Beyond Stem Cells: Healthcare Hot Spots
With the surprise announcement last week by Geron (GERN) that the FDA would allow human clinical trials for embryonic stem cells, all companies in the underlying ETF Innovators Index
to track the space are screaming higher again today – led by the company with the biggest gains over the past year, StemCells (STEM).
Below are three additional areas and associated companies for investors to consider in the search of the next hot spots in the healthcare sector, including a focus on small/mid-cap companies which have the added potential to be acquired as part of renewed M&A in the sector this year.
EXACT Sciences (EXAS) has rejected the hostile $1.50 all-stock offer from Sequenom (SQNM) as the Board pursues a more lucrative deal for shareholders. While EXAS also holds patents in the prenatal diagnostic space; its strongest IP position and commercial potential lies with non-invasive stool DNA (sDNA) screening for colorectal cancer (CRC).
A NY Times report
summarizes the results of a study published in the medical journal, Annals of Internal Medicine
, which concluded that colonoscopies may actually prevent 60%-70% of CRC, rather than previously quoted rate of 90% for the test. While colonoscopies are still effective at preventing CRC and will continue to be widely recommended and used; the study highlights limitations of the procedure – especially in the detection of flat and right-sided lesions, with the latter accounting for about 40% of all CRC cases.
Sensitivity results of 82% were already published last summer for EXACT's V2 sDNA technology
, while the next-generation sDNA test (V3) boasts 92% sensitivity and has shown the potential to detect 86% of precancerous adenomas. Currently, only 24% of the 90M eligible patients in the U.S. are compliant with CRC screening recommendations and there is clearly an unmet medical need for an effective, non-invasive CRC screening test for the average-risk population which people will actually use.
A deal for EXAS with a global diagnostics company such as Abbott Labs (ABT) or Roche (RHHBY) would be ideal to expand outside the U.S. market, as a report concluded
that the E.U. needs to double the current rate for cancer screenings in order to reduce preventable deaths. The report calls on the 27 member countries to improve large-scale screening programs for target groups regardless of their symptoms, and only 12 member countries currently have programs for CRC screening.
While other companies such as Rosetta Genomics (ROSG) have reported promising results for blood-based screening tests for CRC; such tests must be fully evaluated in larger clinical trials and then must be endorsed by the American Cancer Society (ACS) before widespread acceptance and use can be achieved. As EXAS shareholders well know, the process of ACS endorsement can take years to obtain and the CRC testing guidelines were just revised last fall.
CombiMatrix (CBMX) is another molecular diagnostics company with 12 tests on the market which is developing a comprehensive cancer array that is designed to be an early warning detection system for a broad range of cancers. The blood test would be given at annual physicals and CBMX hopes to launch by mid-2010. If such a test makes it to the market, CBMX would only need to capture one-half of 1% of the potential market
to achieve more than its current market cap in annual sales.
Caraco Pharma (CPD) and Hi-Tech Pharmacal (HITK) are my favorite value picks among generic drug makers. CPD will report earnings later this week and still has an overhanging FDA warning letter for manufacturing and quality control issues from last year. The Company responded to the warning letter, but expect shares to hover around $5-$6 until the FDA is satisfied and provides a response.
HITK is down sharply in the past few days on light volume and no news, providing a nice chance to accumulate some shares. The Company reported record quarterly revenue for its second fiscal quarter and is expected to earn 41 cents per share for FY09 (ends in April), which results in a P/E of about 11 based on the current price around $4.60 per share.
Both of these names have upside of at least 2X based on Sun Pharma's (India: 524715) tender offer for Taro Pharma (TAROF) on a relative valuation basis, in addition to favorable trends for generic drugs such as $70B in patent expirations through 2012, a push to increase generic substitution rates to 70% from 65%, and legislation expected this year to clear the way for generic versions of high-cost biotech drugs.
Momenta Pharma (MNTA) represents a pure-play on the future of bio-generics
and is also developing a mix of proprietary compounds, follow-on-biologics (FOB), and complex generic drug products in partnership with the Sandoz division of Novartis (NVS). The pending ANDA for M-Enoxaparin as the generic equivalent for Lovenox does not have a decision date deadline, but MNTA has an inside track over competitors such as Teva Pharma (TEVA) and Amphastar/Watson Pharma (WPI) after working with the FDA during the heparin contamination crisis.
More importantly, new legislation for FOB is not required for the two ANDAs or the proprietary blood thinner M-118, but would serve as an added bonus for MNTA and increase the value of their technology platform and ability to create equivalent versions of highly complex biological agents.
The Health IT space is expected to receive about $20B in the massive stimulus plan, which is expected to pass by mid-February. The Health IT portion of the bill is expected to contain grants to encourage hospitals and clinics to spend on upgrades, in addition to longer-term incentives such as increased payments to healthcare providers to encourage electronic prescribing (e-prescribing) and other technology upgrades to encourage electronic medical records.
I prefer a basket approach to Health IT (until an ETF provider is interested in developing an product on the underlying index
) with a focus on small/mid-cap names such as Allscripts-Misys (MDRX), SXC Health Solutions (SXCI), Quality Systems (QSII), CardioNet (BEAT), and Eclipsys (ECLP). The first four stocks have posted strong results and returns over the past year while ECLP represents a turnaround play trading at multi-year lows.