Long-Term BioTech Play

Mohamed is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Ahh, the excitement of Biotech Investing! Buy a company that is currently in clinical trials, wait for the data to be released, and then watch your investment go through the roof, right?

Guess again!

Biotech will break your heart more often than not

I learned that the hard way with Keryx (NASDAQ: KERX) and Aeterna Zentaris (NASDAQ: AEZS). The two companies were set to release the results of Phase III clinical trials for Perifosine  for the treatment of Colon Cancer earlier in Q1 of this year. The phase II results looked pretty encouraging with a 15 months median survival advantage.

Alas, the 360th patient died in April and top line data was announced.  The Perifosine arm of the trial failed to show any statistical survival advantage over the control arm and both stocks plunged by more than 60% in one day. That would put a serious dent in your portfolio if you had a significant position in any of the two companies.

However, there might be a better way to invest in biotechnology companies. You might want to skip the binary event speculation and instead invest in promising small cap biotech companies that have already passed through the gauntlet of the FDA and have lots of room for future long term growth

A nice example of such a company is Nanosphere (NASDAQ: NSPH)  maker of the Verigene System, which has recently gained approval for it's gram positive blood stream infection test last June for Sepsis.

The Verigine System is one of the first commercialized molecular medical diagnostic systems using  nanotechnology and allows the detection of markers for many diseases, including infectious disease and cancers, with a sensitivity and selectivity far exceeding that of conventional diagnostic tools

Sepsis is the leading cost of inpatient stay in the U.S costing about $15 Billion annually. More importantly the human cost is devastating. Every year 750,000 Americans are struck by the condition.   It’s been estimated that between 28 and 50 percent of these people die, far more than the number of U.S. deaths from prostate cancer, breast cancer and AIDS combined. Sepsis is also the second leading cause of deaths in Intensive Care Units. As each hour passes without targeted intervention sepsis causes an 8% increase in mortality.

The Verigine System costs 25,000 for installation and around $50 per test.  In return it can reduce inpatient stay by 6.2 days and save $21,000 per patient in treatment cost and more importantly lives. The Verigene System can save lives, money, and efficacy of critical last line therapies as well as reduces drug resistance. The value proposition is as clear as the morning sun.

This value proposition may be the catalyst which can trigger a wide adoption of nanosphere's Verigene system by hospitals around the country. Hospitals have shown very strong interest in the technology. Nanosphere had 25 new customers in the past quarter which raises their customer base to 166 worldwide. The company expects that by the end of the first quarter in Q1 2013 that number will rise to 367.

Future Tests that are currently in trial include a test for the detection of C. difficile bacteria and a test to determine patients' suitability for use of the anti-clotting drug Plavix.

Remember another company that used an important FDA clearance for an important diagnostic test in 2007  to get its GeneXpert machine into a great deal of hospitals and then sell wide array of tests?

That company was Cepheid (NASDAQ: CPHD)

In 2007 Cepheid gained approval for The GeneXpert System's test for MRSA  which improved detection time from a few days to a few hours. The improved MRSA screening is reported to have reduced MRSA infections by as much as 70% in a pilot program in the Veterans Administration. 

MRSA or Methicillin Restiant Staphylococcus Aures is another serious infection. It affected 880,000 people in 2007 and cost $8 Billion at a cost of $10,000 per patient. It resulted in about 40,000 mortalities representing 5% of the infected population

The company uses its 3,350 GeneXpert system worldwide commercial base to sell a wide array of other diagnostic tests for the flu, RSV,ect. The market capitilization of Cepheid is now $2.6 Billion, that's more than 13 times the current size of Nanosphere. So if Nanosphere can achieve the same valuation, it has a long way to go. 

However, please remember that the company is a small cap stock, it has yet to show the ability to produce significant revenue from this decision and that it may be affected by future FDA decisions on its clinical trials, so if you choose to invest in it don't make it a large part of your overall portfolio.

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