Two Ways to Play a New Genomics Boom

05/04/2009 12:00 pm EST

Focus: STOCKS

James Oberweis

President, Oberweis Asset Management, Inc.

Jim Oberweis, editor of The Oberweis Report, says the new stimulus plan boosts spending on medical research, which is bound to spur advances in genomics.

The argument can be made that the surge of biotech development in the 1980s and 1990s was a result of increased government funding for programs like the National Institutes of Health (NIH) that bridged the gap between the academically possible and the commercially profitable.

From 1983-1993, the budget of the NIH increased 158%, rising from $4 billion to $10 billion. From 1993-2003, that same budget increased another 163% to $27 billion. Congress also passed a series of laws that fostered the ability to profit from biotech discoveries. Indeed, we believe that the biotech boom was a direct consequence of rising National Health Institute (NIH) funding, cheap equity capital, and the ability to patent NIH-funded discoveries.

Under the Obama administration, NIH funding is about to explode once again and a similar wave of innovation [may] follow. In the last five years under President Bush, NIH funding remained flat at $27-$29 billion annually.

The recently-passed US stimulus plan allocates $10.4 billion in new NIH funding to be spent before September 2010. That’s roughly 30% of the annual budget. Research and academic institutions will benefit, but so will the companies that support them.

No area is better positioned to benefit than genomics and personalized medicine. With knowledge of an individual’s genetic makeup, doctors will prescribe drugs with far better understanding of their efficacy for that particular individual.

The cost of obtaining one’s genotype through entire genome sequencing is plummeting: Sequencing cost $300 million in 2003, and will likely fall below $1,000 by the end of this year. Once below $300, gene sequencing will be cheap enough to be part of routine medical care. With costs this low, personalized medicine is just around the corner.

Today, the two leading producers of gene sequencers are Life Technologies (Nasdaq: LIFE) and Illumina (Nasdaq: ILMN).

Life Technologies is the product of a merger of Invitrogen and Applied Biosystems. Illumina, which is our preferred pick, appears to be leading the market. Even in this tough economic climate, we expect Illumina to grow sales by 30% in 2009. Shares trade for 35x our 2009 earnings estimate. By the end of 2009, both companies will likely benefit from the new NIH funding, of which $1 billion is allocated toward equipment purchases. (Illumina closed above $38 Friday, while Life Technologies closed below $37—Editor.)

In the longer run, affordability of gene sequencing will take the technology out of academic labs and into mainstream commercial labs. Indeed, ten years from now gene sequencers may be as ubiquitous as x-ray machines. The risk remains that a better sequencing technology will eclipse Illumina and Life Technologies, though we believe that the opportunity justifies the risk.

Genomics may be the “next big thing” after the Internet and biotech. Finding those who can make money early on will likely pay dividends to investors.

Subscribe to The Oberweis Report here…

Related Articles on STOCKS