Deep Value Diagnostic Stocks: EXAS GH LUDG

During the pandemic diagnostic testing stocks like Quest Diagnostics (NASDAQ: DGX), CoDiagnostics (NASDAQ: CODX) and Illumina (NASDAQ: ILMN) soared as investors piggybacked on the growth and guaranteed payout of government subsidized tests that were supposed to control the spread of COVID-19. After the vaccine rollout, the political will to continue to fund covid testing waned and the government eventually transferred the burden to the insurance companies.  This move crushed a number of testing companies because they stopped getting government payouts while their testing volume dropped off due to the lower number of COVID cases along with the arrival of the free at-home test kits.  Many diagnostic companies got caught in the downdraft because they thought the testing gravy train was going to continue and ramped up capacity only to find out the demand was gone in an instant.  This shift in demand meant diagnostic companies had to reinvent themselves with better, faster, and less invasive tests that were no longer tied to the COVID-19 business.  A number of cancer centric testing companies have emerged from the downdraft and appear to have promising futures, but cancer testing companies are hard to compare on an apples to apples basis.  This article will help classify the companies with a simple educational section followed by an evaluation of new and existing testing technologies along with their market potential.  

‍Tear Collection

Diagnostics companies have key differentiating features.  The most obvious feature is the method in which the samples are taken. One way to collect samples is to harvest the tears of a person.  The proteins to be analyzed accumulate over a 5 min period on the sterile sample collection strip as seen in this video. The sample must be kept cool during shipping to ensure there is no protein degradation.  

Blood Draw

Another way to screen for cancer involves a blood draw.  Typically a blood draw has to be part of a doctor's order which means the testing companies will have an inhouse doctor to write the script and direct the customer to a phlebotomist for the blood draw. The blood contains circulating tumor DNA (ctDNA) or what is known as “shed DNA” that is measured via a PCR test or with next-generation sequencing (NGS). The challenge with looking for shed DNA is that the amount in early disease is very low which means there is a good chance the levels won't be in the detectable range.  The other factor is that the shed rates vary from cancer to cancer and many may not be detable in the early stage of disease.  

Stool Sample

A common test for colon cancer involves a fecal test of a person's bowel movement. These tests are known as fecal immunochemical tests (FIT) and are looking for changes in shed cells as well as the presence of blood in the stool. One of the big risks is that the test may not be sensitive enough to detect it early enough.  Since people are averse to touching their own poop, tests like Cologuard were developed because they cover a 3 year period as opposed to the 1yr period of the FIT tests. While stool samples are considered non-invasive, the people that are currently taking would switch if there was a less invasive option with better results.

Cheek Swab

Most have seen the police movies where they take a cheek swab to solve a crime.  One company is using that collection method to harvest and ultimately measure mRNA.  A cheek swab is a test that can literally be completed in less than a minute and it is the most non-invasive cancer test on the market. 

The most well known at home cancer screening testing kit is called cologuard which tests for colon cancer.  The only issue is that you have to scoop your own poop and as easy as it is to do, people are turned off by it.  Cologuard has a sensitivity of 92% in colon cancer and a specificity (false positives) of 87%.  The test cannot definitively say if you have cancer, but it does alert you regarding your propensity to have it.  The science behind it is looking at 10 different tumor DNA markers associated with cancer like NDRG$, BMP3, and KRAS. They are also looking for blood that is shed in the stool.  

Exact Sciences (NASDAQ: EXAS) testing volume was hurt during the pandemic as healthcare resources were redirected to manage the pandemic.  This meant that routine cancer screenings fell by the wayside.  It took a couple of years for testing volumes to ramp back up.  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. 

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. 

Illumina 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 had a sensitivity of 88% and a false positive rate of .5% and a physician's prescription is required.  GRAL has approximately $1.0 billion in cash on its balance sheet but it is barely managing a market cap of $500 million because it's still hemorrhaging money. In 2023 they sold 180,000 cancer tests and did $93.1 million in sales and had a net loss of $1.4 billion.  The test kits cost around $1100 eachGRAL’s strategy to break the downtrend is to get FDA approval for the test.  

This is definitely a testing stock to avoid since it was sanctioned by the EU and had to pay fines of €432 million. In addition it retained the same management team that blew through $7+ billion to get a test capable of only $100 million annually. 

Labcorp Inc (NYSE : LH) recently won FDA approval of its solid tumor liquid biopsy test called PGDx elio plasma focus Dx which is capable of distinguishing between 33 cancer genes.  The liquid biopsy test detects down to single nucleotide variants, insertions, or deletions which means it is one of the most comprehensive liquid biopsy tests if used in conjunction with its tissue-based test which assesses for 505 genes.  For physicians this combination ability with capabilities on par with tissue-based kits currently sold for research use.  Investors need to understand this is not an early detection company but rather a post diagnosis company. 

Namida Labs is a privately held company that developed the first cancer screening test that utilizes tear collection. The test is looking for a specific signature of proteins related to breast cancer.  Their 20 patents cover the specific combinations of proteins that correlate to the type of cancer.  They took a multiomics approach to cancer detection in the sense that they are looking for evidence that the tumor is building its ecosystem which includes the formation of a blood supply, evidence of inflammation, and immunosuppression.  

The test kit is called Auria and has a 92% sensitivity and when combined with imaging can reach a sensitivity as high as 99%  It has a negative predictive value of 98%.  It is a lab developed test (LDT) and currently selling online directly to the consumer for $159. Some consumers can get it directly off their website but they are also on AMAZON, Walmart.com, and Target is expected soon.  The company started selling the kit a year ago and is fast approaching their first milestone of 5000 kits and plans on a new and improved version expected to launch in October.  Their biggest challenge was keeping the sample cool once taken to prevent the breakdown of proteins.  They had a recent breakthrough that enabled the preservation of proteins from 3 days to 7 days.  This means that the newest version of the test kit will be able to be shipped back via the postal system and without a coolant to preserve the sample integrity. The company was funded by 3 local family offices in the state of Arkansas and has plans to do a Series A round.  Their funding is expected to expand the number of indications, drive kit sales, and expand their business to business strategy to doctors groups, functional medicine doctors, and employers that have screening gaps in their healthcare plans.  

Ludwig Enterprises Inc. (OTCMKTS: LUDG) is a rare OTC find in the diagnostic screening sector that has  mRNA testing technology that could completely disrupt the top multibillion dollar diagnostic screening companies with their less invasive test. The CEO, Marvin S. Hausman MD said “mRNA is the language that interprets DNA and is the future of medicine.”  While this testing company has no existing revenues it is planning for an exciting product launch on October 15th during breast cancer awareness month that is likely to start priming the revenue stream.  The company has hired a seasoned veteran to launch its viral marketing campaign.  LUDG has a Lab Developed Test (LDT) that will initially be used to screen for breast cancer but the technology is such that it could easily be expanded into other inflammatory driven cancer diseases.  Their LDT are processed at a CLIA lab called the Genetics Institute of America.   CLIA labs don’t need the high bar of an FDA approval which facilitates much quicker product launches.

The company took a different approach than the other tests in the market with respect to cancer screening.  At the core of their technology is measuring messenger RNA (mRNA) at the nucleotide level.  They use Thermo Fisher Scientific Inc. (NYSE: TMO) equipment to measure the number of hits on 48 inflammatory gene biomarkers associated with cancers.  All chronic diseases, especially cancer, have an inflammatory component and what this test does is use AI machine learning algorithms to develop a personalized inflammatory index for the individual.  This index is compared to the relevant portion of their database that contains over 3200 samples of mRNA that was collected, from over 40 clinical centers, via an IRB approved study that has been active for the past 5 years. For breast cancer, there is a 97% dynamic screening signal or test sensitivity which suggests that a person should seek further evaluation and testing.  

When evaluating biotech stocks, the management team is one of 3 critical components, management, money, and medicine.  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).  He has more than 40 years experience developing successful biotech and pharmaceutical companies .  On the research front he was involved with clinical research and development at Bristol Myers Squibb (NYSE: BMY). The bottom line is that this CEO knows how to form strategic alliances and partnerships and has been on the cutting edge of medicine for most of his professional life and his current  mission to unlock the value of mRNA genetic screening technology.  

Upcoming Catalysts

• File for a Name Change
• Uplist to QB
• Launch Revelia - October Breast Cancer Month
• Publish Papers
• Cancer Meetings
• Expansion to Other Disease Indications (colon, bladder, skin)

Investment Summary

The cancer screening and testing business is a very large growing market estimated at $115 billion with a number of entrenched players. One of the largest pure plays in early cancer testing is EXAS. Their growth rate has returned and they are seeing the tail winds of their investment in blood testing. With their purchase of privately held Thrive they have made it very clear they are willing to buy the best technology and want to continue their expansion into cancer. This is one of the reasons why a pair trade with LUDG and a higher weighting in EXAS makes sense because LUDG is the disruptor and the exponential gains in LUDG would more than offset the potential loss of revenue from EXAS should that disruptive event happen. LUDG and their new at-home mRNA based test kits are going to market by October 15th. They appear to have the best in breed of the early cancer detection kits due to their novel way of creating a personal inflammatory score that correlates to breast cancer. LUDG’s Revealia breast cancer test is very much like the EXAS Cologuard test, but instead of testing for colon cancer it's testing for breast cancer and instead of taking poop they take a cheek swab. If LUDG’s market launch messaging is done properly, they are going to have ballooning sales, an uplisting, and get the attention of their peers. An experienced CEO at the helm lowers the overall risk of the investment but a pair trade of buying both EXAS and LUDG weighted 80/20 in favor of EXAS lowers the risk even more.

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Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. A guest contributor wrote this article and solely reflects his opinions.