Thanks to a handful of initial public offerings (IPOs) in the last year, individual investors can now own liquid biopsy stocks. Thanks to awful performance last month, most of them are trading at their lowest levels in months -- or ever.
Shares of Adaptive Biotechnologies (NASDAQ:ADPT) fell over 39% last month, according to data provided by S&P Global Market Intelligence. That was followed by a decline of 27.1% for shares of Guardant Health (NASDAQ:GH) and a tumble of 24.2% for shares of Personalis (NASDAQ:PSNL).
Adaptive Biotechnologies and Personalis, both of which went public in June, are trading at all-time lows. Guardant Health is trading at its lowest level since early 2019. The stocks appear to have simply cooled off following unchecked enthusiasm for the industry as a whole. What should investors make of the recent slides?
By combining high throughput labs capable of sequencing thousands of samples per week (raw data), dozens of PhDs (the context providers), and the latest machine learning algorithms (able to combine context and data at a massive scale), a growing number of companies are trying to corral the complexity of biology into valuable products and services. It's an ambitious goal, but investors are drawn to the potential, nonetheless.
These "omics" approaches -- genomics (data from DNA), transcriptomics (data from RNA), and proteomics (data from proteins) -- promise to diagnose diseases and cancers at earlier stages when they're easier and cheaper to treat, discover new drug targets or candidates, or personalize disease treatment based on the individual patient and the point in time in the treatment regimen. Wall Street has been pretty excited about the potential.
For instance, Guardant Health debuted at a market cap of less than $3 billion in 2018. Swift growth and an intentional growth strategy for its liquid biopsy portfolio catapulted the business to a market valuation of over $9 billion in August. While the growth has been impressive and the potential is enormous, investors nudged its market cap to $6 billion last month after deciding things may have gotten a little out of hand. The market cap still values the business at roughly 30 times expected full-year 2019 sales.
Despite the frothy valuation, investors with a long-term mindset could find Guardant Health an attractive investment at current levels. The business ended June with $823 million in cash and with the expectation it will achieve full-year 2019 revenue of up to $190 million. The latter would represent a year-over-year growth rate of 110%, demonstrating the value being delivered by its initial products (which target the smallest markets, relative to patient population, of any products in its pipeline).
Two peers hoped to ride the wave of excitement for liquid biopsy stocks by conducting their IPOs this summer but they've had very different experiences. The timing initially paid off for Adaptive Biotechnologies, which boasts collaborations with Microsoft, Genentech (part of Roche), and Illumina. The company's market cap peaked at over $6 billion in early September but has since tumbled to $3.9 billion -- well below the IPO price -- as investors have second thoughts over a money-losing company valued at over 50 times sales.
Meanwhile, shares of Personalis have been mired in a near-continuous slide since the company's IPO. It debuted at a more reasonable market cap than its peers -- "only" $900 million -- and doesn't have the same concerns from trading at a premium valuation, but the business is a little too dependent on one customer and hasn't gained much traction with biopharmaceutical companies yet. Nonetheless, if near-term commercialization efforts show signs of success, then investors might consider Personalis a liquid biopsy stock to buy.
A stock can perform well or poorly after an IPO for any number of complicated reasons ranging from institutional ownership levels to lock-up periods for insider stock sales. Throw in a healthy dose of hype from start-ups promising to disrupt the status quo, and individual investors have their work cut out for them.
While liquid biopsy stocks are likely to be accompanied by volatility for the foreseeable future, investors with a long-term mindset who stick to fundamentals -- healthy revenue growth, market traction and insurance coverage for products, and eventually operating profits -- should be better able to pick out the signal from the noise.