Small is beautiful

New biotech firms aim to diagnose disease at the molecular level- saving millions and earning billions

By David Berman
Globe Investor Magazine,
November 18, 2008
Photograph James-King Holmes/SPL/Publiphoto

Biotechnology stocks can scare away investors, and for good reason: These companies often have little or no track record. And as for earnings and revenues, they'll come later. Much later. Maybe.

But with a more targeted approach, biotechnology investing doesn't have to be a high-risk venture. One approach is to limit your universe of potential stock picks to the burgeoning field of molecular diagnostics, where a relatively small number of players are making big waves. These companies aim to take the guesswork out of medical tests, at a fraction of the cost, by focusing on diseases at their molecular level.

The field is relatively new. It began in the 1980s when the first wave of genomic research burst onto the scene with tremendous promise for curing disease. But it was only with advances in molecular biology in the 1990s that the early promise began to take shape. Clearly, big discoveries are still to come, but for a good example of what is already occurring, look no further than San Diego-based Sequenom Inc. Its stock price has soared this year, after the company announced encouraging results for its Trisomy 21 test, which can detect Down's syndrome using a blood sample from the mother. The company believes the test will be commercially available in the first half of 2009, and could help displace the need for invasive, and sometimes harmful, amniocentesis tests.

Rick Serafini, Elmwood Capital's chief executive, believes that the big gains in Sequenom's stock are probably behind it. But there are other names that have yet to catch fire. In particular, he likes Genomic Health Inc., which is working on tests to predict the likelihood of breast cancer recurring in women and the effectiveness of chemotherapy on particular patients.

"Right now, in terms of pure plays in the stock market, there are not a lot of molecular diagnostic companies to choose from," says Serafini, noting that the ultimate goal, from the perspective of investors, is to see some of the more successful firms get snapped up by the bigger players. "The traditional diagnostics space will be surpassed by molecular diagnostics. So the companies that are in there-Baxter International, Abbott Laboratories and Roche- are going to end up acquiring these smaller companies."