Sector Spotlight: Top 4 Basket of Diagnostic Stocks (EXAS, GH, ILMN, LUDG)

Big diagnostic companies soared during the pandemic thanks in part to mandated government testing, but once the at-home kits arrived and insurance companies were forced to foot the bill, diagnostic companies with COVID-19 revenues collapsed. Many diagnostic companies got caught in the downdraft because they thought the testing gravy train was going to continue and ramped up capacity instead of diversifying. The opportunity in the sector comes from diagnostic companies that chose to reinvent themselves by developing early cancer screening tests. During the pandemic, regular cancer screenings were put off to conserve medical resources toward COVID. Since the pandemic is over, it's worth reexamining beat-up diagnostic companies that were able to adapt and are now on the upswing.

The top diagnostic stock to put on your radar is Exact Sciences (NASDAQ: EXAS). Most investors will recognize their at-home cancer screening kit is called cologuard which tests for colon cancer. Those primetime commercials you’ve likely heard mean they’ve established their brand along with a national audience. Testing volume dropped measurably during the pandemic as early cancer screening was pushed aside, but now their testing volumes are ramping back up and helping chew through the testing backlog created by the pandemic.

It has taken a couple of years for EXAS testing volumes to return to pre-pandemic levels. In Q2 2024 the company had a record 1.0 million screenings and got back on its growth trajectory, helped by an expansion of cancer indications that include breast, prostate, and colon cancer. It also started its pipeline expansion into precision oncology. EXAS also made a move into a blood-based multi-cancer space when they purchased Thrive Early Detection Corp. for $2.15 billion. This purchase turned into a business vertical that not only does a deeper dive into the hereditary nature of the cancer but also profiles the tumor in such a way that it assists in the optimization of treatment regimens.

The company has $2.6 billion in trailing revenues and a current market cap of $10.3 billion and is an overall leader in the diagnostic sector with solid earnings and a balance sheet for risk averse shareholders looking for a solid return from a company that consistently beats expectations.

Guardant Health Inc. (NASDAQ: GH) has the first FDA-approved primary screening blood test for colorectal cancer (CRC). The test is called Shield and it is covered under the Medicare reimbursement program. Shield has a sensitivity of 83% and a 90% specificity (false positives) for advanced neoplasia (polyps that could turn cancerous). The company has $600 million in trailing revenues and a current market cap of $4.0 billion. They call it a non-invasive test, but you still have to get pricked.

Another way to play the diagnostic market is to look at the top industry suppliers. llumina Inc. (NASDAQ: ILMN) is a medtech company that makes genetic testing equipment that enables the large-scale analysis of genetic variations. The company manufactures next-generation sequencing (NGS) platforms, microarrays, and bioinformatics software. Their machines are used in genomics research, clinical applications, and molecular diagnostics, which means their customers are research centers, pharma companies, academic institutions, and clinical research organizations. The company recently spun off their diagnostics business called Grail Inc. (NASDAQ: GRAL) which is an early cancer screening company for people that are not symptomatic, enabling a proactive approach to diagnosing cancer earlier.

ILMN funded GRAL with a one-time cash payment of $923 million. The company's leading product is a multi-cancer early detection blood test called Galleri. The test screens for 50+ types of cancer by reading the DNA sequence. The backbone of the testing technology is from the Illumina platform and over 20,000 participants in large clinical trial studies. The test kits cost around $1100 each, and they are awaiting FDA approval for the test.

Investors looking for a little more alpha should look at this diagnostic testing company disruptor and its game changing technology. Ludwig Enterprises Inc. (OTCMKTS: LUDG) is an exceptional OTC company in the diagnostic screening sector, boasting mRNA testing technology that has the potential to revolutionize the multibillion-dollar diagnostic screening industry with its less invasive tests. CEO Marvin S. Hausman MD stated, “mRNA is the language that interprets DNA and is the future of medicine.” Although the company currently has no revenue, it is gearing up for an exciting product launch in October, coinciding with Breast Cancer Awareness Month, which is expected to kickstart its revenue stream. To spearhead its viral marketing campaign, the company has enlisted a seasoned veteran. LUDG’s Lab Developed Test (LDT) will initially target breast cancer screening, but the technology can be easily adapted to other inflammatory-driven cancers. These LDTs are processed at the Genetics Institute of America, a CLIA lab, which allows for quicker product launches as they do not require FDA approval.

The company has developed a unique cancer screening approach by measuring mRNA at the nucleotide level. Their test uses AI algorithms to create a personalized inflammatory index, comparing it to a database of over 3,200 mRNA samples collected from 40+ clinical centers over five years. This method, particularly for breast cancer, boasts a 97% test sensitivity, indicating when further evaluation is needed. The LUDG test kits will cost $249 and will follow proven successful direct-to-consumer viral marketing strategies driven by targeted machine learning algorithmic technologies.

The CEO of LUDG Hausman has come out of retirement to lead this technology to commercialization. He is a Medical Doctor, Immunologist, and board certified Urological Surgeon. Investors in LUDG will have an experienced CEO at the helm with a proven track record of successful exits. One of his most notable exits was when he sold his NYSE company Medco Research to King Pharmaceuticals, which was ultimately acquired by Pfizer (NYSE: PFE). LUDG’s Revealia breast cancer test is very much like the EXAS Cologuard test.

As investors move back into diagnostic stocks, these 4 represent a diversified basket every investor should put on their radar.

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