A Few Gems Among 'Microscope' Stocks

CNNMONEY.com

Of the stocks profiled weekly in IBD's Under The Microscope columns in 2007, a few have become standouts since their stories ran.

The leader is Cepheid CPHD, covered here on April 9. Its stock closed at 11.48 that day and has since more than doubled.

Shares hit an all-time high of 27.60 on Nov. 20 and moved near there on Dec. 21. The stock is up more than 200% for the year.

Cepheid makes molecular diagnostics systems for genetic analysis of infections. The big one is methicillin-resistant staphylococcus aureus, or MRSA, a potential killer that plagues hospitals worldwide.

Quick identification of organisms brought in by patients allows fast treatment and can prevent an outbreak. Cepheid's technology can name the bug in about two hours. Conventional labs can take two days.

Greater Scrutiny

The Centers for Disease Control estimate that 2 million patients annually get an infection while in the hospital, with 90,000 dying from it. The rest face longer hospital stays and treatment with antibiotics, to which infections are becoming resistant.

Twenty states are demanding that hospitals report infections, with the information to be made public.

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Meanwhile, Medicare and Medicaid will reimburse hospitals only for MRSA infections. Hospitals must prove to those federal agencies that they are billing for MRSA and not some other organism.

Lawsuits are starting to pop up for undiagnosed or misdiagnosed MRSA infections. The mother of a 12-year-old boy who died Oct. 14 from MRSA is filing a $25 million wrongful death lawsuit against a New York City hospital for failing to diagnose his infection.

The Department of Veterans Affairs is starting a pilot program to eliminate MRSA from its institutions. Cepheid got contracts to supply most of the testing systems.

"MRSA testing will be mandatory in all U.S. hospitals within three to five years," said Michael Shulman, editor of the ChangeWave Biotech Investor newsletter.

Cepheid's systems require use of the company's own, single-use test cartridges. Shulman calls it "a perfect razor-and-blades model."

The potential market for MRSA countermeasures is $1.2 billion in the U.S. and $2 billion in Europe, says Cepheid Chief Executive John Bishop. The system can also determine what strain of influenza has struck a patient, including bird flu.

Another top performer among 2007 Under The Microscope companies is Pharmion PHRM, a maker of treatments for blood disorders, including cancer.

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Priced at 43.50 when the stock was covered here on Sept. 24, shares have since risen more than 40% to near 62.

The biggest boost came on Nov. 19, when Celgene CELG announced plans to buy Pharmion for about $2.9 billion in cash and stock. That deal pushed Pharmion's stock up 32% in a single day. It should close in the second quarter of 2008.

Pharmion is an atypical case in a year that produced "a mixed bag" of results for biotech investors, says John McCamant, editor of the Medical Technology Stock Letter.

"I'm not sure how well Pharmion would have done without the Celgene buyout," McCamant said.

The investing trend for 2007 was risk aversion, he says -- especially in the aftermath of the subprime scare that began in August.

"Investors were looking for companies with more than one product or with drug candidates for more than one indication," McCamant said.

Risk aversion was one reason Illumina ILMN did so well in 2007. Covered here on Jan. 22, its shares have since risen more than 50% to around 60. The stock hit a record high of 63.38 on Oct. 11.

Illumina's tools take human genetic data and convert it into information drug makers can use to develop therapeutic products that target specific groups or individual patients. The idea is to find the links between genetic mutation and illness.

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"It's a classic case for a risk-averse economy," McCamant said. "You don't need to sell drugs -- you can sell products to drug makers."

And you can sell genotyping to consumers. In August, Illumina partnered with privately held 23andMe. Using Illumina's technology, 23andMe will sell DNA analyses to individual consumers.

While not promoted as a medical application, the evaluations will be used by people to learn more about their genetic makeup and potential health problems that may arise.

Illumina Chief Executive Jay Flatley told an investors conference in September that the market for consumer genotyping will reach $1.5 billion in a few years.

Winning Deal

The No. 4 top stock covered here in 2007 is Respironics RESP, which makes devices to treat sleep apnea and other respiratory disorders. Its story ran on Jan. 29 and followed the same path as Pharmion.

Respironics' shares rose 23% -- from 42 to 53 -- between Jan. 29 and Dec. 21, when they shot to 65 on news that Dutch electronics firm Philips PHG would buy Respironics for $5.1billion in cash.

Before the Philips buy, Respironics was another stock that reflected the interest of investors in risk avoidance, McCamant says. "Their products are not a discretionary purchase," he said. "You gotta sleep."

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For 2008, McCamant expects more risk aversion favoring bio-pharma firms, with products close to commercialization or showing solid clinical trial results.

"It's pretty clear a recession is coming and investors will seek out recession-proof stocks," he said. "And you can't live without your meds."

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