Northfield: Blood Substitute Buy

04/09/2004 12:00 am EST

Focus:

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

Tobin Smith, editor of ChangeWave Investing, has an incredible ability to find lesser known, exciting companies in newly-emerging trends. The latest addition to his speculative buy list is no exceptionNorthfield Laboratories, a company that is developing a blood substitute.

"The American blood transfusion industry has been and remains in crisis following critical shortages and security issues for many years. Not having enough blood where it’s needed has been a problem for decades. But now with the advent of new communicable blood-borne diseases, the cost of tranfusable blood has skyrocketed, too. In many areas the cost of blood for transfusion has doubled.

"The holy grail of the blood bank system in this country has been to create an alternative to traditional blood banks a blood substitute. Others have tried and failed in this field, but we now believe Northfield Laboratories (NFLD NASDAQ) has got it right and is the primary beneficiary of its reinvention of the blood transfusion business. The reasons a blood transfusion substitute is so urgently needed in this country and around the world are simple. Blood stored and used for surgical or emergency transfusion is 1) Very costly due to hepatitis, HIV, and West Nile virus issues; 2) Has a short shelf life (approximately 28 to 42 days); and 3) In chronic shortage for rarer blood types.

"Late last year, Northfield officials announced that the company had received the first full approval from an institutional review board to start a Phase III urban ambulance trial with PolyHeme, its oxygen-carrying blood substitute. This landmark trial represents the first time in the US that patients will be treated with an oxygen-carrying blood substitute at the scene of an injury. PolyHeme is a solution of chemically modified hemoglobin derived from human blood, which has oxygen-carrying capabilities similar to transfused blood. As an alternative for whole blood units in acute blood-loss situations (like emergency and elective surgeries), PolyHeme has the potential to prevent the shock associated with massive blood loss by restoring volume without the side effects associated with some hemoglobin-based substitutes.

"Northfield uses unscreened or cleaned blood donations purchased from the American Red Cross and Blood Centers of America as the starting material, and then uses a proprietary process of separation, filtration, and chemical modification to produce PolyHeme. The company says one unit of PolyHeme contains the same amount of hemoglobin as one unit of blood. Studies of the product have indicated that PolyHeme eliminates disease transmission, is universally compatible (eliminating blood typing before use) and has a shelf life of around 12 months.

"Northfield estimates that around 14 million units of blood were transfused in the US in 2001, with approximately 8.5 million units given to patients suffering from acute blood loss. Patients were charged about $2.5 billion for those units of blood. The company believes PolyHeme may be used by emergency medical technicians in ambulances, medical helicopters, and other pre-hospital settings, and the military has expressed interest in similar oxygen-carrying products for battlefield casualties. NFLD just completed an $18 million private placement of equity that should ensure they have enough cash to complete their Phase III trials.

"The stock has been on a wild ride almost straight up from $10. We’re adding it to our speculative buy list, which represents high-risk stocks that should only be bought with money you can afford to lose. The potential for military buying and international blood bank use makes it very hard to come up with a potential value. Suffice to say, this could be a five-bagger at least with full FDA approval of PolyHeme for hospital and emergency use. But be sure to buy this name wisely. The real payoff on the stock is probably 12 to 18 months (or more) away from now."

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