by Travis Johnson, Stock Gumshoe | December 20, 2013 4:20 pm
“Odds are you never heard of this murderous disease that quickly kills more than 250,000 Americans every year.
“If your doctor correctly diagnoses it within 24-36 hours of its onset you could live.
“If he can’t… and most doctors can’t… your life is a coin toss.
“HEADS YOU LIVE TAILS YOU DIE
“But this company’s new breakthrough technology can, in just 2.5 hours, hunt it down and tag it so it can be quickly destroyed.
“Predictably, this company’s revenues are on the rise.”
How’s that for an opener, eh? It got my attention, that’s for sure.
This pitch for our next “millionaire-maker” stock came in from Alex Daley for his Casey Extraordinary Technology newsletter, and he gets our attention with a few pages of horrific stories about kids dying because they scraped their elbow … and about parents watching as they keep bringing their sick children to the doctor again and again for what doctors keep saying is the flu or a bug, only to die days later as the infection overtakes their body.
Horrible, right? Well, don’t worry — there’s apparently a solution to the problem that will save lives AND make us all rich! Here’s how Daley puts it:
“But there is change in the wind.
“Change that could easily save the life and limb of every man, woman and child who will someday acquire this disease.
“Change that could easily secure you a fortune.
“Already, the company that’s responsible for this remarkable technology and a host of other breakthrough technologies, has become a leader in a $50 billion market that’s growing 29% a year—a growth rate, by the way, that’s double that of Big Pharma.
“Obviously, a company such as this cannot stay hidden, a secret for long.
“Therefore, if you move quickly – before the thundering herd and institutional investors bid up this company’s underpriced shares to possibly ridiculous heights…
“You could see gains that could last you a lifetime – many lifetimes!”
OK … so I know, you’re dying to hear what the stock is — and we’ll get there. The disease they’re referring to as this unknown killer is usually called sepsis, though apparently the proper term is septicemia according to Daley, and it’s basically a whole-body infection that shuts you down or kills organs or parts of the body. That’s my idiot’s interpretation, I’ll let “Doc Gumshoe” chime in and share some more info on it in a moment.
And the basic spiel from Daley is that sepsis is quite treatable, but is very hard to diagnose early enough for treatment to work well. So the solution is better diagnosis, which is where his secret stock comes in.
“… if nearly $17 Billion is now spent every year in the United States alone in a near futile attempt to stem the scourge of this disease…
“Imagine how many billions of dollars such a test, such a tool would be worth to the company that creates it and owns the patents to it.
“Imagine how much money the company’s shareholders will earn.
“Well, imagine no more.
“That tool – that test – exists. A test the entire world has been literally dying for.
“And I’m about to introduce you to the company that developed it, and is selling it – and to the scientist who created it.”
Doesn’t it feel good to imagine that you’re both becoming incredibly wealthy and saving lives? Ah, it puts me right in the holiday spirit. So what’s the stock?
Well, here are a few more clues:
“… it’s not just a test for sepsis—which can now be detected at its earliest, unseen stages—that’s causing excitement…
“It’s the diagnostic platform on which the test runs that is also turning heads the world over….
“.. this diagnostic platform is designed to also test for cancer, heart disease, genetic ailments and how your genetic makeup affects your response to certain drugs – obviously of key interest to Big Pharma….
“… the sepsis test is already selling in Europe and Asia – it was only last year that it received FDA approval to be sold here—the first and only FDA approval ever issued for this type of sepsis test.”
And of course, you have to buy the stock NOW NOW NOW! (After all, they know that if you take your time and think about it a while, you’ll feel less urgency to subscribe to the newsletter RIGHT THIS SECOND and you’ll maybe go on and email your friend, or check your fantasy football team online, or do some shopping, and you’ll forget all about Casey Extraordinary Technology. The horror!)
Our final tidbits to push that urgency:
“the news of this breakthrough test is only now being widely reported.
“So while shares of this company have begun to accelerate – they’re still trading in the $2 range!”
So who’s the stock? The Mighty, Mighty Thinkolator sez this is: Nanosphere (NSPH)
Which is indeed a wee $2 stock — slightly more at the moment, for a market capitalization of about $130 million. They’re far from being profitable, even with some of their tests marketed now, but there are a half dozen analysts covering the stock and they do have enough cash to keep them going for a while (that’s why they have so many analysts even though they’re a tiny company, they’re likely analysts from the firms who helped them to go public a few years back and raise more cash in a secondary more recently). They do have some revenue, and the analysts think that revenue will double next year to about $20 million after doubling this year to roughly $10 million, so that’s a nice trend and doubling year over year can build up quickly … but that’s not enough to turn them profitable in the foreseeable future (if, indeed, any future is foreseeable).
I’m not sure when the profitability switch will be turned — it basically depends on how fast they can sell their testing systems to hospitals, which are their target customers — the idea is to enable testing for lots of different pathogens and diseases within a couple hours instead of the current 10-24 hour (or more, if they’re off-site) standard that the company says is common for similar tests in hospital labs today.
It seems pretty compelling from their investor materials (you can see a fairly recent investor conference presentation from the company here), but, well, every company sounds good in the investor presentation. They are designed to be that most fabulous kind of money-minting company, the “razor and blade” firm: they sell the diagnostic computer/machines to hospitals, perhaps even at a loss, and then make it up with huge volumes of the cartridges and substrates that have to be used, at several dollars each, for every single test that’s done on that machine. So the margins are likely to be very good once they get to profitable scale, I just don’t know when that might be and haven’t looked into it very carefully yet.
So, interesting company — I don’t know what the world of diagnostics or diagnostic devices is like, or how testing is usually done, but I figure there are some huge companies in the business, too, and perhaps they have similar kinds of diagnostic tools.
Since this is a medical topic on which I know very little I asked our friend Michael Jorrin, aka “Doc Gumshoe,” to pitch in and see if he can share anything else to help us understand Nanosphere’s business, here’s what he said:
Where I part ways with that presentation is that, whereas Daley characterizes the diagnosis of septicemia as difficult, such that many doctors go totally off the track, I would suggest that most health professionals are highly alert for septicemia and are able to identify it fairly quickly.
Daley put the spiel in the context of a case history – a kid gets what’s usually thought to be a minor injury and develops septicemia. But the diagnosis is missed and the kid dies. The health professionals looking at him don’t connect his minor injury – a cut treated with a Band-Aid – with his symptoms, which were far from minor, including a high fever, nausea and vomiting, leg pains, extreme weakness.
I don’t doubt that there are indeed cases like that, where a small cut gets infected and the infection spreads through the blood-stream resulting in the kind of catastrophic situation Daley describes. But I think that it would be quite rare for whoever is treating this patient to totally ignore the wound. Infected cuts hurt, for one thing, and they get swollen. My guess is that the kid in Daley’s story would have complained about his injury.
However, most cases of septicemia do not have mysterious causes. The appendix ruptures, permitting the body cavity to be flooded with billions of bacteria. Or a person sustains a serious injury, such as a compound fracture, which is insufficiently cleaned out. Most cases of septicemia take place in hospitals, and a lot of the patients are debilitated or immunocompromised. Persons with diabetes are especially susceptible to septicemia if they get injuries in their lower legs or feet, because their circulation is affected.
And the reason that septicemia is so frequently fatal is that it usually arises from major traumatic events, or in persons who are already vulnerable. We are not talking here about a mysterious disease that strikes people silently and about which the health-care system is not vigilant.
That doesn’t mean that the speedy testing platform Daley talks about wouldn’t be valuable, especially, as he goes on to say, if the same relatively small device can be used to test for a range of other bacteria or the presence of other molecules in the blood that can guide treatment in a variety of ways. I suspect that Daley picked septicemia because it permitted him to tell a riveting story. Clostridium difficile is not nearly so riveting.
I gather from the spiel that the way this device works is that it tags gold nanoparticles with antibodies to whatever it is they’re testing for. Gold would be selected because it’s nearly inert – it’s not going to interfere with the testing process itself.
We should know that there are all manner of blood testing devices out there. When you have your annual check-up, you get back pages of results based on about a jigger of blood – one machine does it, and it does it very quickly. And there are platforms that analyze blood gases quickly, and sometimes at the patient’s bedside. Interest in rapid diagnostic devices is certainly high, because the sooner the disease is diagnosed, the sooner the physician can decide on a treatment course.
Back to Travis now.
So that gives us a bit of a different picture of sepsis, at least — it’s not just that it strikes young people by surprise, it’s generally a disease that folks get from a traumatic event or injury, and when they’re in the hospital, so the story of the boy who nearly dies at home because they send him home is perhaps an attention-getting outlier. Still incredibly terrible, of course, but not likely to be the overwhelming focus of hospitals.
What remains for me would be understanding the selling premise for hospitals — that investor presentation from Nanosphere suggests that it offers a faster, lower-cost test in the end, so it will take some more understanding to see how this diagnostic testing platform competes against others — in just a little scanning I’ve seen diagnostic testing systems from Opko, Bio-Rad, and several others, and there are also lots of small “nano scale” devices that are being developed for testing a variety of things, and another company that offered a next-stage bacterial detection test just went bankrupt earlier this year (Microphage), so it’s clear that there are rarely single products that stand above all else, or straight lines to financial success in the fragmented diagnostics equipment business.
Which means … I’m writing this one down so I don’t forget it. I’ll actually even put it on our watchlist, because I’m curious about how their platform will evolve and want to learn more about the economics of it. I’ll let you know if I decide to pick it up for a bit of speculation, but I’m not there yet.
Anything else I need to share with you as the year comes to a close?
Well, I’m continuing to tinker around with my Bitcoin experiment and my Coinbase account. It remains baffling to me that people have such dramatic allegiance to this “currency” that can easily be halved or doubled with just a few strokes of the pen from a government department (Bitcoin fell harshly when China told banks to stop exchanging Bitcoin for Yuan and vice versa, and it had gone up several hundred percent because of previous Chinese excitement and the tacit acceptance by the US government in November). I haven’t had the chance to try to actually buy anything with Bitcoin yet, but perhaps that will come soon. My initial reaction to Bitcoin is to call it a ridiculous bubble, but one that’s built on a potentially useful technology (if they can get good interchange with real currencies, and fix their time lag problems in transactions) … so I’m trying to be patient and not judge too quickly.
And I note that although the Fed has decided to keep the Fed Funds rate at zero for the next couple years, we are seeing a gradual trickling up of rates in the 5-year and 10-year notes. If that continues, and it remains gradual, banks are going to be ludicrously happy. They’ll continue to have access to money at less than 1%, including Fed Funds and savings accounts and CDs, but will be able to charge ever so gradually more in interest on their loans as the 10-year note creeps up.
That makes me think the banks, which in many cases are already cheap on a price/book or price/earnings basis, will be very pleasant investments in the new year. That’s reflected in the market, of course, I’m not the first person to have this thought and many of the better banks are already at 52-week highs, but I suspect we’ll continue to see the big regional banks, in particular, do very well. My favorite remains PNC (PNC), which I own through their warrants (PNC-WT) and have talked about a few times (I first suggested the warrants here), those warrants have a strike price of $67 and change and an expiration of December 31, 2018, so with PNC shares at $76 and the warrants at $17 we’re assuming only that PNC will go up by at least 10% over the next five years.
I’d be willing to bet that PNC climbs more than 10% next year, and those warrants remain one of my larger holdings. They’re not very liquid, so if you like them be careful and wait for your price, but I think these will reward patient investors very nicely over the next few years. If you like regional banks more broadly, the ETFs following the index of regional banks are also at or near 52-week highs but will, I suspect, also do quite well if we get this interest rate dynamic (flat short rate, gradually rising longer rates) continuing over the coming year and the economy continues to putter along — the most liquid of those ETFs is probably KRE but there are other options as well. I wouldn’t expect jackrabbit moves by these big banks, but if things continue in this trend and a growing economy helps loan demand to bump up a bit they’re going to make a lot of money.
This is likely our last Friday File of the year, since we shut down for about a week and a half around Christmas and New Year’s Day, but if anything dramatic happens perhaps I’ll sneak a note or two in along the way. And early next year I’ll be beginning my annual review of the stocks on our Irregulars spreadsheet and probably doing some tinkering around with those picks. There may be a free article or two on the site early next week, and Myron Martin has promised an update on all the little junior miners he’s enjoyed covering for you this year … but until we meet again, I want to make sure I have the chance to wish you a wonderful Christmas if you’re celebrating that holiday, and a joyful and prosperous New Year. May your heart, belly, wallet and home be full and happy in the coming year.
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