NEW YORK (TheStreet) -- Foundation Medicine (FMI) is a good company in what many believe is an almost-impossible sector -- diagnostics. Bears believe diagnostic tests become commoditized with vanishing profit margins and no real winners. Diagnostic companies are simply providers of hardware (or a simple operator of hardware) vulnerable to relatively low barriers to entry. Even if a company roils out a successful diagnostic test, fast followers introduce similar tests and profit margins disappear. There is certainly a kernel of truth to these bearish arguments but Foundation Medicine has a comparative advantage over other diagnostic companies which investors are failing to recognize.
The price of a particular diagnostic test may fall over time (the rapidly diminishing cost to sequence the whole genome is a great example) but more important is what happens when adoption of these tests accelerates and the Big Data assembled from them are put to use treating patients.
Foundation Medicine's current FoundationOne cancer diagnostic examines about 236 genes and four types of alterations. While you can tout the advantage of a single test that comprehensively analyses information versus a series of more specific tests, the point is this is a lot of data. If you take the low end of the company's guidance -- 22,000 tests in 2014 -- this implies information on about 5.2 million genetic alterations generated in only one year. If you include how these patients are treated and the efficacy of these treatments, you can see how Foundation Medicine is putting Big Data to good use.