by Travis Johnson, Stock Gumshoe | January 18, 2012 4:21 pm
Marc Lichtenfeld[1], who we’ve covered a number of times in this space, focuses largely on biotech investments — he’s teased a number of them for a variety of different newsletters that he has helmed or contributed to, but it looks like he’s now launching a new letter from the Oxford Club[2] called FirstLine Investor Alert.
Does that mean his Access Group[3] newsletter(s) (Access Group[4] and First Access[5]) that used to be published by White Cap Research[6] didn’t do so well? I have no idea, all of these publishers tend to cut letters if they don’t develop an avid following, but I don’t know what kind of performance they demand before they re-up an editor for a new letter launch. Past teaser picks that came in stamped with his name have been a mixed bag thus far, particularly the medical ideas, though some of those picks (like Cytori Therapeutics and Mela Sciences) have enjoyed pretty nice price performance for at least a litte while before being clobbered.
Regardless, folks are queuing up at the door here to ask the Oracle of Oh-Please-Tell-Us who Lichtenfeld is picking, now that he’s again teasing mega-gains from biotech stocks.
His latest ad talks about the “$4 Trillion Money Slam” that will hit the market, basically telling us that the aging[7] and still relatively wealthy baby boomers will generate such a demand for healthcare[8] spending, at the same time that huge advances in genomics and other areas of biotech extend lives and treat dreaded diseases, that fortunes will be made.
And he pitches several companies, but I wanted to look at this one first because it sounded particularly enticing to your friendly neighborhood Gumshoe (don’t worry, I’ll get to the “regenerative medicine” and the “crush ‘Terminator’ cancer” picks in a future piece if there’s any interest).
The one we’re looking for today is focused on genomics and personalized medicine, which has been talked up many times in teaserland before (remember Frank Curzio[9]’s “$1,000 pill” teaser from last Summer? That pick is now back to right about where it was when first teased, just FYI). Here’s how this new teaser ad perks up our ears:
“… this market … could reach $100 BILLION in the next decade according to a recent Forbes[10] research report.
“And, as Marc told me last week, one small company is in the catbird seat.
“More than 10,000 physicians in over 60 countries have already ordered more than 200,000 of its breast and colon cancer tests.
“It’s also working on a pipeline focused on detection of prostate[11] and renal cell cancers, as well as additional stages of breast and colon cancers.
“And get this: It’s just been announced that the Stage II colon cancer test will be covered by Medicare.
“I don’t even need to explain how huge that is.
“Right now this company’s trading at about $28, with a market cap of well under $1 billion. Yet Marc’s research shows it could rake in $250 million next year alone.”
Well, as someone who has lost a loved one to colon cancer before many of the new drugs, tests and treatments were available, I can’t help but be interested in anything that focuses on this awful disease. So who is it?
Well, feed up the Thinkolator and, voila! This is Genomic Health (GHDX)[12]
Yes, they did just get their (pretty expensive) colon cancer test approved for Medicare patients, one of many approvals they’ve gotten from different national insurance groups around the world for various tests — but that was back in September, so the “news” is most likely reflected quite nicely in the stock. Their product is the “Oncotype DX” cancer test, used primarily for breast and colon cancer to help doctors understand what type of cancer it is and what treatment might be most effective or what risks of recurrence might be. Or at least, that’s my scientifically illiterate understanding of the test.
“Marc’s research” may well show that it “could rake in $250 million” in 2012, but if that’s the case his research may be disturbingly close to the in-depth level of my study — which indicates that the high analyst estimate for next year is $248 million in revenue (average is $236 million) … so making a prediction that the number will be 1% higher than the high Street estimate is not exactly earthshaking. And they will likely post over $200 million in sales for 2011 when they report in a few weeks, so that’s the context for the “rake in $250 million” quote.
And those are sales numbers, of course, not profits. The company also updated its forecast for 2011 when it last released quarterly numbers, saying that they expect to post earnings of about $8 million. So for an $800 million company, that means investors are currently paying roughly 100X earnings. Analysts think that earnings will grow by about 50% per year into the future, with a forward PE of about 65. So you could certainly argue that for that kind of valuation, in a competitive and fast-changing business, they dang well better be posting revenue increases of 25% per year.
There are a bunch of other companies with genetic tests that are intended to help guide oncology decisionmaking, though GHDX appears, from my very quick glance, to be the largest player in their diseases (I could be wrong). The name that usually hops to the tip of my tongue when talking about predictive testing is Myriad Genetics (MYGN)[13], which is about twice as big and far more diversified with an array of tests available — Myriad is far more profitable than GHDX, and is priced closer to the market average with a PE in the teens, but is also, as you might expect, growing far more slowly and not as easily boosted by “blockbuster” test releases or approvals. And there are plenty of other genomics and testing companies available as well, of course, including the large machine makers like Illumina (ILMN)[14] and Life Technologies (LIFE), the broader diagnostics testing companies (also large caps) like Quest Diagnostics (DGX)[15] and Lab Corp of America (LH).
It seems inevitable that the era of personalized medicine will continue to push more for more genetic testing, more predictive results, and more patient specific diagnoses and treatments — but that doesn’t necessarily mean it’s an easy road to profits (just ask Dendreon (DNDN)[16], poster child for personalized cancer treatment). Still, when it comes to high-tech medicine I am consistently tempted by services companies and equipment companies, it seems like the companies that sell the tests or the screening equipment that makes it all possible ought to be fertile ground in the hunt for big stock winners. Whether GHDX is going to be one of those winners I don’t know — I’m quite sure that Lichtenfeld is teasing them here, and they are posting some huge growth numbers, but I’m equally sure that I wouldn’t know an assay machine or a genetic test if I drove over it in the driveway. If you’ve got a finger on the pulse of the oncology testing industry, by all means, feel free to fill us in with a comment below.
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Travis,
As a past subscriber to Access Group I was not impressed with the performance of his picks. Lost money on both the above mentioned stocks. Could have been my timing or Mark’s exuberance just oversells the potential on medical gambles on the companies that he touts with approvals that fall short.
I spent quite a bit of time years ago investing in biotechnology stocks and even wrote on the subject back in 2003 or there abouts. In finding biotechnology picks I realized that no matter how scientifically knowledgeable I might be there would always be those who were trained in the field and who had a better sense of the market pulse. So what I did was put together a list of various people/funds et al which specialized in Biotechs and then applied fundamental and technical analysis to those that they had picked. Fundamentally what I look at were those who ran the company– where they trained, their academic past, their employment histories, etc — and I included not just management but the research departments as well. Then I looked at what they were developing. Did it interest me? Did it make sense? How marketable would it be? At what developmental stage were each of their projects — stage 1, 2, or 3? I would also look at their cash flow, balance sheets, income statements. Give that they were losing x per year, how much cash did they have on hand and how long would it last? A company that has to go out and raise additional funds now will likely have to offer the new shares at something below current market price in order to attract investors unless they have a spectacular pipeline. All of this goes into buying biotechnology, but it can pay off if you’re willing to do the work.
Well said — I think that’s the crux of my problem with biotech investing: it’s too much work.
I am an oncologist and had shares in this company which I sold after 5 years about one year ago, at the same price I bought it for ( circa $18). Since then it has moved up to the mid to high 20s. I sold to release funds and not because I didn’t think that personalised medicine wasn’t the way forward. The reason their profitability has increased was because their flagship product – the breast cancer Oncotype Dx test which I use in clinical practice was increasing in use year on year and in 2010 ( I think) they increased the cost of it significantly. They could do this quite easily because there is a competing product but it isn’t really practical because it needs fresh tissue from surgery and Oncotype works on paraffin embedded tissue which is much easier and can be done retrospectively. Genomic health’s colon cancer test may be used by some in the industry but I don’t think it will be anything like as successful as the breast cancer test. There is a renal cancer test I think but not sure if it would be commercially viable ( not my area of oncology). The latest research proves the test to be useful in DCIS ( a pre-cancerous condition) and that may be used by the breast cancer surgeons who are comfortable with the test already. Bottom line: Breast and colon cancer tests will continue to increase in use and since the breast cancer test decreases the use of chemo the insurance companies will support it long term since it saves them money. Assuming growth in cancer rates and more older patients being considered for chemo etc. I would think that this companies revenues will continue to grow even in a recession. Just my opinion. I think medical diagnostics/medical technology are by far the best place to invest in the health care market.
Thanks for the knowledgeable input and I agree that diagnestics and technology are two very good areas in health care. Years ago, 2003, I bought ISRG for 4.82 and unfortunately subsequently sold it for a 30% gain — one of my trades which taught me a lot about holding on to a good thing:).
all my best,
/* Phil */
OPK is a company into simple diagnostic testing in physician’s offices that Cramer has recommended and that has risen on the market lately. What do you know about it, Gumshoe?
OPK is about 38% owned by Dr. Phillip Frost who “served as Chairman of the Board of Directors and Chief Executive Officer of Ivax Corporation since 1987. He sold this Miami pharmaceutical maker, Ivax, for $7.4 billion to Israel-based Teva Pharmaceuticals in January 2006.” (Wikipedia)
Frost is an interesting fellow to watch but he is 76 years old so it depends on his current mental faculties. I still occaisonally look at what he has recently purchased as he is on my list of biotechnology resources.
For a stock with great potential , a nice pipeline and low float, I would look at CLDX. It appears the stock is getting noticed recently and should increase in price leading to ASCO Conf in June.
In case interested in Colon cancer – you might want to have a look at
EXAS EXACT Sciences
EXAS is definitely an interesting story, picking up more shares later today
Right now, on Clinical Trials. Gov, both Celldex and Exact have studies listed, Exact is recruiting for its colon cancer study, CLDX has several in phase I. The reality is they are both several years away from FDA approval. Usually news, or Cramer, can spark volume (did y’all catch is Zeltiq review the other night?) So, I’ll wait for phase II; buy, then pending FDA approval, I would collar these. I ran clinical labs for most of my life, and even if FDA clears a drug or a test, you still have to wait if Medicare will pay for it. No one will order a test or a drug without Medicare reimbursement. It goes to bad debt, and the hospital has to eat it. And Hospitals have buckets of price review and cost review committees to slam Doctors and labs for poor revenue streams. Check DNDN charts that moved on every phase and sold off until just recently medicare started to pay for provenge.
I am rolling the dice on AEZS and KERX. Thanks Travis for all the work you do. I love your newsletter. I used to research the teasers years ago, and based on that research, I bought Autonomy at $6, sold it for $40, sometimes the newsletters come up with great info.
Exact is actually a bit further ahead in getting a product to market than mentioned here. It’s phase 3 is ahead of schedule and it already has CMS blessing. Likely on the market in 2013.
Medicare HAS to pay for any drug the FDA approves – it’s the law. It is illegal even in a CMS review to consider the price of a drug. 14 of 15 Medicare regions paid for Provenge from Day #1, and the other one came around within a few months.
I think what you meant to say is until there is a Q code and electronic reimbursement, doctors can be leery of slow pay. Provenge got its Q code last July.
The sell-off and recent strength in DNDN was related to them convincing urologists to screen for appropriate patients early enough, and getting those patients on Provenge before they are in pain from bone metasteses.
Tnx Travis for such interesting comments and for hosting those of others. As an old-fashioned P&F chart follower, GHDX looks good because in December it hit a new multi-year high around 29. It then corrected to around 26 which was a scary double-bottom. But in Jan it recovered and is now in an up-trend. It may get to 29 and keep going, or it could correct down to 25 and form a triple-bottom. But if it survives that, it could go to 30 and form a triple-top penetration, whidh is a very bullish chart formation and an excellent chartist’s buy point. That’s not to say today’s price isn’t a very good buy price, too, for GHDX.
But maybe even better buys may be Telstra ADR TLSYY or Myriad Genetics MYGN (both mentioned above) because both have completed quadruple-top penetrations after lomg consoloditations. Of these, I would now favor MYGN because it corrected nicely from the Q-top penetration and has resumed its upward trend. Thanks for bringing it to my attention.
if you want a bargain penny stock in this arena, look at source bioscience (SBS.L), a UK company, quoted on the main london exchange. They do genetic medical diagnostics and antibodies, have cash in the bank, and solid long term contracts with the national health service in UK, a big private sector presence and have grown revenues over 30% in the last year and will be in significant profit this year for the first time having bought a german company about a year ago. Very small company but really solid and compelling fundamentals. There has been significant boardroom buying recently which is a very good sign.
Lots of good advice- thanks, but for now I want to see where the market goes from here, as there is a good chance it will go down. Watch the $ index, as this is the driver for continued stock and commodity directions. Since the rating agencies won’t let up on Euro countries, I suspect the plan is for a dollar rally.
PS I got trashed on MELA, and hold BTX.