Thursday, April 10, 2014

Genomic Health And The New Medicine

If I were to describe to you a movie plot where an imbalanced young college genius began experimenting with an inkjet printer building 3D structures, only using living human tissue paste instead of ink, you'd think it was a ghoulish invention of a Stephen King type, and you might not want to watch the movie. But such a thing has actually happened, and they are making, not a movie, but an industry about it.

Dr. Thomas Boland is our imbalanced young man, and as a write up last month in The Economist Printing a Bit Of Me described it:
Dr Boland started experimenting in the summer of 2000 using an old Lexmark inkjet printer that was sitting in his former lab at Clemson University in South Carolina ... At the time he wasn’t looking to print 3D biological structures, just proteins or cells in two-dimensional patterns
But the concept of 3D printing biological structures quickly began to catch on with other scientists over the next couple of years.
In Dr Boland’s case, he simply added to an HP printer a platform that could move up and down. In 2003 he filed for his first cell-printing patent and collaborated with Dr Forgacs and three other colleagues on a paper for Trends in Biotechnology in which they predicted that in this century “cell and organ printers will be as broadly used as biomedical research tools as was the electron microscope in the 20th century.”
"They've got to be kidding" was my first reaction to all this (click on images to enlarge):

But this image from doesn't look very much different than the actual printer they are using at Organovo (ONVO) to print liver tissue samples they intend to begin selling to drug development companies this December! The whole-organ printing depicted above is something they see as maybe being 20 years into the future, although at Wake Forest, they are already printing bladders and putting them in people.

Anthony Atala, is a leader in this field and director of the Wake Forest Institute for Regenerative Medicine in North Carolina. In a Fool article last October, "
Organovo's 3 Biggest Opportunities in 3-D Bioprinting", they discuss the progress made toward organ printing:
So far, surgeons have been able to implant a variety of engineered flat, tubular and hollow tissues into patients, including skin, cartilage and muscle. Dr Atala has also successfully implanted lab-grown bladders and urethras into young patients. But solid organs are another matter.

"Bioprinting" is the name given to this Herman Munster stuff, believe it or not, and as the "Printing a Bit Of Me" article notes in it's lead statement, "Bioprinting: Building living tissue with a 3D printer is becoming a new business". The business sense of it is easily seen when you consider what goes on in drug development. Of every 5000 drugs invented, only 5 are allowed to be tested on any of us living humans, with only 1 of those being approved for sale. But those 4999 failed drugs have soaked up some $5 billion dollars in testing, making the one approved very very expensive for us all. Our healthcare crisis, and I think you could call it that, could be solved in great part with a new era of drug testing on bioprinted human tissue.  As biopharma companies begin getting printed human tissue to test with, it is going to weed out the ones that can't ever be sold much more quickly and with only a tiny fraction of the cost.

One of every four failed drugs in phase III trials, or those yanked from the market once approved, fails because of liver toxicity. This is after the $5 billion wad has been blown to develop it. So Organovo, the only public company so far doing bioprinting for biotech development, is focusing on selling printed liver portions first, to possibly knock a huge hole in the typical drug approval cost.

This is a new direction in medicine possibly affecting Genomic Health (GHDX) in particular. It will effect many healthcare companies, but Genomic is in the business of working on cancer tissues taken from patients to develop custom tailored therapies based on the genomics of that particular patient. A "cure" for cancer as was envisioned years ago as some silver bullet discovery has given way these days to the reality of genetic differences in us all, and a cure for one of us isn't a cure for someone else, even with the same cancer. There likely may never be a silver bullet, other than good nutrition, inherited genes, and avoidance of toxins, etc. Genomic Health treats each cancer as a separate disease with only genetic predispositions and groupings to target with treatment designs. As was explained in the fool article:
Organovo is collaborating with Oregon Health and Science University's Knight Cancer Center to develop the technology. The pair is expected to publish results from several studies after the second half of next year, after which a pathway for commercial develop can be established. While any number of pharmaceutical companies would surely be interested, it would also be worthwhile to partner with a cancer diagnostics company such as Genomic Health to expedite commercialization and improve the chances of building a successful platform.
Genomic Health performs genomic analysis on tumor samples to identify tumor-specific characteristics. If Organovo can print multiple tumor types with certain genetic dispositions (as occurs in the real world), pharmaceutical companies or doctors could rapidly develop individual regimens based on the cancer tissue and patient's genetics
This possibly positive new development among others is attracting a high level of insider buying in GHDX from the Bakers. If you follow Biotech very much, you probably are aware of the Baker brothers, Felix and Julian, their investment funds and other corporate entities. Julian Baker has been on the Genomic Health Board since 2000 and was joined in 2012 by Dr. Felix Baker, who holds a PhD in immunology. They are also on the boards of several other biotech companies. They know more about biotech than you and I combined ever will, and have a reputation of astonishing success with their insider buying of biotech stocks.

I want to present here, not an involved chemical argument for Genomic Health, because, quite frankly, when I read discussions about myelodysplastic syndromes and multi-tyrosine kinase inhibitors, it just makes my head spin. I want, instead, to show some patterns in the insider activity of the biotech stocks the Bakers have been buying over the last decade and how that relates to GHDX. Insiders typically know more than the market participants as is evidenced by study after study concluding that stocks with high insider buying add several points of alpha to a portfolio. And the Bakers seem to know more than your average insider (I did some charting to check on that). There are just a handful of stocks that the Bakers have zeroed in on with massive buying, and by that I mean anything over about $40 million worth. I included the buys of their funds as well as their personal purchases. I did not include granted options or any activity other than market buys of shares.

First let's look at Seattle Genetics (SGEN) (click on images to enlarge)

Here we see $multi-million buys starting to crop up in 2006 at a very opportune low point in SGEN's price history. After a quick climb that more than doubled the stock, there was no big buying in 2007. Then the buying returns and intensifies until 2012, when the stock embarks on a fast multi-bagger and the buying shuts down again. Last year the buying is back at even higher levels. 

Now let's look at Incyte (INCY):

There was some small buying (by their standards) in 2003 and 2004, then two years of no buying. The heavy buying starts in 2007 with about $60 million bought in 2011. As with SGEN, the stock goes into a fast, multi-bagger explosion. The Bakers saw something very good many years before the market did.

Now let's look at  Pharmacyclics (PCYC):

Here, you get the feeling the Bakers were a little tardy in latching onto this rocket having only bought in two years and "only" about $40 million worth before the launch. All the buying in 2012 was done in January and a little in February, just ahead of ignition.

Which brings us to Genomic Health (GHDX):

Here we see the buying started in 2010 and heavy buying setting in during 2011 and intensifying in 2012 to a level much higher than in any year of the previous cases. You have to like the chances of a multi-bagger climb ensuing in the not-too-distant future. The Bakers tend to accumulate heavily for 3 or 4 years, which historically is a very good buy signal. And that's just what they have done with Genomic Health at this point.

The timing of the buying beginning in 2010 is interesting in light of the evolution of  bioprinting and what a massive help to GHDX it could be:

  • 1984 - Charles Hull invents 3D printing in general, creating a 3D model from pictures that began to be used for tests before money was spent on manufacturing
  • 2003 - Dr. Thomas Boland, in his lab at Clemson, modifies of a Lexmark printer to print 2D living cell arrays on a scaffold
  • 2004 - Several other scientists begin modifying printers to print 3D cell structures on scaffolds, and Dr. Forgacs, co-founder of Orgnaovo, first prints 3D living tissue without scaffold
  • 2010 - Organovo prints first human blood vessel without scaffold
  • 2011 - Organovo develops multiple drug discovery platforms and 3D bioprinted disease models
The blood vessel accomplishment in 2010 may seem minor, but a huge hurdle in printing living matter for realistic testing of therapeutics is the creation of the circulatory part. With their buying of GHDX starting also in 2010, one has to wonder if the Bakers were watching this development and are optimistic about the game changing prospects it may hold for Genomic Health.

Their game is simply this, as stated at their Linkedin page:
Genomic Health, Inc. (NASDAQ: GHDX) is the world's leading provider of genomic-based diagnostic tests that address both the overtreatment and optimal treatment of early stage cancer, one of the greatest issues in healthcare today. The company is applying its world-class scientific and commercial expertise and infrastructure to lead the translation of massive amounts of genomic data into clinically-actionable results for treatment planning
The "massive amounts of genomic data" are the gene mapping that used to be a hot topic decades ago. The Human Genome Project was launched in a 1987 budget to Congress with the goal of mapping our genomic make up over the next 15 years. In 2006, they announced an essentially completed project, although "it remains the world's largest collaborative biological project" according to Wikipedia. That was the year coincidentally that the Bakers began their massive buying of Seattle Genetics in the above graph. Now with the advent of bioprinting, a new age of medicine may be dawning where $billions of development money will be chopped out of the creation of effective therapy . They can now begin testing willy nilly on real live human disease types, so much of which is gene determined, without the massive waste of time and money spent on animals, cultures, and all the poor substitutes they have been working on all these years.

Is this a possible reason for the bull market in the biotechs emerging the last couple of years? The biotechs are often thought of as unstable and dangerous in overpriced, frothy markets. But even if you feel that way about the present market, check the behavior of the Baker selections above over the '08 crash. They were vastly more resilient than the market. You can not even find an "08" in their charts. Maybe they're not a "safe place to hide" like a utility, but the advances in medicine will go on pretty much independent of the economy.

Genomic Health is just a $823 million market cap company with plenty of room for growth and a very tiny float of just 17 million (the Bakers have bought up most of the shares) so it could move fast in a bullish development. They have zero debt, $105 million in cash, and a 4.8 current ratio, but unexciting bottom line performance with downgrades and a slumping stock price.

As for basic fundamentals for GHDX, they have growing revenues over the last 5 years and a price/sales of  3, which is reasonable for a biotech. But that's about all you can say for it. The cash flow multiple is over 90 with earnings waffling between positive and negative. They need a game changer. The Bakers seem to think one is on the way.