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You Look Good in those Genes!

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

I’m going to make a bold prediction that genetic sequencing will be the “next big thing” in medical research and treatment technology. A decade after the first draft of the human genome was published, hospitals and clinics are using DNA sequencing to generate better treatments and diagnoses for patients with rare childhood diseases, cancers and other mysterious conditions.

Now that the puzzle of the human genome has been solved there are several companies that provide gene sequencing products and services.  In a desperate attempt to win his battle against cancer, Steve Jobs paid $100,000 to have all of the genes of his cancer tumor sequenced.  The idea was to try to design a drug that could fight the pancreatic cancer that ultimately took Jobs’ life at age 56.

With the evolution of several companies offering genome sequencing services and competing for market share, and with recent advancements in research and technology the cost is coming down and will soon require less than $1,000 to have your DNA unraveled.  As evidence of this trend, a company spun off from Oxford University in England (Oxford Nanopore) announced the MinIon last week - a portable gene sequencing device that will retail for about $900.

Some of those companies will be successful in this business, others will not.  Let’s examine a few that look promising.

Life Technologies (NASDAQ: LIFE) and Illumina (NASDAQ: ILMN) are two of the bigger players in the genome sequencing game.

Life Technologies has a presence in approximately 160 countries, and possesses an intellectual property estate of approximately 4,000 patents and exclusive licenses.  The company offers a range of products and services, including systems, instruments, reagents, software, and custom services.  With more than 10,000 employees worldwide they have a well-established footprint in the industry.

LIFE is profitable and growing and has nearly a $1B in cash. The stock is down about 10% from a year ago and trades at a forward P/E of 10.8.  They are competing with Illumina to introduce a faster, cheaper gene-sequencing instrument in their Ion Torrent division.  The new Ion Torrent devices are called the Personal Genome Machine and the Proton and will also bring down the price of genome sequencing below $1,000.

Illumina has been the target of a hostile takeover attempt by Roche Holding AG. Illumina provides a comprehensive line of products and services that currently serve the sequencing, genotyping and gene expression markets for genomic research centers, pharmaceutical companies, academic institutions and biotechnology companies.

Roche wants to transition Illumina’s gene-mapping technology into routine medical use where it can potentially target medicines toward individual patients.  Getting the technology out of the lab and into hospitals and doctors’ offices will help drive growth in the $1.5 billion market for gene-sequencing machines.

 “Roche’s hostile bid for Illumina sparked a lot of interest in the genetic sequencing space,” Alex Morozov, a Chicago-based analyst at Morningstar Inc., said in a telephone interview.

The share price for ILMN is down more than 25% from a year ago despite the recent pop on news of a potential Roche takeover.  The company has been showing signs of slowing growth and declining margins even though their devices are the most widely used in the industry.  But they also have about $1B in cash and are generating positive free cash flow, so don’t count them out just yet.

Encouraged by the huge market in gene sequencing, Genomic Health Inc. (NASDAQ: GHDX) is planning to create a new subsidiary company in March 2012.  They will invest $20M in the new company which will focus on commercial applications of the human genome. It will establish the business by March 1 and offer its first commercial service by 2013. Randy Scott will step down as chairman of Genomic Health to become CEO of the new venture on March 1.

Genomic Health was founded in 2000, has a market cap of $830M with $100M in cash and no debt.  At about $28 the stock is near its 52-week high and was recently downgraded by two analysts after an earnings miss on their latest quarterly report. There has been a lot of insider buying lately which speaks to the promise of future potential.

I believe that the new company may have a beneficial impact to the bottom line in the long term but in the short term (six months to a year) I expect the stock to retreat from current levels. I don’t feel that there is anything genetically wrong with the company but the stock needs a booster shot before it will attract the serious attention of investors.


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