[ed. note: We’re getting questions about this ad, so perhaps it’s circulating again — to help answer those questions, we’re re-posting this article that we originally published last November when we saw the first version of this ad. The Irregulars Quick Take has been updated above, but what follows has not been updated, changed or edited since it first appeared on 11/10/2015]
Lots of eager Gumshoe readers have been asking about this “Fingerprint of Life” machine, so that will be our project for the day: What is it, and what’s the company who makes it, and will it make us filthy, stinkin’ rich?
OK, so maybe we can’t answer that last part — but we can at least ID the stock for you and get you started on your research. I’m sure we won’t tell you exactly what the Oxford Club folks will after you sign up for a $79 subscription to get their special report, “The ‘Fingerprint of Life’ Company Set to Increase Revenues 3,900%” … but, well, we’re also not going to charge you $79.
So what can we find out, for a more free-ish price? Let’s look at the clues… (you can also pay us, of course — the Irregulars, our paid members, keep Stock Gumshoe going and fuel our 200+ teaser solutions every year and they get some extra commentary in exchange… but they also can scan down just a bit and see the summary of this article without reading all my blatheration. Pay more to get less, what a concept!)
Here’s how the ad gets our attention:
“Today you’ll get a privileged look into the future of healthcare.
“I call it the ‘Fingerprint of Life’ machine.
“And it will change lives in ways never dreamed possible.
“…. it will extend the average lifespan of up to 36 million people….
“And it’s also a story every investor should know.Are you getting our free Daily Update
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“That’s because just one little-known company is responsible for this coming revolution.
“Its patented machine is already extending people’s lives as you read this.
“Its proprietary technology is helping oncologists kill cancerous tumors right this moment.”
Sounds impressive, right? This is all about genetic sequencing, as you’ve probably figured out… but there are a lot of companies in that space, and you can probably imagine several different ways to “play” the idea of sequencing the DNA of more and more people, and finding genetic roots of more and more diseases (and, importantly, figuring out what to do once you know about those roots).
So which one is it?
Well, Laura Cadden at Oxford says it’s “not yet in the mainstream financial headlines” … but it’s clearly also not a startup. More clues:
“… today, these life-changing treatments are only available in just a handful of hospitals around the world.
“That’s about to change.
“We expect this company to start rolling out over 6,200 of these ‘Fingerprint of Life’ machines in the coming months….
“Few know that each machine brings in about $2 million a year in revenue and is surrounded by a moat of more than 400 patents…
“Soon, very soon, the word will get out, and the big money will start pouring in as they roll out.
“As you’ll see in a moment, a $10,000 investment today could turn into $60,000 short term… and $175,000… even as much as $390,000 long term…”
And, as is usually the case when anyone’s pitching a newsletter, this is “just maybe” their “best idea ever” …
“… right now, I want to share what might be the biggest find in our history.
“Its closest historical investing analogy would be the rise of medical testing stocks we’ve covered.
“These are companies that get paid every time new patients comes to their offices for a blood test or other lab work.
“And they’ve handed early inventors once-in-a-lifetime gains…
“Companies like LabCorp rose 2,493%… Quest went up as much as 1,880%… Neogen gained up to 3,179%… Meridian Bioscience shot up 902%… and Thermo Fisher Scientific rocketed up as much as 15,364% so far.”
OK, so those are enticing gains… how are we going to get our hands on something like that?
And it has to be pretty good, because I won’t be able to get a loan to buy a Ferrari given my income statement, so I’ll have to pay cash up front. I figure I need about $150,000 to get a nice used Ferrari, and I’ve got maybe $2,000 to splurge on something that crazy… so if I get my 15,364% gains I should be just about on track (after taxes). Hopefully those gains come overnight, I’d really rather not have to wait ten or 20 years — those gains from Thermo Fisher (TMO), in case you’re curious, are real… but to get 15,000% gains on TMO shares you would have had to buy during some dips in the 1970s or 1980s and hold through today, sticking with the stock and not getting shaken out by the 60%+ drops in 1998 and 2008. Hard to do… so, as I said, I hope these gains will be faster, please, Ms. Cadden.
Oxford Club says we’re going to be getting that kind of cash because we’ll be “conquering Death himself.” Seems like a good idea.
The argument, then, is that there are 36 million preventable deaths per year, because those are the people who die from noncommunicable diseases caused either by infection, lifestyle, or some flaw in our genetic makeup (or some combination of those).
More from the ad:
“This company’s machine… protected by over 400 patents… is at the forefront of a medical revolution.
“It gives the 13.7 million Americans with cancer a new chance at living a full life…
“Including the 72,000 diagnosed with lymphoma… the 54,000 diagnosed with leukemia… the 220,000 diagnosed with prostate cancer… the 230,000 diagnosed with breast cancer… the 130,000 diagnosed with colon cancer… the 70,000 diagnosed with melanoma…
“Not to mention millions more suffering from sickle cell disease, kidney disease, cystic fibrosis, hemophilia…
“People who would otherwise be in a fight for their lives could be saved by this single machine.
“Not only can it help prevent cancers and diseases…
“But, as you’ll see in a moment, it can help CURE THEM too.”
So what are we being pitched here? Turns out, it’s the actual genetic decoding machines….
“It takes all the information inside a single strand of DNA and looks for the errors that indicate you will get a certain disease later in life.
“Just one machine cracks the genetic code of about 18,000 people per year.
“Your DNA goes in one side of the machine… and an index for your DNA comes out the other.
“This index is key to allowing doctors to flip to the critical pages where errors that lead to cancers and other diseases are located.”
And the ad goes on to talk about how this machine is also at the forefront of personalized cancer treatments, where specific DNA markers will indicate which drugs will work better on specific cancer types… and on gene therapy, where attempts are made to “rewrite” part of your DNA.
Which leads them to sum up that…
“Very soon, scanning the DNA of the cells in your body will become a regular part of healthy living… and this company’s machine is at the forefront.”
And we hear that this company is following the same progression as other technological advances — the price is coming down dramatically, which means it will be available to more and more customers…
“In 2001, getting your DNA analyzed by this type of supercomputer cost $100 million….
“But over time, this company quietly developed parallel processing technology with the goal of bringing this breakthrough within everyone’s reach.
“In 2008, the cost was down to $1 million… In 2010, it was down to $50,000… Last year, this company got it down to $5,000….
“The newest version of this patented machine can analyze anyone’s DNA for $1,000…”
So those of you who follow this area might already have an answer at hand — the $1,000 genome has been a hot topic for several years now, because researchers believe that many things won’t really be understood until we can study much larger volumes of patients, and you can’t sequence the DNA of thousands and thousands of people, or routinely sequence the DNA of ordinary patients who walk into the doctor’s office, when prices are high. I don’t see how we can do that many at $1,000 a person, either, but it’s certainly a lot less than $5,000.
Does that mean Oxford Club is touting Illumina (ILMN)? That’s the mega-company behind many of the breakthroughs in gene sequencing… and the one that probably got more attention than any other when they announced that their “$1,000 genome” testing machine was coming out (that was last year, by the way — and when you think “$1,000 genome” you should probably also think, at least to yourself, about the fact that the machine they said would make this possible is on sale for $10 million).
That’s the best early guess, but let’s look at the specific clues:
“Now that this company’s newest machines are available, 197,159 doctor’s offices and hospitals across the country are lining up to buy them.
“That’s because they greatly reduce the cost of expensive testing and ‘guesswork’ by doctors. The machine can tell them what to look for in the first place….
“… this company works on the razor-razor blade model.
“The machines each cost about $1 million.
“Before you throw up your hands thinking that’s too expensive, consider… a CAT scan machine can cost upward of $300,000 and an MRI machine can cost up to $1.2 million.
“You would expect to find those in any hospital you walk into. And pretty soon, you’ll see this company’s machines sitting alongside them.”
Did you notice that little flip in logic there? You start with 197,159 “doctor’s office and hospitals” as your market, throw out that million-dollar number, and then assuage our panic about that number by saying “every hospital would have one”…
… and that may be true, but there are only about 5,500 hospitals in the US. That’s a lot less than 197,159. And the installed base of both MRI machines and CT Scanners is somewhere in the 10,000 neighborhood (probably a little less for MRIs, a little more for CT Scans, though the numbers I’ve seen are several years old).
So get the 197,159 number out of your head — or at least don’t connect it to that $1 million number. There are cheaper and more limited DNA sequencing machines being developed, but they do a lot less than the big, fancy machines… and doctor’s offices are not going to be spending a million dollars on DNA sequencing machines. Very few would spend a fraction of that amount, I expect. Most doctors don’t even do simple things like blood testing in house, partly because it’s not worth it to hire the tech to run the machine and pay even a few thousand dollars for the machine if insurance companies would rather reimburse the lab company at a lower price.
More clues to confirm the stock:
“It already owns 80% of the market share. And we know that companies with ‘first mover advantages’ tend to stay in the pole position over the long run.
“It already has an installed base of 1,000 machines.
“Simply maintaining its current market share, it’s projected to capture $12 billion of the $20 billion in worldwide annual sales shortly.
“If the company sells for 13 times sales, it would take the market cap to $156 billion.
“That’s roughly seven times its current value… or a 600% gain.”
OK, so yes — we can confirm that this is, indeed, Illumina (ILMN). Despite the fact that earlier this year the Oxford Club folks were very aggressively pitching the company that was suppose to unseat Illumina — that was Pacific Biosciences (PACB), touted by Marc Lichtenfeld in teaser pitches for this same newsletter. PACB has actually been the better stock this year, but that’s just because the big spike in shares last month after they announced their newest product, a potential competitor for some of Illumina’s machines, means the shares are flat while ILMN has been drifting downward.
Illumnia is indeed the dominant company in genetic sequencing machines, at least at the high end — their HiSeq machine is the one that they say can deliver a $1,000 genome, though that’s largely because of the huge number of sequencing runs it can do and economies of scale. Their sales of those higher end machines, like the million-dollar HiSeq and the $10 million HiSeq X (really just 10 HiSeqs running in parallel), are obviously quite lumpy, since institutions don’t make those kinds of purchases or upgrades lightly, but they do offer next generation and smaller scale sequencing machines at $250,000 and $125,000 as well, for those who don’t need rapid sequencing of the whole human genome for large numbers of patients. Illumina has a huge market share of the high-end machines, ranging from 65% to 80% depending on who you ask, but the “desktop” market of smaller machines is much more competitive, and the fear has been that Illumina can’t continue to defend this huge market share… new technologies, new competitors, and lower-cost options seem to crop up all the time, though that has done more to dim future hopes than it has actually eaten into Illumina revenues.
The question, really — and it’s not one I can answer for you in the few moments I have to spend on Illumina today — is whether this dominant market driver in genetic sequencing machines can continue to defend its market share, by hook or by crook, or whether the upstarts (including some big ones, like Life Technologies and Roche), will nibble away and cut into Illumina’s margins. That’s going to be determined both by technology — who has the better machine, and who takes the technological lead — and by marketing. It tends to be very hard to unseat a dominant company — if everyone knows and respects Illumina’s machines, there’s probably some reluctance to buy some other brand, and Illumina’s large installed base gives them a steady flow of earnings from the disposables and reagents that are required to run each DNA sequence, but I don’t know how strong that market position will be going forward… particularly if the market changes, and it’s no longer just research centers and pharmaceutical labs and academic hospitals buying these machines, but more “normal” hospitals who haven’t owned DNA sequencing machines in the past.
So I can tell you that this is Illumina — but also that the projections they make of an installed base of 7,400 machines at $1 million each, and annual sales of the kits that the machines use for processing of $2 million per machine, adding up to total annual revenues of $22.2 billion, are way, way into the future (if they happen at all). Analysts are expecting Illumina’s sales to be about $2.2 billion for 2015, and close to $2.5 billion next year… and since Illumina announced disappointing third quarter sales numbers and lowered future expectations a bit, those same analysts have been cutting estimates and price targets, with expectations for next year’s earnings now at about $3.75 per share (average analyst price targets are now in the $180s, well below this year’s highs… Morningstar pegs “fair value” at $195).
Which is why ILMN now looks quite a bit cheaper than it did a few months ago — the shares are right around $150 now, down from a high of about $230 back in July… which means they’ve now given up all of the gains they posted over the last 18 months or so (though the stock is still up by almost 200% over the last five years). So if you do believe that they’ll continue to leverage their market position to dominate the growing market (and it really is growing) for genetic testing, the stock is going through a rough patch now and is certainly a more appealing buy than it was a few months ago. The caution is really just that it’s still priced for fantastic growth — the shares are priced now at about 40X next year’s expected earnings, and earnings are expected to grow at about 20% a year. That means you’ve got a PEG ratio of about 2 (Price/Earnings/Growth rate), which is about the top end of what you’d want to pay for a fantastic “high conviction” growth stock.
So, go forth, researchify, thinkolate on it… and let us know if you have that kind of conviction. Is Illumina going to continue to dominate the market for DNA sequencing machines, and will the market for those machines explode in size as prices continue to come down? Willing to pay $150 a share for this market leader? Let us know with a comment below.
Oh, and getting back to that Ferrari I had my eye on: Thermo Fisher’s market cap in the mid-1980s, when their 15,000% gains started, was about $100 million, and it got to where it is now, with those 15,000% gains, by growing into a $50 billion company (yes, that’s way more than a 15,000% increase in market cap — that’s because the company sold more shares along the way). Part of that, actually, includes them buying Life Technologies, one of Illumina’s largest competitors, for about $13 billion a couple years ago.
But the point is, 15,000% gains don’t start at a $20 billion valuation — that would take them, even assuming that they buy back half their stock along the way with their cash flow (extremely ambitious), to a market cap of well over $1 trillion. You can have the hope of 15,000% gains, or you can have a profitable large cap company with financial stability and strong market position… but you can’t usually have both. Even Apple (AAPL), one of the great and exceptional stories of the past 20 years, didn’t grow that fast — they were a $5 billion company when the first iPod came out in 2001, and grew 12,000% to become the largest company in the history of the world. Illumina may well be a fine investment, but your odds of disappointment or error will be large if you swallow the newsletter marketing argument whole and think about it as destined to become the most successful investment of the next 20 years. Forget the Ferrari, and ratchet your sights down a few notches if you want to give yourself a chance of thinking rationally about the stock and the attractiveness of its current valuation.
P.S. OK, fine, before you start to take me too seriously: I don’t actually want a Ferrari — but that seemed like a more entertaining goal than “send the kids to college.”
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