The process of finding a new cure for a disease is long and expensive, costing millions of dollars with no guarantee of success. Scientists begin with as many as 10,000 compounds and test them for about seven years. The search then proceeds to the clinical trial stage, which goes on for another six years. One of the possible outcomes is that the new drug does have the desired therapeutic effect along with undesired cell toxicity. Such a compound then has to be abandoned. But what if such undesired toxicity could be predicted much earlier in the drug development process?
This is precisely why a bioassay is used. A bioassay is an experimental test performed on a biological system to determine the effect and efficacy of a new drug or molecule. Though a wide variety of bioassays exist they can be classified as In-vivo techniques and In-vitro techniques. In-vivo technique involves administering the drug directly to a living organism where as In-vitro technique means administering the drug to a suitable cell culture. All drugs are tested using at least one technique. The difference between the human biological system and the test condition is a prime reason for drug failure. Hence it is of utmost importance that biological test systems be a close replica of the human biological systems.
Last year President Obama announced a collaborative effort between NIH, Defense Advanced Research Projects Agency (DARPA), and the U.S. Food and Drug Administration (FDA) to develop advanced bioassay systems in coordination with the private sector. The NIH, under the leadership of Dr. Francis Collins, Director is spearheading a number of initiatives and innovative approaches towards reducing drug discovery costs and time.
Charles River Laboratories International, Inc. (NYSE:CRL)
Charles River is a major player in the pharmaceutical industry with a range of products and service offerings that accelerate early stage drug discovery and development process. It has two reporting segments: Research Models and Services (RMS) and Preclinical Services (PCS).
The RMS division supplies research models and services required to enable in vivo drug discovery and development. It is a global leader in the production and sale of rats and mice most widely used by researchers. The company has 20 breeding facilities located in seven countries worldwide.
The Preclinical Services division is one of the two largest providers of preclinical services worldwide with demand generally from small biotech firms who prefer to outsource preclinical development programs. However, selective outsourcing by larger pharmaceutical companies is also picking up. As per the company's estimates, the outsourced in vivo discovery and drug development services market is close to $6 billion. The company derives 61% of its revenues from its RMS division and the rest from the PCS division.
Let us have a look at CLR's financials:
Total shareowners' equity
Charles River's sales have remained almost constant for the past five years and it has had to take Goodwill Impairment in two years leading to a loss. Its 12-month diluted EPS is $2.10 and with the stock trading at around $36, its PE ratio turns out to be 17. The stock is close to its 52-week high as the company recently updated its 2012 GAAP EPS estimate from $2.10 - $2.20 to $2.12 - $2.22. For a company that is already a market leader with minimal growth, it might be a good idea to start paying a dividend to justify such a premium valuation.
VistaGen Therapeutics, Inc. (OTCQB:VSTA)
VistaGen Therapeutics is a biotech firm focused on using stem cell technology to develop bioassay systems for drug rescue applications. Currently, the company is primarily focused on predicting the in vivo cardiac effects of new drug candidates utilizing CardioSafe 3D, a bioassay system consisting of mature human heart cells derived from pluripotent stem cells. The idea is to test new drug formulations on this cell culture in the early stages. If the formulation is found to have adverse effects on the cell culture, then slight modifications can be incorporated or the drug candidate can be totally abandoned. The ability to make an early decision could mean savings of hundreds of millions of dollars.
VistaGen tested its bioassay system using 10 previously approved drugs for which the effect on human heart cells is well documented. The company believes that its stem cell based testing methods could be superior to current procedures used by major pharmaceutical companies. The company can potentially generate a significant revenue stream by licensing its bioassay systems. VistaGen is also working on building a pipeline of rescue variants of drugs abandoned by pharmaceutical companies due to safety concerns. In its most recent communication to stockholders, the CEO, Shawn K. Singh, announced that the company had narrowed its focus to five high potential drug rescue candidates and work would begin on two of them by the year end.
The company also announced that it intends to complete Phase 1b trial of AV-101, its lead drug candidate targeting neuropathic pain, epilepsy, Parkinson's disease and depression. The NIH has awarded over $8.5 million for development of AV-101 to date.
Conclusion: Among the two companies profiled one is a market leader in In-vivo techniques and the other is a research stage biotech firm adopting a novel approach to In-vitro techniques. As a caveat let me add that each company profiled may not be ideal for every investor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.