The term "healthcare" is no doubt a broad one, ranging from medical devices to genomics, but for JM Dutton & Associates senior analyst, Sherry Grisewood, CFA, there is a common theme that cuts through many of the healthcare companies she covers: technology or, more specifically, what she calls "enabling technologies." Ms. Grisewood has over 25 years experience as both a sell-side and independent analyst, in special situations and in small caps, at such firms as DLJ and EF Hutton. She believes that "body heal yourself" will be the direction of medicine over the next 10-20 years and those companies with technologies geared toward self healing will be at the forefront.
What do you focus on in healthcare? I like to look at areas that represent a "sea change" in either thinking or practice. Areas that I think are really exciting right now are enabling technologies that lead to less intervention, that lead to optimizing therapeutic response, for example, and/or which build upon the discoveries in genomics such as determining treatments based on a patient's genetic profile.
There's a lot that's gone on in healthcare over the last three to five years that probably makes the area as a whole as exciting or maybe more exciting than what it was in its heyday of the mid-1980s. In those years we were talking about monoclonal antibodies as "magic bullets". Now thanks to advances in genomics and micro-biomolecular chemistry, we're looking at the nuances of disease and discovering that the molecular targets are as or more important than the "bullet" itself. I think ultimately we're going to be hearing a new nomenclature centered around utilizing the body's ability to self heal. In fact, already medical researchers are referring to this concept as "Regenerative Medicine."
What do you mean by "self heal"?
I'm referring to utilizing or augmenting the body's own healing powers as being the ultimate goal of next generation medicine. Take tissue engineering, for example. Ten years ago tissue engineering as a medical discipline wasn't even in existence. Companies were either developing materials like synthetic polymers for use as therapeutic devices or molecules such as proteins as drug candidates, not recognizing that the body's response requires both the structurally correct material and correct signaling at the same time. But now when we talk about tissue engineering we're speaking about combining the technology and knowledge-base from those two areas and developing medical products combining both a biological element and a structural element that can help the body repair itself, all the while better understanding that the body's structure plays an integral role with the healing cascade. It involves less intervention while augmenting what the body would do as a natural process.
Taking pharmaceuticals, as an example, we have seen the development of very powerful pharmaceuticals from new chemical entities over the past fifty years or so. These drugs have been effective in treating symptoms on a "global" basis but are generally indiscriminate -- thus the concerns over adverse events and dangerous drug interactions. Now we're looking at pharmaceuticals that are derived from natural molecules or mimic moleculars already found in the body that are intertwined and synergistic with the body's natural function. These next generation therapeutics are "targeted" to a specific aspect of the disease process or molecular dysfunction. A perfect example of that has been the renewed focus on using monochronal antibodies as the means to target and destroy cancer cells. Our understanding of the microbiochemistry of organs and tissues is leading to a better knowledge of how to make therapeutic drugs act in a very controlled and specific manner at the disease site. So I think we're on the cusp of a wave of establishing broad new trends leading to the concept of "body heal yourself." In my opinion, these new approaches will become the direction of medicine over the next 10 or 20 years and fulfill the promise of what medical professionals are now referring to as "regenerative" medicine.
What companies have you been following that can capitalize on these trends?
A company such as Neurobiological Technologies (NTII), with its Memantine product, is a perfect example of exploiting the rapid increase in the body of knowledge of the biochemistry of the brain. It's now well known that brain activity is controlled by the flow of ions, and in disease-states these flows are interrupted, blocked or diminished. New therapeutics such as Memantine seek to reestablish normal ionic activity and restore neuronal function in the brain, treating such chronic diseases such as Alzheimer's or diabetic neuropathy. We recently raised our opinion of that stock due to the fact that Memantine received earlier-than-expected marketing approval by the European regulatory authorities for the treatment of moderate to severe Alzheimer's disease. (Click here to view full research report)
Another company, new in our stable, Aastrom Biosciences (ASTM), is focusing on using stem cells as a therapeutic device for regenerative medicine. The company is looking to employ their technology in tissue repair such as bone regeneration. The Ann Arbor, Michigan company is leveraging its platform in stem-cell replication and TRC (tissue repair cell) production and building expertise to deliver tissue precursor cells into areas where there is a specific bone defect. In that way, within the proper environment in the body, the cells themselves differentiate into osteoblasts (bone forming cells) and effect the formation of new bone in which there's a defect. We haven't yet released our initial report on Aastrom.
Earlier you mentioned "genomics." What companies come into play in that area?
One company we follow is CytoGenix (CYTG), Houston, Texas. We will be issuing a report in the near future. The Company's core technology revolves around RNA interference which can block the action of disease-causing proteins. All proteins are governed by a specific genetic code that encrypts their specific chemical structure and determines their function. Some of these are improperly encoded, and what RNA interference does is block the mistake from forming a protein that has a deleterious effect on the body. The company expects this kind of strategy to be beneficial initially to treat diseases such as psoriasis. But in reality, the technology could be applied to any disease or disease condition discovered to result from of some kind of DNA mutation or error. We're only scratching the surface of the interplay of specific, seemingly minor, variations in DNA replication and their implications for the manifestation of a disease. Much of this knowledge is being discovered through studying viruses.
Any other companies that are representative of this trend?
Questcor Pharmaceuticals (QSC) is a specialty pharmaceutical company which is focused on niche acute care pharmaceuticals for nephrology, secondary diabetic conditions and pediatric medicine where there are either no existing competing products or extremely limited competition. The company sells more traditionally oriented pharmaceuticals than the other companies I've mentioned; however, they're targeting diseases that eventually could be cured by some of these newer technologies. In the meantime, these products treat the severe and debilitating symptoms of these diseases and provide patients some hope that they can manage until new therapies are discovered. So Questcor's position is a little different in the market place but fits into this continuum. We are recommending the shares of Questor as a Buy. (Click here to view full research report)
Are valuation methodologies unique in healthcare given the uncertain nature of many new developments?
Valuations are always in the eye of the beholder, I like to say. The fashion for various valuation methods comes and goes. In the mid-1980s, there was the well-known or infamous, some might say, work done supporting a discounted dividend model for biotech companies that extended out 10 years, putting tremendous valuations on these companies. Out of that entire group valued in the work, I think there were only about three companies that ever delivered a commercial product to the market and generated earnings.
With operating companies and the major pharmaceuticals, valuation is fairly cut and dry and uses traditional valuation methods like price to sales and price to earnings--and the DDM when there are operating results. But for start-up and emerging growth companies with new technologies or markets, valuation is less clear and has to be looked at on a relatively individual basis. You have to take a wide variety of factors and assumptions into consideration and at the same time, recognize the inherent risks of an FDA approval process. This usually means that time for approval is substantially longer than what everybody would hope and think, and that market penetration takes longer as well. Even with big marketing partners, it's still an arduous task. I really feel that even more perhaps than communications technology and computer technology, valuing start-up and young health care companies can be more art than science.
Haven't the valuations in this sector have come down recently?
Yes, over the last six months and, in particular, over the last 6-8 weeks. From a sector perspective the performance of biotech doesn't seem to reflect the prospects that many of these smaller companies are now beginning to show. This is a cycle that has occurred in the biotechnology industry before. Often, the best time to look at these smaller companies is just at this time in the cycle. Investors become concerned if high-profile products don't receive FDA approval, and certainly the Imclone situation has exacerbated that viewpoint. But from my experience this is the time to look at many of these companies. The valuations are much more reasonable, the level of risk has been brought down to much more manageable levels, and many of these companies have made significant progress over the last couple of years which is not reflected in their current share price. So from my perspective as an analyst I like to look at areas of the market that are somewhat out of favor or nearing lows, and that could be certainly said of biotech right now.
A VAST LANDSCAPE OF UNDER-COVERED COMPANIES
By John Dutton, President, JM Dutton & Associates, LLC
www.jmdutton.com
As you may know, the majority of companies listed on the stock exchanges are very small companies without research coverage, many of which are undervalued by the market because nobody knows about them. At JM Dutton & Associates, we find good companies that can benefit from investment research, and through our research and analysis we bring them to the attention of investors.
In the interview you are reading, one of our senior analysts, Sherry Grisewood, CFA, describes her approach to researching such companies in the healthcare area. These are companies with stories not easily understood, and Ms. Grisewood's expertise as a chartered financial analyst and years of experience in this sector helps the public to better understand these companies and their investment opportunities and risks.
Why do 4 of 5 U.S. public companies with market caps of $100 million or less, and half of all public companies, have no research coverage? Primarily because investment research is often a department of a brokerage or investment banking firm that won't cover companies unless they'll command sufficient brokerage or financing fees.
At Dutton & Associates, on the other hand, we cover deserving companies that desire to have a rating, as our business model is not dependent on brokerage or investment banking. Nor it is dependent on trading or accepting company shares. We're independent -- objective in our research -- and that is why more and more investors are turning to us to learn about good investment ideas. Our prepaid annual compensation before commencing research coverage lets us call the shots as we see them.
Last month, former SEC chairman Arthur Levitt endorsed our model of independent investment research. When I spoke at the American Stock Exchange conference in San Francisco and the National Investment Banking Association meeting in Houston, we were greeted enthusiastically. Indeed, a number of investment banks now farm out their research to our company.
Wall Street Research magazine just featured us in their July 2002 edition, with the headline reading: "An Independent & Pure Research Shop." You can read a copy of the article at www.wsrmag.com .
The companies mentioned in the interview with Ms. Grisewood have research coverage through Dutton & Associates. Neurobiological Technologies (NTII) and Questcor (QSC) already have published reports, which are available at no charge on our Web site, www.jmdutton.com . The other companies mentioned will have research forthcoming. Please read our disclaimers.
We encourage you to visit our site, read our reports and join our mailing list to receive all the future JM Dutton & Associates research. With 80 percent of US micro-cap companies currently without coverage, we have a vast landscape to cover and share with you in the coming months and years.
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