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
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
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
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
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. (Insider buying is just one of
several "profit catalysts" that can send a stock to the
moon. Before you invest, make sure you identify a clear
profit catalyst. Or better yet, look for
profit catalysts -- like these 10 stocks.)
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
Disclosure: David Sterman does not own shares of any security
mentioned in this article.