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Nanosphere: A Low-Risk, High-Growth Diagnostic Stock

NEW YORK ( TheStreet) -- Many biotech investors believe mistakenly that the only way to make money is to invest in high risk-high reward stocks. Unfortunately, the biotech landscape is littered with failed clinical studies, management promises never kept, and of course, investor hopes destroyed.

Instead, I like to look for companies where the risk is lower. That might mean sacrificing some upside but, overall, the chances for investing successfully are higher.

Here's an example: I purchased Nanosphere (NSPH - Get Report) after a key FDA approval removed risk from the story. Even after the positive news, most of the potential reward in the stock remains, as long as Nanosphere can execute and convert the FDA approval into meaningful revenue.

Nanosphere is developing and marketing the Verigene System, a molecular diagnostic testing platform designed to detect nucleic acids and proteins simply and quickly. By enabling the early and accurate detection of infectious and life-threatening diseases, Verigene helps doctors and hospitals improve patient care and lower costs.

The company went public almost five years ago and has already achieved FDA approval of several diagnostic tests, including flu and a test to determine patients' suitability for the anti-clotting drug Warfarin. None of these tests were unique enough to generate significant revenue.

Nanosphere's outlook improved in June after FDA cleared a new Verigene-based test to detect gram-positive bacteria -- a blood-based infection responsible for life-threatening sepsis.

Sepsis is the leading cause of deaths in hospitals and every hour that a patient remains undiagnosed increases the chance of mortality. Bloodstream infections cost hospitals more than $15 billion per year and can cost more than $20,000 per patient to treat. Currently, diagnosing sepsis requires a blood culture that can take 48 hours to turn around and report results.

Nanosphere's gram-positive bacteria test can confirm a diagnosis of sepsis in just two and half hours. The Verigene System costs $25,000 and individual tests are priced around $50, so the value to hospitals seems obvious.

Since receiving approval for the gram-positive test, Nanosphere says interest from hospitals in the Verigene System has been through the roof. We can't quantify demand until we get through the summer and into the fourth quarter because of the lag between approval, installation of the platform at hospitals and revenue generated from the new test. By all indications, however, interest from hospitals is very high.

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