Keeping Tabs on Genomics

10/24/2013 7:00 am EST

Focus: STOCKS

Our latest featured stock brings us to a new medical technology company that provides "personalized" genomic information about a patient's individual cancer, which, it says, helps doctors to optimize treatments, and drug companies develop target anti-cancer agents, notes Geoffrey Seiler, editor of BullMarket.com.

The offering, from Cambridge, Massachusetts-based Foundation Medicine (FMI) was one of the hottest of the year. The company's first product is a $5,800 test called FoundationOne that examines a person's genetic make-up.

The company launched FoundationOne last year. The company said that, to its knowledge, FoundationOne is the only commercially available comprehensive molecular information product designed for use in the routine care of patients with cancer.

The current product targets patients with solid tumors. A second version aimed at patients with blood-based cancers is expected to be available in 2014.

One of Foundation's most famous clients was the late Steve Jobs, who made use of an early form of the company's test in his, ultimately unsuccessful, battle with pancreatic cancer. Jobs paid $100,000 for the DNA sequence of his genome according to MIT's Technology Review.

The company said that more than 1,500 doctors at community-based practices and large academic centers have already bought the product, which the company said it accomplished with a nascent sales team. Eighteen pharmaceutical companies, focused on developing cancer therapies, are currently using the product as well.

Foundation booked just $10.6 million in revenue in 2012, but the top-line growth is accelerating rapidly, with $11.1 million in sales recorded through the first six months of 2103. The company was founded in 2009.

Its stock priced at $18 on September 5, and nearly doubled in the first day of trading and traded as high as $40.84 on October 1, but it has lost some ground since then.

Foundation Medicine sold nearly 6.8 million shares to the public and the underwriters exercised their rights to buy another 883,333 shares. The company sold all of the stock. It currently sports a market cap of around $950 million.

Steve Jobs isn't the only tech heavyweight to be associated with the company. Microsoft (MSFT) founder and Chairman Bill Gates was an early investor in Foundation Medicine as was Google (GOOG). Google Ventures holds 9.0% of the stock following the IPO, while Gates has 4.1%.

The company's other backers include Third Rock Ventures and the long-time Silicon Valley VC firm Kleiner Perkins Caufield & Byers, with 24.2% and 13.0% of the company, respectively. Laboratory Corp. of America (LH) also has a 4.1% position.

This is the kind of young company that we find intriguing. Like a lot of technology startups, it has a new product addressing a previously unmet need and it has significant growth potential.

Given the high cost of cancer treatments, which, for novel new biotech therapies, can cost tens of thousands of dollars in some cases, a single $5,800 test doesn't seem an outrageous price to pay if it can lead to better outcomes.

The test, conceivably, might also lead to a lower overall cost for treatment, if it can point doctors to the right regimen from the beginning, instead of the standard medical practice, which seems, to the non-medical person to be: If Plan A doesn't work, go to Plan B, and C, and so on. It is still to be determined if FoundationOne can achieve those benchmarks.

There is considerable risk, of course, with the primary initial hurdle being to obtain reimbursement approval from Medicare, which, in turn, can lead to acceptance by the broader health insurance industry.

Foundation will also want to get approval for its sale in Europe and other markets. If the company can clear those hurdles, which we think should be doable, then it has a clearer path to growth.

Valuing a company like this is difficult, and we wouldn't rush right now to buy it. But it is one for risk-tolerant investors to keep tabs on.

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