Four Molecular Diagnostics Companies With An Edge

Companies developing molecular and specialty diagnostics are poised to outperform other sectors of medical technology in the coming years, according to an article that ran over the weekend in the Milwaukee Journal Sentinel.

“The reason they work is they’re very steady in their performance, and many generate cash and have good barriers to entry,” Quintin Lai, a research analyst with Robert W. Baird & Co., tells the paper.

Lai says increasing demand for quicker, more accurate tests has made molecular and specialty diagnostics one of the best performing healthcare sectors in the last two years, delivering a 30% average annual return compared with a 13% return for traditional diagnostics.

“As we see demand grow for more sensitive, more accurate tests with quicker turnaround times, we’re seeing an opportunity for a lot of these life sciences tools and diagnostics companies to rise in prominence,” says Lai, who notes that molecular diagnostic companies tend to be relatively unaffected by issues like inflation, higher interest rates and unemployment. He also points out that these types of companies are less vulnerable to changes in government reimbursement programs like Medicare.

Some of Lai’s top picks from companies working in this space include the following:

Cepheid (CPHD), a Sunnyvale, CA, company whose technology performs genetic analysis for applications in the infectious disease, cancer and biothreat testing markets. Its SmartCycler and GeneXpert systems perform a range of genetic tests that include identifying infectious organisms and evaluating at-risk populations for the early detection of disease.

“Here’s another case of a platform technology no one else has that can go into places where no other provider can provide tests,” Lai says. “When you have those barriers to entry, you can get great revenue growth.”

Gen-Probe (GPRO), a San Diego-based company that makes DNA probe technologies for diagnosing sexually transmitted diseases and microbial infectious diseases, and for screening blood.

“That technology is very hard to replicate, and they have strong intellectual property,” Lai tells the Journal Sentinel. “If they can develop this market, they can own it.”

Immucor (BLUD), based on Norcross, GA, specializes in pre-transfusion diagnostics. The company makes products that are used by hospital blood banks, clinical laboratories and blood donor centers to identify certain properties of human blood prior to patient transfusion.

Lai tells the Journal Sentinel that Immucor and Ortho Clinical Diagnostics (a Johnson & Johnson (JNJ) subsidiary) are the only two companies in the U.S. that do blood typing and grouping.

Third Wave Technologies (TWTI) is a molecular diagnostics company based in Madison, WI, whose chemistry-based technology identifies genetic mutations. It’s currently developing a test for HPV, which it hopes to submit to FDA by the end of this year.

Comments

[hpski:]

Thanks for the info. When I clicked on your name, the first article I encountered emanating from Med Tech Sentinel focused on SyntheMed, out of Iselin, NJ, which is developing products to inhibit post surgical adhesions. While admittedly a high risk micro cap investment vehicle, the near term post open heart post surgical adhesion barrier holds promise. The problem I have with many of these small companies that continue to lose money is delineated in their 8-K (see below). I have seen, "over the top" compensation packages in biotech up close and personal, not to mention the rising spread of CEO compensation relative to even the next person down the corporate ladder. Unless Mr. Sportsman is some kind of international marketing guru who already has substantial contacts overseas, $240,000 per year plus all the other bells & whistles is not justified in a publicly held company with only 6 employees. Even if the September FDA meeting is positive, a product launch would still be months away. If "Third Point" had acquired even 5% of this company, you bet their 8-K, reprised below, would have been worded quite differently:

Effective May 1, 2007, we entered into an employment agreement and change of control agreement with Mr. Marc R. Sportsman, in connection with our hiring of Mr. Sportsman as Vice President of Sales, a newly created executive officer position.




Employment Agreement





The employment agreement has an initial term of three years, subject to automatic renewal for one-year periods unless earlier terminated by either party on six months’ prior notice. Mr. Sportsman is entitled to an annual base salary of $240,000, subject to annual cost of living increases and such bonuses and stock options as the Board of Directors shall determine. Mr. Sportsman’s target cash bonus for 2007 has been set at $75,000 (to be prorated to reflect the portion of the year actually employed), and we have agreed to grant him a stock option under our 2006 Stock Option Plan to purchase 300,000 shares of our common stock, exercisable at fair market value on the date of grant in four equal annual installments commencing the date of grant and expiring ten years from the grant date. Mr. Sportsman shall have the right to participate in, to the extent otherwise eligible under the terms thereof, the benefit plans and programs, including medical, savings and retirement plans, and receive the benefits and perquisites generally provided to employees of the same level and responsibility. Mr. Sportsman is also entitled to a car allowance of $700 per month.





Under certain circumstances, we may become obligated to pay severance to Mr. Sportsman under the employment agreement. These circumstances include (i) our failure to renew the agreement at the expiration of the term, (ii) our termination of Mr. Sportsman’s employment without cause and (iii) Mr. Sportsman’s resignation for “Good Reason” (as defined in the agreement). The severance obligation is limited to a maximum of six months’ of base salary plus the cost of premiums for health insurance benefits that Mr. Sportsman would otherwise have been entitled to receive during such period. The employment agreement contains confidentiality, ownership of intellectual property, non-compete and non-solicitation provisions.





Change of Control Agreement





The change of control agreement is designed to help ensure that our company will have the benefit of the continued services and dedication of Mr. Sportsman, notwithstanding the possibility, threat or occurrence of a change of control. Under the agreement, and subject to the terms thereof, Mr. Sportsman will be entitled to certain payments and other benefits if his employment is terminated or he resigns for “Good Reason” in connection with a “Change of Control” of our company, as those terms are defined in the agreements. Subject to the terms of the agreement, these benefits and payments generally include i) accelerated option vesting, (ii) extended option exercisability notwithstanding termination of employment, (iii) continued entitlement to participate in group health plans for a period of one year following termination of employment at the same cost rate charged to then-current employees and (iv) payment to Mr. Sportsman by our company in 12 equal monthly installments of (A) 150% of his highest base salary in effect during the one-year period preceding termination of employment and (B) the greater of the previous year’s annual bonus received by Mr. Sportsman or his current year target annual bonus. Severance payments under the employment agreement will reduce the severance payment obligations under the change of control agreement.

2007 Jun 21 05:50 PM