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Published: January 12, 2010
You could take a stab at Medivation,
Inc. (Nasdaq: MDVN), whose progress on Alzheimer's treatment
has sent its shares soaring three-fold since March. But then
there's OncoGenix Pharmaceuticals Inc. (Nasdaq: OGXI),
whose shares famously fell more than -30% in short order (mostly
in one day right before Christmas) as investors expressed
disappointment over a deal involving its lead cancer drug
candidate.
To be sure, trying to find the next hot biotech or
pharmaceutical stock is a high-risk/high-reward gambit. A safer
way to play the trend is to find companies that provide the
right tools to the research teams that work at those companies.
Luminex Corp. (Nasdaq: LMNX), which makes diagnostic
tools for genetic analysis, drug discovery, clinical diagnostics
and biomedical research, offers exposure to a wide range of
medical technology trends.
The strength of Luminex’s technology lies in its ability to
rapidly analyze massive amounts of data. The human genome, for
example, has more than 30,000 genes and more than one million
unique proteins. Although machines have been speedily analyzing
medical data since the late 1980s, many of those earlier systems
yielded inaccurate results. In effect, speed and accuracy were
at odds with each other.
Newer systems, such as Luminex’s xMap system, ended that
trade-off by offering highly-accurate and speedy results.
Luminex sells its gear to research labs, which also end up
buying a host of consumables used in the testing process. The
company also sells its software to other industry players, which
incorporate the xMap engine into their hardware. That technology
is protected by more than 50 patents, with an additional 100
patents pending. Many of the company’s partners license its
technology, which has yielded a rising stream of royalties.
As royalties and consumables comprise an ever-larger chunk of
sales, Luminex’s gross margins have been steadily expanding,
from 61% in 2006 to 68% in 2008.
Before the recent downturn, Luminex made great strides in
establishing its technology platform in a range of medical
research specialties. Sales grew at least +25% per annum in the
four years ended in 2008, but the economic slowdown in 2009 has
likely forced that growth rate down to around +15% in the past
year. The company continued to snag new customers at a decent
clip, but many existing customers slowed their pace of research,
which led to a drop in sales of consumables. The slowing
top-line pushed shares down steadily, and they now trade roughly
-40% below their peak in October 2008.
And that spells opportunity for value investors, as Luminex
looks set to get back to +20% or greater annual growth. Thanks
to raising $75 million in fresh capital about a year ago, the
company’s R&D labs have been aggressively developing new
products, most notably a 3-D mapping system that is just
reaching customers. R&D spending, which was slightly less than
$10 million in 2006, exceeded $20 million in 2008. The company
is also tapping new markets, notably in Asia. An upcoming IPO
for its Rules-Based Medicine subsidiary could also boost shares,
if that offering is well received.
Luminex’s board of directors, which is obviously privy to the
company’s sales and marketing plans, recently expressed
confidence that growth will rebound, through their collective
purchase of more than $400,000 in stock on the open market. This
marks the first significant insider buying at the company in
nearly five years. In the summer of 2004, a range of insiders
bought stock at around $6. Two years later, those insiders
became heavy sellers, as the stock approached the $20 mark.
Of perhaps greatest appeal to investors who are growing anxious
about this heady rally, shares of Luminex sport a beta of just
0.51. Beta is a useful way to gauge volatility and determine
whether shares move in tandem with an underlying benchmark. A
beta of 1.0 means a stock marches in lock-step with the
benchmark index, while anything above or below 1.0 implies the
stock typically moves faster or slower. Luminex's beta means the
stock has been somewhat neglected in this recent rally, but also
means that it should stand its ground if the broader market
sells off.
Fourth-quarter results are likely to be decent at best for this
medical diagnostics company, but the broader outlook for all of
2010 – and beyond – should remain bright.
-- David Sterman
Contributor
StreetAuthority |
