The Smart Money Has Been Eying the Future of DNA Sequencing: Should You?

Brendan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Roche (NASDAQOTH: RHHBY) has a remarkable history of making attractive and well-timed acquisitions.  In 2009 they purchased Genentech and bought one of the most attractive companies on the market as blood ran through the streets. Recently Roche has turned its interest to a little known sequencing company named Illumina (NASDAQ: ILMN), but over this weekend they appear to have withdrawn the offer for a second time.

In this context, it is interesting to consider other investments that have a chance of capitalizing on the opportunity that Roche sees in the future of DNA sequencing.  One such company is Life Technologies (NASDAQ: LIFE), which has its own rival Ion Torrent sequencer.  The interesting difference between Illumina’s sequencing technology and Life’s is that while the former uses a complex system of optics, the latter uses an ion semiconductor to sense the flow of hydrogen ions as a polymerase selectively unzips DNA.  In other words the molecule of DNA is literally sequenced by detection of pH.  Since measuring pH (or acidity) is generally cheaper and because putting the technology on a semiconductor may allow Moore’s Law to apply, the Ion Torrent may eventually prove to be cheaper and faster.  

A number of technological hurdles still remain.  Life’s Ion Torrent is applicable to shorter reads of approximately 300 base pairs, so much shorter than an entire strand of human DNA.  Thus, the technology is currently more suited to either cancer genomes or viruses.  But perhaps the technology will lead to a machine that will be faster and cheaper, finally achieving the goal of a $1000 cost for sequencing a human genome.  This would be an amazing accomplishment considering that the Human Genome Project ran a total cost of $3 billion before reaching its goal in collaboration with private researchers from Craig Venter’s laboratory.  In its current form, the technology is still transformational in terms of the speed and ease of sequencing.  This may begin to bring sequencing to the masses and will allow more researchers to engage in groundbreaking research in the field.  There has been a fair amount of recognition for the Ion Torrent as well and it recently won San Diego's CONNECT award due to its potentially disruptive technology.

Another reason to invest in Life Technologies is that the company is not a singular bet on an unproven technology.  Life's industry leading margins are driven by a deep portfolio of instruments, reagents, software and custom services that should perform well in the coming “century of biology.”  Academic laboratories and pharmaceutical companies use these consumables, which drive an 80% recurring revenue stream.  In 2011 LIFE generated $710 million in free-cash flow, not too shabby compared to its $9 billion market cap.  While the company does not pay a dividend it has aggressively repurchased shares in the past year, shrinking the share-count from 186.8 million to 177.3 million, a 5% reduction.  At $51/share and a trailing PE of 22, I wouldn’t call Life a value investment; however, this fairly valued company should continue to outperform due to the success of the Ion Torrent, continuing share repurchases and improvement in overseas revenues.

brenoboyle has no position in any stocks mentioned. The Motley Fool recommends Illumina. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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