Foundation Medicine, the Cambridge, MA-based cancer diagnostic company, reminded me of the 2000 genomics bubble when it went public this week. The company sold its IPO shares at $18, and the stock (NASDAQ: [[ticker:FMI]]) almost doubled in its first day of trading, closing at $35.35, a 96 percent increase off an already bumped-up IPO price. That gives the company a market value of almost $1 billion.
This impressive rise represents one of two potential outcomes. It could be that either genomics is here to stay as a diagnostic tool and Foundation is a harbinger of this change. Or, this could be the peak of another bubble featuring a money-losing company hyped by scientific leaders but still unproven in the marketplace. In that view, Foundation’s IPO is not just hazardous to the company’s most recent investors. It may be damaging to the whole field of genomics-based healthcare and to biotech stocks in general.
Foundation faces a long road, but I am inclined to take the optimistic view. Genome sequencing is a powerful technology that has declined so much in price, so fast, that it has outpaced Moore’s law. The real value in sequencing is not the raw data, which are becoming a commodity, but rather the interpretation of that data for specific patients. In ways I will explain below, Foundation sits just at the nexus of that new data and its own increasingly powerful interpretation engine.
My first take-home from FMI’s monster IPO is, don’t worry so much about the company’s past losses ($22.4 million as of 2012, according to the IPO prospectus). Look instead at the amount of money raised ($106 million on top of $99 million raised since the company was founded in 2009) and consider its practical value: research funding.
When the 2000 genomics “bubble” was inflated, companies such as Incyte, Human Genome Sciences, Celera and Sequenom raised eye-popping amounts of cash at even more eye-popping valuations (one day in February, 2000, Sequenom hit a $4 billion market cap on nearly nonexistent revenue), there was no way for that money to create value in a reasonable time frame. What followed was a decade of retrenchment as one company after another started the arduous process of home-growing its own drugs (Incyte has notably succeeded at this) or shifting to a more sustainable business (such as Sequenom’s prenatal test for Down syndrome and other chromosomal abnormalities).
The fresh money for Foundation Medicine, plus the inevitable follow-on offerings, will fuel a powerful research platform that is in a position to discover and then apply a number of new insights into how genetics influence patients’ response to cancer therapies. That, in turn, has the chance to improve the success rate for physicians in treating cancer using both marketed and experimental drugs.
My second take-home is that the large fundraising gives the company a greater survivability in the absence (until now) of reimbursement. You don’t have to read the prospectus to know that one of the key risk factors for FMI is the lack of buy-in from payers. As Ben Fidler of Xconomy wrote, “Foundation began selling its diagnostic, known as FoundationOne, at the American Society of Clinical Oncology meeting in June, 2012. And while demand has been rampant—-some 1,500 physicians in about 25 countries have ordered the test since—FoundationOne isn’t covered by any plan. Rather, coverage is determined on a case-by-case basis, meaning the company is likely going to have to gather meaningful evidence from clinical trials to prove to payers that its test is making a big difference for patients.” Reimbursement is still a hurdle, probably the biggest. Hold a big IPO and voila—funding is there for these trials.
Personally, I am thrilled that Foundation’s approach reflects a strong shift toward using personal genetic tests (in this case whole genome sequencing) to drive medical care. The term “personalized medicine” has been overused
