FMI - A Call Worth Considering

Investment Analysis Clubs Saul’s Investing Discussions
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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.
William Gibson

All-
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)

https://www.ted.com/talks/jimmy_lin_a_simple_new_blood_test_…

Todd Campbell also wrote a nice piece on FMI:

https://www.fool.com/investing/2017/11/02/the-precision-medi…

Key points that Todd points out:

  1. FMI is the leader in screening for cancer genes.
  2. Sales are increasing at 45% per year.
  3. FMI data benefits drug developers and patients.
  4. 70 FDA approved cancer therapies are best matched to patients with genetic testing.
  5. Over 3000 trials for personalized (genetic) medicine are in progress.
  6. 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.

Best,

bulwnkl

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.

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Just wanted to add a personal perspective on FMI. My wife was first diagnosed with a very rare form of neuroblastoma a number of years ago and has had several recurrence, most recently in the Spring of this year. In searching for latest research on treatment options I came across an article in the Oncology Journal, by a lead author and several other coauthors all at Foundation Medicine, outlining targeted therapies based on genomic testing of the tumors.

I took a chance and just contacted the lead author directly at FMI. She was incredibly responsive and very helpful. I was actually shocked that someone in the field would take the time to have ongoing personal communications.

My partner has not used their genomic testing service yet but is very likely to soon. We were very impressed at the possibilities for testing and targeted therapies and FMI as an organization.

Now I’m excited to hear they could be an interesting investment. Not sure why didn’t occur to me although obviously been a little distracted.

Thanks for mentioning it on the board, bulwnkle.

David

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After missing out on KITE, I am making a bold font, all CAPS mental note of this heads up from blwnkl.

I think I will go add FMI to my CAPS scorecard as well.

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Thank you Andy. After doing some research today, I bought 2 contracts of Jan 2019 $47.50 Calls on FMI. Good luck!

-Gaurav

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bulwnkl

Thanks for this idea. Since the stock was up today and pricing for the $47.50 calls was increasing, I purchased January 2018 calls at strikes of $47.50, $50.00, and $52.50 so I was able to spread out my capital invested.

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Thanks for the tip.

Do you have thoughts on the patent infringement lawsuit recently filed by Caris Life:

https://www.genomeweb.com/molecular-diagnostics/caris-life-s…

2K10

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I’m not sure how much validity or damages there are. Fortunately, it’s a false advertising lawsuit not a patent lawsuit dealing with infringement or theft of IP. My guess is that however the case goes its affect will pail in comparison to the Medicare/Medicaid reimbursement decision.

From what I have read FMI is far ahead of all competitors in terms of methodology and genomic data. I think that is key. I think the fact that they are under serious for massive reimbursement is a testament to where they are at vs. competitors.

Best,

bulwnkl (aka Brian)

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Sorry the previous link looks like it was behind a paywall but hopefully this one isn’t. It calls it a patent infringement lawsuit and seems to go to the heart of what we are hoping would be approved by Medicare:

https://www.prnewswire.com/news-releases/caris-life-sciences…

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I am a retired lawyer who spent his career specializing in patent litigation, though I did not do much in the biotech arena. This appears to be a serious patent case brought by a highly reputable patent firm that litigates more patent cases than any other firm in the country. I think it needs to be taken seriously, particularly since it was just filed, will be next to impossible to handicap since the devil will be in the details that none of us has access to, and probably will take years to resolve. So, you have to assume it presents a high risk to the FMI business at this point. More than that I cannot say at this point.

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I saw a suit on false advertising, but did not initially see a patent case. I missed that. If you get a chance to dig into the details, I’d love to hear your thoughts. Thanks.

buwlnkl

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Need to bump this so that it is easier to find the thread and give bulwnkl his extremely well-deserved props.

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Having read through this Citron short report about Exact Sciences (EXAS), it sounds like FMI and EXAS play in basically the same market.

http://citronresearch.com/exact-sciences-corp-we-admit-to-be…

This Citron thesis seems to have a lot more logic behind it than the Hubspot, Shopify, and Ubiquiti “theses”. If Citron is correct in this case, it may be partially due to the efficacy of FMI’s testing in addition to CellMax Life. Either way, it is an interesting space to look at.

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Well, looking back at this idea, buying shares would been more than a double now with shares about $103, options percentage gains even more, for those who understand them enough to be comfortable using them :slight_smile:

I (only slightly) sadly haven’t held any FMI options positions for a few months now, after selling the Aug $75 call position for around $14.00 or $15.00 after buying at $6.40 (per another old post of mine on this board). So, I could have had more than a double from then… if I had endured a pretty huge drop in the interim.

Regardless, this was a great one to bring to the board, and bulwnkl is a poster to pay close attention to if am idea is presented (see also: Kite, which I missed before it was bought out).

volfan84
No present FMI position and no plans to initiate one in the near future

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I am still holding my shares and options. I purchased $50.00 calls (January 2018 expiration) when Bulwnkl initially presented FMI in November 2017. I then added $75 calls (also January 2018 expiration) in December 2017. I exercised 60% of the $50 calls into shares and sold the other 40%; the $75 calls expired worthless. In total, I netted a 14% profit on those calls.

I set up a $67.50 synthetic long (8/17/18 expiration) in January 2018, for a net credit of $0.80/share; that position is worth $33.17/share. I am considering selling some of those calls to cover the purchase costs of exercising the remaining calls at $67.50. I expect the puts to expire worthless in August.

Of course I am still holding shares acquired at a strike of $50.00 purchased in January.

Overall I am quite pleased with this position.

Thanks again to Bulwnkl!!

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Well, Roche is paying $137/share. Great idea to be brought to the board by bulwnkl.

Roche to buy rest of Foundation Medicine https://seekingalpha.com/news/3364769?source=ansh $RHHBY, $FMI, $RHHBF

I (only slightly) sadly haven’t held any FMI options positions for a few months now, after selling the Aug $75 call position for around $14.00 or $15.00 after buying at $6.40 (per another old post of mine on this board). So, I could have had more than a double from then… if I had endured a pretty huge drop in the interim.

Circling back, guess this is an instance where I could have been better off buying shares at about $50 when the idea was first presented fo the board…or at least held the Aug $75 call position longer. That would be worth about $37 + $25 = $62.00 per contract now.

volfan84
No FMI position, congrats to all on the board who still had one

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Nice job!

I had started eyeballing this again recently. Too late to the party!

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Darn. Was hoping FMI would turn into the gatekeeper for IO. I re-bought at 73.60 in late April so almost a double but guess in the back of my mind I figured Roche would buy the rest eventually. Now I know how Ant feels as many of his picks eventually get purchased.

Rob

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Bulwnkl,

First you bring us KITE, then you bring us FMI. I know that’s a small sample size but what a brilliant track record. I have profited handsomely from both. Thank you for the initial sharing and also the education along the way!!! :slight_smile:

https://www.youtube.com/watch?v=2MXqb1a3Apg

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Thanks for the kind words volfan84. I have been focusing on my daughter’s high school graduation and mentoring her InvenTeam project so I haven’t been very active. I am sitting in a MIT dorm room getting ready for a presentation as I write.

Anyway, FMI was another high probability, binary event that was definitely worth a stock purchase after the insurance approval. I wish they would have remained independent, but can’t complain about my return on this.

I am very appreciative of this board and the efforts made to share stock ideas. I think the best way to say thank you is for me to provide an idea once in a while.

That said, I don’t want to contribute to the congestion so I try to limit what I post to things that I think are absolutely helpful. I am glad this helped some of you.

Best,

bulwnkl

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Thanks for the kind words utahchris