The Precision Medicine Stock That's Revolutionizing Cancer Treatment

Foundation Medicine's (NASDAQ: FMI) genetic screening tests are leading the way in discovering what medicines will work best in cancer patients based on their DNA. As more specialized drugs targeting specific genetic mutations launch, greater reliance on genetic screening will be key to accelerating their use and validating their efficacy. The company's tests are already generating significant sales growth, but it's only early innings in this shift in cancer care. Here's what you need to know before adding this stock to your portfolio.

An important and growing business

Already, there are more than 70 FDA approved therapies that can be better matched to patients by genetic testing and thousands of clinical trials are ongoing that significantly expand the need for genetic insight.

Foundation Medicine's assays provide oncologists with a comprehensive understanding of their patients genetic make-up and a comprehensive view of existing FDA-approved and clinical trial treatment options. The company's solutions are also empowering drug developers with the molecular information necessary to develop drugs and successfully enroll research trials with patients most likely to respond to new therapies.

As a result of the cancer treatment market overwhelmingly moving toward personalized medicine, Foundation Medicine is enjoying record demand for its products. Sales in the third quarter jumped 45% year over year to nearly $43 million on a 50% increase in clinical volume.

The company reports sales in two segments, molecular information services and pharma R&D services, and both of those segments are enjoying demand growth.

Molecular information services sales increased to $28.4 million from $18.7 million in Q3 2016. Clinical revenue accounted for $13.1 million of this amount, up from $8.7 million in the same quarter last year. This third-quarter growth was the result of greater volume, including a 10% increase from the second quarter. At the heart of the performance was growing demand for FoundationOne, a solution that provides genetic insight by testing patient tissue. On average, revenue per test was $2,600 in the quarter, up slightly from Q2 2017.

Molecular Information Services sales also benefited from pharma revenue growing to $15.3 million from $10 million year over year because of an increasing need for clinical trial profiling.

Pharma R&D services revenue comes from biopharma partners who are working with Foundation Medicine to create new assays and other services for their products. In Q3, pharma R&D Services improved to $14.3 million from $10.7 million in the same period of 2016. In the quarter, this segment's sales benefited from a $10 million milestone paid by Roche Holdings (NASDAQOTH: RHHBY), which owns 59% of Foundation Medicine, for work done to enable genetic testing of blood samples to match patients up with a Roche lung cancer drug.

Tapping a big market opportunity

Foundation Medicine estimates that one million patients per year could benefit from genetic screening, yet less than 150,000 patients are currently being screened. As more personalized drugs make it to market and cancer treatment continues to migrate from treatment based on the anatomical origin of cancer to the genetic mutations responsible for it, testing volume should increase significantly and, perhaps, become standard in care.

Consider these facts:

  • 1.7 million new cancer cases are diagnosed in the U.S. per year.
  • 601,000 people in the U.S. die because of cancer in the U.S. per year.
  • 14.1 million new cancer cases are diagnosed worldwide per year.
  • 8.2 million people die because of cancer worldwide per year.

Those numbers are staggering, and they indicate an important need for new treatment approaches that improve patient outcomes. The need is even more pressing when you consider that by 2030, the American Cancer Society estimates there will be 21.7 million new cancer cases and 13 million cancer deaths worldwide annually because of a growing and aging global population.

The role of genetic screening, precision medicine, and personalized treatment in battling back against the tidal wave of people getting diagnosed with cancer over the coming decades remains to be seen, but industrywide R&D suggests that these advances will be important weapons.

Wherein there were about 680 clinical trials of personalized cancer medicine conducted between 2005 and 2013, Foundation Medicine estimates there are more than 3,000 trials ongoing now.

What's next?

Demand for Foundation Medicine's tests could improve dramatically if healthcare payers get on board, and one thing that could make that happen is an upcoming FDA decision on FoundationOne CDx, its comprehensive genomic profiling assay.

FoundationOne CDx is under parallel review by the FDA and Medicare, and a decision to approve it is expected this quarter. If it's approved and given a distinct Medicare code for reimbursement, it could significantly accelerate the use of genetic screening by reducing concerns about costs. Historically, after Medicare grants a distinct code, private insurers follow suit on reimbursement, too.

In addition to increasing demand for genetic screening, an approval should increase demand from biopharma companies who will be eager to work with Foundation Medicine on companion diagnostics knowing that an easier path to FDA approval exists.

Even without that happening, though, the future appears bright for Foundation Medicine. Demand for screening is growing without widespread reimbursement now, and that's likely to continue. Additionally, the company's relationship with Roche provides it with a deep-pocketed partner that's aligned in helping it prosper. Roche is responsible for selling Foundation Medicine's products overseas in 21 countries.

One more important consideration

Roche Holdings acquired more than 50% ownership of Foundation Medicine in 2015 and since then the relationship has been governed by a stand-still provision preventing Roche from making changes to its stake. The stand-still provision expires early in 2018. At that point, Roche could sell shares, or make an offer to Foundation Medicine to increase its stake.

Given the growth runway ahead of Foundation Medicine, I'd be surprised if Roche sells. Exiting Q3, Foundation Medicine is guiding for $135 million to $145 million in sales and 64,000 and 66,000 tests for the full 2017 year. For perspective, sales were $116.9 million in 2016, and clinical test volume exited 2016 at an annualized quarterly pace of about 52,000.

With revenue accelerating and catalysts ahead, Foundation Medicine finds itself in a very good position to reward investors as it taps into what it expects to be a $12 billion to $15 billion per year market. Given that backdrop, it's one personalized medicine stock that investors shouldn't ignore.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.