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Two Biotech Wizards Load up on Genomic Health
By Michael Brush
Exclusively for InvestorIdeas.com
February 22, 2007
You’ve probably never heard of two hedge fund managers named Julian and Felix Baker -- because they keep a low profile.
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But their record speaks volumes. The two brothers run money for university endowments and foundations through Baker Bros. Advisors. They specialize in biotech companies.
Thanks to the database at InsiderScore.com, you can see that these two have notched some impressive gains in companies where they own such a large share they have to report it to regulators. According to InsiderScore.com, Baker Bros. Advisors has made:
- A 92% gain on 5.4 million-share position in Seattle Genetics (SGEN), a biotechnology company that develops cancer therapies.
- A 645% gain in a small, remaining position in a biotech company called ViroPharma (VPHM).
- A 59% gain in a 764,000-share position in Intrabiotics Pharmaceuticals (ARDC).
- A 29% gain in Allos Therapeutics (ALTH), a biotech company that develops small molecule drugs for cancer treatments.
Of course, this is just an incomplete record of all their plays. But it’s an interesting sampling which suggests it’s worth paying attention to what they’ve been buying recently.
That would be Genomic Health (GHDX), a Redwood City, CA-based company that sells tests which help cancer patients determine whether they’ll actually be helped by the agony of chemotherapy.
In the past three months the Baker brothers have purchased over $22 million worth of Genomic Health stock, even though it has more than doubled since last April. They bought $15 million for around $21 a share in early December. Then they were back around Valentine’s Day to pick up another $7.3 million worth in a pull back that saw the stock retreat to around $18.50.
That’s some big buying from a pair that has had good success with cancer-related biotech companies – so I think it’s worth following their lead. Here’s a closer look at Genomic Health.
Custom medicine
As the name suggests, Genomic Health applies the science of genomics to cook up tests that help cancer patients figure out:
- How likely it is their cancer will come back
- Whether chemotherapy will actually help them
It’s all part of an emerging trend in health care that applies advanced knowledge of genomics to produce “individualized medicine.” Genomics is the study of how complex sets of genes are expressed and how they interact.
One problem with chemotherapy is that it’s been used in a kind of “shot gun” manner – meaning that only a small portion of patients who receive it actually get any benefit. Out of a group of 100 breast cancer patients, for example, only a half dozen or less will actually benefit from chemotherapy. But you don’t know which ones will benefit, so it’s better not to take a chance and just put everyone through the ordeal.
A diagnostic test from Genomic Health changes all that, at least for breast cancer patients. Known as Oncotype DX, the test analyzes 16 cancer-related genes in a way that lets doctors know how likely it is that breast cancer will return, and whether or not chemotherapy can stop it, for a particular patient.
The test is expensive. It costs about $3,500. But insurance companies are going along with it because they see the benefit of cutting back on the use of chemotherapy in patients where it won’t really help.
Growth prospects
Revenue at Genomic Health jumped four-fold in the fourth quarter of last year to $8.1 million. Spending on research and marketing jumped as well, so the company lost $9 million, or 37 cents a share.
But Genomic Health has plenty of opportunities for growth. That may explain why the Baker brothers were buying so much while others were selling heavily on the earnings news in early February. The stock was also weak because a competing product from a European company was approved for use in the U.S.
Here’s where revenue growth could come from.
- Broader acceptance by patients and doctors. Right now only about half of oncologists use the test.
- Broader acceptance by insurance companies. Aetna (AET), United Health (UNH) and Medicare are all on board with the Oncotype DX test. That covers about 100 million insured. There’s another 150 million to go.
- Broader use of the test in breast cancer applications. The company hopes to be able to provide targeted reports on specific genes like estrogen receptor and progesterone receptor genes, which would help doctors make better decisions on breast cancer treatments. This would expand the market. The company hopes to complete this by the end of the year.
- Expansion of the testing technique to cover colon cancer. The company will do “validation trials” next year on a similar diagnostic test for colon cancer, and possibly bring the test to market in 2009. The goal would be the same: Identify which patients are likely to see a recurrence, and which would benefit from chemotherapy. Other cancers will also be targeted.
The bottom line: Genomic Health’s stock has been on a roller coaster ride of late – trading in a range of $18 to $24. Right now it’s near the low end of that range in part because of news in early February that a competitor’s product was cleared for use in the U.S. The Baker brothers see this pullback as a big buying opportunity and I would too. I’d buy right here.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/.
InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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