Medical technology is always a prime area for investor excitement — we love the idea of a company that can make things bigger, cheaper, stronger, faster in any field of human endeavor, but somehow the idea of a company doing it in medicine, where we can feel both wealthy and virtuous after investing, is even more appealing than an ordinary tech company.
And there’s some good reason for that — health care is a huge market, of course, without consumer price pressure (though there are obviously pricing pressures more broadly), and medical devices and technology can often make it to market much faster than new drugs (and be easier to understand).
This latest pitch is from Agora Financial for the Breakthrough Technology Alert, which was helmed by the hypetastic Patrick Cox for several years but is now being run by former Discover/Washington Post journalist Stephen Petranek. I covered one of his teaser pitches last month, and that stock is up a good 30% or so since then, so perhaps that’s one reason why readers have been asking about his latest spiel (that, and Agora Financial has millions of email addresses at their disposal, so if you’re an individual investor and they can’t reach you you’re hiding really, really well).
This time it’s about a medical technology that “came from space” … like Tang, but probably better for you. Here’s the intro to give you a sense of what Petranek is pitching:
“Hundreds of Years Before the Birth of Christ…
“Physicians, shamans and healers believed they could smell disease in a person’s body…
“…Now we have Scientific Proof
“The Sweet Smell of Money!
“…It Surrounds This Company
“They’ve developed a “breathalyzer” (already being distributed to doctors and hospitals, and soon to consumers) that could positively identify deadly diseases long before they ever threaten your health and your life!
“Investors are already sniffing the profits it could bring!“
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Makes you want to read, no? The spiel is all about a “little machine” that you can breathe into, the machine senses the chemical signatures in your breath, and it matches those signatures with the “breathprints” of diseases or disorders — like, for example, the presence of acetone in your breath if you’re having specific kinds of heart trouble. Here’s more:
“Breathe in and breathe out into a little machine.
“A little machine that could help you live a long and healthy life free from heart disease, cancer, diabetes and other deadly diseases.
“A little machine that could take the entire medical industry, its current beliefs and practices, and dismantle it.
“A little machine that could take the entire pharmaceutical industry and completely crush it.”
Perfect, right? You don’t have to have a blood test, you don’t have to wait a day for results, you just breathe into a little tube and the doc tells you you probably are fine… or you probably have lung cancer or diabetes or have had a heart attack.
Here’s an example of this technology at work from the ad:
“All this is well known to pulmonologist Dr. Reid Derk at the world-renowned Cleveland Clinic.
“Not too long ago he and his team recruited 25patients who had been admitted to the clinic due to a range of health problems, including heart failure.
“For a control group, he recruited 16 patients of similar age and body mass, who were admitted to the hospital with suspicion of other heart problems — but not heart failure.
“He had the two groups breathe into a breathalyzer.
“But it was far larger and far more sophisticated than what the police use to test the blood alcohol content of drivers who can’t seem to stay in one lane on the highway.
“After computing the results, Dr. Derk’s breath test identified the heart failure patients with stunning 100% accuracy.
“He then repeated the tests on two much larger groups.
“One again, elevated levels of pentane and acetone showed up in the breath of the heart failure patients every single time.”
And there are other research projects going on in this area, too, essentially trying to mimic the sniffing power of dogs (who have anecdotally been responsible for smelling the presence of cancer in a body and saving lives) …
“…breath researchers not associated with the Cleveland Clinic are confirming they have identified with nearly 90% accuracy the earliest signs of liver failure.
“Other breath researchers have identified with 80% accuracy the earliest signs of lung cancer — the most common cause of cancer deaths worldwide, killing close to two million people every year.
“Still more researchers are convinced that breast cancer tumors that are too small to show up on mammograms can also be predicted via a breath test as well.
“Finally, scientists in Israel are developing a breath test for stomach cancer, which could single out stomach tumors nearly 90% of the time.
“But one American company has scooped them all!
“Because they built that little machine your doctor may someday ask you to breathe into.
“A little machine that not only detects — simultaneously — an extremely wide range of diseases…
“Liver disease, kidney disease, diabetes, lung cancer and renal failure…
“It delivers your test results in less than 10 seconds.”
So that’s the money-making opportunity being pitched by Mr. Petranek. He uses the big numbers that all biotech stock touts use (if we’re spending $2.5 trillion dollars a year to treat sick people, won’t this company be worth $XX billions if it can save XX lives?), but then he does get into a few clues for us…
First, that this company developed the technology for NASA — the best tool that’s currently used for identifying trace amounts of specific chemicals, and identifying compounds by their chemical signature, is the mass spectrometer, and this company was charged with miniaturizing the mass spectrometer so it could to into space. So that’s where the product came from.
And second, we get a few specifics about this company that help us make sure the Thinkolator is on the right track:
“… currently trading in the $2 range…
“a small company with a workforce of just 62 employees.
“A company NASA had relied on for the previous 25 years to prepare, fuel and load satellites and install rocket engines on both unmanned rockets and the space shuttle….
“… both Westinghouse and Northrop Grumman have in the past purchased a number of its subsidiaries.
“And in just the last few months, Lockheed Martin acquired yet another of this company’s subsidiaries. Offering to pay a reported $61 million for it.”
And a few tidbits about the little device this company is making:
“The portable mass spectrometers now in development by other companies don’t have the resolution, nor are they as broad spectrum as the ones built by this company.
“In other words, competing portable mass spectrometers are focused, single-use machines.
“They’re being designed, for example, to detect explosives or dangerous chemicals, but nothing more — and certainly not diseases.
“Their range is also limited, meaning they’re not as sensitive.
“This company’s portable mass spectrometer, on the other hand, is in a class of its own — designed to be as powerful, sensitive and all encompassing as a room-size machine….
“They will also have, and this is important, first-to-market advantage.”
So who is the company being teased by Stephen Petranek as the subject of his special report, “Breathe Free and Be Rich: A Gift From Space?”
Well, we polished off the Thinkolator, gave it a good revving this morning, and it obliged by giving us our answer nice and quick, just as soon as we poured the clues into the hopper — this is a little company called Astrotech (ASTC)
And yes, they have been primarily a space services company, contracted mostly to NASA, for a long time — and they did design a miniature mass spectrometer for use in the International Space Station. And they did just sell off their Space Operations division to Lockheed Martin (LMT) a couple months ago for $61 million, leaving them with two divisions: 1st Detect and Astrogenetix.
Astrogenetix is their pharmaceutical research division, aiming to identify drugs and treatments using microgravity research — their primary work right now, they say, is in vaccine research (Salmonella and MRSA). They did a fair amount of early-stage research in the last years of the Space Shuttle, but they seem to be in a holding period now waiting for research to progress, with funding mostly from NASA, so they’re not talking about it much or, it appears, spending any real money on Astrogenetix. It might be that they’ll file an IND at some point, but they also indicate that they need dozens more space flights for additional research at that point. So I’m ignoring this division.
1st Detect is the division being teased in this ad, and it seems to be the primary focus right now — here’s how the company describes itself:
“1st Detect was formed by Astrotech Corporation to commercialize miniature mass spectrometer technology developed for the International Space Station (ISS). The company quickly realized the commercial utility of such a device and began parallel development of a terrestrial unit to be deployed in the security, healthcare, and industrial markets. Leveraging the parent company’s 25 year heritage of developing high performance, lightweight ruggedized systems for the space program, 1st Detect has been able to revolutionize the mass spectrometer industry by offering the same performance as laboratory instruments, but at a price and in a form factor similar to today’s handheld detectors.”
1st Detect is the reason Astrotech sold off its Space Operations division to Lockheed, they want to put the company into a new business and take advantage of what they see as a substantial market opportunity for their small mass spectrometer, the introductory model of which they call the MMS-1000. This is a desktop mass spectrometer, it still seems to be designed for the lab but is much smaller than current standard tools.
And yes, this device is not brand new — the technology was developed for the Space Station, but this particular MMS-1000 was introduced about 2-1/2 years ago as a new product.
And no, this specific device is not the tool used by most of the “breath research” that Petranek cites — nor is breath research necessarily a core part of the 1st Detect mission or market at the moment. There are several different ways to analyze the composition of breath, including mass spectrometers, and there are lots of companies who make mass spectrometers (though 1st Detect does claim to have some edge in the combination of size and capability they’ve designed, largely thanks to their ion trap technology that gets rid of some of the bulky processing and/or vacuum equipment needed for most mass spectrometers).
The Cleveland Clinic work cited in the ad, by Dr. Raed Dweik, is being done with two different sensing technologies, including a much more advanced mass spectrometer and a lower-tech sensor. There are also plenty of other competitive technologies for analyzing breath, including the BreathLink from Menssana using gas chromatography, a tool being developed by a company called Metabolomx, and the newer work by a company called Owlstone Technology, and other ways to miniaturize mass spectrometry, including the MEMS chip technology from Microsaic (a tiny British company, ticker MSYS on the AIM in London), along with lots of other companies making purpose-designed portable detection equipment using variations of the mass spectrometer, often for security, military or energy industry applications, like Torion Technologies (those are all just examples I ran across this morning, there are doubtless others).
So yes, mass spectrometry machines are shrinking and speeding up, and that could be a massive opportunity — democratizing the “detection” business could be a big deal, not as big a deal as the democratization of computing power but perhaps quite huge. And there probably won’t be one “winner” in this race, I did a little browsing and came across a lot of folks who are musing about the future of smaller, high capability sensor/detection devices like those being built and envisioned by 1st Detect and others, and I see no consensus from the few minutes I was “on the clock” with this research. Click here and here (this one’s an ad supplement paid for by the subjects, but still interesting) if you’d like to get a little “sum up” of where things are and might be going in mass spectrometry miniaturization.
Which means that this is a situation where we should cool our jets, step back, and think not about the massive global market that we dream this company can dominate… but about their prospects for building and selling a competitive product and opening up new markets for mass spectrometry with their smaller size and lower cost machines.
So that led me, after I read through their latest quarterly SEC filing to get familiar with their product, the sale to Lockheed, and the risks they see, to actually take a little flier on this one — not because it’s going to dominate mass spectrometry, but because it is small and now very focused on just that task, and because it has a dramatically improved balance sheet now that they’ve sold off their Space Operations business (the division that has always generated most of their revenue, though it’s been in decline in the post-Shuttle years). I didn’t buy the stock, but I did speculate on a small tranche of the options going out into the Spring (March and June), so I’m considering this a binary bet — maybe the company gets some traction and some press as they evolve and generate revenue, getting the stock up by at least 30% or so, and my option trades work out. Or maybe they don’t, or it takes longer, and I lose all the money. It’s a gamble.
Why take a gamble? Because the company is being valued at nothing right now — and I’m not enthused enough about them to want to be a long-term shareholder, at least not yet, but I do think they have a potential turnaround if they can scale up the 1st Detect business at all. The cash they received from selling Space Operations sets them up to clear most of their liabilities and still have more than $40 million in net cash on the books (they think they’ll get $6 million more in cash from Lockheed in 18 months, when the indemnity holdback comes due), so this is really an opportunity for them to start fresh and be entirely focused on this (relatively) new product.
It obviously might not work — so far, they’ve only generated revenue of a couple hundred thousand dollars in two years from their current operations (subtracting out the Space Operations revenue), but they are, at least, now entirely focused on their sensing product and on partnerships and potential customers on Earth. Their first push, it appears, is the factory floor, where they think they have a compelling product for food and beverage, semiconductor, pharmaceutical and petrochemical companies because of the speed and precision of their equipment — the doctor’s office is going to have a wait a long time, I assume, but there’s plenty of research ongoing in that area and future researchers might use Astrotech’s device.
So, we’ll see if it works out — but it’s an interesting speculation for me and I like the fact that there’s a bit of a floor in the stock because of the fact that their market cap essentially equals their cash position right now (assuming they don’t do something expensive and foolhardy, which is no guarantee). Do be mindful of the fact that trailing revenues and earnings mean nothing (what’s in their financial history is all a result of their now-sold division — including the profit they reported last quarter because of the gains from selling that division). They might spend a lot more on R&D (they’ve spent only a couple million a year recently), and I assume they’ll be spending a lot more on marketing and might even make acquisitions, but they are, at least, in a firm financial position and they have an interesting technology to sell… you’re not going to be breathing into the device in the next couple years, in all likelihood, but smaller-scale and faster mass spectrometry is a growing trend and they do have some opportunity to exploit it.
What do you think? Interested in this company or in these new “breathalyzer” technologies that are aiming to improve health? Think I’m crazy for taking a little flyer on this company’s options? Have some more expertise in mass spectrometry than I do? (That’s not much of a hurdle, I’m afraid.) Let us know what you’re thinking by submitting a comment in the friendly little comment box below. Thanks!
Because of the fact that I’m writing about this and I don’t want to be taking advantage of any pop that we might give to the stock from this attention (it is a tiny company, after all, with a market cap below $50 million), I’ll extend my trading restrictions on this one — I promise not to sell the options I purchased for at least two weeks following publication, if my attention gives the shares any “pop” that ought to be plenty of time for that pop to die down.