Q&A with Dutton & Associates' Sherry Grisewood

The term "healthcare" is no doubt a broad one, ranging from medical devices to genomics, but for Dutton & Associates analyst, Sherry Grisewood, CFA, there is a common theme that cuts through many of the healthcare companies she covers: technology or, more specifically, what she calls "enabling technologies." Ms. Grisewood has over 25 years experience as both a sell-side analyst and an independent analyst in independent special situations and small caps, with experience at such firms as DLJ and EF Hutton. She believes that "body heal yourself" will be the direction of medicine over the next 10-20 years and those companies with technologies geared toward self healing will be at the forefront.

What do you focus on in healthcare?

I like to look at areas that represent a "sea change" in either thinking or practice. Areas that I think are really exciting right now are enabling technologies that lead to less intervention - that lead to optimizing therapeutic response, for example, and or which build upon the discoveries in genomics such as determining treatments based on a patient's genetic profile.

There's a lot that's gone on in healthcare over the last three to five years that probably makes the area as a whole as exciting or maybe more exciting than what it was in its heyday of the mid-1980s. In the 1980s we were talking about monoclonal antibodies as "magic bullets". Now thanks to genomics, we're looking at the nuances of disease. I think ultimately we're going to be hearing a new nomenclature talking about utilizing the body's ability to self heal.

What do mean by "self heal"?

I'm referring to utilizing and augmenting the body's own healing powers as being an ultimate goal of next generation medicine. Take tissue engineering, for example. Ten years ago tissue engineering as a medical discipline wasn't even in existence. Companies were either developing materials like artificial skin, or proteins as drug candidates, not recognizing that the body's response requires both the structurally correct material and correct signalling protein at the same time. But now when we talk about tissue engineering we're speaking about combining the sciences from those two areas and making something that can help the body repair itself, all the while better understanding that the body's structure plays an integral role with signalling proteins It involves less intervention while augmenting what the body would do as a natural process.

Taking pharmaceuticals, as an example, we have seen the development of very powerful new pharmaceuticals from new chemical entities over the past number of years. Now we're looking at pharmaceuticals that come from more natural sources or that are intertwined and synergistic with the body's natural function. So I think we're on a wave of establishing some broad new trends. I would describe them as a general path leading to the concept that "body heal yourself" will become the direction of medicine over the next 10 or 20 years.

What companies have you been following that can capitalize on these trends?

Paradigm Medical (PMED) is one unique company that has developed an enabling technology to treat cataract disease. Cataract disease is the number one outpatient medical treatment in the US, and also the number one dollar reimbursement charge on Medicare. For the past20 or 25 years, cataracts have been removed by by ultrasound phacoemuslification with virtually no change in that procedure over that time, even though there can be a large number of complications. Paradigm has developed a laser phacoemulsification system that provides an energy source to break up the cataract in the eye with much less pain, much less intervention, and much fewer complications after surgery. That represents a quantum leap in how a technique is done and can theoretically over time displace ultrasound as the preferred method.

That's taking laser technology and putting it into an application that has never been looked at before--and helping make medicine less interventional.

What other companies would be representative?

In terms of using micromolecular biology as a starting point for new approaches, I think AVI Biopharma (AVI) up in Portland, Oregon, is an excellent case in point The company has two broad technologies. One is Antisense, which essentially decodes the DNA or RNA message sequencing and utilizes that information on which to base therapeutic drug activity. By either blocking a bad message from getting reproduced or correcting a mis-message, intervening at the micromolecular level can be more specific than traditional drug treatments. That's taking technology of the tiniest part of what goes on in the body, at the DNA level, and using it to develop a therapeutic approach.

This is an example of how we are learning more and more about the intricacies of what makes cells function and are able to extract optimized products which potentially have better specificity, with better side-effect profiles, and higher therapeutic outcome. Over the longer term, you can reduce medical costs by lowering unwanted consequences and better targeting of specific disease characteristics while providing better outcomes for patients.

There certainly appear to be a broad range of enabling technologies - from laser devices to genetic decoding.

The range, indeed, is broad. It also extends to technologies that change the way medicine is practiced in a practical sense such as protecting the safety of health care workers from the risks of needle sticks. The federal government has mandated that the medical profession track needle sticks by device and by incident and adopt the use of safety needles. While we have had a plethora of attempts to develop effective, cost-effective easy-to-use passive safety needles, because of the dynamics of the industry, a lot of that research ended up shelved in one form or another.

But one young company, Retractable Technologies (RVP), has persevered and developed a truly elegant safety needle that accomplishes what everybody wants. It's passive, the worker doesn't have to do anything to make it work. It retracts the needle before it leaves the patient, so there's absolutely no risk of sheathing anything that comes out of the body, and it's cost effective.

That's using technology to address a different kind of important need in the healthcare marketplace--again under pressure from cost, but but not at the expense of health care worker safety.

Are valuation methodologies unique in healthcare given the uncertain nature of a lot of new developments?

Valuations are always in the eye of the beholder, I like to say. The fashion for various valuation methods comes and goes. In the mid-1980s, there was the well-known or infamous, some might say, work done supporting a discounted dividend model for biotech companies that extended out 10 years, putting tremendous valuations on these companies. Out of that entire group valued in the work, I think there were only about three companies made it to have a commercial product.

With operating companies and the major pharmaceuticals, valuation is fairly cut and dry and uses pretty traditional valuation methods like price to sales and price to earnings--and the DDM when there are operating results. But with start-up and emerging growth companies with new technologies or markets, valuation is less clear and has to be looked at on a relatively individual basis. You have to take a wide variety factors and assumptions into consideration and at the same time, recognize the inherent risks of an FDA approval process. This usually means that time for approval is substantially longer than what everybody would hope and think, and that the market penetration usually takes longer. Even with big marketing partners, it's still an arduous task. I really feel that even more perhaps than communications technology and computer technology, valuing start-up and young health care companies can be more art than science.