The U.S. stock market reported phenomenal gains in November 2020 -- the S&P 500 rose 10% over the month. While COVID-19 vaccine players have become the stars of the market, once-famous COVID-19 testing stocks have tumbled. But the belief that the rollout of effective COVID-19 vaccines will have an immediate impact on disease prevalence and the need for COVID-19 testing is far from realistic. According to Serum Institute of India, the largest vaccine producer in the world by volume, there will not be enough COVID-19 vaccines for everyone in the world until the end of 2024. In addition to challenges related to rapid ramp-up in vaccine production, there are also difficulties associated with storage and distribution of these vaccines.
COVID-19 diagnostic tests will continue to be relevant for many more years to come. In fact, President-elect Joe Biden's plan to tackle COVID-19 includes ramping up testing and tracing as one of his seven key initiatives.
1. Quidel Corporation
On Nov. 9, Quidel's share price closed down by a massive 28% to $203.70, in reaction to Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) announcing solid interim efficacy results for their coronavirus vaccine candidate, BNT162b2.
In the third quarter, the company's revenue was up 276% year over year to $476.1 million. Its COVID-19 antigen test, Sofia SARS Antigen, accounted for $317.9 million of that revenue. An antigen test is a relatively fast and cheap way to detect viral proteins from a patient's respiratory sample in the early or acute stage of the infection. Quidel's adjusted net income was up 737% to $252 million. The company ended the third quarter with $77.6 million in cash and $11.2 million in total debt, and generated cash flow of $70.5 million from operations in the third quarter.
While multiple COVID-19 vaccines are expected to enter the market in 2021, Quidel expects demand for COVID-19 testing to remain pretty strong. CEO Douglas Bryant has highlighted the possibility of the COVID-19 virus mutating into a new strain, considering that all vaccine candidates are targeting the same spike protein present on the external membrane of the virus. Moreover, antigen-based tests will also be required to assess the time duration for which a vaccine protects individuals, a necessary piece of information to develop a broad public health response to the pandemic.
Quidel also expects strong COVID-19 testing demand from travel and entertainment businesses such as airports and cruises as well as from at-home testing markets in coming quarters.
Quidel's COVID-19 testing portfolio has created exceptional brand awareness for the company. The company expects to end fiscal 2020 with an installed base of 75,000 Sofia instruments, a market-leading point-of-care platform. A point-of-care diagnostic system reduces the waiting time for test results to minutes, a significant improvement considering that the same results may require waiting for hours using laboratory testing systems.
The company also expects the number of installed Sofia systems to double in the next two years, through penetration in non-traditional markets. A larger number of active Sofia systems across the market will prove useful for commercializing other non-COVID-19 respiratory tests as well as a new menu of tests currently under development including a gastrointestinal test portfolio, a Lyme disease test, and a cost-effective Strep A test.
The company also expects its Savanna molecular diagnostic platform, which is under development and includes instruments plus an extensive infectious disease test menu, to emerge as a flagship product in the next few years. Another in-pipeline product, the point-of-care TriageTrue High Sensitivity Troponin assay, can help accelerate treatment of heart attack patients. Quidel is projecting a 18% compound annual growth rate (CAGR) for its non-COVID-19 business from 2019 to 2024 -- that's a very healthy long-term revenue growth rate.
Quidel is trading at price-to-sales (P/S) multiple of eight. Considering that, according to New York University, the average healthcare product stock is trading at a P/S ratio of 5.43, Quidel isn't much more expensive -- especially considering its revenue opportunities in 2021 and beyond. The pullback in share prices has created an attractive opportunity for healthcare investors with average risk appetite to buy this leading medical point-of-care diagnostic player at a very reasonable price.
2. Fulgent Genetics
On Nov. 9, genetic-testing specialist stock Fulgent Genetics also saw an irrational share price decline of over 22%. While the stock has erased these losses and has gained a massive 280% so far this year, there is still upside potential left in this small-cap stock.
The COVID-19 pandemic has been nothing short of a boon for Fulgent Genetics. The company's reverse transcription-polymerase chain reaction (RT-PCR) tests for COVID-19, which are based on low-cost genetic technology, have been very well received. Technology platforms such as Fulgent Enterprise and Fulgent Community have further helped differentiate the company in the crowded COVID-19 testing landscape.
The success of the COVID-19 offerings was reflected in the company's third-quarter revenue of $101.7 million, which was up 883% year over year. Even the non-COVID-19 business has managed to report a sequential revenue jump of 57% in the third quarter. Billable test volumes rose by 5,000% over the year-ago period, and surpassed the 1 million mark in the third quarter. The company ended the third quarter with $104 million cash and zero debt on its balance sheet.
Fulgent Genetics has also revised its fiscal 2020 revenue guidance from $135 million to $235 million on Nov. 9 and then to $300 million on Nov. 23, thanks to the ever-increasing demand for its COVID-19 tests.
The success of Fulgent Genetics' COVID-19 business has created brand awareness for the company, which is helping boost volumes of its non-COVID-19 genetic tests. Once mostly dependent on cash-paying customers, Fulgent Genetics filed 590,000 insurance claims in the third quarter, a sequential rise of 9,000%. This increase in visibility with payers will play a pivotal role in Fulgent Genetics' transition as an in-network provider, further increasing adoption of Fulgent Genetics' products. Finally, the company managed to get the ball rolling for its Picture Genetics at-home testing service, especially since late June, after the company added an at-home COVID-19 test service to its platform.
Fulgent Genetics is trading at P/S multiple of just 6.9. Despite its significant growth prospects, the stock remains relatively cheap and should prove to be an attractive pick for healthcare investors -- especially as long as COVID-19 poses a threat worldwide.