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Is This the Best Precision Medicine Stock to Buy?

By Todd Campbell - Oct 10, 2017 at 5:00PM

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Foundation Medicine is on the cusp of a tidal shift in cancer treatment.

Foundation Medicine (FMI) scans patient samples for myriad genetic mutations, and that insight is allowing increasingly more oncologists to match their cancer patients with treatments that have the best shot at success.

Given it's only early innings for personalized medicine, and the peak opportunity associated with it could total billions of dollars annually, let's learn a bit more about this company.

Revolutionizing cancer treatment 

Our understanding of cancer is morphing beyond its anatomical location to its genetic cause, and as we gain greater insight into genetic mutations associated with cancer, genetic screening could become standard in determining the appropriate treatment.

Scientists look at a screen displaying a double helix.


We're already seeing this happen.

Foundation Medicine's screening solution provides comprehensive insight into the genetic mutations associated with a patient's cancer, and it provides doctors with a user-friendly review of currently approved FDA drugs and ongoing clinical trials that may be appropriate for each patient.

Foundation Medicine estimates between 100,000 to 150,000 U.S. cancer patients with advanced disease are currently being genetically screened to inform treatment decisions, and that number should continue growing as more personalized medicine makes its way to market.

A flood of these drugs may be coming given the amount of clinical-stage activity being done on them. Between 2005 and 2013, there were about 680 clinical trials in the United States investigating personalized medicine in oncology, but in 2016, Foundation Medicine estimates there were more than 3,000 trials ongoing. Right now, there around 80 approved targeted oncology drugs on the market, but there are over 600 personalized medicines being studied right now in the clinic.

Tip of the iceberg

Foundation Medicine believes it's got first-mover advantage in the market for molecular information.

Its solutions assess cancer simultaneously for base pair substitutions, copy number alterations, short insertions and deletions, or indels, and gene rearrangements across all cancer-related genes. Importantly, it does so with the sensitivity and specificity necessary for use in routine medicine.

Clients already include several thousand physicians from large academic centers and community-based practices. However, there are thousands more physicians who have yet to order one of the company's screens.

Foundation Medicine estimates there are 1 million advanced cancer patients in the U.S. who could benefit from genetic screening, and that as more personalized medicines are approved, reimbursement hurdles with payers shrink, and screening occurs earlier in disease progression, there could be 2 million U.S. cancer patients who could benefit from genetic screening in five years. This suggests that only 5% to 7.5% of the potential addressable market within five years is currently being served.

Catalyst coming

In Q4, the FDA and Medicare are expected to wrap up their parallel review of Foundation Medicine's FoundationOne, a genetic screening assay that uses next-generation sequencing (NGS) and computational analysis to identify solid-tumor patients who may benefit from personalized treatment.

If the FDA gives FoundationOne a nod, and CMS provides it with a distinct reimbursement code, it could significantly accelerate the use of genetic screening by eliminating payment bottlenecks. Historically, once Medicare grants a distinct code, private insurers agree to negotiate on reimbursement, too. If so, then genetic screening will no longer have to overcome objections associated with its direct cost to patients.

A Foundation One approval would also go a long way toward solidifying Foundation Medicine's relationships with drugmakers that need companion diagnostics to win approval alongside their medicines. Because FoundationOne can be updated with new biomarkers, teaming up with Foundation Medicine may reduce the risk of a companion diagnostic failing to win FDA approval at the same time a drug gets an OK.

Money to be made

Understanding the potential opportunity associated with the shift toward personalized Medicine, Roche Holdings (RHHBY 0.72%) acquired more than 50% ownership of Foundation Medicine in 2015.

Roche also agreed to collaborate with Foundation Medicine on technology, provide it with a credit line to shore up its financials, and use its global weight to market Foundation Medicine's products outside America.

Roche could be on the cusp of being handsomely rewarded for its foresight.

Though the market for genetic screening is only emerging and reimbursement obstacles remain, Foundation Medicine did 16,000 clinical tests in Q2, up 55% year over year. The increase in volume boosted sales 24% year over year to $35 million, bringing trailing-12-month sales to nearly $120 million. 

FMI Revenue (TTM) Chart

FMI Revenue (TTM) data by YCharts.

In 2017, Foundation Medicine is forecasting it will deliver between 61,000 to 64,000 tests and between $135 million to $145 million in sales. 

In five years, though, Foundation Medicine's revenue could be significantly bigger. The company believes it can be a leader in an addressable market that's worth between $12 billion to $15 billion per year. If they're even close to being right, then sales could be about to enjoy a multiyear run of double-digit growth.

Risks to know

The potential associated with Foundation Medicine's market opportunity is undeniably big, but that doesn't mean this is a riskless stock to buy. The company's forking out lots of money in R&D and marketing, and as a result, there's no telling when this company could turn a profit.

Nonetheless, I believe personalized cancer treatment is the future, and since Foundation Medicine arguably offers the most comprehensive screening solutions out there, it's one stock I think is worth owning in long-haul growth portfolios.

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