Liquid biopsy in the cancer testing is the next big investment opportunity


Multiple companies are working on next-gen blood biopsies tech to detect cancer  

The potential market size is big according to most estimates and analysts

Mergers and acquisitions seem to suggest that the era of liquid biopsies has arrived

The frontrunners highlighted in the article could provide excellent returns for investors

Liquid biopsy a small background

I wrote an article a few months ago about liquid biopsies with a detailed analysis of Guardant health (GH) and this emerging healthcare tech space is turning out to be a massive disruptive opportunity.  If readers want to understand the liquid biopsy, please read my previous article. I will analyze the emerging players in this market in this article and, which of these companies could be potential multi baggers in the next 5 years. I will do this without getting bogged down by the nomenclature, and claims, that are yet to be validated, but rather looking at the front runners and extrapolating the performance based on their financials and  the total addressable market(TAM) that each of them could eventually claim.

Tissue biopsy, commonly used for cancer testing, is a procedure performed by removing a small amount of tissue, usually via needle aspiration. This invasive procedure can be painful (lung, liver etc) and is frequently repeated since about one in five such procedure fails to obtain sufficient material for analysis. Liquid biopsy overcomes these drawbacks by virtue of using a blood sample (blood draw). It is virtually painless and can be quickly obtained using standard materials and, is less expensive. This approach has been touted for the last few  years and is starting to gain significant traction due, in large part, to advances in detection technology. Despite the advantages, though, tissue biopsy will likely remain for the foreseeable future but liquid biopsies should reduce the demand for tissue biopsies if clinicians have confidence in the results.

Reason for Liquid biopsy taking off

Traditional cancer tests require invasive and expensive tissue samples as I wrote in my earlier article but we’re nearing a future in which a blood draw will tell us everything we need to know about cancer.  The advantages of liquid biopsy include screening for cancer, therapy selection (companion diagnostics), monitoring treatment response and drug resistance and detection of minimal residual disease (MRD) after surgery or recurrence.  The diagnostics testing also enables current therapies to drive better outcomes by personalizing the treatments and constant monitoring of the patient with minimal procedures and costs. Besides, studying a tissue sample can help physicians understand which mutations within the tumor cells might make one drug more effective than another for that patient. ARK Invest’s analyst Barnett says, in many cases a so-called liquid biopsy could yield the same or richer information with non-invasive tests. “To use a patient’s biological profile and the biology of their unique disease to craft a personalized treatment plan that matches patients to specific drugs that target the unique characteristics of their cancer is a big benefit”  according to the ARK analyst.

Genetics, pharma and affiliated companies are pulling out all the stops to stay ahead of cancer. There have never been better times for the fight against cancer and the chart below shows the survival statistics over the last few decades.

The market size

Public companies like Roche (RHHBY), Guardant Health (GH), Exact Sciences (EXAS), Natera (NTRA) and Personalis (PSNL) and many in the private space like GRAIL (which has been acquired by Illumina)  are creating this market for genetic testing. Some companies like GH, NTRA and EXAS have been in the market for the last few years and I see this market size expanding as these companies prove their merit and get more studies out the door along with more FDA approvals in the pipeline.

These companies, besides working with pharma companies on the medicine, are also rolling out a series of genetic tests that can help detect cancer indicators early and these testing kits are being used extensively in the doctors’ offices and clinics. According to investor presentations from these companies and looking at analyst research testing services is a huge market and analysts agree this could become a USD $50+ billion market within a few years, from its current size of approx. USD 6 billion. Recurrence monitoring alone is a $15 billion potential market, according to Guardant Health and the recurring opportunity assumes that every one of the 15 million living cancer survivors receives one $1,000 test per year (US only) and then, there is the rest of the world to add to the total addressable market, The current penetration adding all the revenue from these companies is less than 5% and therein lies the massive opportunity for these companies in the next decade.

The front runners

Doing repeat biopsies of the traditional tissue is quite onerous and this is where Natera and Guardant shine. Natera started with a non-invasive prenatal testing (NIPT) to detect fetal aneuploidy (abnormal number of chromosomes) and recently introduced a  diagnostic test called Signatera that monitors the potential for cancer relapse well before a tumor would ever show up on a traditional scan. Another blood test available for patients later this year can detect cancerous cells before they group together to form a mass and this Natera product will monitor for recurring colon cancer. Pseudo-progression is a phenomenon whereby the tumor appears larger on an initial scan during treatment before shrinking on subsequent scans, and it has been reported in up to 1 in 10 patients treated with immunotherapy. The ability to distinguish true progression from pseudo-progression earlier in the course of treatment, has emerged as a significant unmet clinical need, according to Natera If a patient is not responding to treatment, one would expect the tumour to get larger on a scan over time, however up to one in 10 immunotherapy treated patients see their tumor get bigger before it gets smaller, as it’s filled with lymphocytes and swells up under attack from the immune system. With a CT scan, this swelling looks like disease progression, which it’s not, hence the term pseudo progression. Natera hopes to expand its market share with its offerings that could constantly keep track of any recurrence. It is also entering the transplant market with its Prospera line of tests and expanding into China. So there are multiple expansion possibilities for Natera.

Guardant Health also hopes to follow with a blood test that monitors for recurring lung, breast, colon and ovarian cancer as I had mentioned in my previous article. Guardant is conducting a trial called Lunar-1 for the same purpose and it would be completed by late 2021 according to their report. These tests are less invasive, and don’t expose patients to excess radiation often associated with scans. Both companies also sell their products to pharmaceutical companies for clinical research as well, hence there is a 360 feedback loop for these companies to go through continuous improvement and innovation. I have already written extensively on Guardant in a previous article and they recently got approval for Guardant360 a complete genomic profiling test to optimize treatment selection that has added to their overall TAM. Guardant’s Softbank overhang has still not cleared out, but business is humming along though I have to admit, there has been a COVID bump that has hit growth rates for the year but should clear out by early 2021.

Another company which has put its hat in the race is PSNL, which has recently launched its own liquid biopsy platform called NeXT. PSNL has been engaged in whole genome sequencing (WGS) services for the VA (Veterans Association) for last several years, and has used this data to take its offerings to the next level. Drug developers could use the NeXT Platform to establish relationships between immune responses and tumour mutations and incorporate the findings into drug discovery and clinical trials and PSNL had a 20% sequentially increase in the most recent quarter for its NeXT platform. PSNL claims, its NeXT platform can identify biomarkers including neoantigens for all cancers with comprehensive data across all 20,000 human genes from a small tissue sample. They are still early in this space but I would encourage the readers to monitor their progress.

EXAS a market leader with its stool based colon testing kit, is also progressing on other cancer testing fronts. I will analyse EXAS in a later article as more data on their liquid biopsy trials come out, after their recent acquisition of privately held Thrive.

Illumina has also thrown its hat in the ring with its acquisition of Grail which it partly owned,  at a rich valuation of $8 Billion but it may take a few years before we can evaluate the value generation potential of this deal. Grail plans to launch its test for early detection of cancers next year.

There are others that have been making a foray into this space like, NeoGenomics, Freenome and many more, which validates, that the era of liquid biopsies has arrived. I will let readers know a bit more on the others as and when I get verifiable data.

Financial data

I will limit my analysis to the 3 companies for which we have adequate data on liquid biopsies and will do a follow up with an update on the others.

Looking at the metrics data a reader can gauge, the reason Guardant is assigned a higher valuation of USD 10~ billion and a 35 P/S multiple, though its revenue is lower than Natera but has a higher growth rate and GM. Let us also take a further look at the expected revenue in the next 2- 3 years based on the pipeline, the TAM in the investor presentations and competitor data where available. I have used a combination of data and heuristics to extrapolate the indicative and achievable revenues for each of these companies assuming no hiccups on the FDA trial outcomes  and the execution of their marketing plans

Source – Authors analysis based on company website, analyst and earning reports

Source – Authors analysis based on earnings data and investor presentation

Source – Authors analysis based on earnings data and investor presentation

Picking a winner

Illumina’s (NASDAQ:ILMN) $8B takeout of liquid biopsy developer GRAIL, may be a watershed moment for use in cancer detection and management which was followed by Exact Sciences (EXAS) with its acquisition of Thrive. .  It is developing a multi-cancer early detection test that detects very small amounts of tumor-associated molecular material in the bloodstream.

According to my own analysis, the large TAM, and having read about the Goliath and David stories, there could be multiple winners in this space as it is too early to predict the stock that will dominate this market niche. This is a huge unfolding market, and it may be daunting to give a definitive perspective for an investor to play the market but I suppose, there could be multiple approaches that could succeed. The data suggests, GH as a first mover with its high growth rates could maintain its leadership position as the medical fraternity begins pervasive use of blood biopsies. The changing narrative with multiple factors like trial outcomes , increasing reimbursement coverage, and Operating leverage would also suggest that they could hold on to that advantage, and if  the Lunar trials get approved in the forecasted timelines others may find it difficult to catch up.  Natera would work to improve its margin with its new line of products and that would propel it to catch on the multiple expansion gap with Guardant. Personalis on the other hand is the wild card in the mix and the pace of its NeXT platform ramp up holds the key to the stock being propelled forward.  A prudent investor would start positions in all of the above companies with different allocations, and closely watch the developments on these multiple fronts. As the companies compete to provide users with better health care outcomes, it also offers many of us new ways to receive health care that is far more efficient and less invasive.

The author is an analyst and runs an investment consultancy called – Sequity advisors ( Sequity has been developing focused equity strategies and generating 35% returns for investors in the US stock markets. Sequity also mentors and provides strategic advisory and funding services for start-ups in the APAC region to scale their business in emerging economies like India, Vietnam and Indonesia.

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