In the mid 90's, on the brink of bankruptcy with diminishing investor interest, the biotechnology infant Celgene (CELG) is running on fumes from expiring capital that will last for only but a few weeks. Dr. Jerome Zeldis, along with Celgene's senior management crusade to the H&Q Health Conference (now the J.P Morgan Health Conference) seeking additional funds to finance the operations that they were told was just another a dime in the bucket operation. Now let us rewind to the year 1986, the Celanese Research Corp, a company producing chemicals, fibers and plastics has been spun off and renamed to the currently renowned Celgene Corporation. Sol Barer Ph.D, alongside David Sterling Ph.D, were chemists originally focused on creating biologic products to clean up hazardous waste. In the early 1990s, he and Stirling, Celgene's senior scientist, met with Gilla Kaplan, an immunologist at Rockefeller University, to discuss a potential drug project. What he came away with was a vision for building Celgene around the most notorious and vilified drug in pharmaceutical history: thalidomide.
Thalidomide, widely used for morning sickness, was first introduced in Europe in 1957 as a sedative. It was available in 46 countries, none of which included America due to tight restrictions put in place by the FDA. In 1962, the drug was removed from the market as birth defects began to surface as a direct result of taking the prescription. It was not until three years later that an Israeli scientist found that giving Thalidomide to leprosy patients removed many of their symptoms. Sol Barer was one of the limited few who believed that Thalidomide was an innovative treatment for serious conditions, and the only one who believed in creating a modified, safer and more potent version of the drug. By 1993, Celgene's team was well underway testing new compounds believed to increase efficiency and reduce the side effects of thalidomide. By 1998, the FDA had introduced the S.T.E.P.S (System for Thalidomide Education and Prescribing Safety) exclusively to Celgene and used this three prong approach:
- Controlling access to the drug
- Clinicians who wish to prescribe thalidomide must be registered in the S.T.E.P.S. Prescriber Registry and agree to prescribe the drug in accordance with S.T.E.P.S. patient eligibility criteria and monitoring procedures. Pharmacies must also register and agree to comply with patient identification and monitoring criteria.
- Educating prescribers, pharmacists and patients
- Patients receive visual aids, including a videotape, written material, and verbal counseling about the benefits and risks of thalidomide therapy, the importance of not becoming pregnant during therapy, and the types of contraception required (including emergency contraception) and their availability.
- Monitoring compliance
Now if we fast forward to present date, Celgene has penetrated several markets in the pharmaceutical industry sporting a variety of drug compounds and therapies to treat cancers and immune-inflammatory related diseases. From 1998, the year the FDA approved Thalomid to be marketed; there has been a 14,742.85% appreciation in the stock price. For the year end 2012, sales of Thalomid and Revlamid (a derivative of thalidomide) totaled $4.7 Billion combined. Over the years, Celgene has positioned itself for growth with its entrepreneurial culture, buying out several pharmaceutical and biotech companies. Opportunity for investors was given by the skeptics who doubted Thalidomide would ever be profitable, keeping the stock price idle for the years prior to the FDA approval of Thalidomid. Success was accelerated by stellar management who acquired the necessary financing through a second public offering, and the S.T.E.P.S initiative which granted a competitive advantage in the industry as it created a barrier to entry for competitors trying to cut a piece of profit from the thalidomide cake.
Implant Sciences Corporation (OTCQB:IMSC), a technological innovator in the safety and defense space, may possess the fundamentals to act in accordance with Celgene's story. Currently, Implant Sciences is manufacturing two lead scanners; The Quantum Sniffer B220 & H150, used to detect explosives harnessing the Trace Detection Technology (the targeted collection of microscopic explosive residue). Over the years, millions of dollars have been injected into research and development that has put out a product that is a market-relative low-cost unit, using a non radioactive ion source, two components that weigh heavily on the purchasing decisions of buyers in aviation security, customs & immigration, cargo & security, and the entire ETD (Explosive Trace Detection) industry. The TSA (Transportation Security Administration), put in place after the terrorist attacks on 9/11 by the U.S Government, serves as one of the industry's largest customers who has strict requirements in place (outlined in the Certified Cargo Screening Program (CCSP)) which states that any cargo shipped by air transport must be cleared by a Approved Screening Technology in a registered facility. Implant Sciences is one of only three companies that has received the TSA approval for technologies used in the tracing and detection of explosives, a milestone in penetrating the barrier to entry from competition put in place by the TSA requirements. On March 14, 2013, the company announced that it has successfully secured a contract with a U.S Government agency for $585,000. The implications of such a contract could emulate the future, as the government accepts and applies the technology offered from the Quantum Sniffer B220.
Parallel with Celgene's financial situation in the mid '90s, Implant Sciences has been under the gun to refinance because of depleting resources sunk into research and development. To date the majority of financing has come from the DMRJ Group, who has now renegotiated a deal, which will allow IMSC to implement their post-approval growth initiative granted by the TSA. Implant Sciences management was able to do so without severely diluting shareholder value, which Celgene had no choice in doing when they refinanced through a second public offering.
The takeaway from Celgene's success story for investors is the importance of investing in technology that they believe in, getting in early while the stock price is pushed downward from the skepticism of the masses. In the case of Implant Sciences, investors are seemingly being granted the opportunity to invest before catalyst contracts and potential buyouts make the current price level old news. The TSA approval of the Quantum Sniffer B220 creates an insurmountable barrier to entry which makes competition in their segment that much more unlikely. Financial roadblocks and cash restrictions created by research & development and operations are only temporary as the company is positioning itself for future growth. Over the long term, key management, technological innovation and growth potential all play into the overall success of any company, which was present in Celgene's corporate structure and exist in Implant Sciences today.