About 18 months ago, the hottest segment in the life sciences sector was clearly molecular diagnostics. High fliers like Myriad Genetics (Nasdaq:MYGN, http://www.myriad.com), Redwood City, CA-based Genomic Health (Nasdaq:GHDX, http://www.genomichealth.com) and Carlsbad, CA-based Genoptix (Nasdaq:GXDX, http://www.genoptix.com) were demanding heady valuations of four-five times revenues or even higher. The research community was holding numerous planned and ad hoc teach-ins with their institutional client bases, and for the first time the buyside community began to gain fluency with terms such as immunohistochemistry, fluorescent in-situ hybridyzation, novel biomarkers and protein pathways. Recently, though, the blush seems to be off the rose as IP questions, business fundamentals and competition have all worked to rationalize valuations.
Earlier this year a New York district judge ruled that the patents held by Salt Lake City- based Myriad Genetics on the BRCA1 and BRCA2 genes, which identify a woman’s proclivity to breast and ovarian cancer, invalid because they “are directed to a law of nature” and therefore cannot be patented. This ruling, at least temporarily, has chilled the excitement in the segment by calling into question ownership of such genetic markers and others.
More recently, Genoptix, a company that specializes in testing for blood borne cancers, has struggled to maintain the explosive growth curve it had established (and continued to predict) due to the emergence of many new competitors in the oncologist office. Genoptix managment, as recently as June 15 claimed that their oncology customers are seeing as many as 10 visits a month from competing firms asking for bone marrow samples to test.
Finally, as some of these vanguard molecular Dx stocks have hit resistance, business fundamentals should begin to rise in importance and boring concepts such as distribution, margins, profitability and expense control will play a more important role in valuations.
One company, Aliso Vieo, CA-based Clarient Inc * (Nasdaq:CLRT, http://www.Clarientinc.com), believes that it was both fortunate and smart in devising tjheir approach to the market. As an unknown and underfunded diagnostics lab five years ago, Clarient could only afford to hit the market were there was little resistance. While their larger competitors, which mainly came from the pharma world, focused their efforts on the oncologist community – in many cases circumnavigating the traditional role of the pathologist – Clarient decided to partner with the community pathologist. The strategy was to give the pathologist academic-level capabilities, while allowing them to remain an important part of the treatment process and economic value chain. Clarient has quietly built a network of more than 1,200 pathology practices (10,000+ a). It is too early to tell what the final tally will be but Clarient’s valuation has risen dramatically as compared to its peers and several of those peers have announced their plans to begin doing tissue-based diagnostics and trying to compete in the pathologists office. Stay tuned.
* Denotes an Allen & Caron client