This column was originally published on RealMoney on Aug. 1 at 11:40 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
We're all looking for companies that can exhibit phenomenal long-term growth while maintaining high profitability. Trouble is, that isn't easy, especially in technology. The majority of tech companies are like professional athletes: extremely prolific, but only for short periods of time.
Long-term profit generation and stock appreciation depend on margin sustainability, and the only way to maintain margins is high barriers to entry for competitors. But technology is always changing and competition is intense, so it's unusual to find a technology in which the barriers to entry are high enough to prevent competition from eroding margins -- or a new technology from completely supplanting it.
In the past, the most reliably profitable companies were pharmaceuticals, where drugs were protected by patent. That's changing quickly as development costs are exploding and generic competition intensifying. The next most impressive profit generators are anticompetitive monopolies like
. We are slowly legislating away those situations.
That leaves us looking for great innovators with new technology, maybe a touch of prohibitive patent protection, some impressive execution, and maybe just a little undisclosed technological know-how for some breathing room. Let's examine two next-generation technology companies,
, that may have the moats to float our financial boats.
Crucell is a Dutch biotech company that develops vaccines and antibodies based on its proprietary human cell line, PER.C6. Until recently, it was more of a development-stage company with several internal vaccine development programs and an impressive list of partnerships with top-line big pharma and biotech companies like
, now part of
. Its recent acquisition of Swiss vaccine company Berna Biotech makes it a full-fledged vaccine provider.
The reason this company offers a significant long-term opportunity is its immortal self-replicating human cell line, which is a cell culture that will grow indefinitely given the appropriate medium and conditions. PER.C6 can be used for the discovery and manufacture of vaccines and antibodies, and it is the reason much larger companies have taken notice and forged partnerships with the company.
A human cell line offers tremendous advantages over more traditional mediums for drug testing and production, like small animals or eggs. Starter tests conducted in a host human cell offer much more accurate results. Also, since the cell line is self-replicating, researchers can conduct large-scale tests easily and have large and manageable sample pools from which to derive results.
From a manufacturing standpoint, PER.C6 offers similar advantages. The cell line can be used to produce traditional or recombinant vaccines and antibodies. Since the virus or antibody is produced in a human environment, not a foreign animal or egg, it's more likely to produce a well-tolerated and effective product.
Other existing cell lines are limited to production of proteins or vaccines; PER.C6 is suitable for both.
Crucell/Berna currently offers vaccines for hepatitis, typhoid fever and influenza. The company also has over 45 licensees and 100 patents.
The company has the technology platform and distribution to grow its business. The vaccine market is expected to continue to grow at a 13% annual rate and reach almost $16 billion by 2010. Crucell expects to generate 2006 revenue of between 130 million and 150 million euros ($165 million and $190 million) and be break-even in cash flow in 2007.
The company has 178 million euros in cash and no debt. With a market cap of just over $1 billion, Crucell isn't necessarily cheap, but with the large number of products in development for targets such as influenza and West Nile, in addition to its proprietary technology, this could be the kind of investment that has tremendous long-term growth prospects.
Given Imaging is another innovative medical-technology company that offers minimally invasive visual access to the human gastrointestinal tract.
The Israeli company makes a wireless imaging system that uses tiny disposable cameras contained within swallowable pills. The system is comprised of the pill capsule, miniature camera and portable data recorder, sensors, software and a workstation to analyze the information. The stock has been a bit of a disaster lately, but it seems to have stabilized after the most recent earnings announcement in July, and the company's prospects remain attractive.
Given introduced its first PillCam for endoscopy in 2001 and revolutionized physicians' ability to painlessly diagnose disease through the esophagus and small bowel. Since 2002, the company has logged a compounded annual growth rate of more than 30%, which is expected to continue through 2007, when revenue should reach $130 million, with earnings of 54 cents. There is no reason to believe growth will stop anytime soon.
The company offers PillCam SB for the small bowel and PillCam ESO for esophageal capsule endoscopy. To this point, practically all of its sales have come from the PillCam SB. This is due to widespread availability of insurer reimbursement and physicians' acceptance and endorsement of SB as a cost-effective diagnostic tool. The company is working with its distribution channels to promote similar acceptance for ESO for esophageal conditions.
The company has an installed user base of over 3,000 Given Diagnostic Workstations, which represents a large and growing market for new and replacement products. The company is adding sales personnel and is focused on continuing to innovate to drive market-share gains.
In December, the company released its most advanced software product to date, Rapid 4, and recently received approval for it Agile Patency Capsule, a dissolving pill that helps physicians see a clear passage for using the PillCam. The company is continuing research for new product introductions, and in 2007 plans to launch PillCam COLON in the U.S.
Crucell and Given Imaging are on the leading edge of new technologies. As relatively small companies, their opportunities for growth remain substantial. While competition is sure to continue to emerge, technological leadership and large existing user bases should allow these companies to remain market leaders.
Given has indicated that
has introduced a competing product, but it's confident that it will be able to maintain its leadership position. The company is cautiously optimistic that increased competition will increase awareness and the overall size of the market opportunity. Sounds like a very American free-market attitude that I endorse, and I am accordingly positioned to participate.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Crucell to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Bulwa was long Crucell and Given, although holdings can change at any time.
Steven Bulwa is an independent portfolio manager based in Toronto. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bulwa appreciates your feedback;
to send him an email.