6 Ways You Can Profit From Molecular Diagnostics

by: Cory Renauer

Last week, Angelina Jolie's op-ed in the New York Times gave the field of molecular diagnostics more publicity than the industry could have wished for. If, like many investors, you are looking for a way to dial into the trend, here is a quick look at six of the largest molecular diagnostic companies by market cap.

Convenient and mediocre

Exact Sciences (NASDAQ:EXAS) is a molecular diagnostics company focused on colorectal cancer. The company's stool DNA test requires no dieting, bowel preparation, or invasive procedures.

Last October, Exact Sciences excited Wall Street with a pivotal trial involving 1,000 stool samples. The data showed its screening test recognized 98% of cancers and between 50-83% of pre-cancers. The market reacted enthusiastically, but the honeymoon didn't last long.

On April 18, 2013, Wall Street pummeled Exact Sciences after it reported preliminary results from a much larger trial of 10,000 patients. The DeeP-C pivotal trial using the Cologuard DNA stool-screening test showed a 92% sensitivity to colorectal cancer and a 42% sensitivity to pre-cancerous polyps. The results were far below analyst expectations of pre-cancerous sensitivity of 55%.

Separating serious from benign

Genomic Health (NASDAQ:GHDX) describes itself as a: "global cancer company focused on the development and commercialization of genomic-based clinical laboratory services that analyze the underlying biology of cancer allowing physicians and patients to make individualized treatment decisions." Notably, it is one of the few companies in the molecular diagnostics space that has successfully advanced from losses to profits over the past five years.

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The per share earnings dip you see in the recent quarter is largely due to the roll out of the company's latest prostate cancer diagnostic. From Q4 2012 to Q1 2013 revenues actually rose 5%. The new test is designed to separate patients requiring immediate surgery from those with inactive tumors that only require careful observation, at least that is the justification for the test's $3,800 price tag.

From the Supreme Court to Hollywood

Myriad Genetics (NASDAQ:MYGN) has been getting a great deal of press lately in response to Angelina Jolie's op-ed in the New York Times, and the Supreme Court's analogy bonanza.

The Supreme court is seriously considering the economic implications of striking down patents on all genes, and experts most familiar with the arguments expect it to take a middle road. Unfortunately, for Myriad, patents on isolated genes -- like the ones identified in the test that led Angelina Jolie's "medical decision" -- will most likely be stricken while synthetically created genes will remain eligible.

The Company is also marketing a recent test to assess prostate cancer risk, and selling it at about a $400 discount to Genomic Health's. Prostate screening is just one of the company's hereditary cancer screen offerings.

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Wonderfully profitable, Myriad has boasted an operating margin of between 35-40% for the past several years. Beginning in 2008 the company reduced its R&D budget and funneled more money into marketing its diagnostic services, and the profits have been rolling in ever since. Myriad has even been returning profits to shareholders since 2010 with a series of stock repurchases, reducing outstanding shares from 93.65 to 82.43 million.

If Myriad gets lucky and the Supreme Court allows its patents on the isolated gene mutations that it screens for to stand, this company's competitive advantage should allow those profits to continue growing for years to come. If not, I would hold off on a major investment until we can assess the effects of increased competition for identical testing from companies with R&D budgets that are a fraction of Myriad's.

Selling diagnostic equipment, not services

The exciting, but not yet profitable, Nanosphere (NASDAQ:NSPH) develops, manufactures and markets a benchtop analyzer that could be right out of a Star Trek episode. The sample analyzer and processors sit on a benchtop and are capable of identifying infectious diseases, and also performing genetic and protein testing for a handful of diseases. It even tests for genetic differences that affect how patients metabolize specific medications. Using this data, physicians can initiate new treatments using patient specific dosage.

Unlike Myriad's isolated genes, Nanosphere holds equipment patents --151 issued and 52 pending -- that should help this company maintain an advantage over competitors for years to come.

Although not yet profitable, Nanosphere appears to be exceedingly well managed financially. Since 2007, the company has maintained total annual operating expenses of between $33 and $41 million while revenues have grown steadily from about $1.17 to $5.08 million. Q1 2013 was the strongest yet with regards to sales.

The company has recently inked a deal with Hitachi High-Technologies to market its products in Japan. As the company continues to gain FDA approvals for diagnosing new conditions, its equipment should become a must have item for hospitals and clinics around the world.

Co-diagnostics pioneers

Spun-off from the University of Dusseldorf in 1984, Qiagen (NASDAQ:QGEN) has become the world's largest provider of sample and assay technologies. The company sells its products and automated solutions to molecular diagnostics laboratories, biotechnology, and pharmaceutical companies.

In 2012, the company became the first to win FDA approval for a medication specific co-diagnostic screening. Qiagen's FDA approved screening highlights patients with a specific gene mutation that makes them receptive to Erbitux, an initial treatment for specific head and neck, and colorectal cancers co-marketed by Bristol-Myers Squibb (NYSE:BMY) and Eli Lilly (NYSE:LLY).

Qiagen's Erbitux co-diagnostic approval in mid 2012 opened the door to a slew of big pharmaceuticals looking to better target their treatments. Eli Lilly is doubling down on personalized medicine and has entered into a broad collaboration agreement with Qiagen for the development and commercialization of companion diagnostics.

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Over the past several years, this German company's revenue growth has outpaced its bottom line. In recent months, investors appear to have noticed the narrowing margins, lack of share repurchases, and dividends. Since reporting Q1 2013 earnings, the company's soaring share prices have been suffering the effects of gravity, but haven't touched down yet. Recently it has been trading at 37 times TTM earnings.

Prenatal testing

Sequenom, Inc. (NASDAQ:SQNM) is having a great deal of success lately in the non-invasive prenatal diagnostic market. According to Sequenom's CEO Harry F. Hixson Jr., the Blue Cross and Blue Shield Association has made the company's testing services available to its members. Aggressive scaling of its sales force has netted the company record revenues for Q1 2013.

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Unfortunately, Sequenom's penetration into the prenatal testing market hasn't been cheap. The distance between the company's top and bottom lines continues to grow almost as fast as its sales force.

Further fueling my doubts about Sequenom's ability to execute is rising competition from promising start-up Natera and Verinata Health, which both provide testing for similar chromosomal abnormalities. Verinata was recently purchased by Illumina, (NASDAQ:ILMN) a company with a large existing sales force and several years of proven profitability.

An incomplete picture

Data by YCharts

Market Cap

Revenue TTM

Net Income TTM

Free Cash Flow

Long-Term Debt

Current Ratio

Exact Sciences Corporation







Genomic Health







Myriad Genetics




























Although I wouldn't make a decision to buy or sell any of these companies solely on the information presented here, I hope you have found one or two that you feel warrant further investigation.

Personally, I'm most excited about Nanosphere. I think its patented devices could give the company a durable competitive advantage and cause its earnings to grow exponentially over the next decade. But, as with all the companies here, I've provided an incomplete picture. If you feel I've neglected some vital information, please share in the comments below.

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.

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