The $45 Billion Industry Everyone's Ignoring
By Rob Fannon, editor, Phase 1 Investor
March 07 , 2008
More than two-thirds of all medical decisions are based on a lab test.
That may sound like a big number. But I expect this figure to explode in the next decade, perhaps to even 100%. The diagnostics industry is the most rapidly changing sector in modern medicine...
Health care investors used to regard diagnostics as the redheaded stepchild of medicine. The margins and overall economics of routine testing products – tests that cost a few bucks and measure cholesterol or blood-sugar levels – just aren't all that attractive.
But these "one size fits all" tests are rapidly giving way to more accurate, sophisticated, and individualized genetic tests. With such improvements, the price tags on these services are skyrocketing.
For example, take the latest diagnostic product used to determine treatment regimens for breast cancer...
Chemotherapy is one of the most grueling treatments in modern medicine, one that causes nausea, hair loss, infertility, and more. Even so, most cancer patients willingly face such harsh side effects in hopes of getting better.
But what if your doctor told you the chances of you getting any benefit from subjecting your body to such chemical warfare was only 4%? I'd pass on the chemo and advise my family members to do the same...
Yet doctors have had no way to determine who would and would not respond to chemotherapy. So the thinking has been treat first, ask questions later. But now, for the first time, doctors can prescreen patients that will respond to chemo based on the results of a new test that probes their cancer's molecular "fingerprint."
Tissue samples are run through a 16-gene test panel to identify the small percentage of patients that will actually derive a clinical benefit from the physically and mentally taxing chemotherapy regimen.
How much does a test like this cost? About $3,650 a pop.
That's worlds away from your standard $10 cholesterol test. But the information provided in the test is much more valuable, too. The doctor doesn't have to guess whether the patient will benefit. The patient understands the risks and payoffs of such a nasty treatment beforehand. And the insurance company would much rather cough up a few thousand bucks up-front for the test in order to skip out on a $20,000–$50,000 course of chemo.
I recommended the maker of this test to my Phase 1 readers several months ago. We're up about 10% on the position. Of course, this company is just one of many players in the fast-growing diagnostics industry, which rakes in about $45 billion a year.
Here are a few of the biggest players:
Company |
Ticker |
Market Cap |
Price/
Earnings |
Profit Margin |
Quest |
DGX |
$9 billion |
26 |
5% |
LabCorp |
LH |
$9 billion |
20 |
11% |
Bio-Rad |
BIO |
$2.5 billion |
26 |
6% |
|
The diagnostics industry now offers faster, cheaper, and more accurate genetic technologies... with much more attractive market economics. It's the perfect place for health care investors in the next decade and beyond.
Good investing,
Rob Fannon
