- A decade after dazzling Wall Street with big promises and slender earnings, biotech firms specializing in genetic research have returned with a vengeance -- and even more big promises and slender earnings.
- Rising powers such as San Diego-based Sequenom (NasdaqGM:SQNM - News) have scored triple-digit gains this year. The Medical-Genetics group owns the No. 1 spot among the 197 industries tracked by IBD for six-month price performance
- One of the biggest catalysts for stock price growth in the industry has been rampant merger and acquisition talk, says William Ho, senior research analyst at Banc of America Securities.
- "You have two types of companies getting acquired," said Ho, whose coverage includes traditional biotechs as well as genetics stocks such as Myriad Genetics (NasdaqGS:MYGN - News). "You've got the early-stage platform companies, which offer more attractive valuations for Big Pharma companies. Then you've got late-stage companies, those that have already marketed their products or have passed stage three clinical trials and are about to go to market."
- "There's a basic tenet in biology: DNA produces RNA, which translates into proteins," Ho said. "Underexpression or overexpression of a protein causes disease. The thought was that genetics could identify changes or mutant factors that lead to disease. Unfortunately the body is more complex than that. Diseases are often multifactorial."
- Myriad Genetics has experienced plenty of ups and downs. Its stock peaked at 138 in November 2000, fell below 9 in March 2003, and has since trended upward, hitting a seven-year high of 68.59 earlier this month. The firm has banked big growth through a test called BRCAAnalysis. It screens for hereditary risks of breast and ovarian cancer.
- Ho estimates that about 7.8 million U.S. women are candidates for testing, with only 200,000 tested by the end of 2007. With various patents secured through 2016, 2018 and 2023, and a growing knowledge base gleaned from performing tests, Myriad has a strong competitive edge with its BRCAAnalysis.
- The test helped drive company-wide revenue growth of 40% or more in each of the past five quarters. BRCAAnalysis is also a highly profitable test, generating operating margins of 47%, Ho says.
- Despite those high margins, Myriad, like other genetics companies, has had a hard time producing black ink. Research and development costs are usually so prohibitive that it can take years for a company to turn its first profit. Marketing products as a solo venture is often so difficult that genetics companies will sell out to a big drug maker before those profits ever arrive.
- Ironically, the June failure of a stage three trial for another Myriad product, Alzheimer's drug Flurizan, might pave the way to profitability for the firm in the near future. Last year, Myriad spent $116.5 million on research and development, with $63 million going to Flurizan. With Flurizan's progress now derailed, the company figures to devote more attention to its profitable diagnostics business.
- There's also talk of splitting the company into two parts: diagnostics on one side and the cost-intensive therapeutics business on the other.
- Sequenom began doing fine mapping, a technique that studies hundreds of thousands of genetic samples, looking for connections to disease. It expects to clear about $50 million to $55 million in revenue from fine mapping this year, says analyst Sean Lavin of Lazard Capital Partners.
- But Sequenom is on the cusp of marketing a new product with the potential to generate $1 billion in revenue within the next five years: a test that can detect a number of different hereditary conditions, including Tay-Sachs, cystic fibrosis and others. For now, Sequenom's focus is on a test to detect Down syndrome in unborn babies. The test uses fetal RNA found in the blood of expectant mothers.
- When the product does go to market, one challenge will be convincing doctors to adopt it. Some 4 million pregnancies occur in the U.S. every year, Lavin says, creating a potential market of $2.5 billion. (that won't be a challenge as it's NON invasive)
- Sequenom aims to secure its own code for its test. If it's successful, the firm could go from making about $600 per patient to two-and-a-half times that. If OB-GYNs latch onto Sequenom's product and offer it as a less intrusive way to test for Down syndrome, there's potential for an even bigger premium. (Bingo)
[Aug 13: Beginning Stake in Sequenom]
Long Sequenom in fund and personal account