By Brian Nichols
An interesting debate in healthcare is whether or not new age therapeutics are worth the price of treatment. For example, a BRAF inhibitor for the treatment of metastatic melanoma, Zelboraf, shows a clear benefit in overall and progression-free survival. However, the product has an annual price tag of nearly $315,000 when combined with dacarbazine (a $30,000 per year treatment). Such high prices have made it increasingly difficult for insurers to cover drugs to the extent that patients need while in treatment. Over the last year we have seen these changes in high-profile drugs such as Dendreon Corporation’s (NASDAQ:DNDN) Provenge and Questcor Pharmaceuticals’ (NASDAQ:QCOR) Acthar Gel. Due to these high costs for the new class of treatments, it is possible that we could see a shift in treatment away from the innovative drugs to medical devices that improve conventional treatments.
If you want to get a good feel for the strength and the direction of the healthcare industry, then take a look at Johnson & Johnson (NYSE:JNJ). The company recently announced earnings, which were by no means extraordinary, but did provide a good overview of the industry. The company saw slowed growth of its blockbuster drug, Zytiga, and saw a massive boost in sales from its Medical Devices & Diagnostics unit (MD&D). This particular segment accounts for 41% of the company’s total sales and increased by 13.7% (quarter-over-quarter) and 6.4% (year-over-year) as the company’s largest growth provider.
My question after seeing J&J’s earnings is what might this news mean for the industry? Perhaps it means nothing, and this last quarter was one where sales in MD&D just so happen to outperform drugs. However, with drug prices constantly on the rise, it makes sense that insurers would require additional testing and then treatment with various devices to save on costs. Accordingly, it could be a good investment opportunity that numerous companies are developing medical devices to treat various diseases. And seeing as how cancer therapeutics are the most expensive of drugs, doesn’t it seem logical that devices to treat cancer would be commercially successful if effective?
Celsion Corporation (CLSN): A Company that Could Open the Door
There are many medical device companies such as JNJ, but more specifically I am looking at companies with novel devices that aid in treating cancers, that could lower the costs of new treatments, and lead to large gains for investors. Upon my research I have learned there are countless companies, some more promising than others, and the first on my list is Celsion Corporation (NASDAQ:CLSN).
Any day now, Celsion Corporation will announce Phase 3 results for its primary liver cancer treatment ThermoDox. The company has been testing its heat-based system that combines radiofrequency thermal ablation (RFA) with the chemotherapy drug doxorubicin to target a specific site where the tumor exists. The company has already shown a significant benefit over RFA alone and, if it can prove that the platform stops the growth of tumors, then it will most likely be approved, and in my opinion, will be the new standard of care for the treatment of liver cancer.
Celsion has increased in market capitalization by almost 360% during the last year. It now sits with a market capitalization of $270 million, has cash of $22.5 million, and recently signed a technology agreement in China that will pay $10 million upfront and could be worth up to $100 million over the next two years. The company’s CEO has already saidthat, if successful, ThermoDox could earn revenue in excess of $1 billion annually because of its widespread use.
The fact that ThermoDox could earn revenue of more than $1 billion is quite impressive, especially considering the price involved. On the company’s blog, it talks in detail about drug prices, reimbursement, and the issues regarding drug price regulation for patients. Unfortunately, patients are at the mercy of the drug developer, and thankfully Celsion has chosen a cost-effective plan for patients by developing an efficient platform. As of now, the price of Thermoox is set in three categories: Hospital Inpatient, Physician Office, Hospital Outpatient, which of course are tailor made to the severity of the procedure. The most expensive is hospital inpatient treatments, which total $31,000, but can be as cheap as $1,200 for patients in an office setting. This compares favorably to high-profile immunotherapy and cancer therapeutics such as Provenge, Yervoy, and Zelboraf, making it a huge reason that we could see a shift occur.
Keep in mind, ThermoDox is not approved and all prices were obtained from the companies blog. However, this could be a company, and product, to open doors for numerous other small companies with late-stage medical devices that treat horrible diseases such as cancer, but once again, if successful.
A Small Company that Could Benefit
One company whose stock could benefit from the approval of Celsion’s ThermoDox is OncoSec Medical Inc. (PINK:ONCS). The platforms are different for the two companies, but the concept is similar and implications of a ThermoDox approval are the same in terms of building awareness for the potential of this fast-growing field.
OncoSec develops the OncoSec Medical System (OMS), which uses electrical pulses (rather than heat) to target a specific area by creating temporary pores (delivery) in the cancer cells’ membranes. The reason it’s unique and interesting is because of the fact that cancer-killing therapeutics are unable to efficiently penetrate the cell membrane and deliver full doses of a therapeutic to cells’ interiors. However, by creating the temporary pores the OMS platform has created a way that 100% of the therapeutic can be delivered to the inside of the tumors’ cells, which as a result allows for a more efficient drug with fewer side effects because less of the drug is required.
The OMS platform consists of two separate approaches: ImmunoPulse, using interleukin-12 (IL-12), an immunotherapy approach; and NeoPulse, using Bleomycin, a chemotherapy approach. What’s good is that both are using the exact same system, just different drugs; and in the process of testing, it’s now believed that the OMS platform can be used with virtually any chemotherapy or immunotherapy agent to increase the uptake of an agent while decreasing side effects. To date, all data has been positive for metastatic melanoma, Merkel cell carcinoma (MCC), and cutaneous T-cell lymphoma. The company has catalysts throughout the year, just about every month, whether it’s finishing enrollments, announcing interim data, or announcing endpoint data.
This is a company that could significantly rise in 2013, one that could benefit from the approval of ThermoDox, and one that could earn significant revenue over a course of many years as a treatment to reduce costs while maintaining the results of a therapeutic for the treatment of various cancers. Unfortunately, we don’t know for certain the price of the treatment for patients, at this time, but considering the fact it uses IL-12 or bleomycin (two low cost treatments) the costs should compare with those of ThermoDox. As a result, these low costs, combined with the fact that the platform uses less of a drug to reach the same effect, it should also result in a commercial success as a patient and physician’s treatment of choice for metastatic melanoma.
AngioDynamics (ANGO) Launches Cancer-Fighting Platform
AngioDynamics, Inc. (NASDAQ:ANGO) is one of the emerging leaders of minimally-invasive products that is also attempting to fight cancer with its device. The $425 million company is very similar to Celsion, because its most promising platform, NanoKnife, uses the combination of RFA and heat to attack tumors at the source, destroying the individual tumor. It is also a timely solution for patients, producing 90 quick pulses of electricity between heartbeats to kill cancer cell in under five minutes time.
Unfortunately, the platform has been slow to grow, with just $3.2 million in its recent quarter. The company’s strategy of targeting pancreatic cancer seems superb due to the difficulty of treating the disease. Analysts believe that NanoKnife’s sales will begin to appreciate at some point in the near future, as it does have a clinical benefit in treating soft tissues.
The only problem with the NanoKnife is that it’s more expensive initially for the hospital/physician. The technology (system) itself costs about $200,000 and then needles cost $2,000 each and can only be used once. This may explain its slow adoption, as hospitals have to pay the initial costs. However, it’s often used on small difficult-to-reach tumors that can be removed in one, two or three treatments. Therefore, at $2,000 for needles, the cost is relatively small for patients compared to other cancer therapeutics.
The good news for investors is that AngioDynamics is not just a one-hit-wonder in this space; it has systems to treat diseases from cancer to vascular-based diseases. The company grew its revenue by almost 50% during its last quarter and just recently completed the acquisition of a small microwave ablation technology company to further expand its presence. It continues to build its pipeline, offer diversified services, should continue to grow as the industry grows more aggressively, and may become an attractive acquisition target because of its product line and patents in a fast-growing space.
In addition to the three companies mentioned above, there are countless other small companies such as pSivida Corp. (NASDAQ:PSDV) that are developing platform-based products to fight diseases. There are also a number of larger medical equipment/technology companies such as Johnson & Johnson that might be showing us a trend that’s occurring in the healthcare industry. With prices that continue to rise for novel therapeutics, such as with Zelboraf and Dendreon’s Provenge, it seems likely that regulators, physicians, and patients will seek low-cost options that are still effective.
In recent years, the medical device industry was known only as a space for diagnostics and testing, and companies such as Johnson & Johnson and Inuitive Surgical (NASDAQ:ISRG) were pioneering leaders in that sector. However, we may be seeing a shift occurring with a larger portion of medical device research and success focused on therapeutics. Judging by the sales growth at JNJ and the massive earnings beat by Intuitive Surgical we can now see that physicians and patients are electing to undergo additional testing, most likely to offset the costs of high-priced therapeutics.
Since cancer therapeutics are among the most expensive in healthcare, doesn’t it seem reasonable that effective cancer-treating devices would be commercially successful? As of now, it’s a small industry, one that few companies are aggressively exploring, but could lead to a chain reaction in the industry if these devices become a commercial success. As a result, an investment in those companies with a head start might garner a nice return over a course of many years.
Brian Nichols is a blogger, author, and investor. Brian studied in the field of psychology and has researched extensively into behavioral finance, which include fear, emotional reaction, and all other emotions and or decisions that are clouded from an investor’s thought process as a result of money making (or losing) decisions. Brian uses his knowledge of psychology as a way to find value in the market and capitalize on the fear and irrational thinking that creates value in fundamentally strong companies. Brian is neither a long or short-term investor but invests with a system that includes selling once certain price targets are reached. The strategy can take weeks, months, and sometimes years but if the company is truly undervalued it will almost always return sizable gains. Brian explains this process in detail in his upcoming book “Taking Charge With Value Investing: How to Choose the Best Investments According to Price, Performance, & Valuation to Build a Winning Portfolio” which will be released in February 2013 by McGraw-Hill.