The quote in the image above comes from Dr. Ian Malcolm, Jeff Goldblum’s character in the 1993 hit movie, Jurassic Park.
The “force” he was referring to was genetic power.
Don’t worry. We won’t be reawakening any killer dinosaurs today.
But this high-tech company that I’ve uncovered is helping to crack the genetic code.
When it comes to mankind’s deadliest diseases, there’s no doubt that getting an early and accurate diagnosis is absolutely critical to survival.
That’s exactly what NanoString Technologies (NSTG) delivers.
It provides innovative systems, kits, and data analysis programs involved in life sciences research and diagnosing diseases.
We’re talking about deep, molecular-level diagnostics here.
Its unique technology is proving to be a hit with leading researchers and laboratories, as it produces ultra-precise results on one platform.
Ultimately, the company wants to have the go-to platform for molecular diagnostics in labs, clinics, and hospitals worldwide.
An ambitious goal, for sure.
But be warned… for all the positive aspects, my C.H.A.O.S. screener has uncovered a real Jekyll and Hyde situation here…
“We’ve got a bleeder!”
NanoString’s financial situation resembles a patient gushing blood and being rushed into the emergency room.
Its core fundamentals look pretty ill.
Most notable is the company’s woeful net income. In its most recent quarter, NanoString lost $11.4 million, extending the $7.2-million loss in Q1 2013. Similarly, operating income losses increased from $6.8 million in Q1 2013 to $11 million this year.
On an EPS basis, NanoString has lost $3.05 over the past year. At the same time, operating expenses rose from $12.5 million to $19.7 million.
The company’s profit and operating margins are equally ugly.
Before NanoString flatlines, though, there are two glimmers of hope.
First, its year-over-year revenue growth rose by 55%. And sales jumped by 72% – from $18 million in 2011 to $31 million in 2013.
Over the same timeframe, its gross profit has doubled – from $8 million to $16 million.
But that’s it.
And the fact that return on assets and return on equity have plunged by 35.5% and 126.7%, respectively, over the past year underlines NanoString’s sickly state.
The disclaimer here is that NanoString is like many other cash-strapped, small-cap biotech companies.
And it’s a shame that NanoString’s awful financials don’t do justice to the company’s outstanding technology…
C.H.A.O.S. Meter: 3/20
Simply put, NanoString is translating the human genetic code by homing in on RNA (ribonucleic acid).
RNA is similar to DNA, in that it’s crucial to the makeup of the human body.
But RNA also contains messenger RNA (mRNA) – critical molecules that control individual gene expression and hold vital information about the potential for diseases like cancer.
And unlike DNA, which can be captured, RNA sequencing is more difficult to obtain, as the technology didn’t previously exist.
That is, until NanoString brought it to market.
NanoString’s website says its “products are based on digital molecular barcoding technology.” And NanoString has “an exclusive license to develop and market the technology.”
Which is exactly what it’s doing.
For example, its patented nCounter Analysis System takes traditional DNA analysis into the deeper RNA world.
nCounter is an automated, multi-faceted, digital system that uses microscopic imaging and molecular “barcodes” to target specific information within a gene.
It’s able to profile hundreds of mRNAs simultaneously and without the “amplification steps” used in other methods. Without getting into specifics, this essentially decreases the chance of errors.
As I mentioned, before the nCounter platform, RNA sequencing inside a lab wasn’t feasible because existing technology wasn’t able to work with frozen tissues.
But nCounter provides quick, powerful, high-impact technology to labs and hospitals, as it can extract and sequence RNA from frozen tumor tissue with unmatched speed and accuracy.
This is critical. Not every mutation is detectable through DNA analysis alone, so doctors can now use RNA sequencing to maximize their diagnostic tests. Consequently, they have a far clearer image of a person’s total genetic makeup – giving them a full profile of a disease so they’re able to issue a more accurate diagnosis.
At $250,000 a pop, the nCounter instrument isn’t cheap. But its ability, accuracy, and speed means it’s in demand from cancer research organizations and clinics.
And NanoString has locked down its breakthrough technology with a laundry list of patent approvals.
C.H.A.O.S. Meter: 20/20
Given NanoString’s tiny market cap ($231 million) and high-impact gene sequencing breakthroughs, the prospect of a takeover from a larger biotech firm is its biggest catalyst.
For example, Pacific Biosciences of California (PACB), Genomic Health (GHDX), Luminex Corporation (LMNX), Illumina (ILMN), and privately held Indian company, Life Technologies, could all be interested.
Illumina and Life Technologies are the best bets. Since late 2012, both companies have tried to acquire smaller genetics firms in order to boost their share of the rapidly growing genetic diagnostics market. It’s a market that’s forecast to hit $8 billion this year and $25 billion by 2020.
But going even higher up the food chain, Roche Holding (RHHBY) could be on the prowl. The company has already seen its buyout bids for both Life Technologies and Illumina get rejected.
As Roche learned, bigger fish like Illumina and Life Technologies want to dominate the market themselves, not help another company’s dominance.
But NanoString could be a more realistic target, especially since it already has FDA-approved technology.
It’s speculative… but given the traditionally high consolidation rate in the biotech sector, it’s a possibility.
C.H.A.O.S. Meter: 15/20
NanoString started selling its nCounter Analysis System in 2008.
Sounds like plenty of time to get business going, right?
Well, there was one major limiting factor: It only sold to researchers. And as you saw in the cash section, that strategy hasn’t worked out so well.
But the company has begun transforming its fortunes by expanding sales efforts into the clinical laboratory market.
In early 2013, NanoString began its clinical lab expansion in Europe and Israel. It started U.S. sales in November.
Revenue has certainly picked up, but the company still isn’t turning a profit – which is a pretty poor result.
However, it did just receive market approval from the Australian Therapeutic Goods Administration for the Prosigna Breast Cancer Prognostic Gene Signature Assay – a diagnostic test run on the nCounter system that assesses the risk of breast cancer recurrence.
It was named as one of The Scientist’s Top 10 Innovations of 2013 – and the Australian approval could be big news. As NanoString CEO, Brad Gray, told the magazine, “There are a lot of opportunities to continue to expand the utility of the assay.”
C.H.A.O.S. Meter: 12/20
Going forward, NanoString’s growth will focus on a few crucial areas…
The most important will be continuing to expand Prosigna globally. Management is optimistic that Australia’s acceptance of the product will prove to be a catalyst for adoption in Israel and Europe. It’s also gaining some traction in the United States since launching here in December 2013, albeit on a much lesser scale.
In addition to expanding Prosigna, NanoString is also trying to broaden the capabilities of nCounter. In fact, it’s looking into providing assays for patients diagnosed with liver cancer and hepatitis C-related cirrhosis.
It’s also looking to collaborate with biopharmaceutical companies to develop “companion diagnostic assays” used to select patients for specific drug therapies.
With widespread lab adoption and licensing contracts, NanoString is hoping to establish nCounter as the global standard for gene analysis.
But even if business does grow in the coming years (and regulatory hurdles make this unpredictable), NanoString has yet to prove that its bottom line will grow, too.
C.H.A.O.S. Meter: 12/20
Final Verdict: NanoString is a bit of a Jekyll and Hyde story. On one hand, it boasts terrific, patented technology that’s critical in diagnosing killer diseases. But on the other, the company is failing to monetize it, and there are some downright ugly fundamentals that are too hard to ignore.
Sure, shares are up 75% over the past year, smashing just about every broader index performance. But I detect more risk than reward at the company’s current valuation.
It’s an attractive potential takeover target for a bigger biotech firm, which offers a speculative play for investors – but not at current levels. I’d wait for a pullback before making any bet.
Your eyes in the Pipeline,