Grail – A Pure-Play Stock For Cancer Blood Testing

Wasn’t even 48 hours ago that we were commenting on how one of Illumina’s big venture bets – Grail – didn’t seem to be doing much. And here we are today, poring over their S-1 filing as the Illumina-backed venture has just filed for an Initial Public Offering (IPO). Since we’re long Guardant (GH) given their leadership position in what’s looking to be a $54 billion potential market for cancer blood testing, we want to see what threat Grail poses to Guardant.

About Grail

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Grail was formed within Illumina in 2015. In 2016, they received investments from third parties and began operating as a stand-alone company. The San Francisco startup ended up taking in $2 billion in disclosed funding to further their mission to detect cancer early, when it can be cured. Investors include Jeff Bezos, Sequoia, Johnson & Johnson, Bill Gates, and Illumina, the largest shareholder in Grail at the moment with 98,310,709 shares or 14.6% of the company.

The case for early screening is simple and compelling. Most cancers are diagnosed too late, predominantly because we lack recommended screening tests for most types of cancers, those which are responsible for 71% of cancer deaths.

Credit: Grail S-1

Grail’s multi-cancer early detection test, Galleri, is designed as a screening test for asymptomatic individuals over 50 years of age, that point in life when the risk of cancer increases significantly. Grail anticipates Galleri to become commercially available in 2021 as a laboratory developed test (LDT). They then plan to submit a premarket approval application (PMA) of a subsequent version of Galleri in as early as 2023.

While both Guardant and Foundation Medicine (now part of Roche) received approvals for their liquid biopsy PMA applications last month, it’s important to clarify the differences between a liquid biopsy and a cancer blood test.

  • For patients with cancer, a liquid biopsy provides an alternative to a traditional biopsy.
  • When you want to screen asymptomatic patients for cancer, you would use a cancer blood test.

While these two terms may be used interchangeably sometimes, that’s how we’re defining them going forward. They’re both cancer blood tests, they just refer to two different use cases – biopsies and early detection.

About Galleri

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Grail’s early detection blood test, Galleri, has demonstrated in clinical studies the ability to detect more than 50 types of cancer, across all stages, and localize the cancer signal with a high degree of accuracy, from a single blood draw. Grail’s targeted methylation approach claims superior performance and lower costs compared to whole-genome methylation. Says the company:

We compared the performance of three different NGS approaches—mutations, chromosomal alterations and methylation patterns—in head-to-head studies. While all of the markers were capable of detecting cancer, we found that methylation profiling yielded significantly better results for cancer detection.

Credit: Grail S-1 Filing

“It also helps solve a core problem in detecting cancer early in asymptomatic individuals, which is the low level of cancer signal circulating in the blood,” says the company. While Grail has been perfecting their test, they’ve also managed to accumulate some very valuable big data.

Oncology and Big Data

Grail is a pre-revenue company, something we’re not overly keen on. That’s because traction is a demonstration of the critically important “product-market-fit” which shows you’ve built what your customers need and are capable of selling it at a price point that’s attractive to buyer and seller. What Grail has been spending their funding on is lots of pre-work to make sure they’re taking the right approach.

Grail’s four foundational studies collectively enrolled around 115,000 participants which the company believes are the largest linked datasets of genomic and clinical data in the cancer field.

Credit: Grail S-1 Filing

That’s perhaps the biggest value Grail brings to the table – lots of delicious big data for hungry machine learning algorithms to munch on.

Grail vs Guardant

Grail estimates that a 1% reduction in cancer mortality in the United States would be worth $695 billion in today’s dollars from increased quality of life, productivity, and survival. Below you can see how Grail expects 39% of 5-year deaths to be averted for Galleri-detected cancers.

Credit: Grail S-1

These are just some of the interesting insights presented in the Grail S-1 that makes us all the more excited about our investment in Guardant. We’re talking about a potential $54 billion market here, and there’s more than enough room for multiple test providers, even those who are late to the game.

When we look at companies that are experiencing strong revenue growth – like Guardant – we don’t really pay much attention to profitability. That comes later. If your product is selling like hotcakes, it’s much easier to raise funding. However, if you’re doing nothing but burning cash, that makes us nervous.

A rough estimation of burn rate for Grail is about $250 million a year and they have $685 million in cash on hand plus the $100 million they plan to raise in the IPO. The company says their cash and IPO proceeds will get them through at least twelve months, but let’s say they have three years of runway if all that R&D spend shifts to marketing spend and they can keep a consistent burn rate. Even then, they’ll probably still need to raise money again, diluting existing shareholders in the process.

Then there’s Guardant, a company that’s burning about $80 million a year with $522 million in cash on hand. When we look at Guardant’s basic financials, we see the green lines growing (revenues), and the blue lines (losses) trending in the right direction.

Guardant’s basic financials – Credit: Yahoo Finance

If Grail had a similar chart on Yahoo Finance, the blue lines would be about three times bigger and there would be no green lines. In the simplest of terms, we like growing green lines and shrinking blue lines – eventually. Grail has no green lines – growing or otherwise – so we’re sticking with Guardant. It’s a simple analysis, but that’s because we like to adhere to the KISS principle whenever possible. We’re also MBAs, which means we’re not really capable of doing much more than simple analysis anyways.

Conclusion

A simple analysis results in a simple conclusion. Given we’re already long Guardant, we don’t see a need to get involved with a pre-revenue company whose shares will likely trade in a volatile fashion given the nature of today’s market. After looking at Grail’s S-1 filing, we’re even more convinced that early cancer detection is a disruptive technology that we want to have exposure to, and Guardant fits the bill.

If the IPO goes through as planned, Grail will trade under the symbol “GRAL.”

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