Does The FDA Help Or Harm?

It is difficult to overstate the importance of the FDA to companies in the pharmaceutical, medical device, biotechnology and diagnostics industries. In short, the FDA effectively gets to decide who is even allowed to compete in the market. It is illegal to sell a drug or device with advertised medical claims without FDA approval, and insurance companies will typically not pay for their use. As a result, investors cannot afford to ignore the workings, or the prevailing mood, of the FDA when considering investments in this sector.

Unfortunately for investors, the FDA is not constant. The agency does not necessarily maintain a consistent view of its own mission, nor how best to execute it. As a result, the regulatory environment can sway back and forth between lenient and stringent, with little recourse for the companies or their investors. That said, understanding how the FDA operates and its shifting moods can help investors navigate these treacherous waters a little more safely. (To learn more, see Investing In The Healthcare Sector.)

Mission and Motivation
First and foremost, the FDA is in operation to help protect public health, primarily by ensuring that companies prove the safety and efficacy of drugs/devices, manufacture them properly, and market them appropriately. Almost every investor has probably heard stories of the traveling medicine shows of the 1800s and early 1900s where hucksters and frauds sold various "patent medicines" that, at best, did not cure anything and at worst were actually quite harmful.

The FDA also has a secondary mandate to help foster innovation in healthcare by working with industry and academia to find better ways to evaluate safety and efficacy and to respond to innovations in medicine. While the FDA is often criticized for moving too slowly, the agency has made strides in expediting the approvals of orphan drugs and oncology drugs, and has worked with the industry to figure out approval pathways for drug/device-hybrids, biologics, gene therapies and other medical approaches that were never contemplated by the legislation that gave the FDA its mandate(s). That said, the FDA is still somewhat behind the curve when it comes to molecular diagnostics, genetic testing and biologics, and that has created ample chaos for companies in these fields.

Please follow this link for the full piece:
http://www.investopedia.com/articles/stocks/10/pitfalls-pharma-approval-fda-help-harm.asp

Covidien's Still Hungry

Nobody is going to accuse the management at Covidien (NYSE:COV), a diversified medical technology company, of being slow to make any changes. It was only two weeks ago that the company announced that it was entering the peripheral and neurovascular intervention markets by buying ev3 and largely exiting parts of the respiratory care market with a divestiture. 

Now the company is at it again, announcing Wednesday morning that it was acquiring small medical device maker Somanetics (Nasdaq:SMTS) for almost $300 million in cash. That deal represents a 32% premium to the closing price prior to the deal, and a valuation of nearly six times on a trailing price-to-sales basis. Given that growing small-cap medical technology companies generally trade for between four and six times trailing sales and get bought out at between five and eight times, this seems to be a fair deal for both parties. (For more on this topic, check out The Wacky World Of Mergers And Acquisitions.)


You can read the full piece here: 
http://stocks.investopedia.com/stock-analysis/2010/Covidiens-Still-Hungry-COV-SMTS-EW-MASI-BLUD-VOLC-ZOLL0617.aspx

Reposting - Great Dividend Payers In Medical Technology

I just found out that the original link for this article wasn't working. 
Here's is a reposting. Apologies for the inconvenience!

There are a lot of solid reasons for investors to include medical technology stocks in their portfolios. The healthcare sector has grown faster than the economy and seems poised to continue to do so, and the more established names in this field routinely post excellent returns on capital. Better still, medical technology is generally spared the feast-famine cycle of patent expirations that bedevil the pharmaceutical sector. 

Now we can add another reason to like medical device stocks - dividends. As many investors already know, the stocks of companies that pay dividends tend to outperform those that do not. When you combine the advantages of dividend-paying stocks with the advantages of medical technology stocks, you have a powerful mix.

Full text at:
http://stocks.investopedia.com/stock-analysis/2010/Great-Dividend-Payers-In-Medical-Technology-ABT-BAX-MDT-BDX-BSX0521.aspx  

Great Dividend Payers In Medical Technology

This was posted late today on Investopedia. 
I would clearly have included Johnson & Johnson (JNJ) in the list, if not for the fact that Investopedia does not allow writers to even mention stocks they own. I do own shares of JNJ.

Here is the article: 

There are a lot of solid reasons for investors to include medical technology stocks in their portfolios. The healthcare sector has grown faster than the economy and seems poised to continue to do so, and the more established names in this field routinely post excellent returns on capital. Better still, medical technology is generally spared the feast-famine cycle of patent expirations that bedevil the pharmaceutical sector.  

Now we can add another reason to like medical device stocks - dividends. As many investors already know, the stocks of companies that pay dividends tend to outperform those that do not. When you combine the advantages of dividend-paying stocks with the advantages of medical technology stocks, you have a powerful mix.

For the full article, please continue on to: 
http://stocks.investopedia.com/stock-analysis/2010/Great-Dividend-Payers-In-Medical-Technology-ABT-BAX-MDT-BDX-BSX0521.aspx 

A Private Deal For Sequenom

Interesting little deal today in the diagnostics space.  

Sequenom (SQNM) announced a private placement of 12.4M shares at a price of $4.15/sh ($51.6M total). The company definitely needs the cash to continue its R&D program, and the size of this deal should calm the funding fears for a while.Still, I can't help but notice that the investors in this deal demanded a pretty substantial discount to the prevailing stock price - nearly a 25% haircut to today's opening price.

To me, that seems like a pretty fair discount given the concerns and controversy around this company. There are plenty of places where you can read about the details, but the gist of it is that a major scandal hit the company last year; costing most of the sr. mgmt their jobs, costing the company several lawsuits, and throwing into question whether or not the company's lead test even works. On top of that, I'm still under the impression that the owner of the underlying technology (who had extended SQNM a license) wants out of that agreement.

So, in other words, this is a $340M market cap company trading basically on the hope that their test for Down's Syndrome works (but where the past data is all but useless because of the possibility of deliberate bias in prior studies) and that they still have the rights to develop and market it. Given all that, then, a 25% discount is not an unreasonable margin of safety.

On a more positive note, the company gave pretty clear guidance last week regarding the development timeline for this test, with test optimization expected to be over by the end of Q3'10, testing of samples conducted in the fourth quarter, and commercial launch by the end of 2011.Now, maybe I'm reading too much into this, but doesn't this sound a bit like "back to the drawing board?" If  they're having to go back to test optimization, that suggests to me that there were at least a few significant flaws in the old test. Whether that completely invalidates the old promise or not, I do not know. Unfortunately, I don't think anybody outside the company knows either, so it's basically an exercise of faith at this point.

I happen to think that the baseline technology the company is using is pretty sound, and I think there's some real market potential for this test. But with so many other options to chose from, and options that offer "clean" stories, I just don't see the need to take the risk here right now.

Good Luck, Peter

Saw an announcement after today's close that Peter Donato has resigned from his position as CFO at IRIS International. I had the pleasure of interacting with him a number of times while I covered his company as a sell-side analyst. Much as it pains me to praise any fan of Ohio State and the Detroit Redwings, I always enjoyed interacting with Peter, and IRIS is poorer for his departure.

I won't even begin to speculate as to why he is leaving the company and what it may, or may not, mean. People move on in business and it's just a fact of life. Still, it's another ripple through a company that seems to be pretty much cursed with them. Given what the company hopes to accomplish in the near term - filing for VELOCITY, securing FDA approval for ProsVue, launching those two products in the US, and rebuilding the company's reputation with the Street -- that is a pretty significant shake-up for the company.

I guess the "good news" here for an IRIS shareholder is that the value of the stock is pretty much based upon what the company *should* be able to do and not what it has been doing recently. Accordingly, assuming that the company recruits a qualified candidate, it shouldn't really impact the story over the long-term. Still, I would be nervous about what this management shake-up is going to do to the company's launch plans.

Again, best of luck Peter!