Dr. Bernard Churchill
Member of the Scientific Advisory Board for NovaBay PharmaceuticalsNovaBay Pharmaceuticals (Amex:NBY) has a world-renowned urologist on their Scientific Advisory Board, Dr. Bernard Churchill at UCLA Medical Center. In fact, the urology department at the UCLA Medical Center was ranked #4 in the nation (and best in California) by U.S. News & World Report. And in October, Dr. Churchill was awarded the Urology Medal by the American Academy of Pediatrics at their Annual Meeting in Washington DC. This is the most prestigious award given by the American Academy of Pediatrics Section of Urology which recognizes outstanding Career Contributions.

In this interview with Dr. Churchill, he discusses NovaBay's current Aganocide^® program for Catheter-Associated Urinary Tract Infections (CAUTI) and how prevention and treatment for these infections, which can be fatal, have not materially improved in many years. We invite investors to listen as Dr. Churchill describes how NovaBay Pharmaceutical Aganocides^® could represent a breakthough in the prevention of CAUTI. This is particularly important as Medicare and private insurance companies are no longer reimbursing hospitals for hospital-acquired CAUTI.

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Dr. J. William Costerton
Member of the Scientific Advisory Board for NovaBay PharmaceuticalsNovaBay Pharmaceuticals (Amex:NBY) is extremely fortunate to have Dr. J. William Costerton on their Scientific Advisory Board. Dr. Costerton is the Father (or as he jokes, the Grandfather) of Biofilm infection research and is the world's leading authority on Biofilm microbiology. In this interview with Dr. Costerton, he discusses why Biofilms, representing up to 65% of all bacterial infections, are so difficult to kill. He also tells us why he believes NovaBay's Aganocide^® compounds will show success in killing Biofilm infections without developing antibiotic-resistant bacterial strains. We invite investors to listen as Dr. Costerton describes how Biofilms play a role in all of NovaBay Pharmaceuticals development programs and why partners Alcon (NYSE:ACL) and Galderma S.A. are helping bring Aganocides^® through human clinical trials as well as NovaBay's own internal development programs.

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Access Pharmaceuticals MuGard™ is expected to launch in the United States in Q1 2010. MuGard™ is the first FDA-approved, ready-to-use, mucoadhesive oral wound rinse for oral mucositis (affecting an estimated 400,000 cancer patients in the U.S.). Access’ European partner has recently launched MuGard™ in the U.K, Germany, Italy, Norway, Greece and Sweden with additional EU launches expected.

Access Pharmaceuticals ProLindac™ is expected to begin Phase II human clinical trials in Europe and Asia in H1 2010.  ProLindac™ DACH-platinum candidate represents the next generation in this drug class. Sanofi Aventis’ (NYSE:SNY) Eloxatin^® (oxaliplatin) had 2008 sales of approximately $1.9B. Access is planning Phase II trials in combination with Taxol^® (paclitaxel) in recurrent ovarian cancer and liver and/or pancreatic cancer with Gemzar^® (gemcitabine).

Access Pharmaceuticals Thiarabine™ (4'-thio-ara-C) is expected to initiate Phase IIa trials in adult cancer patients with Acute Myeloid Leukemia (AML), Acute Lymphoblastic Leukemia (ALL) and B-Cell Non-Hodgkin Lymphoma as early as Q1 2010. Other catalysts include US/EU partner proof-of-concept data for Cobalamin™ oral delivery with insulin and  hGH, a stock listing on the Nasdaq or Amex exchange and the sale of Pexiganon and EcoNail assets.

Although investors may wait until Access raises more capital to avoid shareholder dilution, experienced biotech investors are aware that occasionally the value of a promising company increases when it receives enough funding to reach the next milestones. We are initiating Access Pharmaceuticals with a Strong Speculative Buy and $7.00 Price Target.

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We believe NovaBay Pharmaceuticals (Amex:NBY) represents a significant opportunity in the drug-resistant pathogen sector.  NovaBay’s Aganocide^® compounds are proprietary, synthetic N-chlorinated antimicrobial molecules that mimic the human body’s natural antimicrobial defenses generated within neutrophils (white blood cells).  It is believed that bacteria cannot, or will not, develop resistance to these Aganocide^® compounds. This is especially important as several strains of antibiotic-resistance bacteria have developed in humans such as MRSA (Methicillin-Resistant Staphylococcus aureus) and VRE (Vancomycin-Resistant Enterococcus) which have resulted in patient deaths.  Aganocides^® may deliver the same or better efficacy than antibiotics without triggering antibiotic-resistance.

We expect several catalysts for NovaBay shares as various human clinical trials complete. Phase IIa data for Conjunctivitis (“pink eye”) partnered with Alcon (NYSE:ACL), Phase I data for Acne partnered with Galderma S.A. (Nestle and L'Oreal) and Phase IIa data for Catheter-Associated Urinary Tract Infections (CAUTI) which is being developed internally. Furthermore, we expect data from the Phase IIa for Impetigo partnered with Galderma S.A.

In addition, we expect several new indications to begin human clinical trials with partner Alcon for Otitis Externa (swimmer's ear), Contact Lens Solution and Sinusitis (sinus infection) as well as NovaBay’s internal Onychomycosis (nail fungus) program.

We believe NovaBay is an exciting biotechnology company with “best-in-class” candidates that appear effective against bacterial, viral, fungal and biofilm targets without generating new, drug-resistant strains. NovaBay’s partnerships with Alcon (NYSE:ACL) and Galderma S.A. (Nestle and L'Oreal) along with NovaBay’s own internal programs result in a biotechnology company with multiple shots-on-goal. We are initiating research coverage with a Strong Speculative Buy rating and $4.50 Price Target.

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HISTORY: Founded in 1967 and headquartered in Newark, NY, (not NJ), IEC went through a rough patch of declining revenues from around 2004 until it began a turnaround in 2007.  During that period, it was servicing a list of well known “consumer” clients such as Compaq, Lucent, Motorola, JDS Uniphase and Tellabs.  The problem was that these were all high volume, low margin accounts, and when pricing pressure befell them, moved their production from IEC to Mexico or overseas.  Management, by its own admission was slow to respond.  In 2005, computing made up 31% of revenues and by fiscal 2008 (September 30^th), it accounted for almost no revenues.  Communications was 40% of revenues then, and now it is only about 11%.  And industrial, made up 28% or revenues, which now accounts for 30%.  The big change came in IEC pursuing new markets with lower volumes but higher margins such as the military and medical markets.  These are less prone to moving production to lower cost venues because of proprietary technologies or government restrictions.  As such, military now accounts for 34% of revenue, aerospace, 11% and medical, approximately 9%, all up from virtually zero in 2005.

Additionally, IEC has increased its technical capabilities which make it a more respected and valuable business partner to its customers.  In its Technology Center, established in 1998, the company offers services that provide its customers with new product design integration or re-design to achieve greater efficiency.  For instance, IEC's Design Engineering Team offers PCB layout, test system development and sustaining engineering services that can help quickly solve customers’ design related issues.  The Design Engineering Team supports system design all the way down to board level design.  IEC's Prototype Lab is also located inside of its 10,000 square foot Technology Center.  The Prototype Lab supports surface mount, through-hole and BGA technologies in quick-turn manufacturing.   Many types of jobs can be performed the same or next day.  It has a world class, high reliability materials analysis lab, capable of performing exotic tests that competitors many times are unable to perform.  The Technology Center has proven to be a very effective sales and marketing tool for attracting new clients and extending existing client relationships.

CAPITAL INVESTMENTS: In fiscal 2008, IEC spent $1.4 million on capital spending to upgrade its ten manufacturing lines.  The company plans to spend an additional $1.2 million in fiscal 2009 and almost $1.0 million in fiscal 2010 in order to completely upgrade all its manufacturing systems.  This will continue to contribute to higher margins by reducing the need to rework products and also because of faster manufacturing, will increase overall capacity.

Most recently, IEC implemented the second phase of its changed business model, that of making acquisitions to further increase its product and service offering.  In May 2008, IEC acquired Val-U-Tech, a private company manufacturing wire harness assemblies, a natural extension to its core business.  Val-U-Tech had revenues of approximately $11 million at the time of its acquisition with double digit revenue and earnings growth and IEC paid $7.2 million in cash and 500,000 shares of stock for total consideration of $10 million.

RESULTS: So what has been the result of this continuing transformation?  In FY 2008, revenues increased 24.9% to over $51 million, gross margin increased to 12.1% of revenues, up from 9.5% in 2007, operating margin rose to 4.7% from 2.4% (industry average is 2.9%) and backlog increased 81% to $40.5 million.  IEC return on equity at the end of October 2008 stood at 13.8% as compared to an industry average of 9.5%.  Revenues in Fiscal 2008 included approximately $4 million form Val-U-Tech ($1 million in FY Q3 and $3 million in FY Q4) and excluding it, revenues would have increased 15.1%.

However, the major challenge for IEC, as with all industrial companies, is the weakness of the US and world economy.  The deterioration in the economy during the fourth quarter of 2008 appears to have had little effect on IEC’s first fiscal quarter ending December 26, 2008.  The company recorded a revenue increase of 42% to $15.8 million, a gross margin of 14.1% as compared to 10.3% in the same period a year ago, an a 140% increase in operating income on a 6% operating margin.  It should be noted that this fiscal year’s first quarter included revenue from the Val-U-Tech acquisition while last year’s first quarter did not.  On a pro forma basis we estimate revenues grew about 17% in the first fiscal quarter still a very strong result given the deterioration of the economy in calendar Q4 2008.

FUTURE: IEC has tentatively set April 23rd as the date for reporting its fiscal Q2 and we expect another strong quarter. While management remains optimistic about the company’s prospects for the remainder of fiscal 2009 and into 2010, it also remains realistic about the mix of its business.  It anticipates some softening in its existing customer base with respect to ongoing projects but believes that its intense approach to providing exemplary service to it clients will garner new programs, increased volume from existing programs and most important, new customers.  As such, management believes total revenues in fiscal 2009 could increase 25% to 35% ($64 million to $69 million) and net income before taxes could increase as much as 50%.

Most importantly, IEC’s management believes that it has put in place the necessary infrastructure to fulfill its mantra “Absolutely, Positively Perfect and On-Time” and drive its revenues to $150 million by 2012.  We believe that value-oriented investors should consider adding IEC Electronics to their long-term portfolios.

The company's proprietary software algorithms can process hundreds of separate medical images taken during an MRI, CT, PET, ultrasound or X-ray session into a single, anatomically accurate three-dimensional model, providing clinical researchers a previously unobtainable source of reproducible data including the characterization of minute changes over time.  Clinically significant changes in the size of a solid tumor or other biological structures and functions can be detected and measured in as little as 24 to 48 hours.  The result is the ability to very rapidly determine if a drug or device is clinically effective in patients and making go/no go decisions earlier in the clinical development process thereby reducing the costs associated with drug and medical device discovery.   

What Makes VirtualScopics so Unique?  

VSCP’s technology is backed by 11 issued and 7 pending patents and produces results at a level of reproducibility that has not been previously attainable by any other clinical research organization.  This contributes to greater precision, higher throughput, the need for smaller sample size, less time to analyze the data, and faster trial times, all of which have the net effect of increasing data accuracy while significantly reducing the time and cost of a clinical trial.

VSCP recently announced its Q4 results with revenues of $1.9 million (+33% Y/Y), a loss of $314K (-73% Y/Y) and fulfilled its stated goal of being cash flow breakeven on an operating basis in Q4.  More importantly, it had previously announced that its backlog stands at $27 million, a Y/Y increase of 84% on a revenue base in 2008 of $7.1 million.  In addition to Pfizer (NYSE:PFE), its largest client and a shareholder, VSCP now had contracts with 12 of the 15 largest pharma/ biotech companies in the world, six phase III studies underway and a 65% increase in the average size of its contracts to $350,000 million.

The company recently announced that it will become the first imaging biomarker in a Canadian-European pivotal trial for a cartilage repair device, BST CarGel, being developed by BioSyntech, Inc. (BSY.TO) of Laval, Quebec.  The traditional biomarker for trials of cartilage-related therapies has been the reduction of pain.  VSCP will provide blinded quantitative data of MRI scans that will allow BioSyntech to demonstrate the effect of its device on the quantity and quality of cartilage as its endpoint.  Jeff Markin, VirtualScopics’ president and chief executive officer stated, “The quantitative nature of these endpoints offers the opportunity to design cartilage repair trials that may be smaller or shorter in comparison to conventional designs which use more qualitative or subjective endpoints. We look forward to providing BioSyntech the critical information they need to demonstrate the effectiveness of their product.”

How Big is the Clinical Trial Market?

The real answer to this question relies on whether or not VirtualScopics’ technology and level of service become a standard endpoint biomarker for all clinical trials that require quantitative imaging.  VSCP provides clinical imaging trial design and data analysis in the major clinical disciplines shown in the accompanying graphic.  Oncology and inflammation represent the two largest markets.  In total, however, VirtualScopics estimates that the market, represented by these six clinical disciplines for clinical trial applications alone, was approximately $500 million.  VSCP estimates that by 2011, by virtue of the number of clinical trials being conducted, the market for its services in just oncology alone, will exceed $500 million.  As such, VSCP’s $7.1 million in 2008 revenues and its $27 million backlog represent only a small part of the market.   While VSCP has competition, it falls into two categories.  There are only two competitors that possess the same high level of technological capability required to deliver such precise image analysis.  They are the MD Anderson Cancer Center and the Cleveland Clinic.  However, they lack the organizational capabilities to rapidly deliver results.  The other competitors, of which there are perhaps five, do not have the technical capability to deliver high quality repeatable results in a timely manner.

Playing a Vital Role in Personalized Medicine!

As large as one might imagine the clinical trial market to be for VSCP’s services, there looms a much larger market for the company to address…that of personalized medicine.  VSCP recently announced that is involved with a consortium of cardiovascular companies for the development of a new cardiovascular system which automates the detection of high risk plaques for both ultrasound and magnetic resonance imaging.  While the initial use of such a system will be by drug and medical device companies to detect and monitor new products for the treatment of high risk plaques, we can foresee this technology as a means for diagnosing patients that may have high risk plaques before a life threatening coronary event occurs.

By virtue of the fact that VSCP’s technology is so sensitive as to be able to detect a change in solid tumor size or other anatomical function in a matter of a few days, we believe it could also become the standard of care in determining whether a specific drug is effective in treating a patient.  With the advent of  our understanding and knowledge of the human genome, proteome, and metabolic pathways which has grown enormously in recent years, the medical community has come to understand that a patient’s unique genotype may respond differently to a drug or therapy than what is perceived as the norm.  Medicine has come to realize that all solid tumors are not alike even though they may be found in the same organ such as the breast.  This specific and individual information can be used to tailor a patient’s treatment by either eliminating therapies that might not work at all or by altering the amount of drug or therapy that is administered, thus reducing side effects.  Most drugs and devices are approved using large cohorts of patients and it is widely known that their response to the drug or therapy varies widely.  It is estimated that most drugs only work, to some degree or another, in 60% of patients.

Ultimately, we believe this opportunity for VSCP could dwarf that of its current clinical business but we recognize that it will take some time to develop.  In the interim, the company has a very attractive business opportunity upon which to capitalize and be successful.  

But before exploring bumps in the road, what is personalized medicine, really?  Over the past several years, our understanding and knowledge of the human genome, proteome, and metabolic pathways has grown enormously, giving rise to the understanding that a patient’s unique genotype may respond differently to a drug or therapy than what is perceived as the norm.  Medicine has come to realize that all solid tumors are not alike even though they may be found in the same organ such as the breast.  This specific and individual information can be used to tailor a patient’s treatment by either eliminating therapies that might not work at all or by altering the amount of drug or therapy that is administered, thus reducing side effects.  Most drugs and devices are approved using large cohorts of patients and it is widely known that their response to the drug or therapy varies widely.  It is estimated that most drugs only work, to some degree or another, in 60% of patients. 

Plavix is a good example.  As the second most prescribed drug in the world (25 million prescriptions in 2007 and $8.5 billion in revenues), Plavix is widely prescribed for patients that have experienced heart attack, stroke, or other vascular events and who are believed to be at high risk for a recurrent event caused by a blood clot. However, approximately 30% of patients taking Plavix do not metabolize the drug because of genetic variation thus receiving little or no benefit. Bristol-Myers Squibb (BMY) co-markets Plavix with Sanofi-Aventis SA (SNY) of France.  As we stated in an article we wrote for our blog on January 8, 2009, we believe the FDA will mandate PCR (polymerase chain reaction) based tests to detect the genetic variations that renders Plavix ineffective.

Personalized medicine has for the most part has been dominated by large companies that have had measured success in developing and getting approved specific genetic tests.  Some examples include  Roche’s AmpliChip that predicts a patient’s response to therapies; BRCA1/BRCA2 test for breast and ovarian cancer risk; Monogram’s Trofile for HIV tropism; Bayer’s Trugene HIV tests and DAKO’s Herceptin Hercep genotyping test.

But personalized medicine is  now taking a much more varied path with more specialized companies playing a role.  Some of these companies offer platform technologies upon which can be developed a family of diagnostic tests while others provide specialized diagnostic lab services upon which treatment decisions can be customized while still others are developing tests for personalized point of care testing.   A few of the more notable examples are  CombiMatrix (CBMX), Rosetta Genomics (ROSG), VirtualScopics (VSCP), Clarient (CLRT), and OraSure Technologies (OSUR).

• CombiMatrix- The company is the world leader in DNA Array Diagnostics with more products available in the market than its competitors’ combined product offering. Through the development of proprietary technologies, products and services, CBMX is a highly diversified company that participates in several rapid growth markets including genetic analysis, molecular diagnostics, drug development, nanotechnology research, defense and homeland security.

  In addition to being the world leader in developing DNA Array Diagnostics, the company is utilizing these tests to rapidly expand its Diagnostic Reference Lab business.  The company provides reference lab services for prenatal scanning, genetic abnormalities, autism, HER2 gene status for breast cancer, HemeScan for Chronic Lymphocytic Leukemia, and a prostate cancer screen for several genetic tumor markers that enable a more precise stratification of the risk profile of the patient.

  CBMX recently reported very positive preliminary data on its investigational Comprehensive Cancer Array (CCA) test showing it can non-invasively screen for the early detection of cancer. The study focused on prostate, colon, ovarian, breast, and lung cancers, as these five cancers comprise roughly 85% of all solid tumors in the United States.  Preliminary data using serum from cancer-free patients and patients with cancer at various stages (stage 1 to stage 4) were presented. CombiMatrix used a comprehensive micro RNA (miRNA, a recently discovered type of nucleic acid) array built on its CustomArray(tm) platform to perform this study.

  The study concluded that the miRNA expression patterns, in blood, for patients with cancer (including early stage 1) were dramatically different from patients who were cancer-free. The resulting analysis indicated that a clear distinction could be made between patients with cancer and those without. 

  We believe this will lead to a screening panel for the aforementioned cancers with the obvious benefit to the patient of earlier intervention than has been the current standard of care. 

• Rosetta Genomics- An Israeli company, Rosetta Genomics is a developmental stage company also involved in micro RNA, used both as diagnostics and therapeutics.  The company reported its firs revenues recently but more importantly, the first-ever study, showing in-vivo systemic a demonstration of a micro RNA therapeutic in liver cancer, with a two-fold decrease in tumor-Mass and a dramatic suppression of the targeted micro RNA.  The study was done in mice.  Liver cancer is the third leading cause of cancer death and affects 19,000 new patients in the U.S. annually.  Unfortunately, the five-year survival rate is only 10%.

The company provides three diagnostic tests based on miRNA technology.  miRview(TM) mets - This test can accurately identify the
primary tumor site in patients presenting with metastatic cancer, as well in patients with Cancer of Unknown Primary (CUP).  miRview(TM) squamous This test differentiates between two subtypes of non small cell lung cancer (NSCLC). This diagnosis is important as some NSCLC patients have demonstrated varying response patterns.  miRview(TM) meso - This test differentiates mesothelioma, a cancer connected to asbestos exposure, from other carcinomas in the lung.

• VirtualScopics-  Presently, VirtualScopics is a contract research organization serving the pharmaceutical and biotech industries in a very unique manner.  The company provides 3D analysis of solid tumor images with proprietary software that can detect very small changes in the size and shape of a tumor.  The semi-automated systems measure and monitor disease progression and changes in biological processes over time. This process provides highly reproducible results, enabling us to measure minute changes in the structure and function of various biological structures and functions, both rapidly and with a high degree of confidence.  Drug development time lines can be dramatically shortened by more quickly being able to determine if a drug candidate is effective in reducing tumor size.

  While VSCP is building a very nice business in this highly differentiated technology and now has relationships with 12 of the top 15 pharma/biotech companies in the world, this technology will eventually be used to determine if a specific drug is effective in treating a patient, a determination which can be made in as little as 24 to 48 hours after administration.  The company also announced its involvement with a consortium of cardiovascular companies studying the ultrasound and MRI visualization of coronary plaques.  These are examples of very attractive diagnostic opportunities that will result in more personalized medicine. 

  VirtualScopics reach operating cash flow breakeven in the fourth quarter and announced a backlog of $27 million in revenues on a base of $7.1 million achieved in 2008. 

• Clarient-  Clarient, Inc. operates as a diagnostics services company in the United States. It provides cellular assessment and cancer characterization to community pathologists, academic researchers and university hospitals, and bio pharmaceutical companies.  The company provides a wide variety of diagnostic tests based on immunohistochemistry (IHC), flow cytometry, polymerase chain reaction (PCR), fluorescence in situ hybridization (FISH), and In situ hybridization (ISH).

The company also offers third party billing, client billing, and patient billing arrangements services, as well as provides cancer diagnostics and consultative services, ranging from technical laboratory services to professional interpretation. In addition, it provides commercial services to biopharmaceutical companies and other research organizations to assist their efforts, ranging from drug discovery to the development of directed diagnostics through clinical trials.

It has collaboration agreements with Natural Selection, Inc. to use genomic mathematic capability to supplement proteomic mathematic capability to help develop novel cancer markers, as well as with Prediction Sciences, Inc. to commercialize a novel breast cancer test.  In January 2008, Clarient announced a strategic partnership with CombiMatrix to market and sell a novel genomics-based cancer test called HemeScan, a comprehensive test related to the treatment and care of chronic lymphocytic leukemia (CLL), among other cancers. The HemeScan test was developed by CombiMatrix.

• OraSure Technologies-  An established company, OraSure engages in the development, manufacture, and marketing of oral fluid specimen collection devices primarily in the United States and Europe. The company’s principal products include OraQuick ADVANCE HIV-1/2, a point-of-care test for antibodies to the human immunodeficiency virus (HIV) type 1 and type 2; OraSure, an oral fluid collection device for the detection of antibodies to HIV-1 in an oral fluid sample; and Intercept, which is an oral fluid collection device along with nine related immunoassays and used for oral fluid drugs of abuse testing.

But of most interest is the highly anticipated FDA approval for the first OTC HIV test to be released to the general public.  This will make it extremely easy for anyone to test his or her HIV status, a truly important advance in personalized medicine.

So what are the impediments to a wider adoption of personalized medicine?  We sense a reluctance on the part of big pharma to encourage personalized medicine.  After, all pharmaceutical companies are most interested in developing “blockbuster” drugs, such as Plavix, and its doesn’t do their business very much good to admit that a drug doesn’t work in 30% of the population and oh by the way, there is a way to test if it is effective.  What we believe will be the major drivers of personalized medicine in our opinion are a mounting body of knowledge that it produces better medical outcomes and a growing realization on the part of payers that in the long run, it will reduce the cost of care by eliminating unnecessary and ineffective treatment.

Certainly there are several caveats that must be put forward before the group returns to clear sailing.  First, the bottom can be a long trough.  While healthcare stocks may outperform other groups on a relative basis, their ultimate performance will still be dictated by the market’s overall recovery.  Secondly, attractive valuations can become even more attractive.  If the market reacts negatively to any number of still unknown factors, healthcare stocks will surely decline as well.  And finally, since corporate buyers are strategic buyers, they have longer time horizons than do institutional or even individual investors.  Just as corporate buyers need to be selective, so do institutional and individual investors.

So what evidence do we have that acquisition activity is heating up, valuations are reasonable and perhaps we are bottoming out?  The following table demonstrates recent acquisitions by major companies and the multiple of revenues paid.

As the table suggests, there is wide variability in the multiples being paid on acquisitions with the larger, friendly transactions being priced at about 3.0X incremental revenues.  As a point of reference, orthopedic companies are selling at 2.2X forward 12 month revenues, as is the cardiovascular group and medical device companies at 2.4X, a slight premium.  So the acquisition premium appears to be 20% to 25%, fairly reasonable based on historic trends which can average 5.0X or 6.0X revenues.

Another way of looking at M&A premiums is the premium paid to the prior day’s closing price.  Over the past three months the medium premium has been 92%, up from 88.4% for the six month medium premium and somewhat better than for the general market.  However, these premiums are still one-third below that of the 52 week highs posted by the stocks of these companies still suggesting reasonable valuations in our opinion.

Source: HealthPoint Capital-Dec. 18, 2008

Source: HealthPoint Capital-Dec. 18, 2008

A couple of other points are worth mentioning.  Pfizer (NYSE:PFE) appears to be giving in to its fears that it will face generic competition in approximately one-third of its revenue base by 2012 that is currently proprietary.  Even Lipitor, its largest product at $3.1 billion in revenues in Q4, decreased 8% year over year and looses its exclusivity in June 2011.  Thus the rush to the altar with Wyeth (NYSE:WYE).  The combined companies will have 17 drugs with sales of $1 billion or more which will cover cardiovascular, oncology, women’s health, central nervous and infectious disease.  On roughly $22.8 billion in revenues, Wyeth achieved a 29% pretax margin and better than a 19% net margin and Pfizer is betting that it can reduce costs and achieve even better incremental margins.

While perennial acquisition train, Johnson & Johnson (NYSE:JNJ) still keeps broadening its product offering via the acquisition route, Boston Scientific (NYSE:BSX), also prolific in the past, is on a siding somewhere, perhaps having grown weary of some of its past conquests such as Guidant.  Medtronic (NYSE:MDT) continues to make steady headway in filling in their product offerings with bolt on acquisitions of technologies it believes are adjunctive to its existing business.  Abbott (NYSE:ABT) has become more active in adding diversification to it product portfolio through acquisition. 

It looks like even the venerable Merck (NYSE:MRK) may be contemplating an acquisition which would mark a big departure from its strategy of growing “it” at home, “it” being new pharmaceutical products.  Like most large pharmaceutical companies, Merck is also facing the daunting prospect of some of its most successful and profitable products passing into the “generic” realm.  The company cited the loss of exclusivity on Fosamax, its osteoporosis drug last February and Merck faces the challenge of replacing Singulair, its very successful allergy and asthma drug in August of 2012.  In total, Merck faces generic competition in about one-third of its revenue base over the next several years. 

And even Procter & Gamble (NYSE:PG) is in the game wanting to sell its $2 billion a year pharmaceutical business.

Although we believe valuations appear reasonable, we are not sure that the M&A activity has picked up enough to declare the bottom.  As we stated at the beginning…the trough may be long and deep.

The most surprising turn of events in our opinion was the Schedule 14A filing made by Ramius on January 22, 2009 in which it said that it would not try to unseat Alan Milinazzo, Orthofix’s CEO, as it had previously sought to do.  It seems to us that the whole exercise of changing the management and recovery strategy being pursued by Ramius becomes irrelevant and point less if the “alleged” architect of the problem remains on the board of directors.  In response to OFIX’s January 28, 2009 letter, Ramius announced that it had received written requests from the holders of approximately 55% of the Company’s common stock to call a Special General Meeting of Shareholders.  With the threshold at only 10% and with Ramius holding 5.3% of the shares, we had predicted in our post of January 13, 2009 that this would likely be the case.

Not to dredge up old dirt…but, in addition to Mr. Feld’s inexperience, shareholders should carefully consider the other dissident board members that Ramius is proposing be placed on OFIX’s board, particularly Steven J. Lee.  Mr. Lee was was the Founder, President, Chief Executive Officer and Chairman of PolyMedica Corporation, a leading provider of diabetes care, from 1990 until August 2002, the time of his abrupt retirement from PolyMedica.  At the time of his retirement, PolyMedica was involved in a Federal investigation alleging Medicare fraud and a related scheme to inflate the company’s revenues and earnings. 

The federal government began investigating PolyMedica in August 2001, when dozens of FBI agents, including 19 computer specialists, raided four offices in Florida of two PolyMedica subsidiaries, Liberty Medical Supply and Liberty Home Pharmacy, and the homes of two employees. At the time, former employees said the company shipped diabetes test strips to people who didn't order them and did not reimburse Medicare for returned packages.  Mr. Lee was Treasurer of Liberty Medical Supply during part of this time.

In November of 2004 PolyMedica reached a settlement with the Federal government in which it agreed to pay a lump-sum payment of $35 million over alleged Medicare fraud but would not admit any wrong doing.  A shareholder lawsuit alleging stock price manipulation based on inflated revenues and earnings was settled for $5.5 million in October of 2007.

While shareholders representing 55% of the shares outstanding have opted for a special meeting, its important to keep in mind that 5.3% of those shares are represented by Ramius leaving slightly less than a majority in effect, requesting a vote.  Management directly controls 7.3% of the shares outstanding with a former Chairman of the Board, Robert Gaines Cooper controlling an additional 5.3% of the shares, all safely on management’s side.  Although it might be tempting on the part of shareholders to give the board a good shake, dissident board members, if elected, would still be in the minority with current management still at the helm.  While we have been critical of management in the past and remain cautious about Orthofix’s recovery, we do not believe that the proposed change in directors by Ramius will net the company any benefit.