Nanosphere Will be a Big Winner

| About: Nanosphere, Inc. (NSPH)

It was quite interesting listening to both the Cepheid (NASDAQ:CPHD) and the Nanosphere (NASDAQ:NSPH) quarterly conference calls recently. It occurred to me that NSPH is possibly exactly where CPHD was two years ago. Then, CPHD was a promising little company with a new molecular diagnostic machine that was trying to break into the market. Now, with the establishment of their test to diagnose the MRSA virus, their machine is a hot item and is growing close to 50% annual rate which has led to CPHD's current market cap of $1.5 billion

The NSPH story is actually better in some ways as they are not only developing a new diagnostic test, a troponin test that can predict heart attacks faster, which could make a major impact in the marketplace, but the company's Verigene machine itself is unique in that because it uses nanotechnology to target proteins making it is simpler to use, has a lower cost, and needs fewer steps to diagnose. Using nanotechnology also enables the testing to be 100X more sensitive than older technologies enabling earlier detection and the discovery of new biomarkers.What's more, the company's next generation machine currently in development will fully automate sample processing which will simplify the testing process even more.

As of now, the company is somewhat hampered by the fact that it only has FDA approval for two tests. The first test is one that tests to see which patients will respond better to Warfarin, a drug to treat blood clots, that need patient specific dosing. The FDA has been concerned about patient mortality when using the drug, so there is a big need for a simple test to determine the correct dose. The other test is for Hypercoagulation, which is a condition when blood clots form more easily than they should. NSPH’s test is the first FDA cleared test for the identification of mutations in three specific genes.

Starting towards the end of this year, the company should have a test for Cystic Fibrosis cleared. Right now, Luminex is the only other company that has a test for CF. Also, the company is targeting approval of a Respiratory Virus Panel test that can diagnose the flu ready for the 2009 flu season. The company also hopes to have a test for HPV virus available in 2009 as well which is important as HPV is one of the fastest growing segments in the diagnostic testing market

The test which will really impact the marketplace is a new earlier detection troponin test which is a protein that can detect heart attacks. The current troponin tests have to be sent to a lab and sometimes do not get a result for up to 10 hours. When a patient is having chest pain this is unacceptable. Furthermore, many unstable angina patients aren't be detected by the current test but could be with the Veregine system . NSPH believes its test will be more accurate be able to detect troponin elevations earlier and have results in under an hour. This may change the way heart attacks are diagnosed and will be an enormous driver for the company.

As far as demand today, the company stated on the quarterly conference call that they have made installations at 12 customers and as of today all have validated the system. They further have 25-30 additional potential customers in the pipeline that should be delivered by years end.

I do not expect the stock to really take off until the Troponin test is ready, but the NSPH story is so exciting that I am willing to hold the stock even though there won't be much excitement for some time. The stock has been dropping almost daily on light volume as investors shun stocks without near term catalysts. Remarkably, the stock is trading at a market cap slightly below the cash on the balance sheet of $114 million. So in essence, by buying the stock at these levels, one is getting a company with a game changing technology for below tangible book value.

I am quite comfortable buying the stock here despite investor sentiment for small medical technology companies, as the positive early customer adoption and the pipeline are significant positives in my mind. The CEO sounded extremely confidant on the call as they work toward their goal of expanding the company's product and getting the Verigene system adapted in the marketplace. If the company meets its pipeline goals for the new tests over the next couple of years, I have little doubt that NSPH will be a big winner.

Disclosure: Author is long NSPH