I suppose I should expect this by now — whenever Frank Curzio and the gang put out a teaser for Phase 1 Investor, which is the big-money newsletter from Stansberry & Associates ($5,000/year, though almost always “on sale” at $3,000 when they’re running promos), my inbox gushes like Spindletop.
Didn’t matter if it was a tiny gold stock, or a ridiculously speculative little miner, or a tech breakthrough company, or some kind of biotech innovator, the Phase 1 promos reach so many people, and inspire such profit-lust, that they immediately jump to the top of my “to do” list. I do, after all, aim to please — and the reader interest in a teaser helps me decide what you most want to hear about (so yes, keep on sending in those requests — ILoveStockSpam@gmail.com — I won’t answer ’em all, but they help us prioritize and discover new topics). And some of those picks have been good ones over the years, though most are so tiny that they move up and down frenetically … like a four-year-old in a bouncy castle after four birthday cupcakes. So the word even before I figure out what this stock is should be, “careful.”
Moving on to the meat of the meal, then — what is Curzio talking about?
The letter starts out by telling you all about the excitement of the research they’ve done for past stock picks (you’ve probably read a bunch of the teasers of these stories over the years — I know they all sound familiar to me … nothing like “risking your life” for your subscribers to make an idea sound exotic and a subscription price sound like a bargain):
“In the history of our firm’s business, we’ve gone to some pretty extreme lengths to investigate investment opportunities… We’ve explored underground vaults in Switzerland, trekked mosquito–infested jungles 12,000 miles away to check out a natural gas discovery…
“We’ve hopped helicopters in the Yukon, explored casinos in Macau, and infiltrated the Byzantine world of high–level academia to get the scoop on vaccine technology…”
And they also pull in that other old newsletter teaser ad technique, the secret insider who lets us in on the straight dope:
“Two months ago, one of my most valuable contacts reached out to me. I hear from this gentleman once, maybe twice a year. But when I do, the information is big and almost always leads to huge opportunities.
“He agrees to share data and information with us on the condition of full protection:
“Not only can we not print his name, but we cannot reveal any of the details about his identity and professional involvement. Especially in this case, as he’s actively involved with several major players in the field of technology I’m about to describe.Are you getting our free Daily Update
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“So, for a frame of reference, I’ll refer to him in this presentation as ‘Dr. W.’
“In short, Dr. W alerted me to a breakthrough in medical technology, which he calls the ‘$10,000 Pill.'”
I won’t bore you with more about what this “$10,000 pill” is — Curzio makes the case for how critically important it might be for a bunch of diseases, and tells us how he, his boss Porter Stansberry, and his colleague Dr. David Eifrig all took this “pill” in their Baltimore offices …
… but then he goes on to be clear that, as they so often do for these promos, they’ve just invented the phrase “$10,000 pill” to simplify and explain the technology they’re touting. The real discovery and breakthrough that they’re pitching here as being on the verge of mass commercialization and huge profits is genetic sequencing.
And to his credit, Curzio doesn’t try to keep that a secret — he does eventually get into the fact that DNA sequencing for individuals is the theme of his investment idea, and that this technology is on the cusp of a breakthrough as the cost declines. The current $10,000 price is already dramatically increasing usage of this technology, we’re told, and “Dr. W” notes that it will soon hit the critical $1,000 price point that will stop health insurance executives from slamming the door in your face.
Curzio compares it to the computer industry, and the huge breakthroughs and consumer breakout products that emerged rapidly once personal computers became feasible and started to sell widely in the late 1970s and 1980s, and also notes that the race to capitalize on this is not unlike the early days of the Internet.
We’re told that the cost of this “$10,000 pill” (OK, the cost of sequencing your own DNA) has been falling at a rate of something like tenfold annually for years now, from $2 million a few years ago to $68,000 just two years ago, when the service was auctioned off on eBay as a publicity stunt, to $10,000 today and maybe $1,000 next year (or at least, “soon”). That $1,000 breakthrough is later described in the teaser as the “X-factor” for this stock — here’s the quote from the mysterious “Dr. W”:
“At the current rate, this technology could break the $1,000 within the next year. When it does, we’ll see an incalculably huge sum of capital flooding into this sector. From institutions, insurance companies, hospitals… governments. The key players will shoot up like buoys in a great flood.”
And, naturally, the pioneers who make breakthrough products that are better, cheaper and faster will make you rich, right? Well, that’s the idea, at least, and the promise of pretty much every tech stock.
But which stock is it? There are a lot of companies who make DNA sequencing equipment and other related testing machines and materials, and I’m sure there’s a whole industry underlying that — Curzio teases that he’s got five ideas for investing in this industry, but the whole pitch is really just about what I presume must be the favorite of the bunch … here are the clues I gleaned from the ad:
They’re tiny …
“… the company we’ve found is so small (and owns 144 valuable U.S. and foreign patents)….
“… our little $90 million firm….
“… a market cap of less than $150 million – less than 1% the size of Google and half the size of its nearest competitors.”
And they have something that’s apparently faster/better:
“The company’s proprietary technology allows them to quickly process someone’s DNA in a mere 30 minutes.
“This is a remarkable feat because other companies take up to a week, and even one of the fastest companies still takes over an hour and a half.”
And they’re not just an idea — they’re generating sales growth:
“This speed is one of the main reasons their sales shot up an astounding 91% last year…
“And why they have contracts with hospitals and biotech firms all over the country, including a couple big names I can’t mention here.”
And of course, you need a hotshot insider to tell you about them because they’re small and secret:
“For now, this stock remains under the radar. It’s never been featured in Forbes, Barron’s or Wired.”
Finally, there’s some stuff that we all delight in seeing: a catalyst that might move the share price up, and some insider buying:
“… recently, the company received 510(k) clearance from the Food and Drug Administration.
“This is huge… and why this stock could take off at any moment.
“(And… probably why less than two months ago the founder and Chief Scientific Officer of the company purchased 100,000 shares of the stock on the open market.)”
So … who is it, you ask? Well, the clues are a little bit thin but the Thinkolator is up to the task. First we amplify the samples, then put them in our handly little assay cartridges, then slide ’em into the Thinkolator, and the answer comes out in less than 30 minutes: this is almost certainly GenMark Diagnostics (GNMK)
As teased, the market cap is VERY SMALL at about $100 million currently — there’s very little liquidity and any additional attention is bound to move these shares, so if you happen to be interested in this stock do be careful … when stocks like this jump on a newsletter recommendation (or even because an article in this space calls attention to them), they tend to come back down pretty quick when that interest wanes.
I do not know of any impending news from the company, though they did receive the 510(k) approval for their machine a while back and they do expect FDA approvals for some new tests to come in the months ahead. Earnings came out a couple weeks ago, so that particular variety of news isn’t imminent.
And like Frank Curzio, I’m not a doctor — nor am I much of a biotech expert. In fact, despite having a great biology teacher in high school I find much of this stuff entirely baffling (and that was roughly 100 years ago) … so I’ll give over some space here to let the company describes itself, this is from their latest Annual Report:
“We are a molecular diagnostics company focused on developing and commercializing our proprietary eSensor detection technology. Our proprietary electrochemical technology enables fast, accurate and highly sensitive detection of up to 72 distinct biomarkers in a single sample. Our XT-8 system received 510(k) clearance from the Food and Drug Administration, or FDA, and is designed to support a broad range of molecular diagnostic tests with a compact and easy-to-use workstation and self-contained, disposable test cartridges. Within 30 minutes of receipt of an amplified DNA sample, our XT-8 system produces clear and accurate results. Our XT-8 system supports up to 24 independent test cartridges, which can be run independently, resulting in a highly convenient and flexible workflow for our target customers, which are hospitals and reference laboratories.
“We have developed four diagnostic tests for use with our XT-8 system and expect to expand this test menu by introducing two to four new tests annually. Our Cystic Fibrosis Genotyping Test, which detects pre-conception risks of cystic fibrosis, our Warfarin Sensitivity Test, which determines an individual’s ability to metabolize the oral anticoagulant warfarin, and our Thrombophilia Risk Test, which detects an individual’s increased risk of blood clots, have received FDA clearance. Our eSensor technology has demonstrated 100% accuracy in clinical studies compared to DNA sequencing in our Cystic Fibrosis Genotyping Test, our Warfarin Sensitivity Test and our Thrombophilia Risk Test. We have also developed a Respiratory Viral Panel Test, which detects the presence of major respiratory viruses and is labeled for investigational use only, or IUO. We intend to seek FDA clearance for our Respiratory Viral Panel Test in 2011. We also have a pipeline of several additional potential products in different stages of development or design, including diagnostic tests for an individual’s sensitivity to Plavix, a commonly prescribed anti-coagulant, and for mutations in a gene known as K-ras, which is predictive of an individual’s response rates to certain prescribed anti-cancer therapies.
“We are also developing our next-generation platform, the NexGen system. We are designing the NexGen system to integrate DNA amplification with our eSensor detection technology to enable technicians using the NexGen system to be able to place a raw or minimally prepared patient sample into our test cartridge and obtain results without any additional steps. This sample to answer capability is enabled by the robust nature of our eSensor detection technology, which is not impaired by sample impurities that we believe hinder competing technologies. We are designing our NexGen system to further simplify workflow and provide powerful, cost-effective molecular diagnostics solutions to a significantly expanded group of hospitals and reference laboratories.”
So that’s what they do — it’s not the same as doing a full DNA sequence, but they sell a machine that lets you process a number of specific tests in a short period of time. These tests use their disposable products and reagents, so they also generate revenue from selling those disposable products to the labs and hospitals who are their intended customers — much like the much-loved “razor and blade” business model (or if you’re HP, the “printer and ink” model), where you sell a machine (hopefully at a profit, but sometimes not) and reap much of your expected profit over many years of supplying the critical ingredients and services that allow that machine to function.
So that makes sense, and sounds pretty good from a financial and business standpoint, and they do say they can do it in thirty minutes if they start with an “amplified sample” — though apparently their next generation machine will also do that amplifying. But these are tests that look for specific markers (as in the quote above, for Warfarin sensitivity, for example, or for other markers that indicate a risk or tendency for some disease or disorder or the potential effectiveness of a particular drug), they’re not not full sequencing machines that map out your entire genetic code and look for anything that might be unusual or bad. That kind of full sequencing is, I presume, what that guy paid $68,000 for on eBay a couple years ago, and what Sergey Brin did a year or two ago when he found out that he has a chance of developing Parkinson’s. There are apparently great variations in this kind of testing, Brin’s wife’s company 23andMe, which he used, also offers a basic “what are your risks” profile of your DNA for a few hundred bucks and a swab of your saliva.
The machine that GenMark sells, and that got 510(k) clearance from the FDA recently, is called the XT-8 System, they describe it on their website here.
And they did report 91% sales growth year-over-year to match our teaser, though that was in the first quarter, not in the recently reported second quarter that showed a 35% year-over-year revenue increase.
And yes, there has been at least one sizable insider purchase recently — and, per the tease, it was the founder and Chief Scientific Officer, Jon Faiz Kayyem, buying 100,000 shares (that was a couple months ago, at $4.25 in an indirect purchase). If you want to “dot the i’s” on all the clues in the teaser, they do also claim 144 US and foreign patents (either owned or under exclusive license — the patents expire between 2013 and 2021, though with the speed of evolution in this business that might be irrelevant).
So I’m quite sure that this is the match for Curzio’s teased pick — but will those insiders get rich from this? And will you? I have no idea — it’s an extremely competitive business, and the biggest players are also constantly coming up with newer, faster machines (and buying little innovators) as well. From what I can tell, the dominant companies selling these testing kits/sequencers to labs and institutions right now are Illumina (ILMN) and Life Technologies (LIFE), both of which are roughly $6 billion market cap companies with varied business lines, and there are plenty of other smaller companies in the space as well (a few are listed here, and Illumina was teased for similar reasons by the Motley Fool a couple years ago). The Ion Torrent division of Life Technologies sells a machine that seems to be pitched pretty similarly to GenMark’s device, and the founder was profiled over the winter in Forbes if you’d like more background, and they also have some fun ads that push the PC comparison (Life Technologies bought Ion Torrent, a startup that hadn’t yet completed the development of their machine, last Fall). So things are competitive and moving fast.
For what it’s worth, quite a few of these companies have seen insider buying during this latest market decline, and I do see lots of general articles about the increasingly important role genetic testing is playing in disease prevention and treatment … but it’s still a pretty wild area to be investing, I don’t have any idea whether there will end up being a dominant player (or whether Illumina will continue to have that role) in the years to come, or if these startups and new technologies will fight over customers or cut off niches of the market for themselves (ie, which will be the bigger market: smaller, low capability machines for doctor’s offices or big, precise, fast machines for hospitals? I have no idea).
I am encouraged that GenMark’s sales of reagents and disposables are going up quickly, I expect that will be the key to long-term profitability for any company that wants to dominate these markets, but getting a critical mass of installed machines is certainly the first step to building a profitable business, and that’s where the large players like Illumina start with a huge advantage — that seems like a hard and competitive job both in product design and in salesmanship for any upstart. I wish ’em all well, but that’s the limit of how much I can say about this market with any degree of intelligence (and some of you will probably note that if that’s the criteria, I should have stopped quite a few paragraphs ago).
As a quick bonus, let me also identify a couple other picks that Curzio very briefly teased with just a couple lines of info — he has five ideas overall, remember, but we can probably name two more for you … hints and answers:
“One of these companies, for instance, ‘is being compared with Google, Apple and Intel for the disruption it could create in biology and medicine.’
“They’ve already received an investment of more than $80 million from one of the world’s top technology firms (a name you’d instantly recognize.)”
I suspect this must be Pacific Biosciences (PACB), which has been a high-profile venture capital company for a long time but went public last year … and has recently seen its share price collapse. They do have some highly recognizable investors, including Intel, but I don’t know if one of them has specifically invested $80 million. There’s a really good BusinessWeek article on PacBio here from back in the Spring, when the stock was twice the current price.
Lots of folks compare startups to Google, Intel and the like, but that specific quote above comes from this older Forbes article about the PacBio IPO. They’re quite a bit bigger, they’ve reportedly raised something over five hundred million bucks and spent a lot of it (they still have $200 million from the IPO to spend on growing the business), but even after the collapse in the share price (post-IPO high around $17, currently about $6) they still have a market cap of $300 million.
And another bonus?
“Another one, makes a highly accurate test for colon cancer. Dr. David Ahlquist of the Mayo Clinic calls this test’s accuracy ‘remarkable.'”
That must be Exact Sciences (EXAS), a substantially larger company (market cap around $350 million) … the quote and the basic info are in this article from Adam Feuerstein at TheStreet.com, who I suspect might be one of the folks Curzio is hosting on that conference call he teases as another benefit for Phase 1 subscribers. (As with most Phase 1 ideas that get promoted with these teaser ads, folks who sign up get the company info and report right away, and a conference call a couple weeks later with outside experts and, sometimes, company insiders or CEOs — for this particular teaser the conference call is touted as planned for September 6, just FYI … those calls shouldn’t usually move the stock much since the subscribers already have the report).
Enough? I think so, too — certainly a growing business, and certainly a tough one. If you’ve a favorite, or if you know more than your friendly neighborhood Gumshoe (don’t all raise your hands!), please share with a comment below. Thanks!