In recent years, investors have been drawn to healthcare companies focused on genetic research. This field has transformed science and medicine, and its innovations have made some investors wealthy from its successes.
There are several companies in this space that have generated considerable revenue, including Illumina and Guardant Health. Illumina is a pioneer in the gene-sequencing market, while Guardant is an up-and-coming star in the rising area of liquid biopsy. Which of these healthcare stocks is a better buy for the long run?
Image source: Getty Images.
The case for Illumina
Illumina has always been considered a leader in the gene-sequencing market. It maintains over 70% of the sequencing market and specializes in providing instruments and tools to a variety of customers such as academic institutions and government, pharmaceutical, and biotechnology companies across the world.
Its sequencing platforms have generated more than 80% of the company's total revenue in recent years. Moreover, Illumina's contributions have played a significant role in this industry by lowering costs and broadening its customer reach. Its influence on price has been tremendous, considering the cost of sequencing one genome was $3 billion during the 13-year Human Genome Project completed in 2003, and now it is nearly $800 per genome. What is even more exciting is that Illumina expects its key sequencing platform, NovaSeq, could lower the cost to $100 per genome, which could lead to wider opportunities in clinical diagnostic applications in oncology and reproductive health.
Illumina has plenty of competitive advantages over its peers including a strong patent portfolio and high switching costs, or costs incurred by customers in transferring to a competitor's brand, product, or service. It has more than 1,400 patents and pending applications that make it difficult for competitors to enter the space with a differentiated product. Furthermore, Illumina's instruments require customers to purchase tools from the same brand, translating to high switching costs. Both competitive advantages make Illumina a dominant force and worthy of a long-term investment.
The company's recent first-quarter results show that its business was not immune to the COVID-19 pandemic. Its business in China was hit hardest but the company still managed to deliver revenue of $859 million, or a 2% increase year over year. It posted non-GAAP earnings per share (EPS) of $1.64 beating the consensus estimates by $0.38. Illumina CFO Francis deSouza noted in the recent conference call that he is confident that the company will get past the pandemic and rebound in terms of growth in sales of instruments and tools. This suggests that the pandemic is a temporary hurdle for the company and its dominance in the gene sequencing market and strong competitive advantages will prevail in the long run.
The case for Guardant Health
Guardant Health's focus on precision oncology using liquid biopsies is novel in the space of cancer detection. The traditional methods of detection occur after the cancer is suspected and involves the use of invasive procedures such as surgery to extract a sample, while liquid biopsies are simple blood tests that have the potential to detect cancer at earlier stages. Liquid biopsies have the potential to improve clinical outcomes, lower healthcare costs, and enable biopharma companies to advance new therapies. Management believes that there is an estimated market opportunity of over $50 billion in the U.S.
Guardant currently offers two products, Guardant360 and GuardantOMNI, for advanced stage cancer. Guardant360 has several different applications. Clinicians use it to inform the selection of cancer therapy for their patients, whereas biopharmaceutical companies use it to accelerate drug development and commercialize products.
GuardantOMNI differs from Guardant360 in that biopharma companies use it for comprehensive genomic profiling in both immuno-oncology and targeted therapy areas. Both products are in the process of development as a companion diagnostic (CDx) for use in non-small cell lung cancer (NSCLC). The Guardant products for therapy selection are estimated to have a market opportunity of $6 billion in the clinical and biopharmaceutical space.
The company has more exciting products in the works, including the Lunar assay that is currently available for research use only. There are two Lunar programs: Lunar-1 and Lunar-2. Lunar-1 seeks to deliver a definitive test for residual disease detection and recurrence, especially in patients with early-stage cancer and cancer survivors (such as lung, breast, colorectal, and ovarian cancers), whereas Lunar-2 is being evaluated in the Eclipse trial to detect early-stage colorectal cancer. Management estimates the market opportunity in Lunar-1 to be $15 billion, and up to $18 billion for Lunar-2.
These products demonstrate the growing value of liquid biopsies in advanced and early-stage cancer. Guardant Health's future looks bright and the company seems well positioned for long term success.
Head to head: Financials and valuation
|
Name |
Market Cap |
Quarterly Revenue |
Net Income (Loss) |
Cash |
Price to Sales Ratio |
|---|---|---|---|---|---|
|
Illumina (ILMN -1.28%) |
$54.2 billion |
$859 million |
$243 million |
$3.3 billion |
15.18 |
|
Guardant Health (GH 4.38%) |
$7.9 billion |
$67.5 million |
($27.7 million) |
$758.3 million |
30.07 |
Data Sources: Yahoo Finance, Illumina, Guardant Health.
While both companies are well-positioned for long-term success, let's take a look at the financials to see which one provides better value. Both companies have plenty of cash to operate, but Illumina commands a market valuation of $54.2 billion, nearly seven times the $7.9 billion market cap of Guardant Health. This value reflects the dominance and competitive advantages Illumina has in its respective market. Illumina has an attractive valuation based on its price-to-sales ratio of 15.18, which suggests the stock could run higher in the long term.
Image source: YCharts.
Which is the better buy?
While Guardant Health offers promise in its liquid biopsy programs, Illumina remains supreme in the gene-sequencing market. The companies' financial situations are similar, but Illumina has a larger growth opportunity once the COVID-19 impact settles. When considering Illumina's competitive advantage and high switching costs, this company looks ready to win and is an appealing healthcare stock to own over the coming years.
