Even before the COVID-19 outbreak was declared a pandemic, problems with testing plagued this country's response to the coronavirus.

During the early stages of the crisis, shortages of the sole federally approved diagnostic (which also had technical issues), tight rules restricting who qualified to be tested, and the lack of a centralized federal strategy all combined to mask the rapidly widening scale of the U.S. outbreak. It took almost two months before the Food and Drug Administration and the Centers for Disease Control were able to remedy some of those problems and private COVID-19 tests began to reach the American public.  

From there, several companies helped lead the charge to make tests widely available, and their stocks skyrocketed as a result. Shares of OPKO Health (NASDAQ:OPK) and Quidel (NASDAQ:QDEL) benefited the most, up 217 % and 161% year to date, respectively. Shares of Hologic (NASDAQ:HOLX), along with diagnostics leaders Quest Diagnostics (NYSE:DGX) and LabCorp (NYSE:LH) are also up in 2020, though more modestly.

Against that backdrop comes this news: Last week, the FDA issued an emergency use authorization for Lucira Health's at-home rapid test for COVID-19. The small, privately held biotech's new product may raise a question for investors in this niche: Could this more convenient tool eat into the booming sales of the incumbents?

A person in a car getting a swab COVID test from someone in protective equipment.

Image source: Getty Images

A whole lot of coronavirus testing to go around

As of the end of November, more than 190 million COVID-19 tests had been conducted in the U.S. During Quidel's third-quarter earnings call, its CEO estimated the potential demand at 685 million tests per year. And in a recent investor presentation, Quidel laid out some market projections for the next few years. Globally, polymerase chain reaction (PCR) testing volume is expected to rise from 1.28 billion in 2019 to almost 4 billion in 2020, then decline moderately in subsequent years.

OPKO and LabCorp have reported conducting 6.75 million and 19 million PCR COVID-19 tests, respectively, as of their third-quarter earnings calls in late October. Quest reported that it had performed 22 million tests to date, but did not break out PCR tests as a separate category.

On the manufacturing side, Hologic produced 25 million COVID tests in the fiscal quarter that ended Sept. 30, and Quidel -- while it didn't provide its 2020 numbers -- said it wants to produce 50 million per month in 2021.

Those rising sales figures are already being reflected in the companies' valuations. But their price-to-sales (P/S) ratios have also increased, signaling the market's expectation that demand will remain high.

OPK Chart

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OPK PS Ratio Chart

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Other notable diagnostics to gain approval include Sherlock Biosciences' offering, the first FDA-approved coronavirus test that uses CRISPR technology. And the federal government began distributing Abbott Laboratories' (NYSE:ABT) rapid-result BinaxNOW to states in late September, though it has been the subject of some controversy over questions about its false-positive rate.  

New players on the field

Other, more convenient diagnostic tools are also becoming available. Cue Health's point-of-care molecular tests were used to keep tabs on the NBA's COVID exposures within its "bubble." Now, those tests and the hand-held, battery-operated readers that process them are being shipped to five states in a wider pilot program. As with the BinaxNOW, a trained clinician must conduct the test, but it provides results in about 20 minutes. Earlier this year, the company got a $481 million contract to provide at least 6 million tests to the Department of Defense. 

And today, as mentioned above, we can add the offering of Lucira Health. Getting the test requires a prescription, but with the rising adoption of telehealth, that could be less of an obstacle, even for those who are loath to visit a healthcare provider. It provides results in under 30 minutes and will be available nationally by early spring 2021 for under $50. Current at-home tests are more than twice as expensive, and require patients to mail their sample to a lab and wait several days for a result. Lucira's product uses loop-mediated isothermal amplification to reproduce the viral DNA until it's detectable. And while that method is viewed as producing results that are marginally less accurate than the now-common PCR diagnostics, it could still prove a useful tool in the battle against COVID. So far, Lucira's test is only available in parts of California and Florida, and the company hasn't discussed its production capacity. As of October, there were already nine companies selling at-home tests, although none are as convenient as Lucira's.

What will it mean for investors?

The market-share and sales math in the COVID-19 testing realm is complicated. On the one hand, demand may level out as vaccines drive the infection rate down. But our efforts to return to normal life may have the opposite effect. As people begin to travel, attend large events, and hold family gatherings again, there may be a surge in demand among cautious attendees -- even those who have been vaccinated. I can also envision the Biden administration subsidizing such tests as part of its effort to stem the virus's spread. Those advising the president-elect have publicly discussed the value of increasing access to cheap, rapid tests, which could encourage more asymptomatic (but potentially infected) people to use them.

Investors in the big coronavirus testing companies should keep a close eye on the market for at-home options like Lucira's. Given that the demand for testing in some areas of the U.S. still outstrips the existing capacity, I think we are at least a year away from the combination of inconvenience and vaccinations putting a dent in the growth trajectories of the current leaders. However, at some point, we'll be able to walk into a drug store and grab a cheap COVID-19 test off the shelf. When that happens, investors will want to make sure the new growth trajectories of the medical testing companies they own can support their valuations.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.