My Trading > My Trading Journal > October 4, 2013

My Trading Journal

October 4, 2013

9:00 pm (PST)

There as a very good SeekingAlpha article by author "PropThink" about DiaDexus. (DDXS), a company that makes a patented blood test called the "PLAQ test" for heart disease. I meant to post this back on July 11th, but didn't get around to it until now.

This guy does a very good job of intelligently analyzing a stock by framing the analysis in terms of the EV ("expected value") of different valuation scenarios. This is a technique that I only use occasionally. It benefits you most when you are looking at a situation where there is a wide disparity in possible values in different scenarios. This technique doesn't have much value when doing an analysis of scenarios which will only have a marginal effect on the value of the stock. Biotech stocks awaiting an influential FDA approval are probably the most relevant example. But this is a technique that most analysts (and traders) do not use - and is a technique that is particularly ignored by bio-tech stock investors, who are probably the most valuation-ignorant sub-group of investors there is.

I am very up-to-speed on LP-PLA2 and the market and products relating to it (including Darapladib), and I do agree with him on just about everything he said, but I have one major disagreement with his analysis:

"Essentially, the diagnostic would likely be added to the standard battery of tests suggested for patients at risk for cardiovascular disease."

I think this prediction is completely wrong. I'm not sure how familiar he is with the hs-CRP test for cardiac health, but it is a test that has proven to be extremely useful in helping diagnose heart problems. It has been shown to be better than standard cholesterol tests (LDL, HDL, etc). The literature on the CRP tests goes back to the 1980s, and there have been tons of studies done over the last 20 years that have proved the benefits of CRP testing. Yet, despite these undeniable benefits, very few doctors recommend CRP testing, even though it only costs about $45 (lower than the $150 PLAQ test by DiaDexus).

There is one particular reason why the majority of doctors don't recommend CRP testing. They simply don't care. Most doctors are happy being stuck in their 1980's mindset where LDL and HDL testing is all you need. Having a public that is illiterate with regard to basic health issues is a benefit to them. The public likes to idealize doctors as a group of people who are interested in intellectually pioneering new roads in medical research and health treatments. Personally, I take the opposite view. I think most doctors are lazy - and are no different than other groups of workers as a whole, and most of them are content with merely being mediocre at their jobs.

The approval of Darapladib would indeed lead to a healthy increase in the growth of the PLAQ test and it's resultant revenue, but this growth will not be explosive growth. And this is because there will be no revolution in the way the medical community treats heart disease - or even the way they think about heart disease diagnosis.

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