The World's Best Innovation That Isn't Worth Investing In

This article is part of our Innovation in America series, in which Foolish writers highlight examples of innovation going on today and what they see coming in the future.

The sequencing of the human genome was arguably one of the most important innovations for advancing drug development. Having the sequence of all the genes has accelerated the ability of researchers to identify drug targets and then design drugs that can inhibit or activate them.

And being able to sequence genomes to identify patients who will or will not respond to a medication is leading to a new era of personalized medicine. Pfizer's (NYSE: PFE  ) lung cancer drug Xalkori and Vertex Pharmaceuticals' (Nasdaq: VRTX  ) cystic fibrosis drug Kalydeco wouldn't be possible without understanding the mutations in the genes involved.

And yet, I see little reason to invest in the genome sequencing industry. What's great for the end users isn't necessarily great for those producing the tools.

Plummeting costs
In January, Life Technologies (Nasdaq: LIFE  ) announced that a $1,000 genome is within reach. That article has a nice picture of how far the price has dropped in the last decade; note that the price is on a log scale! Go look, I'll wait.

Illumina (Nasdaq: ILMN  ) shattered the $1,000 mark last week, announcing that it'll sequence whole genomes for $9,500 or as low as $7,600 if you've got 50 or more samples. And it'll turn around the data for you in under two weeks.

The decreasing cost is great for researchers, but the competition has to put pressure on net profit and eventually profit margins.

It's certainly hindered upstarts. After IPO'ing in late 2010 and generating some excitement, Complete Genomics (Nasdaq: GNOM  ) and Pacific Biosciences of California have been utter failures as investments.

GNOM Chart

GNOM data by YCharts

Like Life Tech and Illumina, Pac Bio develops machines that sequence genomes. Its technology might be superior, but that doesn't really matter in the race to the bottom on price.

Complete Genomics has taken a different approach, basically acting as a service company for researchers who want genomes sequenced but don't want to have to buy their own expensive sequencing machines. Illumina's moving into the sequencing service space seems to have squeezed Complete Genomics; the company recently cut staff and announced a plan to undergo a review of strategic alternatives.

Finite market
It's certainly possible to make money in low-margin businesses; just take a look at Costco or Wal-Mart. You just need to make it up in volume.

There's no doubt that there are a lot of genomes to be sequenced. At some price point, doctors will just routinely order a genome sequencing test for every patient they see.

But how often does your genome change? Pretty much only if you get cancer. So most people are only going to need one test in their entire lives, two if they're unlucky.

Yes, there are other applications for genome sequencing, identifying the exact bacteria in an infection, for instance. But most of those are one-and-done applications. Just as antibiotics tend to be low sellers compared to drugs that treat chronic conditions, genome sequencing will settle into a niche business after the impetus of initial sequencing.

Interested, just not at that price
Even with my gloomy outlook, it's still possible to make money with genome sequencing companies. The sure number of potential customers -- every man, woman, and child in the developed world -- means companies can make money on the ramp up.

Figuring out the value of the market is difficult, though, with the price plummeting so quickly. Roche was interested in purchasing Illumina, but only at a certain price, which I take as a sign that the health-care giant is conservative about the long-term potential of one of the world's best innovations.

Investors should follow suit.

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Read more about innovation today and its future in America; head back to the series intro for links to the entire series.

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Pacific Biosciences of California, Pfizer, Illumina, Vertex Pharmaceuticals, and Costco Wholesale. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy.

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Read/Post Comments (4) | Recommend This Article (6)

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  • Report this Comment On July 02, 2012, at 12:14 PM, scbaker813 wrote:

    You may very well be right about this market not being worth your investment, but your assessment that the applications are 'one and done' is shortsighted. It's looking like genomes aren't as stable as was originally thought, so patients may need to be sequenced several times throughout their lifetime (and maybe have multiple cell types sequenced). And then there's the epigenome which changes quite a bit (at least on a monthly or yearly basis). And then there's the transcriptome, which changes on a minute by minute basis. I agree that it may be difficult to pick an obvious winner, but it's pretty clear that sequencing will become a routine medical tool used many, many times (hundreds? thousands?) throughout a patient's lifetime.

  • Report this Comment On July 03, 2012, at 9:38 AM, gioby wrote:

    First of all, you should think that genome sequencing will be applied at a very large scale in the future. Last year the Far Oer islands declared that they are planning to sequence the genome of their whole population[1]; there is a project to sequence the genome of 10,000 English individuals; and I have heard of similar plans for sequencing the whole Denmark population, which already has a very good recording system for health.

    So, it is fair to believe that, within 10 years, genome sequencing will be routinely applied to whole countries. Sequencing will become less expensive, and as the knowledge of our genome increases, the advantage of sequencing will improve. Sequencing a genome can provide many information on the risk of developing diseases, and in a few years, this will become a tool to reduce the cost of public health.

    Moreover, it is also false that genome sequencing is needed only once in the lifetime. First of all, as the sequencing techniques improve, people will need to sequence their genome again. For example, the 23andMe project in reality only provides the status of about 1 million positions in the genome; so, in the close future, many 23andMe customers will need to have their genome sequenced at a higher resolution. The same will happen more than once, as the resolution will improve, and as we will start sequencing more than one single tissue, and including also information on DNA methylation and epigenetics.

    [1] http://www.wired.co.uk/news/archive/2011-10/07/faroe-islands

  • Report this Comment On July 03, 2012, at 9:49 AM, mtf00l wrote:

    IMHO Genome Sequencing is still in its infancy and will continue to be until someone figures out how to create profit from it.

    That is most unfortunate. Where are the Dr. Salk's of our day?

  • Report this Comment On July 10, 2012, at 2:51 PM, sbridgett wrote:

    I would definitely agree with the comments above, that sequencing of genomes, transcriptomes, microRNAs, etc will become increasingly common in medicine. For example here is an article about Michael Snyder, who sequenced blood samples each two mounts to identify beginning of his diabetes: "First-ever integrative 'omics' profile lets scientist discover, track his diabetes onset":

    http://med.stanford.edu/ism/2012/march/snyder.html

    But it is still early days, and predicting which sequencing supplier will be most successful or profitable is still difficult.

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