China Medical Technologies Science Background

In order to really understand the benefits and drawbacks of investment into a company like CMED it really helps to take a brief look at the science behind its operations. By having a background in biochemistry I was able to read about and(for the most part at least) gain an understanding of CMED's three current technologies: HIFU, ECLIA, and FISH. I know that I for one hate to invest in companies whose products I don't understand (hence I often stay away from technology companies with esoteric products that only computer science people truly understand). Here I hope to discuss how CMED' s products generally work and what that means for the potential growth of the company and therefore for investors' potential risks/rewards.

High Intensity Focused Ultrasound (HIFU)
Summary/Background

I am not a physicist (I do have a very basic background) so my HIFU description may have some inaccuracies. Hopefully it overall gives a general picture that may be helpful.

Waves carry energy. This energy can be in the form of heat. The electromagnetic spectrum is the one that may be most familiar to you. http://stuff.mit.edu/people/rsmith80/spectrum.gif

Microwaves carry less energy than visible light normally. Non UV visible light does not make us hot. So how can we heat up our food in microwave machines? When microwaves are specifically designed in a way to heat water molecules we can get this heat energy in a closed, specific environment. The advantage of this is that unlike higher energy waves the microwaves are not dangerous when not specifically designed in a way as to generate heat. This prevents the microwaves from being dangerous or hot to people waiting for their food outside the microwave. Ultrasound waves are similar to waves in the electromagnetic spectrum but travel at the speed of sound, not at the speed of light. Ultrasound waves generally are not particularly dangerous/destructive and have been used for years for many medial procedures. However, with HIFU scientists have determined how to specifically target certain areas with the high intensity waves. The focal point of the waves can generate intense heat in this way. Yet because the waves outside of this focus are not inherently high energy they do not damage surrounding tissue. Check out this link... very informative...

http://www.prostate-cancer.org/education/novelthr/Chinn_TransrectalHIFU.html

This, at least in theory, allows scientists/doctors to selectively destroy certain tissues but not healthy ones. Studies in China on animals since the 1990s and on humans more recently have shown that these treatments can be safe and effective. Studies upcoming at the University of Washington will try to prove this to the FDA as well.

There are three main ways that HIFU can destroy carcinogenic cells. The first is the direct effect of the focused ultrasound heat on the tissues (via two mechanisms called cavitation and coagulative necrosis). The second is by damaging the blood vessels that enervate the cells. (Note that this effect can also be used to treat hemorrhaging… another possible use for HIFU). Without functioning blood vessels to enervate them the carcinogenic cells cannot survive for long. The third, though less proven so far, is to upregulate the immune system so that the body selectively attacks tumor cells after the HIFU procedure because the damage to the cells and the heat induce the immune system to recognize the tumor cells as non-self (as it does a virus or a bacteria) while still recognizing normal cells as self and not attacking them. Over time tissue not destroyed by the heat may be destroyed by the bodies' own immune system… (by the way doctors have been trying for years to see if they could destroy tumors by activating the immune system but the problem has been that the immune system has difficulty distinguishing tumor cells from normal healthy cells because both cells come from the same animal). Studies in China have shown preliminary evidence that this in fact may occur as a result of HIFU treatment. This three-pronged attack has the potential to… knock on wood… (not just for investors but for humanity) possibly change the face of tumor treatment and cure conditions never previously thought possible.

So far a number of companies across the world have developed HIFU procedures to treat prostate cancer. However, as far as I could determine, only CHINA has developed the technology to treat extracorporeal tumors- that is tumors that cannot be accessed by inserting the probes into the body via the rectum. They have treated kidney, liver, bone, lymph, and other cancers in China with this method and have shown in many cases the complete destruction of the cancer with only minor, reversible damage to healthy tissue. Recent HIFU studies on the worst of them all, pancreatic, has shown pain reduction in patients but not tumor clearance. This alone may be used and is what they are going to experiment on at the University of Washington. The studies are still very new and the hope is that they can eventually actually cure this condition once they learn more about the HIFU technology as it pertains to the difficult to treat areas of this organ.

The bottom line for investors: this may be China and people give it a bad rap but the technology being worked on at the top universities there is at least as advanced, and probably more advanced in this field, than any other in the world. This treatment could open up a whole new wing of science in the future… it is still too early to tell but it is possible that HIFU could be in every major hospital in the world in the coming decades. Although CMED probably won’t be the only seller it is on the forefront of this technology and even a piece of this could be enormous. However this is a case of don’t count your chickens before they hatch because until regulatory approval and worldwide acceptance of these procedures occurs they cannot be banked on internationally. But if I were a betting guy I would at least like the odds!

ECLIA-
This is an extension of a technique already in use- ELISA. ELISA works like this: say you are looking to see if someone is HIV positive: If they have been exposed to the virus they will have developed an immune response (molecules called antibodies) to the virus. ELISA puts general HIV proteins in a petri dish, adds the patient’s blood, .and sees if there are any HIV antibodies in the blood. If yes then the person has been exposed to HIV. The procedure uses animal (often mouse) antibodies that bind to to the patient's antibodies, and fluorescence to see if the patient’s antibodies are in the dish and they have been exposed. For the past decades ELISA, has been the gold standard for detecting certain chemicals and proteins in patients’ blood/ serum/ etc. ECLIA is similar to ELISA except that instead of using animal antibodies (which are expensive) it is able to detect fluorescence by using chemical reactions. The chemical reactions have been shown in certain cases to make ECLIA cheaper and faster than ELISA. Studies have shown (according to pubmed) that ECLIA and ELISA can be equally accurate. This means ECLIA can match the gold standard and is cheaper and faster.
Bottom line for investors: ECLIA may very well replace ELISA as the gold standard in years to come. Or it may be used in consjunction with ELISA. Because there are many different compounds/processes to be detected and each one binds to different things (each process needs separate ECLIA reagents (i.e. the specific chemicals/proteins needed to detect HIV are different from those needed to detect diabetes but the overall process is the same). As science and medicine advance enormously in the upcoming decades (remember the human genome was just mapped a few years ago!) the number of reagents may expand along with it. Unlike extracorporeal HIFU CMED does not have a special leg up over international companies on ECLIA. However, it does have enormous advantages over other domestic companies in the Chinese market because some of its reagents, such as HIV reagents, are expensive and are specifically designed for best results by CMED. This makes it difficult for other startups to jump in. Also, CMED is practically giving away the ECLIA analyzers at cost so that they can establish analyzers that only work with CMED reagents in hospitals throughout China. It’s kind of like computer printers: sell the printers for cheap and make money on the cartridges. Also it may make CMED the premier provider in China which could potentially establish them as a trusted brand name for years to come.
Internationally it may be the case that CMED can offer reliable products at a much lower price than companies like GE or Abbot. However, I have some doubts about this. Major international companies will have no hesitation to outsource labor to countries like China. Thus I am not sure that CMED will have a cost advantage: it may be the same and people may trust American companies more at least in the near future. However… China will likely be a superpower in this century (I’d be more surprised if they are not than if they are) and these things may change. For now I would look at ECLIA primarily for the domestic market.

FISH-
Flourescent In Situ Hybridization looks at DNA and RNA of cells to determine a whole spectrum of potential changes and their associations with different disease conditions. Essentially it fluoresces parts of the DNA or RNA in cells or on chromosomes (the 46 different DNA bundles that make up all cells- one is an x or a y and determines if you are a guy or a girl).
For now some of the mentioned uses are: looking at cells to see if they are cancerous, testing for fetal abnormalities like Down Syndrome, determining which chromosome a gene is on, looking for cell replication and division patterns and abnormalities, and many others. Like ECLIA, FISH is describes a general procedure that can be modified to detect many different things. FISH has been in existence for decades in the west. Does this mean that it is a secondary procedure? At first glance, since I knew it was around for a while I thought so, but upon further examination I realize that it is just the opposite. FISH looks at the most complex and important part of cells: the DNA, RNA and chromosomes. It is not that FISH is outdated but rather much of what FISH can offer will only be unlocked as our understanding of medicine grows more sophisticated. FISH procedures may evolve step in step with medicine and provide tremendous benefit in the upcoming years.

Further remarks on CMED
It must be understood that the entire field of medicine is poised to grow leaps and bounds in the upcoming decades. The human genome project was just completed. Scientists from around the world at the world’s finest Universities can collaborate like never before. Information can be transmitted quickly and effectively. Furthermore, China is the world’s largest country. By most estimates it will no longer be a third world country but a leader in the future. China Medical is headed by a CEO, Xiaodong Wu, who has a college degree in physics and extensive experience in managing technological development.( http://www.forbes.com/finance/mktguideapps/personinfo/FromMktGuideIdPersonTearsheet.jhtml?passedMktGuideId=1062899)
The population is aging. The Chinese government is determined to improve the healthcare system. The company appears to be making lots of smart moves. The company seems to care about their shareholders by offering dividends early in their growth phase not at the expense of growth but with excess cash from their huge operating margins. The price to operating cash flow (ttm) is 20.59 for a company estimated to grow 42% a year for the next 5 years. The companies’ growth is in a secular industry that may offer partial protection from the inevitable future bust in the Chinese economy. Just as importantly, CMED has shown that they are not content to sit on their HIFU technology. If they continue to diversify their offering over time they may possibly become a huge, wide-moat health products company in the world’s largest market. Xiadong Wu owns 26% of the company (huge insider ownership).

The biggest concern I have here is getting too excited about this company. With all of these synergies in place there is a danger that investors may cease to see the risks. So I am going to mention mine here:
1. The company is still very small and has only three core products as of today.
2. The actual business conditions in China are unknown. Also there are not many analysts/companies covering this company so it is hard to ascertain information often.
3. China is fairly new to capitalism and the Chinese government’s moves are always a bit uncertain.
4. The Chinese economy will most likely eventually go through a major correction. CMED may be more protected than most but it is not entirely certain. Even if the company remains in good shape the stock will probably get hit along with others until conditions improve.
5. HIFU’s uses, while potentially exciting, are still experimental in many aspects.
6. It is unclear if outsourcing by international companies may limit CMED’s ability to underprice competition, especially for overseas markets
7. The competitive landscape domestically is still shaping itself.
8. Can the management and general business practices in China be trusted? It seems that the company is honest but what are the regulatory guidelines in China?
I’ll think of more as they come up in my mind.

That being said… this company might turn out to be big. We'll have to see. This company is a clear case of high risk and high potential reward.



Some good links:

http://www.hifucancertreatment.co.uk/hifu-treatment.html
http://www.pasteur.fr/recherche/unites/biophyadn/e-fish.html