Wednesday, December 14, 2005

Beware of the Hemosense Solution....

Hemosense, Inc. (HEM - $7.65) manufactures and sells handheld blood coagulation monitoring systems for use by patients and healthcare professionals in the management of warfarin medication. The Company's product, the INRatio System, measures the patient's blood clotting time to ensure that patients with a propensity to form clots are maintained within the therapeutic range with the proper dosage of oral anticoagulant therapy.
The Company anticipates fiscal 2006 total revenue to be between $16.0 million and $17.5 million, representing growth of 82% to 100% compared with fiscal 2005 total revenue. Given increased investment in SG&A, as well as in R&D, management anticipates a fiscal 2006 net loss of $10.5 million to $11.5 million. This is similar to the $11.7 million loss reported in fiscal year 2005. The net loss per common share is expected to be $0.96 to $1.05 based on 11.0 million average common shares assumed to be outstanding.
The market for PT/INR patient self-testing and point-of-care diagnostics is intensely competitive, subject to rapid changes and new product introductions. Two companies, Roche Diagnostics and International Technidyne Corporation, a division of Thoratec, currently account for over 90% of the worldwide sales of PT/INR point-of-care and patient self-testing devices. In addition, both of these competitors enjoy many competitive advantages, including: greater name recognition; established relationships with healthcare professionals, patients and third-party payors; established distribution networks; and [most-important] additional product lines and the ability to offer rebates or bundle products to offer higher discounts and incentives to gain a competitive advantage.
To gain acceptance and market share, a small capitalized company like Hemosense [market capitalization - $87.8 million] has to open up the spending spigot. Being a one-pony Company, with an annual burn-rate of $12 million and only $12.8 million in working capital, look for management to tap the capital markets in 2006.
If one is predisposed to Hemosense and believes that Hemosense can march successfully forward to profitability, consider these other tidbits lifted from the Company's recent 10K filing:
  1. Sales Operations are Dependent on Few and Concentrated Distribution Channels. Hemosense is dependent upon three distributors for a substantial portion of itsrevenue, and the loss of any of these key distributors would have a material adverse effect on its business. Its distributors, Quality Assured Services, Medline and Cardinal Health accounted for approximately 24%, 19% and 13%, respectively, of total revenue in fiscal 2005.
  2. Emerging Oral Anticoagulation Therapies. A number of pharmaceutical companies are working on the development of a new class of oral direct thrombin inhibitors, or DTIs, to replace older anticoagulants such as warfarin. In theory, these new oral DTIs should have very few drug/non-drug interactions and should not require the same level of monitoring that warfarin requires. One goal of current research in this area is the elimination of the need for PT/INR testing, which if successful could render the INRation System obsolete. In fairness to Hemosense, however, as of yet, it is unknown whether oral DTIs will be approved in the United States or perform as well as warfarin, especially for the chronic user.
  3. FDA Oversight. The FDA enforces the quality system regulations, or QSRs, through scheduled and through unannounced inspections. In May of this calendar year, Hemosense underwent an inspection at its San Jose manufacturing site, and was cited by the visting inspector for the following: (i) Failure to timely file Medical Device Reports, or MDRs, for six of seven complaints the inspector reviewed. (ii) The FDA’s second observation was that the Company had not properly defined the statistical techniques for calibration of its PT/INR test strips. Subsequently, management did submit further written response to the FDA, which [they believe] addresses FDA concern(s). Nonetheless, the Company is now filing an increasing number of MDRs, which could harm market adoption of the INRatio System. MDRs are publicly available, and competitors could use this information in an attempt to paint the product as suspect, disrupting Hemosense's customer and potential customer relationships.
  4. A principal stockholder owns a significant percentage of Hemosense stock. MPM Capital and its affiliates own approximately 32% of the common stock. This significant concentration of share ownership may adversely affect the trading price for the common stock because investors [might] perceive disadvantages in owning Hemosense. For example, MPM Capital has the ability to exert substantial influence over all matters requiring approval by stockholders and could dictate the management of Hemosense's business and affairs. (Not to mention what would happen to the price of the common stock should MPM Capital file to sell part of its stake.)
  5. Related Party Transactions. Now here are some red flags blowing in the wind....During the year ended September 30, 2003, the Company paid Innovative Medical Products GmbH (IMed Pro), a services company in Germany affiliated with Gregory Ayers, a Board member, $436,000 for clinical trials consulting and distribution services. During the year ended September 30, 2004, the Company paid IMed Pro for distribution services of $560,000. The agreements between the Company and IMed Pro were terminated effective January 1, 2005. [STILL] Since January 2005 I-Med-Partner GmbH (“IMedPartner”) has served as a distributor in Germany and purchased $416,000 of product. IMed Pro is a shareholder of IMedPartner.

    Edward Brennan, Ph.D., one of the Company’s directors, has provided consulting services to the Company not directly related to his service as a board member. During the past three fiscal years, payments were made to Dr. Brennan of $23,000 in 2005, $58,750 in 2004 and $15,000 in 2003 for these consulting services.

    The Company paid Dade Behring Inc., a stockholder which had a representative on the Company’s Board of Directors, $8,000 and $102,000 of license royalties for the years ended September 30, 2003 and 2004, respectively. Also, in May 2003 the Company issued 787,919 shares of preferred stock valued at $1,245,000 to Dade Behring Inc. to extend an existing Supply and License agreement, and in June 2004, the Company issued 357,570 shares of preferred stock valued at $565,000 to Dade Behring Inc. for the prepayment of $1.0 million of future license royalties.

    These actions beg the question: In whose interest are these Directors working on behalf of--Management or Shareholders?

The Hemosense, Inc. solution rests on providing patient-friendly, fast and easy-to-use meter and test strips. This may-or-may not be true, but after reading this blog, ask yourself--how investor-friendly is Hemosense stock?

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