Sherry Grisewood, CFA, Senior Analyst, Healthcare,
Medical & Biotech

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: therapeutics technology or, more specifically, what she calls "enabling technologies that are leading to therapeutic strategies." Ms. Grisewood has over 25 years experience as both a sell-side analyst at such firms as DLJ and EF Hutton and an independent analyst focused on special situations, small caps and private equity. She believes that "body heal thyself" will characterize the direction of medicine over the next 10-20 years, and those companies with technologies are geared toward tissue regeneration and 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 I think are really exciting right now are enabling technologies that lead to new therapeutic strategies, less intervention, or optimizing therapeutic response, for example, and/or which build upon the discoveries in genomics and proteomics such as determining treatments based on a patient's genetic profile.

A lot has gone on in healthcare over the last three to five years that probably makes the area as a whole more exciting than what it was in the first biotech heyday of the mid-1980s. Then we were talking about "magic bullets" -- for instance, a monoclonal antibody that could cure major cancer, or one drug that cures diabetes for everyone. Now, thanks to advances in genomics, proteomics and micro-biomolecular chemistry, we're looking at the nuances of disease and discovering that the molecular targets and signaling pathways are as, or more, important than the "bullet" itself. In other words, nothing in the body works as a single system. The body is immensely, and perhaps infinitely, complex.

I think ultimately we're going to be using a new nomenclature in the medicine practice of the future, centered around utilizing the body's ability to regenerate on its own. This will be a profound transition for medicine. I like to think of medical knowledge and practice of the past 20-40 years as being on the level of Einstein's General Theory of Relativity--approaching diseases and chronic medical conditions from a "macro" view. In the future, we will be practicing medicine at the level of quantum mechanics, on a micro and nano level, as it is clearly apparent that disease is a manifestation of aberrations or abnormalities of the sub-micron biological world.

What do mean by "self heal"?

I'm referring to utilizing or augmenting the body's own regenerative powers as the 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 synthetic polymers for use as therapeutic devices such as sutures -- or molecules such as recombinant proteins as magic bullet drug candidates. Each of these camps, at the time, failed to recognize that the body's response requires both a structurally correct material to support an appropriate macro environemnt and the correct signaling and biochemical modulation in the micro environment at the same time. But now when we talk about tissue engineering we're speaking about combining the technology and knowledge-base from those two areas and developing medical products combining both a biological element and a structural element designed specifically for an indication so that the body repairs itself in an optimal fashion, all the while better understanding that the body's physiochemical structure plays an integral role with the healing cascade. At the logical end of this as a medical practice is that there is less intervention, less extraneous harm done to the body, while these new technologies and products augment what the body would do as a natural process.

Taking pharmaceuticals, as an example, we have seen the development of very powerful pharmaceuticals from new chemical entities over the past 50 years or so. These drugs have been effective in treating symptoms on a "global" basis but are generally indiscriminate -- thus the concerns over adverse events and dangerous drug interactions. Now we're looking at pharmaceuticals that are derived from natural molecules or mimic molecules already found in the body that are intertwined and synergistic with the body 's natural function. These next generation therapeutics are "targeted" to a specific aspect of the disease process or molecular dysfunction.

A perfect example of that has been the renewed focus on using the immune system as the means by which to target and destroy cancer cells. Instead of using an "off- the-shelf" monoclonal antibody-based therapy for all patients with a particular form of cancer, researchers are now developing specific cancer vaccines based on a specific patient and his/her specific cancerous tumor by "training" dendritic cells, the immune system's marshalling squad, with antigens from the patient's own tumor. Our understanding of the microbiochemistry of organ and tissue systems is leading to a better understanding of how to make therapeutic drugs act in a very controlled and specific manner at the disease site. So I think we're on the cusp of establishing broad new medical practices geared to the concept of "body heal thyself." I believe these new approaches will become the direction of medicine over the next 10 or 20 years and fulfill the promise of what medical professionals are now referring to as "regenerative" medicine.

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

A company in our stable that immediately comes to mind is Aastrom Biosciences (ASTM). Aastrom is taking its stem cell technology to produce specialized cells as components for therapeutic devices for regenerative medicine. These cells, for instance, could be part of a guided tissue repair system for bone regeneration or cartilage repair. This is just one way the Ann Arbor, Michigan company is leveraging its platform in stem-cell replication and TRC (tissue repair cell) production. Another way is that the company's cell products include dendritic cells. These naive dendritic cells can be the base cell population used by cancer vaccine companies to produce patient specific anti-tumor vaccines. Investors are just beginning to acknowledge the reach of Aastrom's technology in these areas. We rate ASTM shares as a Strong Speculative Buy.

What other areas of medicine are exploiting this trend towards viewing disease locally rather than globally?

Researchers are weaving together advances in our understanding of genomics, biomolecular signalling interactions and nanobiochemistry to "build" more accurate models of disease progression. One disease that comes as an example of this integration of multiple research disciplines is Alzheimer's disease. As you know, the social and economic costs associated with Alzheimer's disease are enormous. Up until a few years ago, there was virtually nothing a doctor could do for an Alzheimer's patient except watch the slow and dreadful progression to a non-functioning being. Now, we are slowly filling in some of the blanks in understanding the "causes and effects" that take place in the brain which lead to this terrible condition, and many of these "causes" and "effects" are becoming targets for treatment intervention. So at last, maybe, doctors will be able not only to treat some of the early symptoms but slow the progression of the disease and eventually, we hope, at least to some degree, reverse its consequences.

Any companies come to mind?

Yes. Alzheimer's is such a huge, unmet market, and for investors there are many ways of approaching the market. Nymox Pharmaceuticals, Inc. (NYMX), a Montreal company, has developed a urine-based test, the AlzheimAlert, to aid doctors in making an informed diagnosis of Alzheimer's. There are virtually no quantitative ways by which to diagnose Alzheimer's except through autopsy. The AlzheimAlert measures a protein thought to become elevated during the development of Alzheimer's disease. There is an increasing body of clinical research correlating the level of this novel protein marker used with the progression of the disease. This could become a very important clinical tool for early detection nd critical part of the management of the disease.

Two other companies we follow, Neurobiological Technologies Inc. (NTII) and Axonyx Inc. (AXYX), both have products in late-stage development which may, in fact, slow the progression of the disease by preserving cognitive function. Both of these companies' potential drug therapies go beyond treating just symptoms by interacting with specific molecular targets. New therapeutics such as NTI's Memantine seek to reestablish normalized ionic activity in the brain, thereby restoring neuronal function. Axonyx's Phenserine, now in Phase III trials, seems to act in several ways, one being as a mediator of a primary enzyme involved in memory formation, acetylcholinesterace, while at the same time researchers are finding it may mediate actual beta amyloid plaque formation by interfering with "genetic" control over amyloid precursor protein production. Even though all three of these companies have or are developing products for Alzheimer's disease, each is doing so in their own "space." Since Alzheimer's is a multifactorial disease with multiple consequences, we see opportunities for all these companies, so we have Buy ratings on each of them.

Regarding genomics, what companies come into play in that area of DNA-oriented therapeutics?

Actually, genomics is everywhere and a very broad term. By that I mean leveraging genomics is more than just studying the structure of genes. Newer technologies like DNA or RNA interference are also part of "genomics." For example, AXYX's Phenserine is not only an acetlycholinesterace inhibitor but also apparently can mediate the translation of Alzheimer amyloid precursor protein m (messenger) RNA, and so may be thought of in the future as an anti-RNA-directed therapeutic.

Another company in this space we follow is CytoGenix (CYGX), out of Houston. The company's core technology revolves around RNA interference, which could block the action of disease-causing proteins. All proteins are governed by a specific genetic code that encrypts their specific chemical structure and determines their function. Some of these are improperly encoded, and RNA interference blocks the mistake from forming a protein that has a deleterious effect on the body. The company expects this kind of strategy to be beneficial initially in blocking the action of viruses such as the herpes simplex virus. CytoGenix is in pre-clinical research for a topical treatment of herpes simplex attacks based on this technical approach. But, in reality, the technology could be applied to any disease or disease condition we discover is a result of some kind of DNA mutation or error. We're only scratching the surface of the interplay of specific, seemingly minor, variations in DNA replication and their implications for the manifestation of a disease. Much of this knowledge is being discovered through studying viruses.

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 (DDM) 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 only about three companies ever made it to putting a commercial product on the market and generating earnings. With operating companies and the major pharmaceuticals, valuation is fairly cut and dried 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 of 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 an art than science.

Certainly, valuations in this sector have risen sharply.

Yes, over the last six months and, in particular, over the last 6-8 weeks. From a sector perspective the performance of biotechs have repeatedly gone through boom and bust periods. But, let me be clear, I do not think the recent "run-up" in the sector reflects a boom. Instead, the collapse in technology and market averages in general coupled with all that has gone on in the geopolitical sense led many investors to abandon virtually all of their higher risk investments in a "throw the baby out with the bathwater" mentality. Now that the Iraq situation has moved to some sort of status quo, our nation has moved on from Sept 11th, and early signs of an improvement in the economy have substantially brightened market sentiment, investors are beginning to put their "risk" money back to work. Meanwhile, the survivors in the biotech industry have continued to make progress-there have been clinical successes, mergers, and, most of all, perhaps a "kinder and gentler" face put on the FDA by Commissioner McClellan.

So, the best time to look at these smaller companies may be just at this time in this cycle. The valuations are still reasonable, after being severely and abnormally suppressed, the level of risk has been brought down to much more manageable levels, and many of these companies have made significant progress, which is still not reflected in their current shares. So from my perspective as an analyst, biotech IS the story.