Game Changer in Hospital Labs?

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

Some researchers estimate that roughly 90% of all bacteria found in or on human beings cannot be cultured.  Treponema pallidum, better known as syphilis, represents a prime example.  Currently, the only way to grow syphilis is by inoculating a living animal, such as a hamster.  Rest assured, few hospitals have the resources to routinely diagnose a patient with syphilis, or any other disease, using lab animals.  Currently, diagnosing syphilis relies on blood tests that, while good, are well known for having limitations.  I personally have interviewed patients with false positive syphilis tests and have seen first hand the angst these shortcomings can cause.

While current blood tests remain in use, genetic testing (aka molecular diagnostics) may be the diagnostic venue for syphilis and other infections of the future.  In 1998, researchers at the University of Texas sequenced the entire genetic code (genome) of syphilis, opening the door for diagnosing syphilis with greater confidence and speed.  Further, genetic sequencing is becoming so inexpensive for bacteria, some believe a $10 genetic test for syphilis and many other bacteria is possible, if not likely.  

The Future is Arriving

Things are already moving in that direction.  The Centers for Disease Control and Prevention recommend hospitals use molecular diagnostics to detect a bacteria known as Clostridium difficile (or C diff).  This bacteria can cause diarrhea in patients who have been treated with large doses of antibiotics.  The diarrhea can be so bad as to kill the patient.  At the very least, it prolongs hospitalization.  In the past, hospitals looked for the C diff toxin in patient’s stool.  Unfortunately, the toxin breaks down quickly if the stool specimen is not refrigerated, a real problem for patients in nursing homes or other facilities without a microbiology laboratory.  Culturing for C diff frequently leads to false positive results.  Cultures and toxin assays also take time, up to 48 hours.  C diff DNA is far more stable than C diff toxin, and amenable to detection by molecular diagnostics, specifically real time polymerase chain reaction or PCR testing.  Not only can PCR detect C diff in unrefrigerated specimens, PCR can usually detect C diff within one hour.

So how to invest in these pleasant topics of syphilis and diarrhea?

Bigger is Better

I recommend investing in larger lab equipment providers such as Abbott Laboratories (NYSE: ABT), Roche (NASDAQOTH: RHHBY) or Becton Dickinson (NYSE: BDX).  These companies sell a host of other laboratory equipment and thus offer “one stop shopping,” or something close to it, for hospitals.  This makes it easier for hospitals to negotiate contracts and volume discounts and to interface the instruments with hospital computers.  For example, Abbott markets lab instruments for a broad spectrum of blood tests, as well as point of care testing devices and home glucose monitoring systems.  The company makes a decent investment, too.  The stock is up to $63 per share, a $10 gain for the past year, and sells at a P/E of 16 with a 3.2% dividend.  

Roche not only makes instruments for blood tests, but through its Ventana subsidiary, markets some of the best instruments in the US for testing tissue specimens.  The stock is up 21% for the year but sells at a P/E of about 18.  Roche does not pay a dividend on its ADR shares.  BD also makes specialized instruments for hospital and research labs.  As an investment, the stock has seesawed this past year.  On the other hand, it sells at a P/E of less than 14 and pays a 2.4% dividend.  Overall, I lean towards Abbott.

Smaller companies like Cepheid (NASDAQ: CPHD) or Meridian (NASDAQ: VIVO) make very good instruments, they receive favorable reviews in medical and professional journals, and likely are cost-effective relative to traditional assays and culture techniques.  As investments, they seem to struggle.  Cepheid is operating at a loss and recently lost a patent infringement suit.  The stock has sunk 10% from a year ago and has a downward, if not erratic, trajectory.  Meridian makes a profit, pays a 4% dividend, had a good earnings report last quarter, but trades at a P/E of 24.  It too is down 10% for the past 12 months.  Neither company makes the diversity of instruments that the larger companies offer; this may put Cepheid and Meridian at a disadvantage with hospital administrators.

Foolish Bottom Line

Genetic testing/molecular diagnostics for microbiology may prove more clinically valuable than cancer testing.  Typically, a bacteria contains only one tenth of the number of genes in a human cell.  This makes it far easier to sequence or otherwise detect bacteria relative to subtle genetic changes in cancer cells.  If sequencing bacteria ever costs $10, then expect this technology to take off.  To put this in perspective, diagnosing a blood stream infection costs $30 just for the blood collection vials alone.  Add the plating and biochemical testing costs if something grows.  It may take two to three days before a final result becomes available.  Using a $10 genetic test, theoretically, a blood specimen could be tested for the three most common bacterial infections for the cost of the blood collection vials in less than an hour.  This could be a huge benefit for patient care and hospital finances.  Pick the right company, and your finances may not do too badly either.

dylan588 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Becton, Dickinson and Co.. 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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