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Goldman Sachs, Leerink Swann Initiate Coverage of Foundation Medicine

NEW YORK (GenomeWeb News) – Coverage of Foundation Medicine was initiated today by Goldman Sachs and Leerink Swann, which gave the cancer genomics analysis firm a Neutral and Outperform rating, respectively.

Goldman Sachs gave the company a six-month share target price of $33, while Leerink Swann gave it a $39 price target. The two investment banks were underwriters in Foundation's initial pubic offering.

Foundation went public a month ago, and in its first day of trading, its shares soared. Since then, the Cambridge Mass.-based firm's stock has remained high, trading for as much as $41.51 per share, more than double the $18 price the company set for its IPO.

As a result, Goldman Sachs' analyst Isaac Ro said he sees "limited near-term outperformance given valuation."

However, he noted that the market for cancer diagnostics using sequencers and bioinformatics represents a $4 billion to $7 billion market opportunity with "hypergrowth potential." Foundation launched its FoundationOne test more than a year ago, giving it first-mover advantage, which "should facilitate a networking effect and competitive advantage."

The company's scalable business model offers attractive margins, Ro added, and there is potential for upside to his conservative pricing assumptions.

Core growth drivers include potentially an 87 percent increase in revenues on a compounded annual growth rate basis between 2013 and 2018. The figure, Ro added, implies a US market penetration rate in solid tumors of just 8 percent.

Also, the introduction of a hematological cancer test expected in 2014 should expand the company's total addressable market. "Over time, we expect that FoundationOne will see increased adoption in earlier stage cancers and a larger percentage of the prevalence population that together will help to expand the [total addressable market] to roughly 1.7 million patients," he said.

Leerink Swann analyst Dan Leonard also noted the market opportunity for high-content tumor profiling tests, and called Foundation "a leader in this market with clinical volume [of more than] 2,700 tests in [the first half of 2013], which suggests the market is only minimally penetrated to date."

The FoundationOne test "uniquely addresses the market need," he said, and a "healthy pipeline" of targeted cancer drugs means there will be a need for larger, not smaller, profiling panels "as the number of genes which convey sensitivity to therapies has continued to increase."

He added that FoundationOne, which comprises 236 cancer genes, allows physicians to maximize the amount of information from one patient sample. In addition, Leonard said that the company's physician-friendly report makes the information digestible to community oncologists, which he said see about 85 percent of cancer patients in the US.

In the 12-month span since FoundationOne's launch in June 2012, clinical test volume has exceeded 4,000 cases, and as the number of Foundation's sales representatives have grown to at least 18 today from one in 2012, "we believe [the company] should enjoy continued strong growth," Leonard said.

Despite his bullish assessment, he noted that reimbursement issues could slow the company down. FoundationOne is not reimbursed by Medicare or any commercial payor.

The list price for the test is $5,800, but Leonard noted an "average commercial reimbursement of approximately $3,700 for tests, which have met [Foundation's] revenue recognition criteria."

Also, while Ro noted Foundation's first-mover advantage, Leonard said that "hard barriers to entry are low," and competitors could move into the space, including Caris Life Sciences and the Translational Genomics Research Institute, as well as "the more targeted hotspot panels in wide use today."

Other risks include the "evolving understanding of clinical utility" of the company's test, and an uncertain regulatory environment, Leonard said.

"While these risks must be taken into consideration, we don't believe their magnitude is sufficient to dampen investor enthusiasm over a large and thematic market opportunity," he said.

In afternoon trading, shares of Foundation on the Nasdaq were down 4 percent at $32.74

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