DNA Giant Illumina's Newest Partnership

by: Daniel Lauchheimer

Starting on March 5th of this year, I wrote three articles about Prolor Biotech (NYSEMKT:PBTH). During this period I wrote about the companies innovative platform technology, which allows them to make longer lasting therapeutic proteins. The company harnessed this platform by developing drugs based on their technology for the treatment of human growth hormone deficiency (hGH) for children and adults, an innovative GLP-1 drug that can stimulate insulin production without the attending weight gain risks, and finally a blood clotting factor drug. Just over six weeks after I wrote my first article on Prolor Biotech, Opko Health (NYSEMKT:OPK) bought the drug maker giving each holder of Prolor Biotech almost one share in Opko. News of the deal leaked in the run up to the acquisition, and during that time the kind editors at Seeking Alpha picked up on my Prolor Biotech pieces and noted their prescience.

From the time when I started covering Prolor Biotech to the date I submitted this article (7/17/2013) Prolor Biotech gained 31.19% relative to 9.52% for the S&P 500 (NYSEARCA:SPY), and 19.52% for the S&P Pharmaceutical Index (NYSEARCA:XPH) see chart.

After covering Prolor Biotech in some depth, I turned my attention to the company that bought Prolor Biotech --Opko Health. I laid out the Opko story in this article, and tried to show that while the bears have been calling Opko overvalued for sometime now, with their acquisition of Prolor Biotech we could now make the opposite argument -- that because of its Prolor Biotech acquisition market undervalues Opko. In that article, I outlined Opko's main products. Its products fall into two camps -- diagnostic and therapeutic. One part of their diagnostic technology allows patients with elevated PSA levels (which could indicate prostate cancer) to take a test instead of having a painful and intrusive biopsy.

This piqued my interest. What other companies have begun to offer less intrusive and painful diagnostic methods, which can save a patient not only physical pain, but also time and money. After searching around, I found that TrovaGene (NASDAQ:TROV) fit the bill as one of the more innovative, and more importantly, promising, members of this class. In this article, I will explore TrovaGene through the lens of the critical partnership they struck with Illumina (NASDAQ:ILMN). In order to do this properly I will take a fairly deep first cut in trying to explain the different parts of the DNA analysis process, find out how Illumina played a roll in it in the past, how they have tried to expand that roll going forward, and how TrovaGene fits in with their future plans.

What Is DNA?

DNA forms the code that makes each human unique -- hair color, eye color, facial features, etc. When a new cell needs to form messenger RNA (mRNA) copies the code from the DNA, and uses it to synthesize new proteins, which form the backbone of the human cell. DNA, as I am sure many of you have seen in pictures, takes the form of a double helix, or to bring it a bit closer to home, a ladder with two pegs on each side holding a rung into place. Scientists have named these "pegs" A, T, G, and C. Critically, A always pairs with T and G always pairs with C. This phenomenon will form the backbone of much of the current DNA testing as we will see soon, so keep this in mind. You can find DNA cells in many places in the body, including the cheek. When sampling DNA from the cheek, you only get a tiny portion of DNA -- how can you use that small amount to analyze an entire pattern of DNA?

What To Do After You Get The Sample: PCR

Remember when I told you just a bit ago to remember that A always pairs with T and G always pairs with C -- well we need to use this rule, now. When doctors take a small sample of DNA, they take it through a process called a polymerase chain reaction (PCR). In this reaction a strand of DNA gets broken into two, and a doctors add a chemical that takes one half of the broken DNA and uses certain chemicals to fill in the rest. Remember, even though we only have one part of the DNA strand, because we know that A always binds with T and G always binds with C, then if we know one half of the DNA strand we can easily fill in the other. Doctors repeat this process around 30 times before they have a large enough sample size to analyze. For a good illustration of this watch this 1:31 video. Now you have the large sample, but you don't know the order of the A,T,G, and C's -- and you need this in order to make sense of the patient DNA, so how do you do this?

Many Ways To Analyze, But Let's Focus On One

As mentioned, we have the large sample, now we need to figure out the order. One of the benefits of knowing the order centers on determining whether or not patients has an error in their DNA code. Doctors call such errors single-nucleotide polymorphism (NYSE:SNP), and they can point to major problems for patients. Scientists have come up with an ingenious way to figure out if a patient has an SNP. They figure this out by slicing the sample DNA in half, after that they take an example of a dangerous SNP sample from a library and slice it in half as well. They then place this library sample into a microscopic bead, which can hold the library reference in place. With the library DNA held down firmly in place, we can now see if the sample DNA fits with the library DNA. If it does, then the patient tests positive for an SNP. When the DNA gets placed in the beads, we call that placing it in an array, and the process of analyzing (or sequencing in DNA terms) we call an assay. This process differs depending on your goal -- do you want to find SNP's, do you want to figure out how a gene forms a protein (called gene expression), or do you want to have a paternity test? Depending on the end goal, the process of analyzing the DNA will change. However, the bead array method remains one of the most common ways to execute a DNA analysis.

But Where Does Illumina Fit In?

When Illumina first started in the late 1990's they innovated the bead array market. They made better beads, with better assays, and produced a more accurate sequencing. They built on their success in this market by adding more libraries, arrays, and assays. Recently, they increased the velocity of their acquisitions expanding into many different areas of the DNA market. First, in 2010 when they acquired Helixis and its PCR technology (p.4 of annual report). This expanded them vertically by giving them a presence on a higher up level of the DNA sequencing food chain. However, they didn't limit their expansion to more of a presence in different parts of the DNA process, they also expanded into different DNA markets. Namely, they first provided their products and services mainly to life science companies looking to replicate DNA that can in turn replicate therapeutic proteins. However, they have recently expanded in this area, turning to the diagnostic DNA market, called molecular diagnostics. They made a big move into this game by acquiring BlueGnome in 2012 (ibid), and continued on it with their partnership with TrovaGene.

What Does TrovaGene Bring To The Table?

As mentioned earlier in this article, you can easily sample DNA through a cheek swab. If so, what does TrovaGene bring to the table with its urine based nucleic acid test? Let's take a step back for a moment. DNA stands for Deoxyribonucleic acid -- making it a part of the nucleic acid family, but not the only member. Other members of this family include RNA, and importantly for us, trans renal DNA and trans renal RNA (TrDNA and TrRNA respectively). The diagnostic information we can glean from the trans renal variety differs from the information we can glean from plain old regular DNA. Normally, for doctors to sample this type of DNA they would need to draw a blood sample -- as we mentioned a painful and difficult experience, especially when the patients needs frequent sampling. TrovaGene's key breakthrough lies in its ability to extract and sequencing this TrDNA and TrRNA from a patients urine without needing to draw a blood sample. Considering Illumina's significant push into the diagnostic space, we can now better understand their desire to expand into other areas of nucleic diagnostic testing

Final Thoughts

Though we didn't spend much time discussing the TrovaGene and its unique technology, I think we needed to understand the history of Illumina, both to give us perspective on the DNA market as a whole, and also to give context to its partnership in TrovaGene. In future articles I hope to explore TrovaGene in more depth, both by examining it on its own terms, and furthering the comparison with Illumina.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.