Avoid This One-Trick Pony and Get a LIFE Instead
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After enjoying positive earnings and a recent contract with CIGNA insurance, Genomic Health (NASDAQ: GHDX) seemed poised to grow like a weed. Riding the success of its Oncotype DX assay for invasive breast cancer, Genomic Health was profitable and its stock was moving higher. The future promised more. Now, it might not happen. Published research over the past year or so hasn’t looked kindly on Genomic Health’s products.
The University of the Sciences in Philadelphia reported Oncotype DX was not as cost-effective as Agendia’s MammaPrint for optimizing breast cancer treatment. Agendia also recently rolled out a version of MammaPrint for formalin fixed tissue, directly competing with Oncotype DX in the breast cancer market.
Researchers at both University of Pittsburgh and Emory University found the traditional staining method for proteins estrogen receptor and progesterone receptor in breast cancer was superior to Oncotype DX and less expensive. The Pitt researchers also found Oncotype DX had a high false negative rate for detecting a protein called Her 2. These three proteins predict which chemotherapy drugs a breast cancer patient will respond to.
The Mayo Clinic showed the Everist Genomics OncoDefender-CRC assay was superior to the Oncotype DX assay for colon cancer. It must be pointed out, though, that six of the ten authors of this study work for Everist Genomics.
While these studies won’t doom Genomic Health, they do highlight the headwinds the company faces despite past successes and momentum.
A Better Way to Invest in Genetic Testing?
Make no mistake, genetic testing (molecular diagnostics in medical parlance) plays an important and growing role in oncology, infectious diseases, and forensics. However, rather than invest in a company fighting to establish itself in the medical field (a time consuming and costly process), why not invest in companies making the instruments and reagents for these genetic tests? Two companies come to mind: Life Technologies (NASDAQ: LIFE) and Illumina (NASDAQ: ILMN).
LIFE began from the merger of Invitrogen and Applied Biosystems in 2008. Since then, it's grown into an $8.5 billion market cap company with $3.7 billion in sales in 2011. LIFE also made itself into a major player in the gene sequencing industry. LIFE serve a diverse clientèle: medicine, food safety, forensics, and veterinary medicine all use LIFE products. This diversity supported an annual earnings growth rate of 17% over the past five years. The acquisition of Navigenetics, Compendia Biosciences and Pinpoint Genomics adds to their portfolio of oncology and pharmacology related companies.
Bristol-Myers (NYSE: BMY) signed a deal to develop diagnostics to identify patients who will benefit from targeted chemotherapy drugs. Over the past fiscal year, both operating margins and gross profit margins improved and the most recent earnings report exceeded expectations. The company’s CEO aims to have LIFE achieving the number one spot in gene sequencing sales next year. The only problem with that aspiration: Ilumina.
Illumina currently controls 60% of the next generation gene sequencing market, with LIFE controlling about 20-25%, according to Bloomberg News. Bloomberg also points out an important benefit of this dominance: customer loyalty. That is, Ph D. students who use Illumina’s products during training are likely to keep using them after they graduate and conduct their own research. In my opinion, though, the stock is a bit over-priced with a P/E of 68 and a PEG of 4.
No question earnings are growing, margins are great, and the company is marketing its products aggressively to maintain market share. However, their return on equity is only 7.5%. Also, according to S&P, a large number of Illumina’s customers depend on government financing or grant support and the current environment in Washington would predict cuts in research funding. This would adversely affect Illumina’s earnings. Illumina is a formidable player in the gene sequencing world, but perhaps overbought at the moment.
Genomic Health enjoyed an enviable run with a popular breast cancer prognosticator. It now faces a direct challenge from MammaPrint and recent medical research questions the value of Oncotype DX in clinical practice. According to an oncologist I know, there are a dozen other companies all offering similar products and services. Rather than invest in Genomic Health and risk losing money to competition, invest in companies making the instruments and reagents that develop the tests. Both LIFE and Illumina, in my opinion, make a better investment than Genomic Health. Of these two, LIFE, with its broader product menu and clientele and significantly lower P/E, would be the better investment. For those looking for capital gains in a growing industry, stay tuned to molecular diagnostics. I believe the growth has only just begun.
dylan588 has no positions in the stocks mentioned above. The Motley Fool owns shares of Genomic Health and Illumina. Motley Fool newsletter services recommend Genomic Health and 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.If you have questions about this post or the Fool’s blog network, click here for information.