These obscure stocks could alter the face of medicine

In ten years' time, the face of medicine could look very different, as research promises to find the key to diseases such as cancer and diabetes. Tom Bulford looks into one of biotech's most promising fields, and picks one small-cap company to watch.

By Tom Bulford

published 14 July 2011

in Features

When I was a fund manager back in 2000 the dotcom bull market blazed in all its glory. Each day, analysts and brokers would visit our office to push their latest idea. By the time they left the room, our heads were spinning. These technology experts might have known the difference between bytes, middleware and dongles, but we certainly didn't - although no doubt we nodded our heads sagely as if it was all crystal clear.

It was all too easy to dismiss these fancy new companies with their high-tech dreams and fresh-out-of-college directors. The dotcoms duly crashed in 2001. Those who followed the rule of 'never invest in anything that you do not understand' felt smug.

But the real winners were not those who looked down their noses at these young business upstarts, but those who made the effort to understand them. For sure, many of the dotcoms were never heard of again, but many of the best performing shares of the last decade ASOS (ASC) and SDL (SDL) for example were born in those crazy times. Those who understood these new businesses got in early and profited. Those who never made the effort missed out.

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Investment is not meant to be easy. You have to make a real effort to understand new ideas because that is the only way to get ahead of the crowd.

Today I want to talk about the very exciting prospects in a poorly understood industry epigenetics. The word may mean nothing to you now. But in ten years it could have altered the face of medicine creating a few more of the likes of ASOS and SDL along the way.

A journey to the source of hereditary disease

All of the cells in your body are capable of forming any type of tissue or organ. The actual type of tissue or organ that they form depends upon the DNA recipe and the action of the genes. If the cells are to form a liver, for instance, then liver genes will be active but others will not be.

The problem is that not all cells do what they are supposed to because genes that should be 'switched on' are 'switched off' or vice versa. What epigenetics seeks to establish is why this happens.

Epigenetics is the study of changes in gene activity that do not involve alterations to the genetic code but still get passed down to at least one successive generation. These patterns of gene expression are governed by cellular material the epigenome telling your genes to switch on or off. It is through the epigenome that factors like diet, stress and prenatal nutrition can make an imprint on your genes.

These changes may remain through cell divisions for the remainder of the cell's life and may also last for multiple generations. However, there is no change in the underlying DNA sequence of the organism; instead, non-genetic factors cause the organism's genes to behave (or 'express themselves') differently.

Is that clear? It may not be! So let's go back to the human genome. You probably know that it is now possible to map the entire human genome that is all the genetic material within us in a matter of days and at a cost of a few thousand pounds.

By comparing the genes, and their activity, of healthy people with those suffering from disease, scientists are starting to identify the genetic variations that increase our susceptibility to diseases such as cancers, diabetes, coronary heart disease and inflammatory bowel disease amongst others.

However, it is one thing to identify genes and relate gene expression to disease. Ideally we need to go one further step back in the process and ask why some genes express themselves and others do not.

Genes and their actions are programmed by DNA (short for deoxyribonucleic acid). DNA is a blueprint carried by genes that determines the construction of cells and organisms. By reading and altering this blueprint, epigenetics could allow us to kill diseases before they ever manifest themselves.

A tiny stock at the frontier of epigenetics

A penny share company working to make this a reality is Valirx (VAL). It has developed a hypergenomics platform that characterises disease by detecting genes that are active when they should not be. It also has 'GeneICE' technology that 'silences' (switches off) aberrant genes.

Chief executive Dr Satu Vainikka expects epigenetics, and its related discipline epigenomics, to become a cornerstone of new pharmaceutical and biotech research, with cancer a prime target. Valirx has over one billion shares in issue and the directors have been buying some of them only this week.

But at today's price of 0.65p Valirx is still only valued at a tiddly £6.7m. I don't pretend to know everything about epigenetics. But I think I get the basic idea and I think it will pay to find out as much as I can. I'll be watching the progress of this penny share very closely in the months ahead.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.