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Wound glue revisited:
Closure Medical (CLSR - NASDAQ) hits US$48 a share, blowing through my one-year price target of US$40...for a 94% gain within two months!
by Brian Hicks
It’s a great time to be a biotech and medical technology stock investor. In terms of product approvals, the next 5 years will prove to be a windfall for patients and investors alike.
As we head into the first quarter of 1999, nearly 200 biotech products are either in late stage Phase III clinical trials, or are submitted or about to be submitted to the FDA for approval.
Some will be blockbuster drugs (e.g., Aviron’s FluMist -- the nasal spray against influenza). Others will be niche drugs serving a small population.
Regardless of which biotech stocks you invest in, whether they’re first-tier companies like MedImmune, or third-tier companies like AVI Biopharma, the opportunities are there to make a fortune. But as a biotech investor, you have to know exactly when to invest...and when to sell. More so than any other sector in the market.
The before and after effect
You may have heard me claim before that there are 2 times to invest in an emerging biotech stock: 1) well before FDA approval, and 2) well after FDA approval.
Now, I’m not saying you can’t trade biotech stocks in between these times and make money. You can. But the bulk of the gains are made before and after FDA approval. And that’s exactly how we’ve played Closure Medical (CLSR - NASDAQ) in Taipan.
Taipan first recommended Closure Medical in October ë96 -- right after its IPO. Its prized product -- Dermabond (a super glue that heals wounds without painful stitches or staples) -- was in the last stages of Phase III clinical trials.
The IPO went unnoticed by Wall Street. This is a key factor. Because Closure Medical was a small, start-up and very speculative medical technology stock, institutional money was nowhere to be found. They waited for validation of the technology.
But I already had enough validation of the technology to issue a buy on the stock: Clinical trials were going smoothly, and the company had just signed a major deal with the largest distributor of medical sutures and staples -- Ethicon (a division of Johnson & Johnson).
Buy shares while the stock is still cheap, speculative...and unknown
Taipans picked up shares of Closure Medical for peanuts -- about US$5.75 a share.
In the months that followed, Dermabond proved its effectiveness in clinical testing. Institutional buying began to surge. By September ë97, shares of Closure Medical soared to a high of US$38.75 -- an increase of 573% in just a year’s time.
Taipans were out of the stock with a hefty profit. This is another key factor in biotech investing: Get out of the stock when speculation is rampant.
You see, by September ’97, Dermabond was still a year away from being approved by the FDA. (This is when the smart money begins to start shedding the stock -- selling into the strength of the anticipation of a positive FDA review.)
Taipan was right in the decision to sell. In 1998, Closure Medical never broke above US$31 a share for the entire year.
But an important milestone occurred in the third-quarter of ë98: Dermabond received FDA approval.
Watch and wait
Because Closure Medical fulfilled its promise of successfully getting a high-profile product through the approval process, it was time to see if Dermabond could become a blockbuster. In other words, stock appreciation wouldn’t come easy (as with speculation before approval). The company -- and the product -- would have to produce real results...with a growing top and bottom line.
Where we are now
Taipan recommended Closure Medical most recently for one simple reason: Dermabond is penetrating the market better than expected. We bought at US$25 a share -- right before a significant rally which took Closure Medical to above US$48 a share.
 And even though I put a one-year price target between US$35 and US$40 a share, my recent analysis of the company, the product, and its industry suggests Closure can go higher -- possibly above US$50 a share before the year is over.
Liquid gold
Closure’s flagship product -- Dermabond -- is a topical tissue "glue" that may be used as an alternative or adjunct to sutures and staples.
Dermabond is based on the company’s proprietary cyanoacrylate (superglue) technology. Closure’s proprietary cyanoacrylate technology has its roots in "superglue," which has been used in industrial settings since the 1950s. Closure is the first to transfer the technology to the medical setting by demonstrating both biocompatibility and sterility.
Dermabond is waterproof, clean, and sloughs off in about 7 to 10 days -- eliminating the need for a repeat visit to the physician to have sutures or staples removed. In addition, since Dermabond is synthetic, there’s no risk of contamination that is inherent in human or animal-derived fibrin glues or collagen-based products.
It’s these benefits over traditional sutures and staples that are now the driving force behind the increasing popularity of Dermabond.
Sealing up the world market
The worldwide wound closure market is estimated at 80-90 million procedures annually, split approximately 60/40 between sutures and staples. Surgical and emergency room wound closures account for 80% of total wound closure procedures (plastic surgery makes up the balance).
I happen to know for a fact that emergency room docs who have used Dermabond love it. And those who haven’t are eager to try it.
Also, the plastic surgery market could be a goldmine for Dermabond. According to clinical testing, plastic surgery patients treated with Dermabond "experienced superior cosmetic outcomes compared to patients treated with sutures."
Look at the numbers
In 3Q98, Closure Medical posted total revenues of US$4.2 million -- of which US$2.7 million were product sales.
Remember, Dermabond just received FDA approval in August. Closure’s third quarter numbers were announced on October 21. So just in a month and a half, Dermabond produced sales of US$2.7 million. These numbers were better than expected -- as analysts were estimating product revenue just above US$2 million for the third quarter.
The better than expected results put Closure Medical on the Street’s radar screen.
As you can tell by the chart, Closure rallied in anticipation of the 3Q98 results. Obviously there were some leaks about the stellar sales of Dermabond -- as CLSR went from a low of US$16.25 in early October to a high of US$28.88 after the announcement.
I waited for all the selling to be exhausted before reissuing a buy in Taipan.
Long-term looks good
The long-term potential for Closure is significant, with sales ramping to more than US$120 million (20% penetration of the US$2.6 billion worldwide suture/staple market) in the next couple of years.
As a result of Dermabond’s market penetration, it’s estimated Closure could post an eps of US$0.22 in 1999, and US$0.85 in the year 2000.
Currently Closure Medical trades at a market cap around US$600 million. Steep by most measurements, but not for a biotech with a new blockbuster product on the market.
However, I’ve set a target of US$40 for the stock. If you feel inclined to take profits, go ahead. But based on the stellar sales growth, I’m increasing my one-year price target to US$50 a share.
| Benefits of Dermabond over Sutures |
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Sutures |
Dermabond |
| Wound |
Puncture healthy tissue in order to align and close the wound |
Non-invasive alignment of injured tissue -- mitigates trauma and post-procedure inflammation |
| Pain |
Painful, may require local anesthesia (another needle). Needle holes cause additional trauma |
Painless. Does not require local anesthesia |
| Seal |
Does not seal. Wound remains open and requires bandages and antibiotic ointments due to potential for infection |
Flexible, waterproof seal protects underlying tissue without need of bandages, ointments |
| Application |
Time consuming -- requires significant training |
Fast, easy, one-handed. Requires minimal training |
| Removal |
Must be removed by nurse/physician. Requires repeat visit |
Naturally sloughs off in about 7 days…eliminating need for repeat visit |
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