June 16, 2016
Not Just a Treatment for Cancer, This Technology
Could Cure Almost Any Disease in the World
At this stage, it’s usually hopeless.
Layla was diagnosed with acute lymphoblastic leukemia
(ALL) when she was 3 months old. That’s a disease where
cancerous stem cells (located in bone marrow) release
“immature” immune cells into the blood.
These immature cells keep other cells from developing
normally. They also travel throughout the blood at a super
fast rate. They can spread to other parts of the body
including the liver, spine, spleen and brain.
The standard treatment for acute lymphoblastic leukemia
is chemotherapy. I’m sure some of you are familiar with the
terrible side effects of chemo. Not only does this treatment
kill cancerous cells, it kills your good cells as well.
For these patients, chemo is just the beginning. Once the
cancerous cells are killed, a bone marrow transplant is
needed to help restore the immune system.
In older children, these treatments have a high success rate.
In other words, most people diagnosed with this disease can
be cured.
However, the survival rate for infants is only 25%.
Layla’s family knew she was facing an uphill battle. In
March 2005, she received chemo treatments followed by a
bone marrow transplant. Unfortunately, these treatments
did not work. Two months later, tests revealed the cancer
was still in Layla’s body.
Layla’s parents feared the worst. Their youngest daughter
was only given a few months to live. Plus, her last months
of life would be lived in pain due to the recent round of
treatments.
Layla’s doctors were not ready to give up. They reached out
to the University College London. A team called the Waseem
Qasim Research Group was developing new treatments for
diseases using gene therapy.
Investment Monthly
Illumina ( ILMN )
Positives:
» Gene sequencing represents one
of the most disruptive technologies
in healthcare. It has the potential to
predict, treat and cure a long list of
deadly diseases.
» Illumina is one of the oldest
companies in the gene-sequencing
industry and has developed game-
changing technology that allows it to
deliver high quality DNA test results at
scale and low cost.
» ILMN’s stock price is recently
depressed, offering a great buying
opportunity.
» Investors include Baillie Gifford,
Blackrock and Sands Capital
Management.
» After several disappointing quarters,
Illumina is poised to report stronger-
than-expected results in the next year.
Risk Factors:
» Illumina continues to see slow adop-
tion of its next-generation sequenc-
ing. This could lead to lower profits,
and ultimately a lower stock price.
» Gene sequencing is expected to be
one of the biggest trends in health-
care over the next decade. This will
open the door up to new competition
that could eat into Illumina’s profits.
» Health insurers could be slow to
adopt (or cover) DNA testing in
patients. This could result in much
slower adoption and could negatively
impact profits for Illumina.
One treatment included removing immune cells from a
patient’s body. Quaim’s team would “genetically engineer”
Illumina ( ILMN ) continued
these cells to attack cancerous cells. These new cells would
Investment Synopsis:
then be injected back into the patient’s body.
» Buy-up-to price: $147
There were a few problems using this particular form of gene
therapy treatment on Layla, though, because she was very
» Fair value per share: $242
sick at the time. Due to her past chemotherapy treatments, » Position size: 2%-3% of total portfolio
she did not have enough “good cells” in her body. That meant
there would not be enough immune cells to extract and » Exit Strategy: Sell half of the posi-
tion when ILMN reached $242 (70%
genetically engineer. upside), and hold the other half for
the long term.
Qasim’s team needed to improvise. After careful
consideration, they decided to use a revolutionary treatment
that had never been performed on a human before.

Instead of extracting the good cells from Layla, they used cells from a healthy donor. Normally, this
process would result in complete failure. Cells that are not a perfect match to Layla’s would not be
recognized. Her body would see these cells as “foreign” and attack them.

Yet, Qasim’s team used “gene editing” to disable a specific gene in the donor’s cells. In other words, a
gene within the donor cells was basically turned off. This allowed Layla’s body to recognize the donor’s
immune cells as her own and ultimately fight off her cancer.

In November, her doctors talked about this remarkable technology during a press conference in
London.

It was the first time ever that a person’s life had been saved using gene therapy.

Layla is now 2 years old and still cancer-free. Her doctors are not yet ready to say she is 100% cured, but
after being given a small window to live, Layla is thriving.

Layla with her parents and sister

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This is just one small example of how gene therapy is reshaping the entire healthcare industry. Not only
can gene modification help treat some of the deadliest forms of cancer, but it’s also being used to treat
HIV, Parkinson’s, Alzheimer’s, cystic fibrosis and cardiovascular disease.

Gene therapy is one of the most remarkable technologies in the world, and it’s at an inflection point
that will soon make it affordable for tens of millions of people. First, let’s take a look at the history of
gene sequencing. You will have a better understanding on why this now-affordable technology will be
available to almost anyone in the world.

Unlocking the “secret code of life”

One of the biggest breakthroughs in the healthcare industry happened in 2000.

The human genome was decoded for the first time. Most scientists and healthcare experts believed this
would be the catalyst to unraveling the “secret code of life.” This information would provide a roadmap
to understanding all diseases and developing life-saving drugs.

For example, decoding someone’s DNA could help you find gene mutations. Actress Angelina Jolie had
a double mastectomy even though she was not diagnosed with breast cancer.

She chose to have this procedure after taking a DNA test.

This test confirmed she had a special gene mutation (called BRCA). Roughly 65% of women who carry
this gene mutation are at risk of breast cancer. In fact, her mom and grandmother carried this gene
mutation and both passed away from breast cancer.

Instead of using radiation and chemo after getting breast cancer, Jolie was able to use a form of
preventive medicine to avoid cancer altogether. And all of this was made possible because of a simple
DNA test.

Another example of how gene therapy is reshaping healthcare is with lung cancer.

Roughly 4% of lung cancer patients will have a gene translocation (called ALK). By knowing a person’s
genetic code, doctors can target this cancer using special drugs. In fact, one drug made by healthcare
giant Pfizer specifically targets this type of lung cancer by shrinking tumors by an average of 60%.

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This excitement is what led to the original funding of the Human Genome Project in 1990.

However, this technology has not progressed at the speed most healthcare experts predicted.

Some say there are not enough experts in the genetics field that have the training and the know-how
to help implement this technology on patients. Others believe revolutions in medicine to target gene
mutations have just been slow to develop.

That’s why there’s been no windfall of life-saving treatments, diagnostic technologies, or opening of a
magic window into 21st century disease.

But these theories are missing the much bigger point, and it’s the reason why gene sequencing is about
to become one of the biggest trends in healthcare.

In 2001, the cost to sequence an individual’s genome cost $100 million. This included dozens, if not
hundreds, of technicians working full time while using the best equipment available.

In 2011, the cost to sequence an individual’s genome dropped dramatically to roughly $10,000,
according to the National Human Genome Research Institute. That’s a massive reduction in just a
decade.

At $10,000, gene sequencing was still very expensive for the average person.

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A few years later, these costs were again cut in half. In fact, Angeline Jolie said she paid around $4,000
(in 2013) to map her DNA.

Today, the current cost to sequence your genome is less than $1,000.

To put this in perspective, it’s as if the price of the new Apple Watch fell from $400 to a nickel. That
translates from a few million people owning the Apple Watch to a few billion.

The chart above also compares the huge drop in prices against Moore’s law. That’s the oft-cited trend
that describes a doubling of computer power every two years at half the cost. As you can see, the real-
world advances in gene sequencing make Moore’s law look archaic.

Gene sequencing is about to go mainstream

At less than $1,000 per test, I expect gene sequencing to become a game-changing trend. It will be
similar to what we saw with personal computers over the past few decades.

For example, the first computer in the 1970s cost upward of $500,000. It weighted 30 tons and took up
nearly 2,000 square feet of space.

By the 1990s, companies like Xerox, Tandy, Commodore and IBM entered the market. They competed
against each other offering smaller and faster computers each year. This resulted in a huge fall in the
price of the PC and made the computer affordable for more people.

Today, it’s difficult to find someone who does not own a personal computer or mobile phone.

The same will happen for gene sequencing.

As the cost continues to fall, more people will run to get their DNA tested. All it takes is a quick swab of
your cheek and you can have your results back inside of a few weeks.

For Angelina Jolie, she chose to get her

breasts and ovaries removed to avoid
breast cancer. This will allow her to live
longer and see her children grow up.

This type of preventative care is also

important to healthcare companies.

Jolie would have spent hundreds of

thousands of dollars on radiation and
chemo treatments if she got cancer. She
would also spend tens of thousands of
dollars on other medical bills like X-rays,
scans, hospital visits and cancer drug
prescriptions.

Many of these costs can be avoided

through DNA testing.

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That’s why I expect insurance companies to begin covering gene-sequencing tests in the future. This will
amount to a further explosion in demand if these tests require no out-of-pocket fees for consumers.

And this life-changing information costs less than $1,000 today. That’s much less than the $10,000
these gene-sequencing tests cost just a few years ago. That’s also less than what most people spend on
their mobile phone plan each year.

A technology in its infancy

We are just scratching the surface when it comes to gene technology.

For example, we covered how DNA testing can determine how you are going to die. We covered how
this could lead to certain lifestyle changes to prevent catching a deadly disease like breast or lung
cancer. But there is much more to this technology that we haven’t discussed yet.

Gene therapy could lead to cures for some of the most deadly diseases.

In the 1980s, human immunodeficiency virus (HIV) was a deadly disease. Once contracted, patients
usually had a short window to live.

Today, people with HIV can lead normal lives. A good example of this is basketball legend Magic
Johnson. During a press conference in 1991, Magic shocked the world by announcing he was HIV
positive. He was forced to retire from basketball.

More than 25 years later, Magic is still alive. In fact, he looks great and works as a basketball analyst,
owns several successful businesses and runs his Magic Johnson Foundation to help combat HIV.

Magic is living a healthy life mostly because of the advancements in gene therapy. Scientists have now
come up with a way to “edit” genes, which removes the virus from DNA cells entirely. This is the process
I discussed earlier that ended up saving Layla’s life.

Put simply, doctors can find the cells infected with HIV. Once they take these cells out of the patient,
they can genetically alter them. These cells are then injected back into the body where the new “altered”
cells produce proteins to kill the virus.

This technology is not limited to

HIV or cancer. Companies are
investing billions of dollars into gene
therapy, which has the potential for
discovering cures for Parkinson's
disease, Huntington's disease, and
hemophilia.

A single gene alteration like this

can also allow couples to have
children where natural conception is
impossible. So gene therapy not only
has the potential to save lives, it’s
leading to the creation of new life.

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In other words, the possibility for finding cures for the most deadly diseases is here. Gene therapy is not
a futuristic technology that has little chance of success. It’s being used right now and it’s changing the
landscape of the entire healthcare industry.

So how can you get involved in this trend?

Buying the best gene sequencing company in the world at a 35% discount

The biggest company in gene sequencing right now is Illumina (ILMN).

Illumina has been sequencing DNA since the mid-1990s, when scientists came up with a technology
called sequencing by synthesis (SBS). In simple terms, this technology allows Illumina to generate
significantly more sequence data by using reverse terminators when mapping the human genome.

Over the years, Illumina has perfected SBS. They are the most efficient sequencing company in the
world as a result. They also added numerous products like sequencing kits and platforms that they sell
to hospitals and individuals.

As you can see from the chart below, investors in Illumina made a fortune over the past 10 years as gene
sequencing has gone from sci-fi to reality.

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Illumina’s instruments can now generate over one “terabase” of data. To put that in perspective, more
DNA gets sequenced every two seconds today than was sequenced from 1982 to 1987 during the first
genome sequencing tests.

This means sequencing data can now be interpreted in a matter of hours or days. This quick turnaround
(which is called next-generation sequencing) will lead to more lives being saved. It will also lead to
quicker profits for Illumina—the undisputed leader in the industry.

However, next-generation sequencing has not developed as quickly as many expected.

For example, some sell-side analysts predicted next-generation sequencing would result in a big
increase in sales and earnings for Illumina. Yet, Illumina reported weak results over the past few
quarters.

As you can see from the chart below, investors have all but given up on the stock. After several quarterly
earnings misses, Illumina has lost more than 25% of its value in just the past six months.

This pullback is giving us a huge buying opportunity to buy one of the greatest healthcare stocks.

Like most big trends, this is going to take years to fully develop.

We saw this take place during the Internet “boom and bust” years in the 1990s. Some companies had
incredible runs. Others were too leveraged and wound up going bankrupt shortly after the technology
crash of 2000.

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But one thing was for certain: The Internet was still in its infancy during the 1990s.

The Internet has now led to cloud computing and data analytics. It led to the creation of social media
and the power of “connecting” to people in real time. It led to the huge development of smartphones
and mobile tech.

In other words, it’s normal for most companies to see huge volatility during their growth years. This is
exactly what’s taking place right now with Illumina.

Not too long from now, patients will be required to have their DNA analyzed. This information will be
in every patient’s chart. It will help doctors diagnose patients much more quickly and identify genetic
disorders during the curable stages that otherwise could take years to figure out.

Illumina’s technology generates 90% of all DNA sequence data. That makes them the super-dominant
player in this massive growth trend. And the company just formed a new venture called Grail, which is
trying to become the first company to detect certain forms of cancers by using a blood screen. This will
help detect cancer at a curable stage and ultimately prolong lives.

According to some estimates, this market could become a $200-billion opportunity. That’s probably
why Bill Gates and Jeff Bezos have invested big money into Grail. Illumina will retain majority
ownership of the venture.

Keep in mind, Microsoft and Amazon have two of the biggest cloud/data analytics platforms in the
world (Alure and AWS). This will work hand-in-hand with the hundreds of millions of people who are
likely to get screened for cancer using these specific DNA tests over the next decade.

But Gates and Bezos aren’t the only smart investors who are working with ILMN right now. Baillie
Gifford, the largest independent active investment management firm in the UK with $135 billion
under management, owns 12.1% of ILMN and is the largest single investor in Illumina. Blackrock
owns another 7.4% of the company (a very large stake for Blackrock by percentage, given its total $4.6
TRILLION in assets under management). Sands Capital Management, is another major investor and
has a great track record and has a reputation for smart investments in high growth companies.

Risk factors

Granted, as with any new technology and new industry, Illumina is facing some risk factors.

It is the major player in a massive, emerging market, but the company continues to see slow adoption
for its next-generation sequencing. This could lead to lower profits, and ultimately a lower stock price
for ILMN.

Furthermore, health insurers could be slow to adopt (or cover) DNA testing in patients. This could
result in much slower adoption and could negatively impact profits for Illumina.

The final risk factor could also be seen as a positive. Gene sequencing is expected to be one of the
biggest trends in healthcare over the next decade (a good problem to have!). But this will open the door
up to new competition that could eat into Illumina’s profits.

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The investment case for Illumina

Turning to valuation, Illumina looks expensive trading at 35 times earnings. It’s also trading at 9 times
sales and 10 times book value. Normally, I would not recommend such an expensive company that’s just
reported several weak quarterly results.

However, Illumina has a market cap of just $20 billion. As I mentioned earlier, they control 90% of all
DNA sequencing data.

And this is a trend that’s about to disrupt the multi-trillion-dollar healthcare industry!

Based on my analysis, Illumina may be one of the best long-term growth plays in healthcare. At current
levels, the stock could easily double over the next few years as the costs to get your DNA analyzed
become more affordable for tens of millions of people.

Longer term, Illumina could become one of the biggest healthcare companies in the world. This is not
as far-fetched as it sounds since “gene sequencing” and “gene editing” have already been proven to treat
(and cure) the most deadly diseases.

My advice is to buy Illumina on this 35% pullback. The stock is likely to bounce sharply over the coming
quarters since expectations are low. In other words, I expect Illumina to report stronger-than-expected
results over the next few quarters as the bars for earnings and sales have been lowered.

Buy Illumina under $147 a share and hold long-term. It’s fair value is $242, which was the previous
high before ILMN reported several weak quarters. Based on my analysis, the stock should be trading
close to these levels right now.

On the exit, sell half of the position when ILMN reaches $242 (70% upside), and hold the other half
longer term as gene sequencing continues to disrupt the multi-trillion healthcare industry.

This position should account for no more than 3% of your entire portfolio.

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