Top Gene-Sequencing Stocks for 2019

Todd Campbell, The Motley Fool

Our ability to treat health problems has historically been hamstrung by an incomplete understanding of the role our own genes play in the process. But advances in the accuracy, speed, and cost of genetic sequencing have led to breakthroughs that could only be imagined a few years ago -- and that's creating exciting opportunities for researchers and investors alike. 

The prospect of using our DNA to inform healthcare decisions is so significant that new players are flocking to this emerging industry all the time. Some are already making good on their potential. However, not all gene-sequencing stocks are likely to be winners.

Here's what you need to know about the industry, how it's changing, and the top gene-sequencing stocks worth owning.

A double helix consisting of gold U.S. dollar and euro signs.

IMAGE SOURCE: GETTY IMAGES.

What is a gene?

A gene is essentially a building block of hereditary material. Our genetic code contains everything we inherited from our parents and all the traits we'll pass along to our children. More specifically for our purposes today: Each gene contains a distinct series of nucleotides, molecules that form deoxyribonucleic acid (DNA) and ribonucleic acid (RNA). DNA is the genetic blueprint necessary for building and maintaining organisms, including humans, while RNA is a copy of DNA that's tasked with making proteins necessary for healthy bodies.

DNA contains four chemical building blocks, or bases, that always bond to the same partner in what's called a base pair. Adenine (A) pairs with thymine (T), while cytosine (C) pairs with guanine (G). There are about 3 billion base pairs containing instructions necessary for human existence, and there are an estimated 30,000 genes, each responsible for making an average of three proteins.

RNA can be ribosomal RNA (rRNA), which makes a specific protein; messenger RNA (mRNA), which delivers instructions on how to build a protein; or transfer RNA (tRNA), which transports the raw material necessary for making a protein. Single-strand RNA copies of DNA tasked with making proteins are usually made without a hitch, but sometimes the genetic instructions for making a protein are incorrect because of mutations. If these mutations cause abnormal or inadequate protein production, it can result in one of over 6,000 genetic disorders. About 80% of the estimated 350 million people worldwide with rare diseases are caused by a faulty gene, according to nonprofit Global Genes.

What is gene sequencing?

To spot genetic mutations, researchers must sequence, or screen, a person's genetic material and then compare it to a baseline.

The human genome was first sequenced by the U.S. government's Human Genome Project, which was announced in 1988 and funded by Congress in 1990. Initially, the project's goal was to sequence the entire human genome by 2005 at a cost of $3 billion. But the program wrapped up in 2003, when 99% of the genome was sequenced, at a total cost of $2.7 billion.

The human genetic code is massive, so the project fragmented DNA into smaller, more manageable pieces that could be cloned in bacteria in quantities large enough to create a reference library. These bacterial artificial chromosome (BAC) clones were then cut into short fragments, or subclones, that could be used in sequencing machines. Afterwards, a computer reassembled the results back into their longer sequence using the reference library.

Technological limits at the time made fragmenting and reassembly necessary, but this sequencing approach is unable to sequence complex genes, including those with particularly long repeats of genetic code. The short-read sequencers used in the human genome project generated about 500 to 800 base pairs per run, so when repeats exceeded that size, gaps were left -- which is why the project was declared complete after 99%, rather than 100%, of the genome was sequenced.

Today, the most common approach to short-read sequencing is sequencing by synthesis (SBS) biochemistry. As a DNA chain is copied, SBS tracks the addition of labeled nucleotides, allowing large genomes to be sequenced in a few days. Short-read technology remains the fastest and cheapest form of gene sequencing, so it's still the most commonly used approach.

However, technological advances are making long-read sequencing a viable option as well. Long-read sequencing machines can produce reads of 15,000 base pairs on average, and up to 100,000 base pairs under ideal circumstances, helping researchers overcome the obstacle that long repeats present to short-read sequencing. Long-read sequencing isn't without its drawbacks, though. In addition to taking longer and costing more than short-read sequencing, it's also historically more error-prone.

There are various practical uses for gene sequencing, including research, drug development, biomarker analysis for treatment decisions, and determining ancestry. Some of these applications are better suited to short- or long-read sequencing. For example, long-read makes sense for complex organisms with little reference data, while short-read is best for analysis of DNA fragments. Increasingly, researchers are combining short- and long-read sequencing to obtain the most accurate results.

A shadow of a man looking at a double helix with his hand on his chin.

IMAGE SOURCE: GETTY IMAGES.

What companies make up the gene-sequencing market?

Before diving into the different gene-sequencing stocks we can invest in, it might be helpful to explain the different categories of companies operating in this field.

  • Gene-sequencing companies: These companies market systems to researchers that can be used to sequence genes using short- or long-read technology. They also sell consumables that are used each time a gene sequence is done.

  • Drug developers: These companies are using discoveries enabled by gene sequencing to overcome genetic mutations contributing to disease. Gene therapies developed by these biotechnology companies may seek to shut off (or knock down) a gene's production of a gene, sidestep the mutation causing the genetic disease, or edit the gene to restore normal protein production.

  • Genetic screening companies: These companies provide genetic screening services to drug developers, doctors, and patients to inform drug development and treatment decisions. 

Let's dig deeper into each of them.

A person preparing genetic samples in a lab for sequencing.

IMAGE SOURCE: GETTY IMAGES.

Gene-sequencing companies: The big Kahunas

The marketplace for gene-sequencing machines is dominated by Illumina (NASDAQ: ILMN) and Thermo Fisher Scientific (NYSE: TMO), both of which have built up a large installed base of short-read gene-sequencing machines at researchers worldwide. (Illumina also a foothold in long-read sequencing through its acquisition of Pacific BioSciences of California (NASDAQ: PACB), which was announced in 2018.)

Illumina is the biggest gene-sequencing company. Not only has it become the leader in gene sequencing, but it's also opened the field up to more researchers: It's driven the cost of gene sequencing down from the multibillions spent by the Human Genome Project two decades ago to about $1,000 now.. And following the 2017 launch of its latest system, NovaSeq, the company thinks the cost of sequencing could eventually drop to $100, opening up the door for a flood of research that was previously believed to be too expensive to justify.

Globally, Illumina has over 13,000 systems installed, including 600 NovaSeq machines. The ongoing interest in gene sequencing fueled by lower prices and deeper insight into genetic disease has allowed Illumina to deliver 20 consecutive years of revenue growth and capture an estimated 75% market share. In 2018, its sales eclipsed $3.3 billion, up from $2.7 billion in 2017, and in 2019, ongoing growth has management targeting sales of about $3.8 billion. Demand for NovaSeq has been robust, reaching $1 billion in shipments in just two years.

Thermo Fisher Scientific is no slouch, either. A far more diversified company, Thermo Fisher got into the gene-sequencing business with its $13.6 billion acquisition of Life Technologies in 2014. Today, that business is reported within the company's life sciences solutions segment.

Thermo Fisher doesn't break out exactly how much money its sequencers contribute to its top line, but its life sciences revenue increased 9% to $6.27 billion in 2018, accounting for 26% of the company's $24.4 billion in total sales. The company launched its latest gene-sequencing system, the Ion GeneStudio S5 Series next-generation sequencing system, in 2018, and it's a good bet that Thermo Fisher owns most of the remaining 25% market share not controlled by Illumina. 

The outlook for demand for machines and consumables used by them appears very good for these companies. Illumina estimates less than 0.1% of species, 0.02% of humans, and 1% of human variants have been genetically sequenced so far. As gene-sequencing prices drop, drug developers can use it to create ever more personalized medicine, and people will be able to use it to gain a deeper understanding of themselves via their genetic profile.

DNA binding together at a base pair.

IMAGE SOURCE: GETTY IMAGES.

Drug developers: Top companies revolutionizing treatment 

Drug companies have already launched medicines targeting DNA and RNA, and more of these gene therapies are on the way. There are about 700 gene therapies under development in roughly 1,800 clinical trials, about 500 of which are in the middle or late stages, according to Informa Pharma Intelligence's Trialtrove database. Most gene therapies target cancer, but they're also being developed for cardiovascular disease and infectious disease. Over 250 companies are conducting this research, up from fewer than 70 in 2014.

In 2017, the U.S. Food and Drug Administration (FDA) approved the first two chimeric antigen T-cell receptor (CAR-T) gene therapies for fighting cancer. These therapies reengineer T-cells -- a type of white blood cell that's essential to our immune systems -- to spot proteins on the surface of cancer cells, allowing them to find and destroy cells they'd otherwise miss. One of the two CAR-T's that won approval is Gilead Sciences' (NASDAQ: GILD) Yescarta, while the other is Novartis' (NYSE: NVS) Kymriah.

Gilead Sciences acquired Yescarta when it bought Kite Pharma for $11.9 billion in 2017. FDA-approved for use in patients with certain hard-to-treat blood cancers, Kymriah won approval following studies demonstrating that 72% of patients responded to it, including 51% who responded with a complete remission. Yescarta's sales were $284 million in 2018, including $81 million in the fourth quarter. 

Novartis' Kymriah is also approved for use in adults with certain blood cancers that fail to respond to other treatment options. Its sales totaled $76 million in 2018, including $28 million in the fourth quarter.

Sales for both of these gene therapies could increase significantly, though, because of trials evaluating earlier use of these therapies in treatment. Furthermore, both companies have substantial gene therapy research programs underway that could result in future FDA approvals for other forms of cancer in the coming years.

Investors interested in gene therapy may also want to consider Celgene (NASDAQ: CELG), which was recently acquired by Bristol-Myers Squibb (NYSE: BMY)bluebird bio (NASDAQ: BLUE)Roche Holdings (NASDAQOTH: RHHBY); and Regenxbio (NASDAQ: RGNX).

  • Celgene's gene therapy program stems from its $9 billion acquisition of Juno Therapeutics in 2018. Its most advanced gene therapy is liso-cel, a CAR-T for the same cancers addressed by Yescarta and Kymriah that was designed to sidestep the dangerous side effects associated with those two drugs, including a life-threatening condition called cytokine release syndrome. Trials are ongoing. Celgene has also licensed rights to two CAR-Ts -- bb2121 and bb21217 -- developed by bluebird bio for use in multiple myeloma, a bone marrow cancer. Studies that could support FDA approval of bb2121 are expected to wrap up in late 2019, but data reported at this writing is compelling -- it's achieved an overall response rate in patients that's north of 90%.

  • Multiple myeloma isn't the only indication bluebird bio is targeting, either. For example, it's already filed for European approval of LentiGlobin, a gene therapy for transfusion-dependent β-thalassemia, an inherited blood disease that can result in severe anemia. LentiGlobin could eliminate the need for a lifetime of transfusions by inserting a functional human beta-globin gene into the DNA of a patient's blood stem cells. Studies are also evaluating LentiGlobin's potential in sickle cell disease, a life-threatening blood disorder. 

  • In February 2019, Roche announced it was acquiring Spark Therapeutics for $4.8 billion. Spark won FDA approval for Luxturna, a gene therapy for a rare cause of blindness, in December 2017. Luxturna restores vision by using a deactivated virus to deliver a normal copy of a missing gene, RPE65, directly to cells in the retina. The acquisition also landed Roche a promising gene therapy for hemophilia A, SPK-8011, which attempts to restore production of a critical missing clotting factor that otherwise leaves patients exposed to the risk of uncontrollable bleeding.

  • Regenxbio is also intriguing because of the role it plays in an FDA decision expected in May 2019 for Novartis' Zolgensma, a gene therapy for a condition affecting motor nerve cells known as spinal muscular atrophy, which takes away the ability to walk, eat, or breathe. Zolgensma, formerly AVXS-101, was developed by AveXis, which Novartis acquired last year for $8.7 billion. Using inactivated viruses from Regenxbio, Zolgensma inserts a gene that restores the production of a missing protein.

Investors should also keep an eye on progress being made in gene editing. Gene editing therapies are only entering phase 1 studies in 2019, but their use to snip away problematic DNA and splice in functional DNA could propel shares higher at related companies, including CRISPR Therapeutics (NASDAQ: CRSP) and Editas Medicine (NASDAQ: EDIT).

An image of a DNA double helix in test tubes.

IMAGE SOURCE: GETTY IMAGES.

Genetic screening companies: Making sense of genomics

Yet another way to invest in gene sequencing is to focus on the companies providing genetic screening tests for research trials or to inform doctors on how best to treat their patients. 

Roche is a player in this field, too -- in 2018, it paid $2.4 billion to acquire Foundation Medicine after the FDA approved Foundation's comprehensive genetic screening test for cancer. But you can still buy shares of companies for whom genetic screening is more of a specialty, including Myriad Genetics (NASDAQ: MYGN), Genomic Health (NASDAQ: GHDX), Invitae (NYSE: NVTA), and Guardant Health (NASDAQ: GH).

  • Myriad Genetics' roots are in testing for hereditary forms of cancer, such as breast cancer and ovarian cancer caused by a mutation in the BRCA gene. Hereditary cancer tests accounted for almost 100% of revenue in 2013; however, they've fallen to about 25% of revenue in 2018 as more tests have been introduced, including GeneSight, a test for determining the best drugs for patients with depression, and prenatal screening tests for genetic disorders. In fiscal 2018, Myriad's revenue totaled $773 million.

  • Genomic Health derives a more significant share of its business from cancer gene screening, including breast cancer, prostate cancer, and colon cancer. Last year, sales were $394 million, up 18%, including U.S. revenue of $335 million ($299 million of which were sales of its Oncotype DX Breast Recurrence Score test). In 2019, Genomic Health's guidance is for sales to climb another 11% to 14%.

  • Invitae also targets the cancer gene screening marketplace, but like Myriad, it derives a lot of business from serving the prenatal and neonatal market, and its ultimate goal is to offer low-cost comprehensive genetic screening to everyone. Sales jumped 117% year over year to $148 million in 2018, and in 2019, it's targeting revenue of $220 million. If management can execute on its goal of making genetic screening accessible to everybody, then that could only be the tip of the iceberg. Interestingly, its co-founder and executive chairman is Randy Scott, who was also the founder of Genomic Health. Invitae was spun out of Genomic Health in 2012.

  • Guardant Health, which had its initial public offering in October 2018, is the most recent of these companies to go public. The company markets genetic screening tests that can be used by doctors to figure out the best treatment to use in lung cancer and by drugmakers to identify patients likely to respond to gene therapies in clinical trials. Using a blood test, Guardant's solution can identify genetic mutations with similar accuracy to more invasive tissue biopsies obtained via needles. Its liquid biopsy is already winning converts. Its sales jumped 82% to $90.6 million in 2018. That could only be the beginning, though, because the company estimates the value of the market its targeting with existing and future products is worth $35 billion.

The number of people diagnosed with cancer is increasing because of a larger, longer-living population, and that suggests the need for genetic screening enabled by gene sequencing is heading higher. Over 18 million cancer patients were diagnosed worldwide in 2018, and since understanding how genes contribute to disease is critical to better outcomes, each of these genetic screening stocks could have a long runway of success ahead of it.

Keep this in mind

Gene sequencing is already contributing to the development of better, more targeted, and potentially safer medicines. Its use to inform treatment decisions, reduce the use of less effective treatments, and possibly reduce the risk of relapse or provide functional cures is revolutionary. 

In the future, we may see more blurring of the lines separating gene-sequencing system manufacturers like Illumina, drug developers like Novartis, and genetic services companies like Guardant. We're already seeing collaborations that cut across these individual market segments, such as Grail, a company spun out of Illumina that's using gene sequencing to develop next-generation cancer tests that could catch disease at its earliest stage. Since these companies may wind up competing more aggressively with one another in the future, investors will want to keep close tabs on this market.

More From The Motley Fool

Todd Campbell owns shares of Bluebird Bio, Celgene, Gilead Sciences, Invitae, and Regenxbio. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Bluebird Bio, Celgene, Editas Medicine, Genomic Health, Gilead Sciences, Guardant Health, and Illumina. The Motley Fool owns shares of CRISPR Therapeutics. The Motley Fool has a disclosure policy.