Monday March 12, 2012
by Benjamin Shepherd, contributing editor Personal Finance
One of the most exciting — and potentially lucrative — trends in the biotech space is the emergence of personalized medicine.
The concept behind personalized medicine is simple: Based on genetic information medical practitioners can tailor health care solutions for individual patients. Here are three stocks poised to benefit from this trend: Qiagen (QGEN), Life Technologies (LIFE) and Roche Holding (RHHBY).
Advances in gene sequencing have enabled researchers to identify the root causes of chronic diseases. These discoveries, in turn, allow drug makers to develop targeted treatments, with less damaging side effects, for a number of illnesses.
Netherlands-based Qiagen develops and markets high- and low-end technologies used in DNA analysis and diagnostic testing. It generates about 15 percent of its revenue from instrument sales, with the remainder coming from reagents and consumables used in testing.
Over the past three years, the company has grown its revenue at an average annual rate of 19 percent. Qiagen’s fourth-quarter sales surged 17 percent from a year ago, bolstered in part by the launch of QIAsymphony, a system that automates sample processing and analysis to reduce work time and errors.
Qiagen had installed more than 550 QIAsymphonys by the end of 2011 and aims to expand this base to 750 units in 2012.
The firm has also benefited from limited vaccination for human papillomavirus (HPV) in the US. Although a vaccine against HPV is available, the treatment only inoculates against two of the 13 known high-risk strains of the virus.
Qiagen has developed low-cost HPV tests that detect and differentiate between the 13 high-risk strains of the virus and the five low-risk strains. With this knowledge, physicians can recommend the best course of treatment for a patient.
The firm has also reduced its debt load and amassed a sizable cash balance, moves that should enable the company to self-finance its expansion plans. Buy Qiagen up to 20.
One of the largest manufacturers of life science products, Life Technologies offers more than 50,000 reagents and sample kits for analyzing genetic information and proteins.
The firm’s efforts to drive down the cost of DNA sequencing should pay off in coming years. Low-cost DNA sequencing would also expand the pool of information available to genetic researchers.
Life Technologies in January 2012 announced that within a year, its Ion Proton Sequencer would be able to sequence an entire genome for $1,000.
This has been the holy grail of DNA sequencing research. At $1,000, sequencing would cost less than an MRI scan—a routine imaging study—and could become a widely used diagnostic tool.
The firm has shipped five of the $149,000 machines to academic centers for testing and validation; the final hurdle will be the introduction of the company’s Ion Proton II semiconductor chips by early 2013.
Nevertheless, the market has assumed a wait-and-see approach regarding the company’s latest breakthrough. Although the company has grown its revenue by 46 percent in the past three years, Life Technologies’ shares trade at 12 times the midpoint of management’s 2012 earnings guidance.
A solid balance sheet adds to the stock’s appeal. Life Technologies has about $3 billion in debt, but the firm also holds $855 million in cash—almost 10 percent of its market cap. Life Technologies Corp rates a buy under 56.
Roche Holding generated about 77 percent of its revenue from pharmaceuticals in 2011, with diagnostics accounting for the remainder of the firm’s sales.
Although the Switzerland-based outfit has brought many in-house innovations to market, acquisitions also play a big role in the company’s success.
For example, Roche Holdings’ takeover of Genentech in 2009 added a deep pipeline of promising treatments and transformed the firm into a leading provider of cancer drugs. In fact, sales of three major cancer treatments account for about 50 percent of Roche Holding’s pharmaceutical revenue.
The firm has set its sights on growing its diagnostics segment and recently launched a hostile bid for Illumina, a company that controls 80 percent of the DNA sequencing market.
The takeover target generated more than $1 billion in revenue in 2011; if the deal goes through, Roche Holding would catapult to the top of the diagnostics business.
Even without the Illumina acquisition, Roche Holding has 17 diagnostic tests in various stages of development. The company also has about 80 molecular entities that show promise as potential drug candidates.
Given its size, Roche Holding will never deliver the year-over-year earnings growth of smaller firms such as Qiagen and Life Technologies.
Nevertheless, the company should be able to generate top-line growth in the mid-single digits over the next few years. Roche Holding’s American depositary receipt rates a buy under 51 for conservative investors.
Learn more about this financial newsletter at Personal Finance.