Biodesix – A Lung Cancer Diagnostics Stock

One can’t help but wonder why the Americans are so worried about peanut allergies when 34 million of them use a product every day that slowly kills them. In the United States, cigarette smoking is linked to about 80% to 90% of lung cancer deaths. While we may not be able to pry someone’s cigarettes from their cold dead hands, we may be able to develop tools that help us better treat and diagnose lung cancer.

In our recent piece on A Liquid Biopsy Stock That’s Going Places, we talked about how invasive biopsies will soon be substituted with cancer blood tests, also called liquid biopsies. Being able to detect the presence of cancer using a simple blood draw will transform cancer care as we know it. Today, we’re going to talk about a life sciences company that’s focusing on liquid biopsies and diagnostics for lung cancer.

About Biodesix Stock

Founded in 2005, Denver startup Biodesix has taken in nearly $189 million in funding to apply a multitude of advanced technologies like artificial intelligence (AI) and genomics to build better diagnostics for lung cancer. Now, they’ve decided to offer shares to the public, so we dug through the S-1 to see what’s really going on. The company chose to go the traditional IPO route, and unlike most SPACs these days, has actual revenues which fall into two segments:

• Providing diagnostic testing in the clinical setting
• Providing biopharmaceutical companies with services

Up until the beginning of this year, Biodesix was focused on cancer, but now like many others, they’ve done the “pandemic pivot,” and decided to start selling COVID tests that are owned and developed by another company, Bio-Rad. More on that in a bit, but first let’s talk about the work Biodesix is doing in lung cancer detection and personalized treatments.

The Lung Cancer Opportunity

Despite all the technological advancements being made in life sciences, lung cancer is still the deadliest type of cancer in both men and women in the United States today. That’s because it’s often difficult to diagnose. The process usually starts when a lung nodule is identified during a medical imaging procedure.

Small masses of tissue in the lung – commonly referred to as lung nodules – are quite common with most being benign (harmless). Using only medical imagery, it’s hard to tell if a nodule is cancerous or benign, so surgeries or biopsies are often the next step. Biodesix estimates that 65% of biopsies and 35% of surgeries are conducted on benign nodules. Even worse, they estimate that 17% of patients who are simply assigned to surveillance using medical imaging actually have cancer. Biodesix provides two tests – what they believe are the only kind on the market – that can help determine whether or not a nodule is cancerous.

Biodesix believes they’re the only company offering two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. They acquired the Nodify XL2 test from Integrated Diagnostics in July 2018, and acquired the Nodify CDT from Oncimmune USA in October 2019. As of March 2020, both are offered as a single test called Nodify Lung.

In addition to Nodify Lung, Biodesix also offers other tests including GeneStrat and VeriStrat which are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to help guide treatment decisions. Their in-house AI platform, the Diagnostic Cortex, is used to discover diagnostic tests for clinical use after it munches through loads of big data including over 140,000 samples and data in their biobank, including tumor profiles and immune profiles.

One concern we have is the earlier mentioned pivot they’ve made into COVID testing which seems like a distraction from developing their lung cancer capabilities.

A Pandemic Pivot

It boggles the mind how everywhere you look supply chains are being disrupted, businesses are going bankrupt, and entire industries remain halted, yet the market roars on unscathed. Still, everyone acts surprised when companies make statments like this one Biodesix makes in their S-1 filing:

We expect that our costs to expand capacity for COVID-19 testing will increase for the remainder of 2020 and the first quarter of 2021 and we expect that the revenue that we generate from this expansion will comprise a significant portion of our revenue for these periods.

Credit: Biodesix S-1

If a significant portion of revenues will come from COVID-19 testing, what happens when the pandemic eventually – we hope – becomes a non-issue? Biodesix acknowledges this, stating that if the pandemic were to dissipate, that would impact revenues. It’s hard to see how this pandemic pivot does anything but delay their progress while competitors like Guardant Health (GH) and Illumina (ILMN) are in a much better position to weather the storm. (Illumina’s recent purchase of Grail means they’re also in the liquid biopsy business now.)

Guardant and Illumina

As of their last earnings call, Guardant had $1.1 billion on their balance sheet and no debt. Illumina has about $2.5 billion in cash net of debt. Both of these companies seem more than capable of weathering any potential crisis that may arise when the impacts of “the Rona” rear their ugly heads.

We’ve been long Illumina for a while now (presently one of our top-3 biggest positions), and are slowly accumulating a position in Guardant. That means we have plenty of exposure to the precision oncology theme. When we assess other companies that operate in this space, we want to understand what threat they pose to our current holdings. We’re not seeing much of a threat here from Biodesix, at least until the pandemic passes. That’s especially apparent when you consider how much progress Guardant has been making.

Just this past August, the FDA announced the first approval to combine two technologies – a liquid biopsy and a companion diagnostic – in one test in order to guide treatment decisions. Also referred to using the acronym “CDx,” a companion diagnostic scans the patient’s genetic profile for biomarkers that determine if they’re suited for a particular medicine. It appears to be the future of precision medicine, with more than half of all oncology trials using biomarker testing in 2018 versus 15% in 2000.

Guardant’s newly approved test provides information on multiple solid tumor biomarkers while also identifying certain biomarkers that show the patient will benefit from treatment with AstraZeneca’s TAGRISSO (osimertinib), an FDA-approved therapy for a form of metastatic lung cancer. While Biodesix showcases the services they provided to AstraZeneca during the development of osimertinib, Guardant is already selling an FDA-approved companion diagnostic for the drug.

In 2019, Guardant cleared $214 million in revenues up from $90 million the year prior. Contrast this to Biodesix’s 2019 revenues of $24.5 million, up from $20.5 million the year prior. The growth just isn’t there yet for Biodesix, and now they’re pivoting towards a pandemic that’s less than a year old. It appears to be a distraction for a company that operates in a very competitive space with Blue Cross showing at least thirteen different providers of liquid biopsies now.

Conclusion

We’re risk-averse investors during the best of times, and our strategy right now is to use our cash stockpile to very slowly and cautiously accumulate tech companies we want to be holding. (The majority of our dollars are in a recession-proof dividend growth strategy.) When evaluating new tech companies for investment potential, we look for leaders with strong revenue growth, solid balance sheets, and business models that don’t throw off red flags.

Biodesix has done a great job convincing us of the opportunity in lung cancer diagnostics. We’re just not convinced they’re in a good position to capitalize on the opportunity right now, while others are. If the IPO goes through as planned, the company will trade under the ticker BDSX.

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