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The Supreme Court of the United States struck down Biden’s vaccine employer mandate, landing a major blow to the Biden administration’s vaccination-focused strategy in dealing with the pandemic. Now, with Omicron cases off the charts and vaccinations failing to protect people from infection, the medical and political communities are putting a much larger emphasis on antiviral pills as a means to treat COVID-19.
It's pretty clear the virus cannot be vaccinated out of existence. Just like the annual flu, vaccination can help but it doesn’t prevent people from being sickened by the virus. The second line of defense are the robust antivirals, similar to Roche’s (RHHBY) Tamiflu which was a blockbuster in fighting serious seasonal influenza. The main drug companies with antivirals out are Pfizer (PFE) and Merck (MRK).
But these companies, as well as society, have a big problem facing them. The COVID-19 pills need to be dispensed immediately after patients are actually diagnosed with COVID-19. In order to get Paxlovid (Pfizer) or Molnupiravir (Merck) prescribed, the patient needs to test positive for COVID-19. Unfortunately for the sick, testing had been sidelined ever since health officials figured everyone would be fully protected with the vaccines. At the time, getting everyone vaccinated was a much higher priority than testing, but in hindsight, it's obvious that turned out to be a shortsighted - or at least, overly optimistic - move as Omicron has caused breakthrough infections and also hospitalizations to soar.
Therefore, astute investors will anticipate the huge demand for COVID-19 testing and identify the companies that will benefit most from the impending testing surge. Up until recently, the Biden administration has failed to follow through in expanding testing capacity but now these tests will be required so that treatments can be administered. And COVID-19 testing stocks could be set up for a major boon.
Testing Required Before Treatment
There are a few key reasons tests are so important as they are required before treatments can be handed out. Without any therapeutics available, few saw the point of reporting their test results. Identifying who was likely to be infected helped curb community spread.
Pfizer was having a hard time producing its initial supply of Paxlovid, so it decided to invest $545 million to expand manufacturing in France. Looking beyond Pfizer’s initial lack of availability are safety concerns with Mercks’ pill. So with both pills, testing has to be done to determine who really needs the pills. Only about 180,000 courses were manufactured by the end of 2021. The company intends to ramp this up to 120 million courses in due time. SincePaxlovid use is considered to be risky with other common medications such as statins and blood thinners, it’s important to screen for the COVID first. According to some industry chemists, the manufacturing is expected to be difficult to scale even with Pfizer’s projections because the reagents required are so difficult to source.
Second, when looking at the Merck pill, there are also supply constraints initially. However, as opposed to moderate safety concerns with the Paxlovid, molnupiravir has been flagged for “major safety concerns”. France even canceled an order of it after it became clear Paxlovid was the better drug. According to the Economic Times,
“Molnupiravir has major safety concerns including teratogenicity, mutagenicity, muscle and bone damage. If this drug is given, contraception must be done for three months as the child may have problems.”
It’s not hard to see how avoiding the risk of pregnancy for an entire three months is not a reasonable or easy-to-control issue for many people. However, there are also issues with spare doses potentially being left around the household—and then given to children—unknowingly putting them at risk of a wide range of serious problems related to mutagenicity (the ability to cause cancer) and bone growth, which is explained in the Economic Times:
“experts are concerned about issues regarding pregnancy, lactation, children's soft tissue injury, reproductive age group, history of infection and vaccination. "Whatever benefit is there was on these 1,433 patients and they were unvaccinated individuals. There was only 3% reduction from mild to moderate disease. As of now, where the current recommendations stand is that it is not part of the treatment”
Merck completed mutagenicity studies using molnupiravir, but concern remains. Typically these studies are needed to be cleared for safetyl, but according to a former Harvard Professor and Virologist, it still has a strong chance of being unsafe:
“The study on mutagenicity of the molnupiravir metabolite in the Journal of Infectious Diseases earlier this year also tested favipirivir. The study found that the molnupiravir metabolite, NHC, was a far more potent mutagen than favipirivir (FAV) (see Figure 1), which is a drug that has widely known issues related to teratogenicity and links to birth defects.
[Appili Therapeutics (OTCMKTS: APLIF) ran a phase 3 trial in mild-to-moderate COVID-19 which recently failed to meet its endpoints.]
Graph showing genotixicity of molnupiravir metabolite, NHC.
Figure 1. The left side of the panel shows the genotixicity of molnupiravir metabolite, NHC, in ... [+] SHUNTAI ET AL., THE JOURNAL OF INFECTIOUS DISEASES, VOLUME 224, ISSUE 3, 1 AUGUST 2021, PAGES 415–419
Because of this, favipiravir has not been approved in the US or the UK, and is only approved in Japan under the strictest of regulations and for the most severe form of influenza, for which no other drugs exist.”
This simply means that these pills cannot be handed out like candy and must be prescribed carefully to those who need it, with a positive COVID-19 test.
With antivirals now on the market and expected to reach $20 billion in sales, an even greater amount of testing will need to be done for every prescribed dose.
Assuming $10 billion in sales, and $500 per one-week regimen (which is what the U.S. government is paying for Paxlovid), this means analysts are forecasting 40 million prescriptions annually. And surely not every COVID-19 test will result in a prescription. The reasonable assumption to make is that many positive tests will result in self/home quarantine and only a fraction will result in treatment, at least initially. These numbers are mirrored in the statistics. According to Statista, the USA has performed over 800 million COVID-19 tests since the pandemic started, as of January 3rd, 2022. That is 800 million tests that people took knowing that there was no convenient treatment even if they did test positive. These tests were for information purposes for quarantine only and had little-to-no treatment utility because there was no early antiviral treatment available once patients found out they were COVID-19 positive.
The only actionable insights before these pills were approved were home remedies like taking Vitamin D, and quarantine. Now, people at risk can take the 89% effective Pfizer pill (Paxlovid) or the less effective Merck pill (molnupiravir)… if they can get their hands on it. What many people aren’t aware of is that there is a botanical extract nutraceutical that people can buy that acts on the same biological target (3CL protease) as the highly effective Paxlovid. That nutraceutical is made by Todos Medical (OTCMKTS: TOMDF), a company that is advancing testing and clinical treatments for COVID-19, and it can be bought online via amazon.com (NASDAQ: AMZN) or even on the company’s Shopify (NASDAQ: SHOP) site, here. Unlike Paxlovid and molnupiravir, consumers can buy now it as a prophylactic for immune support or for immune support after one has already been infected. Perhaps Paxlovid and molnupiravir will be available as prophylactics later.
But which companies will benefit from the necessary, massive amount of testing?
Testing Companies to Benefit from Testing Ramp-up
As COVID-19 testing demand soars and labs limit access, There are different types of tests patients can take to help them determine whether or not they have COVID, and it's important to know the difference between them to understand which ones are important in which scenarios. Most COVID-19 tests fall into three categories: RT-PCR/molecular tests, antigen tests, and antibody tests. Antigen tests test for a little piece of the virus and are used as rapid tests; however, they can be inaccurate. RT-PCR (reverse transcriptase-polymerase chain reaction, aka PCR) tests amplify the viral nucleic acids (RNA) of the virus to detect the virus and are considered more accurate than antigen tests. However, they take longer to complete. Lastly, antibody tests are used to tell if one has been infected in the past. This test measures your immune response antibodies and doesn’t give you a good idea of whether you’re infectious or not.
Fast coronavirus tests: what they can and can’t do - note that this graphic was created in the early days of the pandemic, mid-2020.
To test for active infection so that a person can have an oral antiviral treatment option, antibody tests will be useless. So investors will want to look at companies with tests that inform active infection—mainly antigen tests or PCR tests. Though as mentioned before, antigens tests can be unreliable. For instance, Abbott Laboratory’s (NYSE: ABT) PanBio antigen test was found to have about a 50% false negative rate in the pediatric population. This will vary from test to test but the takeaway is that this can be problematic. In fact, a recent study showed early infection antigen testing for Omicron resulted in 28/30 false negatives. Despite that, Abbott shipped more than a billion tests since the beginning of the pandemic. With that, they raked in billions of dollars of COVID-19 testing sales in the last quarter alone. It is unclear how much of a problem Omicron will pose for Abbott, which has a $237 billion market cap and provides nine COVID-19 tests, including PCR, antigen, and antibody tests.
Investors might want to be wary of antigen testing companies on the back of this shocking data—especially those companies with higher exposure to COVID-19 antigen tests.
This is bad news for antigen test providers such as Quidel (NASDAQ: QDEL), which has a rapid diagnostic testing provider generating revenues of $510 million per quarter. They are best known in the market for their QuickVue at-home antigen test. The company stated that its antigen test is accurate for Omicron. Antigens are subject to errors in mutations, but the inability to be detected early is a whole different issue. The company’s market cap is $5.6 billion.
Lumira DX (NASDAQ: LMDX) is a $1.82 billion company backed by Bill & Melina Gates that provides a Point of Care (POC) diagnostic, including D-dimer, antigen, and antibody tests that use nasal swabs and a proprietary compact reader to quickly process samples and distribute results in a matter of minutes. This is really a great device for on-the-go, but yet again if the antigen test results are so inaccurate that the test is useless, it doesn’t matter how convenient or fast the POC diagnostic is. Lumira reported $109.1 million in revenue in the third quarter, similar to results for the past few quarters.
There is one new kind of test intended for the detection of early infection and that is a 3CL protease test called TolloTest. The reason many are so excited about the TolloTest provided by Todos Medical (OTCMKTS: TOMDF), which measures the 3CL protease enzyme (which can be found during viral replication in concentrations 70x the number of virions) is that the test was shown to be 100% accurate in the outpatient setting and also extremely accurate in the hospitalized setting, demonstrating utility across patient populations. So the TolloTest seems much better at identifying more/all patients with COVID-19 with fewer false negatives (i.e. a person with COVID-19 that would accidentally test negative) in the early infection time window. For rapid testing, TolloTest and Todos Medical might be the way to go, but they still face an uphill battle trying to get it approved by unseating the incumbent PCR.
There’s also likely going to need to be confirmatory PCR tests. There is a range of COVID-19 PCR providers.
Among the largest in the PCR group is Labcorp (NYSE: LH) which has a nasal swab self-collection RT-PCR kit. The kit can be sent through FedEx to and from the lab, our through Walgreens locations in 32 states in the U.S. Labcorp is a larger company so it also has antibody tests and genomic testing to determine the variant. The company can handle 275,000 molecular tests daily, and its quarterly testing revenue is over $2.5 billion. They also have other tests in other markets such as oncology and are a major part of much of the testing done in clinical trials. However, with a market cap of $27 billion so it's not clear how much extra COVID-19 testing could move the needle. However, with the Biden administration talking about purchasing 500 million tests, this could represent some significant revenue even for a big company like Labcorp.
Another diversified COVID-19 testing company is Applied DNA Sciences (NASDAQ: APDN). They perform surveillance testing and they have made diagnostic kits with EUA approval. They are also using their kits to monitor the spike gene mutations which are indicative of the Omicron variant. The company is growing very rapidly; 868% YoY, 79% QoQ, and netted $9 million in revenue for the entire fiscal year. The company also provides Tag, Track, and Trace forensic verification for supply chains using its CertainT platform, unrelated to COVID. They can genetically tag cotton for the textile industry, different cannabis strains and their sources, fertilizer, and more. This ensures that products are indeed safe and are exactly what the customer ordered. The company boasts 93 patents which includes their Linear DNA manufacturing platform. With a market cap of $32 million, there is considerable upside for the company if COVID-19 testing continues to take off. After all, their new test, Linea™ 2.0, is more accurate than the 1.0 test and New York just conditionally approved it.
A bit of a different business model comes with XpresSpa Group (NASDAQ: XSPA), which offers 43 COVID-19 PCR testing sites at 21 major airports though certain locations are closed at the moment (14 currently operating). They offer these onsite tests at the airport because their main business prior to COVID were airport massage chairs. The company is already active on the Omicron scene with its collaboration with Gingko Bioworks (NYSE: DNA) where the companies are helping monitor variant spread through airports. XpresSpa’s cash position includes over $100 million which brings the company’s enterprise value down to only $89 million, despite a market cap about twice that. They have about 50% gross margins in their business and locations where they have a large moat on the customer because others cannot compete at the airport. Their footprint could grow very large as government agencies strive for more testing at points of entry to cities, states, or even the U.S. from overseas. The company is also seeing that testing may last much longer than initially expected during the pandemic, and that is guiding them to obtain pre-security airport locations. In a semi-recent fireside chat with Water Tower Research, the company stated that they are “on track to have a record breaking fiscal year” and the company’s goal is to have $500 million in revenue by 2025, presumably with those 50% margins. The stock appears to be undervalued purely because it is relatively unknown; the company turned a profit for the first time last quarter to the tune of $5.6 million in net income, representing a very significant inflection point for the company.
Not quite so small anymore is Fulgent Genetics (NASDAQ: FLGT), which transitioned into COVID-19 PCR testing during the pandemic. The company recently brought in $228 million last quarter, $40 million of which was from their core, non-COVID-19 business which was up 300%. With revenue for the year expected to be north of $900 million, and the company cash flow positive, the stock is not expensive despite returning about 20x from 2019 till now.
Co-Diagnostics (NASDAQ: CODX), a $255 million company, has a platform technology that makes PCR tests more accurate. Because of this, it quickly became a favorite COVID-19 stock in early 2020. Since then, the stock has drifted down with the biotechnology sector (NYSEARCA: XBI), but also due to the lack of the Biden administration’s focus on testing. The vaccine stocks have had massive moves already as that has been the focus. Co-Diagnostics guided for $96-$100 million in sales for FY2021, and recently, the company had its Logix Smart™ COVID-19 2-Gene Test approved in the United Kingdom. As such, Co-Diagnostics could expect major growth as COVID-19 testing makes a comeback.
Conclusion
There is likely going to be a big push for testing as the vaccine mandate has failed and breakthrough cases are skyrocketing. Additionally, the new and effective treatments available have some significant issues associated with them from safety to availability, and it will be critical to make sure those who receive COVID-19 pills first confirm illness via tests. Thus testing volumes should see huge growth.
There are a wide variety of testing companies but the most valuable tests for treatment purposes will be those that identify COVID-19 early on in the disease, like RT-PCR and the TolloTest. Antigen tests are okay but very inaccurate for Omicron so healthcare professionals will likely focus on the aforementioned PCR, and TolloTest.
Investors looking to make significant gains off of this testing trend need to focus on businesses that have a significant portion of their business as COVID-19 tests. Those looking for low-risk solutions might want to buy Labcorp or other large-cap companies. However, those looking for multi-baggers need to look at the flourishing PCR companies like Fulgent Genetics, XpressSpa, and Todos Medical. All three are seeing massive growth but the tiniest company is Todos Medical, which also has a 3CL protease inhibitor just like Pfizer’s Paxlovid, in clinical testing, which if using Paxlovid as a proxy could be worth billions.
Nice, but why did I not see this on the main site?