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How to Profit from Hidden Medical Device Gems: Caroline Corner
Source: George S. Mack of The Life Sciences Report (6/28/12)
Innovation, efficacy and convenience are keys to success in medical devices and diagnostics. Put those elements together with underfollowed names and you have uncovered buried investment treasures. Medical technology research analyst Caroline Corner has assembled a short list of hidden jewels destined for incremental acceptance and then rapid uptake by physicians, clinics and hospitals. In this exclusive interview with The Life Sciences Report, Corner talks about her favorite small-cap companies, none of which are household names.
The Life Sciences Report: You focus on uncovering new, unfamiliar opportunities for investors. How do you pick a name?
Caroline Corner: It doesn't do any good for an analyst to cast a voice on a highly covered name. I look for companies with unique products for existing large markets. Maybe a company does something different that will leverage entry into a market and result not only in revenue ramping but also in the potential for becoming an acquisition target.
TLSR: Are you looking for companies with an exit strategy?
CC: Most of the time, but not always. It is more important to have options. Can this company go it alone? Yes, it can. Is it also a company that could be acquired down the road at a premium by a larger company? That's an opportunity as well. I am not looking for acquisition targets exclusively, but that option certainly helps me assign value to a company.
TLSR: A company that serves the needs of the vascular surgeon, for instance, can manage a very small sales force. But sales force management is generally a major problem for small companies, isn't it?
CC: Yes. It is tough to compete when you are a small medical device player competing against a powerhouse such as Medtronic Inc. (MDT:NYSE), Stryker Corp. (SYK:NYSE), Covidien Ltd. (COV:NYSE ) or another large-cap company. But if a smaller company has a differentiated product, is approaching a smaller or niche market and has an energized sales force, it can compete. Smaller sales forces usually consist of people who are well trained and very excited about their products. That is something I look for when I'm talking to salespeople.
TLSR: What do you talk to salespeople about?
CC: When I talk to salespeople at meetings or trade shows, often they are introducing customers and encouraging me to talk to them. You can tell if someone is excited about a product. That helps the product get adopted. I see that enthusiasm with the Mela Sciences Inc. (MELA:NASDAQ) sales force, which is in a controlled launch of the MelaFind system, a screening technology for melanoma. The salespeople have something new and unique with which to approach dermatologists, and they are also engaging physicians who aren't in the geographically constrained initial target audience. That's pretty exciting.
Uroplasty Inc. (UPI:NASDAQ) has a unique, exciting product that relieves symptoms of overactive bladder. I saw it in May at a trade show. The sales force is out doing demonstrations and engaging people, even doctors in areas that don't yet have reimbursement for the product. There are only a couple of areas in the U.S. that don't, but the sales team is talking to those doctors, too. They are really excited about getting the product adopted.
TLSR: Let's stay with these two companies. Mela has been weak relative to the other companies in your coverage. It's down about 28% over the past four weeks. Have there been any particular issues?
CC: I don't think so. With Mela there's impatience on the investor side because it is doing a controlled launch, which I personally think is a smart idea. The company is rolling out 200 units of the MelaFind system in the first year, exclusively to dermatologists in the Northeast U.S. It is trying to figure out where the new screening system fits into the treatment paradigm within physicians' offices, and making sure it has all the details hammered out before it approaches a broader audience. The company is putting the product into the hands of the right people to make sure the diagnostic test is performed correctly. That makes a lot of sense.
TLSR: And, unlike an interventional product, it is very easy to demonstrate, isn't it?
CC: Yes. The company has the system set up at trade shows and meetings.
The system doesn't tell you yes, you have cancer or no, you don't have cancer. It gives physicians more information about whether or not they should perform a biopsy. Specifically, Melafind looks at disorganization of cells from imaging and recommends biopsy if something compares to existing melanoma images in an unfavorable way. Physicians, historically, are not very good at determining with their eyes and magnification what is, or is not, melanoma. We have a lot of unnecessary biopsies because doctors want to err on the side of caution rather than missing cancers. MelaFind is designed to help reduce the rate of unnecessary biopsies and to give the patient and physician more confidence in the process.
TLSR: MelaFind systems are only about $7,500. If a large physician practice management group buys one and likes it, is it likely to buy several more for the same freestanding practice?