2 Undervalued Medtech Stocks: Opportunities in Liquid Biopsy

Liquid biopsies are one of the largest potential market opportunities across the entire healthcare sector. A liquid biopsy is a noninvasive method of diagnosing and analyzing tumors using blood, which represents a potential paradigm shift in when cancer will be detected and treated. In our view, this technology has the ability to expand exponentially and the companies that develop it have explosive growth potential. According to our forecasts, the amount of revenue generated from liquid biopsies could grow to over $30 billion by 2032 from approximately $2 billion today. We estimate the total addressable market is even several times larger than that and provides a long runway for further growth.

Early Cancer Detection = Higher Long-Term Survival and Lower Costs

The widespread usage of liquid biopsies is expected to improve early cancer detection, which would lead to better long-term survival outcomes as well as lower overall costs for treating cancer patients. Currently, there are only a handful of screening programs for cancer, and over 70% of all cancer deaths are in cancers where there are no screening programs. [1][2] Many cancers are only detected when active symptoms are present, and the cancer may have already begun to spread to other parts of the body.

Liquid biopsies could help detect cancers before they spread beyond the organ of cancer origin, or at earlier stages when cancers are more likely to be treated successfully. Early cancer detection could save lives. For example, the average five-year survival rates for cancer are about 89% when cancer is detected in stage 1 or 2 but drop to 21% when it is detected in stage 4. [3][4] In addition, the cost to treat cancer patients is much lower during the early stages. For example, according to recent Frost & Sullivan research, treating localized cancer costs more than 2 times less on average than when the cancer has spread to other parts of the body. According to our estimates, shifting cancer care to earlier stages could reduce U.S. cancer care spending by $26 billion in our base-case scenario and could be as high as $70 billion in a scenario where over 80% of diagnoses are made in early stages.

How Big Is the Opportunity?

Within the liquid biopsy space, the largest revenue opportunities include pan-cancer testing (about $15 billion in revenue by 2032) and colorectal cancer (about $8 billion in revenue by 2032). Julie Utterback, senior equity analyst on Morningstar’s healthcare team, thinks that pan-cancer screening could become the holy grail of regular cancer screening, as it could be a game changer for detecting and treating cancer.

Pan-cancer biopsies screen for many different types of cancer in just one blood draw and could be used in regular physicals or wellness checks to detect many cancers beyond the handful detectable by active screening programs today. For example, Illumina/Grail’s Galleri test currently tests for over 50 different cancers from a single blood draw. The Galleri test is already marketed in the United States but lacks significant third-party payer reimbursement, which could come after potential U.S. Food and Drug Administration approval, which it plans to file for in 2024-25. After that, significant expansion of Illumina/Grail’s test could occur. International expansion is possible, too. The U.K.’s National Health Service is currently studying the Galleri test in asymptomatic individuals over the age of 50 and people over 40 with suspicious signs of cancer. If that study is successful, the NHS aims to ramp up that trial to 1 million people annually by around 2024-25. We see the potential for exponential growth in this indication in 2025 and beyond, and Illumina/Grail looks likely to lead the way in the pan-cancer market opportunity.

Existing Cancer Screening Product Expansion

There is room for improvement on existing cancer screening methods, too, and we expect the largest screening opportunity for individual indications will be for colorectal cancer. Exact Sciences’ Cologuard is currently the leader in the noninvasive colorectal cancer screening market, but we project Guardant Health and other liquid biopsy makers could disrupt the colorectal cancer screening market in the near future. By 2032, we think the noninvasive screening market for colorectal cancer could reach about $8 billion in annual sales, mostly in liquid biopsies, up from over $1 billion in Exact’s stool-based test in 2022.

Also, while we see opportunities in other early cancer detection and therapy selection liquid biopsies, we are particularly intrigued by the nascent but large opportunity in the monitoring of cancer survivors. In this indication, liquid biopsies could be used to identify the small number of cancer cells that can remain in the body during or after cancer treatment and can be a key indicator of potential cancer reoccurrence. Companies like Guardant and Natera are actively pursuing this end market currently, while Illumina/Grail and other firms aim to enter this market eventually, too.

Stocks Leveraged to Growth in Liquid Biopsies

Illumina ILMN

In its legacy operations, Illumina provides tools and services to analyze genetic material with life science and clinical lab applications. The company generates over 90% of its revenue from sequencing instruments, consumables, and services. These sequencing tools are key supplies in liquid biopsy testing and should be able to benefit from the expansion of liquid biopsies in the long run. Also, in August 2021, Illumina entered the liquid biopsy race directly by acquiring Grail, a company that was originally formed in Illumina’s labs and focuses primarily on liquid biopsies for the early detection of multiple cancers, including its Galleri test that is able to detect 50 types of cancer in one blood draw.

While we think Illumina is significantly undervalued, investors should be prepared for potential near-term volatility, especially around whether or not Illumina will be forced to unwind the Grail acquisition. U.S. and EU regulators have ruled that the acquisition is anticompetitive, which may result in the divestiture of these assets. Illumina is currently appealing those decisions; decisions on the appeals may come in late 2023 or 2024. Our $269 fair value estimate on Illumina includes $201 per share of value on Illumina’s legacy genomic sequencing business and a $68 valuation relating to Grail’s liquid biopsy assets. While Illumina may be forced to unwind the Grail transaction, we would not be surprised to see the divestiture structured such that Illumina investors will be able to retain an economic interest in the long-term optionality that comes with Grail, such as through a spinoff directly to Illumina shareholders.

In March 2023, activist investor Carl Icahn revealed that he had taken a stake in Illumina. Icahn has nominated three members to Illumina’s board to help unlock the company’s intrinsic value, which will be voted on at Illumina’s annual meeting on May 25. Also, on April 25, Illumina reported first-quarter results, which mildly exceeded expectations, and management maintained its 2023 guidance and announced a margin expansion plan in its legacy sequencing business that appears roughly in line with our estimates. Illumina’s stock is rated 4 stars and trades at a 25% discount to our intrinsic valuation.

Guardant Health GH

Guardant provides cancer blood tests and analytics for clinical and research use.

The company offers Guardant360, a blood-based test for therapy selection in advanced stage cancer, and Guardant Omni, a broader gene panel for immuno-oncology research. The most promising part of Guardant’s pipeline is its Shield test for the early detection of colorectal cancer that could receive FDA approval within the next year and appears to meet the guidelines that the Centers for Medicare & Medicaid Services has set to gain reimbursement in that indication, too. The company is also targeting other individual cancer screening tests along with monitoring of cancer survivors for recurrence.

On May 9, Guardant Health reported strong first-quarter results and management increased its sales outlook for the full year. For 2023, management increased its sales outlook after this quarter’s strong sales momentum. Specifically, Guardant now expects 19% to 21% growth in sales, which is mildly higher than its previous guidance. Guardant Health’s stock is rated 5 stars and trades at a less than half our intrinsic valuation.

Exact Sciences EXAS

Exact Sciences provides cancer screening and diagnostic test products, including Cologuard screening, a noninvasive stool-based screening test for colorectal cancer. The company also competes in the precision oncology market with Oncotype DX, a genetic-based therapy selection test for breast, prostate, and colon cancers. With the acquisitions of Base Genomics and Thrive Earlier Detection, Exact is building a multicancer early screening test to detect about 15 cancers in one blood draw—a test that would be one of the earliest entrants in multicancer liquid biopsy cancer screening and could compete with Illumina/Grail’s Galleri test eventually. Additionally, the company plans to develop a liquid biopsy in colorectal cancer that could build on its Cologuard expertise in that indication but in a more user-friendly format.

Exact Sciences delivered strong first-quarter results on better-than-anticipated Cologuard expansion that allowed management to increase its 2023 sales outlook and accelerate its timeline to reaching positive free cash flow in 2023, up from 2024. However, even after incorporating these assumptions into our financial model, we continue to view the stock as fully valued. It is rated 3 stars and trades at a 27% premium over our intrinsic valuation.

[1] Illumina. September 2020. Review of SEER Program (https://seer.cancer.gov/) *Stat Database: Incidence—SEER 18 Regs Research Data, Nov. 2018 Sub. Includes persons aged 50-79 diagnosed 2006-2015 “Early/Localized” includes invasive localized tumors that have not spread beyond organ of origin, “Late/Metastasized” includes invasive cancers that have metastasized beyond the organ of origin to other parts of the body.

[2] Noone, A.M., Howlader, N., Krapcho, M., et al. (Eds). SEER Cancer Statistics Review, 1975-2015, National Cancer Institute, Bethesda, MD, http://seer.cancer.gov/csr/1975_2015/, based on November 2017 SEER data submission, posted to the SEER website April 2018.

[3] Illumina. September 2020. Review of SEER Program (https://seer.cancer.gov/) *Stat Database: Incidence—SEER 18 Regs Research Data, Nov. 2018 Sub. Includes persons aged 50-79 diagnosed 2006-2015 “Early/Localized” includes invasive localized tumors that have not spread beyond organ of origin. “Late/Metastasized” includes invasive cancers that have metastasized beyond the organ of origin to other parts of the body.

[4] Noone, A.M., Howlader, N., Krapcho, M., et al. (Eds). SEER Cancer Statistics Review, 1975-2015, National Cancer Institute, Bethesda, MD, http://seer.cancer.gov/csr/1975_2015/, based on November 2017 SEER data submission, posted to the SEER website April 2018.