Toddlers Among Baby Breakers

Every Friday I write a short column called "Baby Breaker Birth Announcements." (For last Friday's entry, click here.) The idea is to identify innovative private companies taking equity investments. These are the ones, in my very humble view, most likely to grace us with their presence in the stock market.

A crazy quilt of prospects
We've tracked a remarkably diverse mix of businesses through Baby Breakers. I'd call many of them classic Rule Breakers -- businesses seeking to reshape common conventions in firmly established tech markets. Here's a list:

Hardware

Software

Web

Telecom

Ageia Technologies

Revver

Shop.com

SunRocket

Vue Technology

Onewave Tech

Yelp.com

BlueFrog Mobile

DiBcom

SmartPay

Midasplayer.com

Alloptic

Funcom

Chipsbrand Micro

Jobster

VeriSilicon Holdings



But many others were seeking to establish rules where there weren't any (biotechs, for example). Here's a full list:

Health Care

Biotech

Nanotech

Other

MicroCHIPS

CellFor

Nanosys

Oanda

InTouch Tech

VIRxSYS

HealthDataInsights

Raven Biotech

Intarcia Therapeutics

EpiCept

Amicus Therapeutics

Protez Pharma



The venture capitalists behind these deals aren't slouches. From Bessemer and Draper Fisher Jurvetson to Mayfield and El Dorado, there are plenty of very successful investors backing each company -- which made picking two (just two!) a chore. However, last year I came up with a tool that made narrowing the field much easier.

Shall we play a game?
I call it Press Release Bingo, and it helps judge the business progress of firms that possess no publicly filed financial statements. Firms like our Baby Breakers. How, you ask? By grading the past five non-financial press releases based on how they answer these three key questions:

  • Is there money being paid to the company?
  • Is there a happy customer featured?
  • Is the news about something truly groundbreaking?

Sometimes I'll give bonus points for unusual endorsements (i.e., celebrities, hard-to-find analysts, etc.) or especially good executive quotations. Otherwise, each "yes" scores a point. Each "no" scores nothing. The maximum score, or bingo, is 15.

In many cases, there were fewer than five releases to work through in a given calendar year. Firms with two or fewer announcements were eliminated; a lack of news indicates an immature business model, in my experience. And just like you wouldn't ask a six-month-old to stand or eat pizza, it would be unfair to directly compare Baby Breakers at different stages of development.

Other firms had less than five releases in a year but had three that didn't score all that well, and were thus eliminated. Everything else was a judgment call.

Introducing the two toddlers among babies ... VIRxSYSandInTouch Technologies
Let's start with VIRxSYS, otherwise known as Viral Therapeutic Systems. First reviewed in my Oct. 14 column, VIRxSYS has pioneered a gene therapy that claims to cripple the HIV virus and protect the CD4-type T cells that direct the immune system. It's a novel approach that recently drew $31 million in funding -- the first funding it has taken from venture capitalists. The deal was announced in the last of three releases this year, each of which was impressive, and led to a score of 5 of 9 possible points. Here's the breakdown:

  • VIRxSYS Completes $30 Million Financing (PDF file here). First, the company gets money, so score a point. Second, the round was oversubscribed because of -- at least according to one investor -- the track record of the new CEO, Dr. Riku Rautsola. That's an impressive endorsement and merits an extra point, especially because Dr. Rautsola's bio (on the company's website) mentions that he has built and sold other young biotech firms.
  • VIRxSYS Announces Completion of Phase 1 Study of Vrx496 (PDF file here). There's groundbreaking news in that all five patients being treated with the Vrx496 therapy have successfully completed six-month assessments. Three have gone a year without experiencing serious side effects from the treatment. Score a point.
  • Novel HIV Gene Therapy Yields Exciting Results in Phase 1 Clinical Trial (PDF file here). This is more groundbreaking news: two patients receiving the therapy saw net increases in CD4-type T cell counts, indicating success in blocking the effectiveness of HIV. That's worthy of a point. Moreover, the co-principal investigator in the trial, Dr. Carl June of the University of Pennsylvania, went on record saying that Vrx496 may enhance the immune system in HIV patients. That's an important endorsement, and probably not given lightly. It scores an extra point.

Notice how the high score had everything to do with the company's progress, and that it scored more than half of its possible points. If my broker had a watch list for private companies, VIRxSYS would be on it.

Now let's move on to InTouch, which, interestingly, made an episode of NBC's ER not long after it made my Oct. 7 column. The company develops robots that allow doctors to remotely treat patients, one of which helped an ER cast member participate remotely in a surgery staged during the show. So much for bedside manner, right? Maybe, but real-live hospitals love the products. That's why its past five releases score a remarkable 9 out of a possible 15. Here's the breakdown:

  • InTouch Technologies Secures $12.1 Million Series C Funding Led by Galen Partners (HTML file here). This is as straight-up as it gets for a news release. The firm has more cash, and it has a plan to keep expanding. Score a point.
  • Midwest Hospital Leads Nation's Use of Revolutionary Robot to Increase Patient-Physician Communication (PDF file here). And there it goooooeeeees! Yep, this one is right out of the park. First, you've got a customer issuing a news release announcing its endorsement and purchase of the technology. Score two right there. Then there's this statement from the release: "Shawnee Mission Medical Center is one of only 12 hospitals in the country to utilize the robot and is the only facility nationwide to use multiple robots throughout virtually every area of the hospital." Sound groundbreaking to you? Me, too. That's three points, bucko.
  • Statewide Bioterrorism Exercise Will Move Bits ... Not Atoms for Medical Response (PDF file here). InTouch only gets a mention in this announcement, but it's an important one. The Feds used one of the company's robots to demonstrate how it might remotely treat affected patients in the event of a bio-attack. Score a point for innovation.
  • InTouch Health Receives the American Telemedicine Association's 2005 Innovation Award for Telemedicine (PDF file here). Doesn't the headline tell you all you need to know? I'd say so. Score a point for an endorsement of InTouch's breakthrough.
  • DMC Embarks on New Era in Urban Health Care: Robots (PDF file here). It's outta here! This one, too, scores a triple. Like the Shawnee announcement, there's money paid to InTouch for the purchase of its robots, a happy customer, and an innovation in that the Detroit Medical Center says robots will help it fulfill its promise to see every emergency room patient within 29 minutes.

VIRxSYS did well, but InTouch has the kind of momentum that suggests its final destination is the public markets. And it doesn't hurt that I saw the product on TV because, as you know, my wife makes me watch ER. Either way, it tops my list of the quarter's Baby Breakers.

The Foolish bottom line
Will any of our Baby Breakers make for good investments one day? That's impossible to predict, and it hardly matters. Sure, we hope to find a Baby Breaker that everyone else has ignored, get in at the IPO, and collect our rewards. But that's not the real reason we study these privately held mavericks. We do it because it helps us better understand the markets in which our favorite stocks participate now, and how they might change over time. That's what matters when your investment time horizon is measured in decades.

Let me be clear: I'd never suggest you make an investing decision based purely on PR. Valuation must always come first. But when financial data is lacking, as is the case here, press releases are as good a place to start as any, and may even provide a telling glimpse into the future.

Could you ignore the private equity markets and still make money in the stock market? Undoubtedly. But every great investment started somewhere. Someone saw how Apple (Nasdaq: AAPL  ) would change computing. And another found Netflix's (Nasdaq: NFLX  ) e-rental model too tempting to ignore. They've made a lot more money than you in the market. And they're looking for the next billion-dollar idea right now. Would you rather join them? Or envy them? See you back here next quarter.

Biotech. Nanotech. Info tech. Any tech. David Gardner and his merry band of Foolish analysts cover them all in theMotley Fool Rule Breakers newsletter service. Their research has resulted in a portfolio of 28 picks that are beating the market by more than 13 percentage points as of this writing. Get in on the action by taking a risk-free 30-day trial today. All you have to lose is the prospect of better returns.

Fool contributorTim Beyersonly breaks the rules in his portfolio. Wimp. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile, which ishere. Netflix is a Motley Fool Stock Advisor recommendation. The Motley Fool has an ironcladdisclosure policy.


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