I wanted to title this post:
Foundation Medical May Enable a 95% Cure Rate for Cancer- A Call Worth Considering
The future is already here – it’s just not very evenly distributed.
THIS IS NOT PUFFERY! Foundation Medicine (FMI) is the leader in genomic cancer testing. Within a few years, many, if not most, cancers will be detected in blood before symptoms appear. Genes leaking from cancer cells can be detected months or even years before people become symptomatic. This is important because rapid therapy can destroy the cancer before stronger and otherwise harmful therapies have to be employed.
From FMI’s website:
A genomic profile is more than just a test. Our assays provide biomarker information to help match patients to approved targeted therapies, immunotherapies, and clinical trials — giving doctors and patients powerful actionable insights for navigating cancer care.
If these tests provide the benefits that I think they do, then earlier treatment should reduce cancer treatment costs. A great description of this approach to cancer treatment is given by Jimmy Lin (TED 2017)
Todd Campbell also wrote a nice piece on FMI:
Key points that Todd points out:
- FMI is the leader in screening for cancer genes.
- Sales are increasing at 45% per year.
- FMI data benefits drug developers and patients.
- 70 FDA approved cancer therapies are best matched to patients with genetic testing.
- Over 3000 trials for personalized (genetic) medicine are in progress.
- Roche Holdings owns 59% of FMI
FMI is about to have an inflection point. I call these binary events. This is because Medicare and Medicaid are reviewing these tests for reimbursement. If reimbursement approval is granted, FMI is likely to skyrocket. If not, we get pooped on. This reimbursement decision is expected this quarter.
Why do I think you should consider a call? Consider a situation where you want to buy 1000 shares of stock that would be 10 call contracts.
If you buy the stock today at $49.55, you would spend $49,550.
If you buy a January $47.50 call, you would spend $5,000.
If reimbursement is granted, I would guess the stock goes up 50% over the next month. The gain in the stock is $25,000. The gain in the call is also $25,000.
On the flip side, if reimbursement is not granted, I would guess FMI drops by 30%. The stock drops by $14, 865. You loose everything on the call. In absolute terms, you loose $5,000.
On a percentage basis, I’d recommend that no one invest more than 2% in this type of investment for the stock, and 0.5% for the options. If the stock goes up, your allocation goes to 3%. In this case, the $47.5 call option increases from 0.5% to 2.75%.
If the Medicare/Medicaid approval does not work out, the option holder is down 0.5% but the stockholder is down 0.6%. When you keep the options in roughly the same proportions that you might invest in a stock, you limit absolute risk to your holdings. I probably make 5-10 investments like this over a 2-year period. I am about 50% correct so when I recommend low allocation, I RECOMMEND NO MORE THAT 0.5% FOR THE STOCK. Options, like vitamins, can be beneficial in small quantities. Regardless of the thesis, a market downdraft can kill option traders.
BUT THERE’S MORE- Roche owns 59% of FMI and has a tendency to buy companies in this way. I believe FMI will not last long on the market (just as I predicted for KITE :o)
My plan is to hold my call until after the reimbursement decision for a few weeks, the convert my gains to actual stock. Actual stock will give me time to let Roche buy FMI or let FMI grow like crazy. Either way, I need time to let that part of my thesis to play out.
Time is a key reason that people can get messed up with options. That is why I consider binary events such an insurance decision as such a valuable situation.
PS Long FMI January $47.5 calls.
PPS I don’t post often on Saul’s board, which is my favorite board, because I want to limit my comments and discussion to what might be valuable to the community. Often, people make points that I would make so I don’t chime in. I think that improves the quality of discussion.