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It seems odd. Sometimes the less money a company earns, the better its shares perform. It's counterintuitive, but there is method to this madness. The fact is markets move and trade on anticipation. The market must consider not only what a company has done, but also what it could do. In this article we'll explore three companies who provide the necessary supplies for genetic testing. None of them have much in the way of current earnings, but they do have something the market values very much - potential. Strong R&D Focus Illumina (Nasdaq: ILMN ) sells about $271 million in equipment for genotyping, gene expression and DNA sequencing into a $2.5 billion market. The firms has a market capitalization of about $3 billion. Illumina makes most of its money through the high-margin consumables that the labs need for each experiment. Illumina has recently launched two new products - BeadExpress, which is aimed at small research projects, and its 1G system to analyze DNA sequencing. The potential market for these two systems is roughly $1 billion. What Illumina sorely needs is means to differentiate its products from the competition, as this business has fairly low barriers to entry. Investors should also know that Illumina is in the midst of a patent infringement lawsuit with rival equipment-maker Affymetrix (discussed next). The outcome is uncertain at this point. Sailing Royalty Stream Affymetrix (Nasdaq: AFFX ) hasn't been executing well recently and that shows up in its market cap of not quite $1.6 billion, even though it has sales of $358 million. The company launched a new gene chip this past May that has 1.8 million genetic variables, but the firm still must depend on consumable sales as competition in the research end intensifies. Affymetrix has recognized this and is focusing its innovation efforts on more and better consumables. The company's recent entry into molecular diagnostics is a significant opportunity for the firm. This opportunity has considerably more upside than down, since the firm intends to lend the technology to other firms it partners with and then collect royalties at a future date. This is very much like owning a call option on your own technology, all the upside and limited downside. Industry Leader With a market cap of almost $4.6 billion and sales well in excess of $2.6 billion, Beckman Coulter (NYSE: BEC ) is a leader in the clinical diagnostic industry. BEC has a fine reputation for its systems and instrumentation and enjoys a strong brand name. With more than 200,000 installed units, the firm has a dependable stream of consumable income and its aftermarket sales account for 65% of the firm's revenue. Beckman Coulter's latest innovations have been well received by the market, and the company is seeing a good level of placements, with almost 30% of those sales coming from new customers. These automated systems combine several modules into a single platform so customers can consolidate the number of units they use. Beckman Coulter's goal is to double its market share in immunoassay systems (tests that measure concentrations levels of a substance in urine and other bodily fluids) over the next couple years. Hopefully this strategy will work because Beckman Coulter's revenue growth rate has averaged not quite 5% for the last three years and last year grew at just 3.5%. (For more insight, see Great Expectations: Forecasting Sales Growth .) R&D is the Key One of the best ways to tell if a company has good things coming on the horizon is to examine its spending on research and development (R&D). Take a look at the level of R&D spending versus share price: • Beckman Coulter allocates 9.5% of revenue to R&D and over the last three years the stock has risen about 30%. • Affymetrix devotes 22.3% of sales to R&D the stock has gone up about 10% over the last three years. • Illumina spends almost 131% of revenue on R&D and its stock has risen around 700% over the... [ABSTRACT FROM PUBLISHER] |
