Medical Technology Stocks

Medical Technology Stocks: Doing Drugs
by Eric J. Fry
The Rude Awakening
Wall Street, New York
Tuesday, February 28, 2006 

Eric Fry recounts a dicsussion with David Lashmet on Medical Technology Stocks.

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Eric Fry, back from Miami's South Beach, reporting…

David Lashmet is an unusual guy…who produces an unusual product.
Lashmet is not the sort of unusual guy that knits booties for Basset
Hounds. Rather, Lashmet is unusually diligent, hence the name of the
investment research product that he produces: Diligence.

The 1954 edition of Webster's Unabridged Dictionary defines diligence as
"devoted and painstaking effort to accomplish what is undertaken" – a
definition that quite aptly describes Lashmet's research process. For him,
"Diligence" means criss-crossing the country to attend the "Keystone
Conference on RNA Inhibition" or the "SpeechTEK West 2006
Conference"; it means consulting with numerous medical experts about
promising new drugs and medical technologies; and it also means
continuously and painstakingly re-examining each of his recommendation
to insure that the original investment thesis remains intact.

Intrigued by Lashmet's recent investment successes, your New York
editor checked in with him recently to find out what's going on inside the
always-intriguing and often-profitable world of "Diligence."

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Doing Drugs
By Eric J. Fry

Fry: As you may know, the gang here at the Rude Awakening tracks the
performance of the stocks recommended by you and many of your
colleagues.  So we are always aware of what's hot and what's not. In fact,
on the Rude Awakening Web site you can actually find a section that we
call "What's hot, what's not."  And lately, a few of the medical technology
stocks you've been recommending have been popping up on the list of top
performers. That's one of the main reasons that I wanted to chat with you.

Lashmet: Yeah, we're pretty excited about what's been happening.  We
utilize a long-term investment strategy. That is to say, there's always a
possibility of a buyout, or that other investors begin buying a stock
because they see the same potential that we have already identified… and
both of those things have been happening with some of our
recommendations.

Fry: before you start telling me what's been happening with your
recommendations, why don't you tell me a little bit about your investment
process, because it is quite different and more intense that what most
investors do.  The research you do is more typical of the type that you find
at some hedge funds.  So do you mind describing the tactics and processes
that you use to identify your opportunities?

Medical Technology Stocks: Second Opinions

Lashmet: We have a lot of ways of honing in on an opportunity. But we
tend to think of the process of investing as being similar to the process of
medical diagnosis. Before you go into surgery it's a good idea to get a
second opinion. The same is true whenever you put your investment
capital at risk. When you lose money it hurts. We don't like to lose
money. So whenever we think we have a good investment idea, we seek
the informed opinion of at least two outside experts. If both of them agree
that out investment thesis makes sense, then we move forward. But if one
of them disagrees, we don't start shopping for a compatible diagnosis. We
simply trust that the expert understands the medical technology in question
better than we do. I not only attend many medical technology conferences,
but I also drag various experts along with me.

Fry: I assume most of the guys you bring with you are from academia, and
not from the big pharmaceutical companies.

Lashmet: Well, I have a few contacts at the big Pharma companies, but the
experts that we feature on the conference calls for Diligence subscribers
are usually from academia.

Fry: How long have you been producing Diligence?

Lashmet: Six years.

Fry: Wow! Really?

Lashmet: Yep, six years.

Fry: Obviously, your research process has evolved over this period of
time. Are you more specialized now than you were six years ago? Within
the biotech or pharmaceutical world itself, have you found yourself
focusing more on one area than another?

Lashmet: I'm looking to make money. So that means I'm focusing on
cancer treatments and cardiology drugs. That's where the money is.
Anybody who finds a breakthrough cancer treatment is going to make a lot
of money...and they should…We try to focus on the new drugs and
treatments that have the fewest side effects. The best medical product is
the one that has the fewest side effects. If you've got something that's
really good, but really toxic, compared to something comparable that is
much safer, then obviously the treatment with fewer side effects is
superior. This one consideration turns out to be an excellent winnowing
factor when considering the viability, and thus the investment potential, of
new drugs. We already have highly toxic treatments for cancer, for
example, so the next generation of treatments must be as effective, but
safer. That's the sort of thing we're always looking for.

Fry: So to identify the exact companies in which you wish to invest, is that
still a process of attending trade shows?

Lashmet: Yes, I attend trade shows and medical conferences all the time. 
I think of them as "scouting missions." I've also developed some excellent
contacts who often guide me toward interesting drugs in development and
new opportunities. I also attack the process from the other side, from the
stock aside. I run filters to search for certain kinds of biotech companies,
for example.

Medical Technology Stocks: Bought Out by GlaxoSmithKline

Fry: Okay then, let's talk about a few trends in the biotech area. You had
ID Biomedical Corp. that that was bought out by GlaxoSmithKline. What
was the rationale behind that transaction?

Lashmet: SmithKline paid $30 per share for company that was worth $100
per share.

Fry: It was worth $100 per share because of what?

Lashmet: For one thing, the company has a brand-new flu-virus vaccine,
and it is administered as nasal spray. And so it is much easier to
administer than the traditional flu vaccine. It's a much better product. It
has already passed Phase III trials. Better still, the vaccine looks like it
might work against bird flu. IDBE has a bunch of other stuff in
development as well. It has a treatment for strep throat, which is a disease
that costs about $4 billion a year to treat. Antibiotics are the traditional
treatment. There is no vaccine for strep anywhere in the world. But IDBE
has one in Phase-II trials. If this vaccine clears Phase-III trials, it's going
to be a multibillion-dollar drug.

Fry: But neither of these drugs have full FDA-approval. And yet,
SmithKline bought IDBE anyway. This takeover appears to be part of a
trend - the big Pharma companies are buying-out or joint-venturing with
small biotech companies that have products in Phase II or Phase III trials,
but that do not yet have FDA approval. Is that true?

Lashmet: Sure, I think it's true and I think the trend will continue…The
big Pharma companies have lots of blockbuster drugs that are coming off
patent. So they need something new to fill the pipeline.  Some of these
companies have 30,000 or 40,000 marketing reps, and these folks need
products to sell.  On the other side of the coin, looking at the same 40,000
people, small biotech companies don't have 40,000 trained sales agents. 
So it's a natural marriage…if they get a great new product.

Fry: I guess what I'm really talking about is a nuance of this phenomenon.
Because we have often seen the identical phenomenon transpire in the
resource sector, where large gold companies are always buying smaller
gold companies. That's always happened. But in the resource area for
example, typically a large company wouldn't buy a smaller company until
some resource of some magnitude was proven to exist. But what seems to
be happening in the Pharma sector would be like Exxon buying a company
with large unexplored exploration properties, but no oil proven to exist
within it. It would be like saying, "The oil is probably there, so we'll buy
the Company."

Lashmet: That's somewhat true, but the big Pharma companies have to
take calculated risks with respect to buying early-stage development
drugs.  If they don't step in early, they'll miss their chance.  And quite
frankly, they're simply not able to conduct the style of research that often
leads to breakthrough drugs. The big Pharma companies have
institutionalized research, and you can't really institutionalize research. 
But if you've built a research organization that spends $7 billion annually,
you will inevitably build so many levels of bureaucracy that you will stifle
innovation. These bureaucratic structures are not really a great way to
invent new drugs. A great way to invent new drugs is to put 25 smart
scientists in a room, all working toward the same goal.

Fry: This trend toward buying small companies, or joint-venturing with
them, to gain access to promising drugs early in their development cycle,
must be lots of fun for you.

Lashmet : Yes, it's a good time right now…and this trend is going to
continue.

[Joel's Note: And so will this interview. We'll bring you the second half
tomorrow and let you know how you can get in on Mr. Lashmet's latest
findings. There is a very exciting and highly profitable opportunity on the
table right now…if you simply can not wait until tomorrow, you can join a
conference call with David Lashmet and two experts this afternoon and get the
full scoop on the next two breakthrough companies. Sit back and laugh this time
tomorrow by following this link:

Your Spot On This Afternoon's Conference Call:
http://www.stansberryonline.com/redirects/EDILG225.html

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