IRM/Company/ShowPage.aspx?CPID=1871&EID=27240511

Taxing stuff.

This discussion follows on from my previous post (EBIT +46%). From the comments that have been posted and private correspondence received, two facts have become clear to me.

1. I didn't do a very good job of making it really clear what I was talking about.
2. There is some value to be had from discussing tax a little more.

Let's quickly knock over number 1 first.

Cellestis is a young Company. You might not consider 10 years old to be young but "young" in this context means that it has only just begun it's growth and has a lot of growing to do. That alone means that any analysis of the Company performance probably puts emphasis on different characteristics than it would for a more "mature" Company.

As an aside to that it is my view that CST finds itself (from a shareholder analysis perspective) in a strange place. It is no longer a pure speculative play. A pure speculative Company usually has no income, no profits and certainly pays no dividends. All it has is potential to achieve those things. Cellestis is well and truly past that point. It has income, profits and pays dividends. On the other hand, Cellestis is not yet an "investment grade stock". Such a stock would have a number of characteristics but is probably most easily (lazily?) characterised by a PE of 15 or less. 

So, Cellestis finds itself stuck somewhere in between. At a quick glance somebody looking for a speculative play would probably not see CST as being sexy enough and somebody looking for an investment grade stock would probably see CST as having too high a PE.

Of course we know that those doing such a superficial analysis are doing themselves a disservice. That's their problem, not ours. 

Anyway, back to the theme. (did I say this would be quick?).

Because CST is "young", we who hold it as an investment are looking for something specific - growth. And we want spectacular growth. Furthermore, the growth we want is growth in earnings that come back to us, in one form or another. An effective measurement of this growth would tell us not only how fast the Company is growing but also how effectively the management of the Company is managing that growth.

During its building stage, Cellestis operated at a loss (as it should). These losses incurred tax credits. Now that the Company is making profits, they can net off those earlier tax credits against current tax payable on current profits. They have been doing this for the past few years as the profit stream has built. It seems that those tax credits have now been used up and the Company is now having to pay its full whack of tax on profits. (There may be a few tax credits remaining in overseas jurisdictions, I'm not sure). 

Okay. So, if, as I have expressed, my desire is to examine the Company growth it would make no sense to compare a figure (from last year) that has been artificially reduced by tax credits with another figure (from this year) that has not been artificially reduced. The easiest and correct way, therefore, to make that growth analysis is to drop the tax from the comparison. That is, compare EBIT (Earnings Before Interest & Tax). (It has been expressed to me that I should actually term it PBT - Profit Before Tax. That is actually correct. However it doesn't make any difference because CST has no borrowings :) and pays no Interest :) ).

Of course, as others have said, PAT (Profit After Tax) has its uses also. 

Which, conveniently segues us into a little discussion of Tax.

It is easy to say, "Well the Company sells stuff, pays for the stuff it buys and incurs some expenses along the way then pays tax to the Government - what ever is left over belongs to us and is what we should be looking at in assessing the investment that we make/hold".

Is that really true though?

As one of my friends points out - tax is not an outright (dead) expense. There is a little more to it than that.

In Australia, the Government has decided that we should not be charged twice for the earnings that we receive from the profits made by the Companies that we invest in. In the simple case (put aside overseas earnings for the moment), the Company tax rate in Australia is 30%. That means that for every $1 that our Company earns they pay the Government 30c. Leaving 70c that can be paid out to the Company owners (shareholders). Let's take the simple case of a Company that pays out 100% of post tax earnings as dividends. Dividends are counted as income for the shareholder. If we assume that the shareholder is on a tax rate of 30% then that 70c of income would attract 21c tax. That would mean that, of the $1 earned by the Company, 51c (30c + 21c) would go to the Government and the shareholder would net 49c.

Obviously that is not just and our Government agrees (not all Governments do). For that reason they have implemented a system of franking credits. 

In essence, what the Government has said is that the tax on Company earnings should be paid once and once only by the final recipient of the earnings at the tax rate of that recipient.

The mechanics of this are to firstly "gross up" your dividend to the amount of Company earnings that were made to enable them to pay that dividend (that is, add back the amount of tax that the Company paid on that dividend). In the example above that means add the 30c tax paid by the Company to the 70c dividend received to give a taxable income to the shareholder of $1. The taxpayer is then charged tax on the $1 of income and receives a tax credit of the amount of tax already paid on their behalf by the Company. If in the above example the taxpayers tax rate is 40% then the tax payable on the $1 income is 40c. 30c has already been paid by the Company so only a further 10c is payable.

You can check that this is correct. The profit was $1, the taxpayer received 70c and paid 10c in tax, leaving them with 60c which is the same as $1 less 40% tax.

Its actually harder to explain than do. Dividend certificates always show the franking credits in dollars and cents attached to any dividends. All the tax payer has to do is add that franking credit amount to their total income, calculate their tax and then subtract the franking credit amount.

When I am examining the dividend return for a Company I always gross them up. This enables me to make a fair comparison between alternate investments. Grossing up the dividends of all investments yields to a level playing field. In the end it tells me how much I will receive as income that I will need to include as taxable income on my tax return.

For a dividend that is 100% fully franked (as CST is) the simple way to gross up the dividend is to divide by 7 and multiply by 10. That grosses up the recent 2c dividend to 2.85c.

If you have money to invest and want to compare, for example, the interest rate on a Bank IBD and a dividend return, it is essential to remember to gross up the dividend. A 4.9% fully franked dividend gives the same return as a 7% IBD. 

There is another reason, aside from return comparisons, that we might be interested in franking credits and grossing up. 

Whilst the tax rate for Companies in Australia is 30%, our own tax rates may be higher or lower. If we hold our shares in a Self Managed Super Fund that is in pension mode then our tax rate on income is zero, zilch, nothing (I just like saying it). That means that if we receive 70c of fully franked dividend from the Company then at the end of the year, when we do our tax, the Government will send us another 30c (ie the tax that the Company paid on our behalf that the Government doesn't want).

So, in the end, when we are looking at the returns from a shareholding it can make sense to look at PBT (even in the absolute sense). 

EBIT +46%

I have to be honest, I hadn't really thought about the importance of EBIT (Earnings Before Interest & Tax) as a measure of the financial success of a growing business. It is only when I looked carefully at the Cellestis 2011 H1 results that I realized why this gives us a picture of what is happening (financially) with our company.


Tax is, to all intents and purposes, something that is totally outside the control of the Company. The tax rate and requirements can change from year to year. For that reason, if you want to measure how well the Company is being run in making profits it is sensible to exclude tax from the figures that you judge the Company by. After all, we shouldn't judge the Company by something that they can't control. As it happens, in Cellestis' particular case, at this particular time, there is a huge reason to exclude tax (ie use EBIT as a measure). In the past, Cellestis has not paid income tax at the full rate - most of the reason for this has been the consumption of tax credits that were accumulated during the early, development, years of the Company. It seems that we have now used all of those tax credits and are paying tax at close to the full rate.


If we look at the last four half years (2009 H2 -> 2011 H1) then our effective income tax rate has been 17%, 17.6%, 20% and 27%. So, in the last half year we have paid 27% income tax which is pretty much full Company tax rate. What this means is that if we used PAT (Profit After Tax) to compare successive period profit growth we would see a distorted figure that has been dampened by the increasing tax rate. (The impact of this will probably end now as we would expect the tax rate to flatten out. In other words, in the future, the growth rate of EBIT and PAT will probably converge.)


So, excuse me for getting excited, but I think that a 46% growth in earnings (cf pcp) is a spectacular result. Particularly on a 24% increase in Revenue. A 30% increase in Profit After Tax, even forgetting that tax dampening effect above, is something to shout about.


If they can do this when the Forex winds are working against them, just imagine how things might look when those winds die down (as they now have) or swing through 180 degrees (as they most certainly will at some point.)

CST Data Sheets.

Updated CST Data Sheets with 2011 H1 figures included.

Cash.

Again, if we are to accept the predictions from the Shaw Stockbroking Cellestis report, then it is hard to miss the progressive cash position of the Company. Because the report assumes a relatively low dividend payout ratio (54% to 61%) the cash holdings of the Company grow quite rapidly. By 2018 the cash pile has built to over $200m. By 2023 it would be approaching $400m. (All done using the Shaw numbers). If, as I believe (and Shaw intimate), the numbers are very conservative then the cash position could be even bigger.

Every well managed Company needs to have sufficient cash on hand to meet operational requirements, protect against untoward events and generally be prepared for whatever the future sends along. However, there is a limit to how much cash is sensible to hold - earning bank interest only. Previously, the Company have alluded to the necessity of holding $20m in cash. I suspect that view may well have changed as the Company has grown and they will want to hold more than $20m. $200m on the other hand is a lot of cash - I think it would be hard to justify so much "lazy money".

So, what might happen with that cash?

• Dividends. The Directors may decide to increase the dividend payout ratio. They have certainly not ruled that out. There may be a small problem in that they have expressed their desire to pay fully franked dividends. Depending upon how the overseas operations are structured, they may or may not earn enough franking credits to increase the amount of fully franked dividends. Of course there is nothing stopping them from paying some unfranked dividends, if they want.
• Capital Return. They could do a capital return to us. However, I think that would be quite limited as we have not actually contributed much capital in the first place.
• Share Buyback. They could start a share buyback program. In effect this is an acquisition - they would be investing (on our behalf) in a great little Company called Cellestis. Probably a lot of people like this option - the share price watchers are happy because it tends to drive the price up and I am happy because it means that I have to share the future profits  (and dividends) with less people.
• Acquisition. The Company have suggested that they would not be averse to making an acquisition if it made sense and would be earnings accretive. As far as we know, to date they have not found such a candidate. The problem for CST is that it is going to be hard to find anything that can match the returns that Cellestis will be making.
• Waste it on Company Ego. They could build themselves a chrome and glass edifice for Company headquarters. Fortunately our Directors have shown no inclination to do such a thing. 
• Sit on It. Bank Interest return? No thanks - I can do that (and better) myself.

The above is all just my musings. Really just stating the obvious. I have no idea whatsoever what the Directors are actually thinking about this issue. 

Finally, can I just point out the huge difference between Cellestis and most other biotechs listed on the ASX. If you are invested in most of those others you will be watching and worrying about their quarterly cash burn and where they are going to raise their next tranche of cash. What a pleasure it is, on the other hand, to have the luxury of wondering what Cellestis is going to do with its ever growing cash pile.

Admin.

As I have previously said, I really appreciate your comments. Some of you may have noticed that I have changed my comment policy slightly so that you need a google account to be able to comment. I have not done that to restrict the ability of people to comment. I have only done it because, despite numerous requests, multiple posters have insisted on posting under the name "Anonymous". It's just tedious trying to hold a conversation with somebody when multiple people are using the same name. The change that I have made means that you can comment while still retaining your anonymity to whatever extent you like. I apologize for the small inconvenience.

Luscious Dividends.

Browsing the Cellestis report from Shaw Stockbroking got me thinking again.


Now there's nothing to say that their numbers are correct but let's just for a moment presume that they are.


Perhaps I'm a bit different from other people in that I am totally interested in the return that I get from my investments, not what I might get if I sold them. That is, I don't care too much about the Share Price. My preferred position is to own an investment that returns me so much that there is no incentive for me to sell that investment to get a better return elsewhere. (it's just too much work pressing that sell button).


In other words, it's dividends that excite me.


Look at the predicted dividend flow as projected by Shaw:


2011 7c
2012 10.5c
2013 15c
2014 24c
2015 30c
2016 39c
2017 48c
2018 54c


If we consider a decision to hold as being the same as a decision to buy (do I need to explain that?) then we can see that based on the current price of $2.55 the dividend yield becomes


2011 2.7%
2012 4.1%
2013 5.8%
2014 9.4%
2015 11.7%
2016 15.2%
2017 18.8%
2018 21.1%



If, like me, you hold them in your superannuation fund in pension phase then it makes sense to "gross up" the dividends to account for the franking credits that the Government will so generously give back to us


Now, our returns are something like


2011 3.8%
2012 5.8%
2013 8.2%
2014 13.4%
2015 16.7%
2016 21.7%
2017 26.8%
2018 30.1%


To my way of thinking, 5.8% is an okay return (2012), 8.2% is a good return (2013) and 13.4% and up is a bloody fantastic return. It's not long till 2012 and not much longer (one year, actually!) till 2013. I reckon I can suffer another couple of years of cabbage soup and lard on stale crusts till these chickens come home to roost.


Seriously, it doesn't look too shabby to invest some money now (= hold), believing that you will get a 3.8% return for the next 8 months (that's an annual rate of 5.7%), 5.8% the next year, 8.2% the following year, etc etc.


Of course the dividends, in the harsh reality of the future may actually end up being bigger or smaller than projected but you have to believe in something, right?


I do understand that people look at it quite differently and will assess the yield on an ongoing basis as the share price changes. There's nothing wrong with that. It's just that I look at my investments more as I would look if I was buying an entire business. If somebody proposed a business venture to me (that I believed in) with those projected returns then I would be quite interested. If I owned such a business I wouldn't be asking potential buyers what they might be willing to pay me for it each and every day.


None of this is to say that if the rest of you go crazy and offer me a ridiculously high price for my shares that I wouldn't sell them to you (just as I would with the business venture). I'm not that crazy.


The question that anybody considering purchasing CST shares would have to consider is what is the best time to buy to achieve the maximum return with the minimum risk. As time moves forward the risk may diminish but, no doubt, the share price will increase. I guess each purchaser would need to make that assessment (guess) for themselves. Based on the figures above I'm quite happy to hold. (Actually, I'll let you in a little secret, I did buy a few more last week).


(coffee break)


My above thoughts got me thinking some more (on a roll today).


The other side of the story is about if you decided to sell your CST (or any) shares today, or at any time. In essence, you would be selling the future cash flow for a price today. In essence you would be "betting" that the money that you receive can earn you a better return elsewhere. This goes on all the time in the financial markets. It is why fixed interest bonds will be traded at prices quite different from their face value (and why they will often be quoted with an "effective interest rate") It is actually what share traders are doing (though they mostly don't actually realize it).


This is why an investor-centric discounted cash flow (DCF) is so useful. It enables us to turn our belief about the future into a financial metric that we can use to make our investing decisions. We can either use it to determine an effective rate of return or to determine what price we should pay to achieve a required rate of return.

A Shaw Thing*

Well, with Valentines day approaching I guess we all look forward to a little lovin'. Shaw Stockbroking have come to the party. 


As many of us would know, Shaw have been interested observers of CST for many years but have not published any official coverage. Finally, they have now initiated coverage of Cellestis.


With their kind permission I am able to pass on their Broker Report.


There is much to absorb and possibly discuss about this report but I will just make a couple of salient points here.


Firstly, this is an extremely well put together report and clearly reflects the long term interest of the broker in Cellestis. I am particularly impressed that they have been very conservative with their projections. On the other hand they also point out that it is quite likely that the Company will perform much better than these projections. 


Projections are just that - a projection based upon known facts and opinion. Personally, some of my opinions are at variance with theirs (but that does not detract from the value of this report).


I note that they have maintained the dividend payout ratio at around 60%. The problem with that is that by 2018 this means that the Company would have more than $200m cash on hand. I suspect that at some point the Company will increase the dividend payout ratio. Of course the alternative is that they use the $200m to make an acquisition. They have previously said that any such acquisition would be earnings accretive. 


I note that the Shaw DCF Valuation has been done without a terminal value in 2023. I understand why they have done this - the current patents expire then. Of course between now and then we would expect much to change about our Company anyway. It is also worth pointing out that, based on the Shaw figures, the Company would have something like $350m in the bank at that time - that alone is a terminal value. A quick and dirty calculation tells me that $350m in 2023 has a net present value of around $100m ($1 per share).


I am also a little curious as to why they have used a discount rate of 12.2%. I would normally use a lower figure (I have explained my reasoning in previous posts). That would result in an increase in the DCF valuation.


Anyway, don't read any of the above as a criticism, just a difference of opinion. 


Enjoy the read.




*Apologies for the title. It's Roger's bad influence.

QFT News - Progression.

As Rog has reported, Cellestis have released their latest QFT News which is primarily all about the superiority of QFT in identifying those with latent TB that will progress to active TB as demonstrated by the large scale, longitudinal study by Diel et al.


It's a very worthwhile read.


At the same time, the Company have released a web resource dedicated to the issue of TB Progression. 


Here is a diagram taken from the Cellestis documentation that summarizes the comparison between QFT and TST very neatly.

A Big Diel.

As Rog has already reported, the results of the long awaited longitudinal study by Diel has finally been formally published. Whilst I have discussed the findings from this study previously here and here its importance is such that it is well worth discussing again.

Firstly (and we will see this in the following), this study gives the Company some really solid, incontrovertible evidence of the efficacy of QuantiFERON TB that they will no doubt be able to use to complement their already extensive marketing. My understanding is that whilst the results of this study have been available for several months the Company is prevented from using them until it has been officially published in print in a peer reviewed journal. That now appears to have been done by the American Journal of Respiratory and Critical Care Medicine, here.

This report is actually an update of Diel's longitudinal study that was published back in 2008. It was that study that enabled me to understand that "It's all about Progression". If you are suitably enthused you might want to click on that link.

Longitudinal studies (the longer the better) are very important in convincing the medical community of the true effectiveness in the real world of treatments, interventions, diagnostics etc. It takes no mental giant to work out why that is. Furthermore longitudinal studies are expensive both in time and resources. They are therefore "worth their weight in gold" (as long as they support the original contention, of course). The other attribute of a study that adds weight to it's value is the size of patient group.

This study has followed 954 close contacts of active Tb patients over a mean period of 3.5 years.

I believe that the results from such a study would be hard to deny.

You can read the results for yourself but in summary the results are:

QFT did not miss a single contact that subsequently progressed to active TB. Let me say that another way - of the 756 patients that QFT identified as not having latent TB, not a single one went on to develop active TB.

In comparison, the TST skin test, even at the very tight 5mm cutoff, missed 11% (2) of the contacts that subsequently went on to develop active TB. At the commonly used 10mm cutoff the TST missed a massive 47% (9) of the contacts that subsequently went on to progress to active TB.

Now, the scientists can apply all sorts of fancy statistics to that but to me it is summarised with the statement that using the TST would have resulted in either 2 or 9 people being turned out into the community to later develop active TB and potentially spread it to others. On the other hand, QFT allowed nobody that later progressed to active TB to be turned out to spread TB further.

As a side note, this statistic alone, destroys the value of the "use TST then retest the positives with QFT" proposal that has been suggested in some jurisdictions. Under such a program those 2 or 9 people would never have been tested with QFT.

But it gets better, a lot better.

On the other side of the coin the TST would have resulted in either 555 or 207 people (depending upon which cutoff was used) to be treated for latent TB. QFT on the other hand would have determined that only 147 needed to be treated.

Using the TST you actually end up with an unenviable choice. Use a 5mm cutoff, treat a massive 555 people for latent TB and still miss 2 people that later progress to active TB or; use a 10mm cutoff, reducing the number of people to treat to 207 but miss 9 people that later progress to active TB.

Surely it makes sense to use QFT, treat only 147 people and miss not a single progression.

So, a huge saving in costs, a huge reduction in people subjected to antibiotic treatment and not a single progression missed.

I believe it will be very hard for anybody, when faced with these results, to deny the superiority of QFT based TB Control program over a TST based system. I look forward to these results permeating throughout the TB Control Community. I would imagine that there are many TB Controllers who have been waiting for such ammunition.

Dear Anonymous.

G'day "Anonymous",

You have commented:

"More grandstanding from the master of sophistry masked in verbal diarrhea. If this is a thesis, your pretensions to academia fail, but keep up the ramp as your "investments" dwindle. If your ramp succeeds you may be able to sell to some more "suckers" north of 2.50 as would appear the motive behind this so-called thesis."

I always appreciate comments that dispute my thoughts that are presented with a modicum of reasoning and logic. After all, I am not the fount of all wisdom. The wisest thing that I do is to listen to others and learn.

Unfortunately, your comments don't seem to even make the vaguest attempt to reach for anything of value to anybody.

Generally, I no longer bother to reply to comments that consist purely of unsupported criticism. However, whilst your postings clearly fall into this category, I am making an exception. (It's my blog - I'll break my own rules if I wish)

I actually have no problem whatsoever in your considering my posts to be "verbal diarrhoea". Furthermore, it is within your rights to express that opinion - even though it adds nothing at all to the discussion or the community knowledge. Perhaps my ramblings add nothing either but at least they have an intention of doing so and I am willing to support them with a logical argument.

As to sophistry. Depending upon which definition you use, this could be considered a compliment or an insult. Whilst I would (of course) prefer the first, I suspect that your intent is the latter. The problem that you have with that accusation is that sophistry (used in the negative sense) implies the presentation of a logical argument with the intent of deceiving somebody.

As a starting point, you and other readers have my assurances that I have no intent or interest in deceiving anybody.

Perhaps a better assurance might be achieved by considering my more than ten years of public postings. I am simply not smart enough to maintain a deception for such a long period of time.

Ultimately, however, it is the content of my posts that, I believe, speak most strongly for my integrity. I have always provided in detail the reasoning behind my views. After all, I would achieve no personal satisfaction from simply spouting comments with no reasoning applied. It is my (sometimes failed) attempt to build my skills of expression and logic that drive me to make the effort to write my postings.

You make the strange accusation that I am a stock ramper. If I am then I am a very poor one. A successful share ramper should by now be sitting a massive pile of ill gotten gains. I assure you that I am not.

More specifically, you make the accusation that my post is a ramp for CST. I am wondering if you have actually read it carefully. If you do then you will see that firstly it does not suggest any action to anybody other than that they make decisions for which they are willing to account to themselves for. The result of such a suggestion (if I was bold enough to believe that my post may actually impact anybody's thinking) could just as equally be to sell CST shares as to hold or buy.

In the end, I am happy with who I am and am enjoying the never ending task of becoming more proficient at the things that I do. I am by no means under the misapprehension that my posts are revealing some hitherto unknown secrets - they are nothing more than a result of my own personal thoughts and my attempts to translate them into the written word. If the result of that is postings that you find objectionable then there is little that I can do about that, other than to suggest that you don't read them or, better still, address them with contrary, logically supported thoughts of your own. (I would respectfully request that if you would like to do that then you select a nickname for yourself - addressing posts from "Anonymous" is a little tiresome and results in unnecessary confusion)

Finally, (here's some irony) it strikes me that perhaps the reason behind your attack on me exemplifies exactly the point that I make in my post. I suspect (but admittedly have no evidence) that you have at some point made some investment decisions regarding CST that you now feel unhappy about. You now wish to blame somebody else (me, it seems) for the decisions that you have made. If that makes you feel somewhat better about yourself then I am more than willing to passively provide that need - as sad as it is.

Try to have a great 2011.

(With apologies to other readers. It is always my intent to provide posts of interest. In this case, please forgive my indulgent actions in defending myself).

Investment Performance Vs Investor Performance.

I've been thinking a lot recently about why it is that many of the comments that I see and hear about people's feelings about their investments seem to make no sense to me. Intuitively, they immediately strike me as illogical. It has taken a lot of thinking but I finally feel that I have managed to understand the situation.

Intuition is not actually a concept that I really like but, in truth, it does apply if you define intuition to actually be an almost subconscious expression of a persons' accumulation of knowledge, experiences and thinking. The really hard part is to somehow go back through that thinking, experience and knowledge and then to turn it into a concept that can be written down and explained. It's a challenge that I have been wrestling with. I think I have come up with a core concept that may satisfy my need to express this.

When we measure something (eg performance), we need to have it very clear in our head both what our "ruler" is and what it is we are measuring. My thesis is that it is the second of these (what it is we are measuring) that sometimes gets blurred, resulting in illogical outcomes.

Often, it is tempting to use analogies to explain something like this. However, in my experience, very few analogies actually stand up to rigorous examination. Furthermore, in this particular case, we don't really need an analogy. We are all familiar with the basics of financial investing and can therefore very easily understand the distinction that I am making - even if we have not thought about it in these terms previously.

We need to be very very clear in our own minds when we assess our return from investing whether we are measuring the performance of our investment or whether we are measuring the performance of ourselves as an investor. Both are worthwhile candidates for critical examination but we need to be very careful about which it is we are measuring in any part of our thinking.

The performance of an investment is the actual performance of the vehicle that we have invested in. In the following I will concentrate on a share investment but all of the same logic applies to any investment.

For this logical argument to stand true it doesn't matter what metric we decide to use to measure the performance of the Investment. We might use the Share Price, the Company Profits, the Dividend Payout or even the Social Benefit. It doesn't matter. The important distinguishing feature is that the Performance of the Investment is outside our control.

On the other hand, the performance of us as an investor is very much in our own hands. We decide what to invest in, how much to invest, when to invest and when to divest. These are our own decisions - nobody  forces us to make the decisions that we make. In my world that is delicious - we can congratulate ourselves when we make great decisions and learn from the other decisions. As I may have said before, unlike a job, the share market doesn't reward us just for turning up. We stand and fall on our own decisions.

In my opinion, it is very important that we have that distinction very clearly set in our thinking. We need to see the investment as something that we may have lots of information about, on an ongoing basis but have (effectively) no control over. If we want to be in the share market (and nobody forces us to be) then we have to accept that that is the way it is. The only level of control that we have is to buy and sell the shares.

What this actually means is that it is quite possible for the Performance of an Investment to be great but the Performance of an Investor in that Investment to be poor. Likewise it is quite possible for an Investor to perform well by being invested in an Investment that, itself, is performing badly. It takes no great feat of intellectual analysis to work out that, most often, this will be due to timing.

Allow me to indulge myself by looking at some examples of what I see as faulty thinking.

"This Company is crap because I bought the shares at $4.70 and now they are only worth $2.50"


The truth is, this says nothing about the Company whatsoever. All it says is that (if your measure of performance is the share price) that you made a decision that you are now unhappy with. (Incidentally, we all make decisions that we later regret. There is nothing inherently wrong about making such a decision. It's what you do next that counts. It may even be that a decision that currently appears "bad" may ultimately turn out to be "great"). Having decided that your measure of Investment Performance is the share price then you may well decide that the reason the share price has gone down is that the Directors of your Investment have done the wrong thing. That's fine - you are fully entitled to feel that way if you so wish. However, moaning and whingeing won't change a thing. All you can do is use the only tool that you have - your right as an Investor to invest (or not) wherever you see fit. Surely you use whatever tools you trust to make decisions? It doesn't matter if you use charts, fundamental analysis or whatever - the only thing that you can do is to use the tools that you believe in to make your own decisions. Nobody forces us to invest in the share market. Nobody forces us to invest in or hold any particular investment.

As I hinted at a little earlier, our performance as investors can often be ascribed to timing (or as others have opined "time in").

Here's an interesting little tidbit. If you had bought Cellestis shares in the float at 25c, ten years ago and sold them now for $2.50 then your effective annual return on your investment is a shade less than 30% per annum compound. Now probably most of us didn't actually do that. However, we have to ask - who is to blame for the fact that the share price didn't just go up a consistent 30% each year?  That would have allowed anybody to join the party on an equal basis at any time. In fact, the share price has been all over the place between the float and now. No doubt there were opportunities in there to invest with a return of greater that 30% p.a. and there were certainly opportunities to invest with returns of much less than 30% p.a. Yes, hindsight is a wonderful thing but, in the end, all we can do is to buy and sell shares as we see fit. If our timing has made a great Investment Performance (if we are measuring investment performance by share price) into a poor Investor return then surely the only person we can assign the responsibility to is ourselves.

"This is a crap Investment. As soon as I can get my money back, I'm out!"

Gee, do I have to say it? The lack of logic in this statement is astounding. Either it's a crap investment (by whatever measure you have decided to use) or it isn't. If you have used the actual performance of the business as your measure then I guess you are hoping that nobody else will notice and the share price will go up enough so that you don't feel bad about your investment. In fact, because you need to sell your shares to somebody, you are hoping to find a "greater sucker".

Which reminds me of a little story. We have all found ourselves in this situation at a party. I am standing around in group of six or so, balancing a drink and an angel on horseback, having a nice discussion. Then one by one people drift away and before I know it, I am stuck talking to the one most boring person in the room. It happened to me many times and because I'm a slow learner it took me more than three decades to realize that, in actual fact, it may have been me that was the most boring person in the room.

If, on the other hand, you are using the share price as your measure of investment performance then you are saying that the investment is crap because the share price is not going to go up but you are holding on till it does! Sounds like a recipe for disaster to me.

In the end, an Investment may be good or bad but it is our own decisions that determine whether we are successful Investors, or not. We should take credit when we make good investor decisions and learn from the times that we don't. It is all our responsibility and we cannot blame anybody but ourselves when things don't turn out to our expectations.

Once and for all.

It seems that, once again, some people are a little confused about the difference between latent TB (LTBI) and active TB. The recent announcement that WHO has endorsed the Xpert MTB/RIF fast diagnostic for active TB appears to have created some (unwarranted) nervousness amongst CST investors.

Let's see if we can clearly put this to rest once and for all.

We can look at this from a couple of perspectives, the technical distinction; and the operational impact of improved Active TB diagnosis. We will discover that improved Active TB diagnostics are actually a positive for Cellestis.

Active Vs Latent.

Whilst active and latent Tb are both the results of the same bacterium, they exist in quite different states. Active Tb is, well ... active, it is destroying human tissue and has an ultimate outcome, if untreated, of death of the patient. Fortunately, the human immune system is incredibly capable and in the majority of cases is able to effectively fight the Tb bacterium. Unfortunately, the Tb bacterium has a defence mechanism which, in my simple layman terms, is implemented by building a shell around itself to protect itself from destruction by the immune system. The result of this is a stand off - the Tb bacterium is contained and inactive, protected by its shell while the immune system patrols. In this state the Tb is termed latent and is essentially harmless. Of course if the immune system becomes compromised (age, HIV, some medical interventions) then the latent Tb will "break out" and become active. It is clearly important, then, to diagnose and treat latent Tb to avoid that future possibility.

Now, here is a really important differentiation for our consideration. When Tb is active it can be found in various bodily fluids. All of the specific diagnostics (including the Xpert MTB/RIF) for active Tb look for traces of the actual Tb bacterium. However, when Tb is latent it is hidden and cannot be found in bodily fluids at all. Latent Tb cannot be diagnosed by looking for the bacterium itself. Therefore, the only way to "find" latent Tb is to look for some other indication that it is in the body. This is what all diagnostics for latent Tb do - they look to the immune system to notify them that they are currently waging a war with some Tb.

Whilst the above is clearly a very imprecise description of the situation it does allow us to understand that no amount of tweaking will ever make a diagnostic for Active Tb diagnose Latent Tb. They are totally different diagnostic methods.

So, next time somebody announces a new test for Tb (and it happens frequently), check to see if it is a diagnostic for Active Tb. In fact, I can pretty much save you the effort - there are no records of anybody having a diagnostic for latent Tb in development other than the three existing diagnostics - TST (skin test), T-Spot (IGRA by Oxford Immunotech) and QuantiFERON (IGRA by Cellestis).

Now,

The Operational Impact.

Firstly, putting aside our own desires, we should always be pleased to hear of any progress in the fight against Tb. After all, it kills around two million people each year.

However, as it turns out, better diagnostics and treatments for Active Tb are actually of benefit to Cellestis. In low incidence countries (ie the developed world) the diagnosis and treatment of latent Tb is a worthwhile and viable exercise. Unfortunately, in less developed countries, where Active Tb is rife, the first attack on Tb has to be the diagnosis and treatment of Active Tb (Incidentally, the treatment is not expensive). In these situations, the vast majority of resources must be used in this fight. It will only be once effective control programs for active Tb are in place that resources can be turned to dealing with the reservoir of latent Tb.

We should therefore give three cheers every time we hear of a new diagnostic or treatment for Active Tb.