3 Biotechs Flying Under The Radar

Includes: MAKO, ONVO, PACB
by: Craig Keolanui

As biotechnology investors, we often spend countless hours considering the next cure for cancer and many other advancements most often made by pharmaceutical companies. Sometimes other companies that have developed great products can fly under the radar. The following three companies will not produce a drug that fights cancer, program cells to fight off viruses or disease, or even fight pain more effectively. Instead, they produce products that will help scientists and physicians advance medicine through their usage. Ultimately, mankind and investors will be sure to benefit if these three companies can realize some sales and achieve some results.

Pacific Biosciences of California, Inc (NASDAQ:PACB)

Pacific Biosciences is engaged in doing business in the evolving field of genetic analysis and DNA sequencing. PACB's products are intended to aid scientists in solving more complex genetic issues by helping them to identify and characterize genetic variations with greater ease, accuracy and speed. Their systems are able to target sequencing to obtain a more comprehensive characterization of genetic variations, allow de novo genome assembly to assist scientists to identify, annotate and decipher genomic structures, and also enable DNA base modification identification to help characterize epigenetic regulation and DNA damage.

Pacific Biosciences recently launched their newest product, PacBio RS II, a new single molecule, real-time DNA sequencing system (SMRT) that provides the highest consensus accuracy, longest reads and double the throughput of the previous version of the system. Pacific Biosciences appear to have a very viable product in an industry that has only a few major players. The great hurdle for Pacific Biosciences might just have more to do with the economy than the product itself.

For PACB to sell more of its product, government investment in science and genetic applications in general, must be consistent and robust to keep encouraging more advancements. Since most equipment of this nature is sold to members of the scientific community, PACB at the same time must prove that their product is worthy of buying or of replacing existing sequencers. There is also worthy competition that exists in this marketplace. Illumina (NASDAQ:ILMN) is still a major force in this marketplace, as well as Life Technologies (NASDAQ:LIFE) that is currently being acquired by Thermo Fisher (NYSE:TMO). Illumina and Pacific Biosciences will be the last two standalone publicly traded sequencing companies as Life Technologies business will now be only a small component of Thermo Fisher.

Illumina was a buyout target of Roche (OTCQX:RHHBY) just last year, and the sequencing marketplace has been a hotbed in the last couple of years. The activity seems to have propped up PACB's shares lately as the current price of $2.54 a share (April 26th) is well above the 200-day moving average of $1.97 and also the 50-day moving average of $2.32. Interesting to note is that almost 75% of PACB shares are owned by insiders and institutions to go along with a float that is only 61.7% of overall shares. Pacific Biosciences has been generating a little revenue but still has a quarterly burn rate of just over $20 million and only about $100 million in cash reserves, but really has no significant debt. This is a good company to watch for the future-- and maybe as a takeover candidate it can offer a reward to investors who take a chance now.


Organovo is involved in the very futuristic regenerative medicine field. They have developed a proprietary bioprinter, NovaGen, to produce 3-D samples of human liver cells. This complex cell matrix is a revolutionary upgrade over traditional 2-D formations and will allow scientists to test things like drug toxicity in a more realistic setting. This 3-D liver tissue developed by Organovo consists of three distinct types of liver cells organized into a similar architecture that normal human liver cells exhibit. Additionally, this tissue is very close to being functional producing proteins like albumin, fibrinogen and transferrin along with two key enzymes evident in a fully functioning human liver. The amazing thing about this Organovo tissue is that it exhibits the formation of microvascular networks or the makings of blood vessels. This cellular matrix mimics the human liver with greater accuracy, allowing thicker cellular density and cellular communication that is typical of the actual human liver and is not evident in current 2-D tissue samples.

The 3-D tissue also has a longer life expectancy in the laboratory compared to the current 2-D tissue with samples lasting over 5 days compared to the 2 day average of most 2-D samples. What makes Organovo's tissue really interesting is that this doesn't stop with the liver and in addition to drug toxicity, cancers and diseases can be studied. The tissue also has surgical applications and what will happen if Organovo can improve even further? Could liver replacement or other such monumental applications be considerations?

Organovo has been looking to work with the Oregon Health and Science University to use its technology to create diseased or dysfunctional cellular formations for scientists to use in cancer research. The potential of these 3-D formations is limitless, with the capability of eliminating the need of animal testing and the added potential of cost savings in future drug development and cancer/disease studies. The investor community has been aware of this potential, taking Organovo's share price up to $10.90 in June of last year. The shares are currently trading at $3.68 a share (as of April 26th) and are now above the 100-day moving average of $3.27 a share but below the 50-day moving average of $3.70 a share. The current share price is over 59% higher than it was a year ago.

Organovo was considered one of the "Best Inventions of 2010" by Time magazine and only recently went public in February of 2012. A look at the books gives a hint of potential financial difficulties that might be on the horizon as Organovo only had about $14-15 million in cash at the end of 2012 with a product that might require more time to boost revenues. Any news can move this stock, with two spikes earlier this year resulting in prices above $5 a share. The market cap currently at $229 million might be undervalued if Organovo is able to establish itself first with pharmaceutical companies and later with further development of its tissue product.

Mako Surgical (NASDAQ:MAKO)

Mako Surgical has terrific systems for knee and hip repair that use rototic arm technology and multicompartmental knee systems to enhance patient recovery, surgical outcomes and joint performance. The Mako Surgical robotic arm or Robotic Arm Interactive Orthopedic System (RIO) is a technology that allows surgeons to make precision cuts and optimal replacement device alignment by using pre-surgical CT scans and 3-D visualization to guide surgeons and help achieve better accuracy. This robotic system spares tissue damage, allows for a smaller incision, saves unnecessary bone loss and also customizes each surgery to allow for a better "fit" of replacement devices.

Mako's RESTORIS MCK MultiCompartmental Knee System complements the RIO robotic procedure by allowing partial knee replacement, where full joint replacement usually is considered. Together, this procedure is called MAKOplasty and is suitable for partial knee resurfacing procedures in early to mid-stage osteoarthritis. Total hip arthroplasty procedures are also possible using the RIO system with RESTORIS implant devices for patients with degenerative joint disease. In both cases the superior alignment of the orthopedic devices is paramount to the performance and longevity of the devices to go along with keeping the patient's comfort, recovery and ability to perform daily functions in high regard. Mako's big battle is to convince more of the patients who need surgical procedures for the knee or hip to go through with them. Mako is marketing safety, recovery, comfort and post-surgical performance to encourage these patients to seek MAKOplasty procedures.

Compared to a company like Intuitive Surgical, Inc (NASDAQ:ISRG) that produces a da Vinci surgical system that can be used for a variety of procedures, Mako has concentrated on orthopedic surgeries of the knee and hip which is a much more targeted market. The issues facing Mako's acceptance are money and convincing surgeons and medical providers that Mako's system is far superior than conventional methods. Mako would like to focus on the 90% of men and women who need surgical procedures but decline them out of fear, needing to convince this group that MAKOplasty is a "game changer". Additionally, Mako needs to convince the medical community that obesity and an aging population are combining to create increasing demand for knee or hip procedures and by carrying this product they can get more of these patients to accept the MAKOplasty procedures with more beneficial outcomes and results.

Mako could sure use more performance with a share price that sits at $10.61 (April 26th), not far from a 52-week low of $10.00 a share and far from the 52-week high of $42.79 a share. Revenues have been going up each year from $44.3 million in 2010, $84.5 million in 2011 to $102.7 million in 2012. Profit, however, hasn't followed suit --with a burn rate of over $30 million a year hard to break. Mako has no debt and about $73 million in cash and short term investments, but the rush is on to grow revenue and give investors something to be excited about. The product is great, but the $77 million spent on sales and marketing in 2012 has to yield more results.

These three companies have terrific products, but face uphill battles with marketing and investors alike. Unlike traditional pharmaceutical companies waiting for the approval of the FDA or competing with drugs that are already out on the market, the products of these three are certainly advancements in medicine that are truly unique. Some positive results for any of these three can easily attract the interest of investors but sustaining that interest will have more to do with revenue growth than just good news. Still, with more room for share prices to move up than down, it might be worthwhile to watch any of these stocks with great interest.

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.

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