Outlook and Issues for Application of NGS for Clinical Diagnostics

We heard a few presentations on NGS solutions and still think it is an important growth market for clinical diagnostics in oncology, rare diseases transplant medicine and NIPT. Gene sequencing (NGS) can lead to a better understanding of the molecular basis of disease and personalize diagnostics and therapy.The difficulty is when to invest in this area as the research market has matured and new clinical applications are needed to accelerate growth. We were lucky to get into Illumina (ILMN) stock before the Conference and now have a nice profit as the stock has moved from the $130 level to $160 based on a new product rollout. We also have small positions in Pacific Bioscience (PACB) and Foundation Medicine (FMI) an emerging leader in NGS-based cancer diagnostics and a partnership with Roche (RHHBY).

Here are some of the key issues that will determine the growth trajectory of Next-Gen Sequencing (NGS) for clinical diagnostic solutions.

  • Explosion of -omics and proteomics analysis has presented a big data challenge and there is greater need for collaboration among the players.
  • Reimbursement will be needed for clinical applications with pre-certification of tests.
  • Interpretation of data is a big issue and requires a lot of time and expert resources. False results are still a problem.
  • Valuations are still a bit high with P/Es ~20 so need to look at top line growth.

Foundation Medicine (FMI) has a molecular information platform to analyze cancer specimens for personalized treatment regimens. Clinical products are Foundation One for solid tumors and Foundation One Heme for blood based cancers such as leukemia and multiple myeloma. Medicare reimbursement is being expedited through an FDA/CMS parallel review with the objective of a genomic profiling assay  to incorporate multiple companion diagnostics. FMI is a subsidiary of Roche Holdings (RHHBY) and is growing revenues from the $118M  level in 2016 and forecasted to $155M in 2017. Growth will be determined by payor reimbursement issues.

Pacific Bioscience (PACB) sequencing systems resolve genetically complex problems utilizing its long read, real time single molecule real time technology (SMRT).The stock took a hit from $7 to $4 in mid-December when Roche Diagnostics terminated its licensing and development agreement based on the Sequel platform for the in vitro diagnostics. The long read competitive landscape for long read sequences is growing with Oxford Nanopore (ONT) and 10X Genomics. The Company has litigation with ONT.The balance sheet looks OK with about $80M of cash and securities. P/S is 4

Illumina (ILMN) is a core play in sequencing with a broad product line, strong financing and dominant market share.Although 2016 performance was disappointing investors believe the Company will maintain 7% growth in 2017 because of new products. like the NovaSeq platform further reducing the costs to the $100 genome. A new Company called GRAIL was formed in January 2016 to enable early cancer detection via blood based screening (liquid biopsy) powered by Illumina sequencing. a clinical readout on GRAIL is expected in 2017. Revenue estimates for 2017 are $2.660M a 10%+ YoY growth rate.

All of these stocks are volatile so difficult to call entry points but sequencing technology is key to the future of early clinical diagnostics and personalized medicine.

Disclosure: Long FMI, ILMN,PACB

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