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Coronavirus Drives Testing Stocks: Is There Room for More Upside?

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Since the month of March, despite massive deferral of elective medical/surgical procedures, the MedTech industry has had a solid run on the bourse, primarily banking on the extremely bullish coronavirus diagnostic testing environment. While the spread of the virus is showing no signs of abatement, major indices worldwide are on a rollercoaster ride since the outbreak.

The temporary market rebound has not been able to lift investor sentiments in the recent months with a new wave of infections in Europe and many regions of the United States leading to another slew of layoffs. Added to this is the threat of the rapid gene mutation of SARS-CoV-2, which is thwarting all efforts toward determining a confirmed timeline of the vaccine and therapeutic advancements. The growing political tension in the run-up to the elections is weighing on markets as well.

Demand for COVID-19 Testing Pushes Stocks Higher

In spite of the current uncertain scenario, given the testing requirements across the world, the diagnostic testing business for COVID-19 is rapidly evolving.  Massive amount of investments have been channelized in the past few months, which have played a part in driving these testing stocks.

However, a section of Wall Street is showing concern about the sharp rise in valuation multiples of these stocks over this period, which, according to them, might indicate that there is limited room for upside left.

What Raises Hopes for the Industry’s Continued Growth?

We may start with the example of Thermo Fisher Scientific (TMO - Free Report) . Even amid the September market meltdowns, this stock remained among the top performers on several of the benchmark indices, driven by progresses related to COVID-19 testing.  From March till September end, the stock gained 51.8%, consistently remaining above the broader market as well as the S&P 500 Index. Its valuation multiples have reached expensive levels, raising the million-dollar question that whether there is still any room for an upside. This Zacks Rank #1 (Strong Buy) stock currently trades at 5.76 P/B multiple, 24.06 P/CF multiple and 26.62 EV/EBITDA multiple, way expensive relative to the respective valuation metrics of the industry and peers.

On Oct 1, this stock once again reached a new 52-week high of $452.69, banking on strong end market growth, continued rise in testing revenues and the company’s affirmation about an additional $1.6 billion in revenues from COVID-19 in the third quarter. This has once again attracted investors’ focus to testing stocks with the expectation that there is still upside potential left.

Amid this encouraging backdrop for the COVID-19 testing space, Moody’s recently upgraded its outlook for the U.S. medical device industry from stable to positive. Going by a MedTech Dive report, Moody's raised its outlook in response to not only the evidence of the MedTech industry’s faster-than-expected recovery from the deferral of procedures but also on visible fact that COVID-19 testing will enable some companies to grow despite headwinds in other parts of their businesses.

Price Performance Till 10/05/20


Apart from Thermo Fisher, Moody’s also focused on the flourishing diagnostic testing businesses of Abbott (ABT - Free Report) and Hologic (HOLX - Free Report) . Abbott came in major limelight when in August, through a combined initiative of the U.S. Department of Health and Human Services (HHS) and the Department of Defense (DOD), the government decided to buy 150 million of the company’s $5 rapid antigen tests for COVID-19.

A report by The Atlantic termed this development as a sea change in the testing landscape of the nation. All other traditional or even rapid diagnostic tests that had earlier received FDA’s EUA require an expensive machine and cost around $40 or more. In contrast, this $5 test that only requires a coated-paper card and a small swab is immensely significant.

Hologic too has earned a lot of public attention over the past few months, banking on significant strides in COVID-19 testing space. The company generated solid second-quarter revenues from strong customer adoption of Hologic’s two SARS-CoV-2 assays that run on the Panther and Panther Fusion systems. Again, in late September, the company announced receiving the FDA’s EUA for its Panther Fusion SARS-CoV-2 assay to test asymptomatic (without symptoms) individuals and those having symptoms of the COVID-19 infection. Additionally, the FDA has authorized Hologic’s pooling protocol, which was announced on Aug 11, for symptomatic testing with the Panther Fusion SARS-CoV-2 assay.

Non-COVID-19 Testing Ramp Up in the Cards Too

On Oct 5, Diaceutics Research came up with a report that while there was a highly disruptive impact of the pandemic on non COVID-19 diagnostic testing in the previous months, the ramifications of this enormous backlog will be felt in 2021 and beyond with significant increase in these specialized testing needs following COVID-19. Diaceutics particularly took the example of Non-Small Cell Lung Cancer (NSCLC) testing market, which is predicted to expand to $3.6 billion in the United States by 2025 — up considerably from just $125 million currently — banking on mounting dependence on precision medicine therapies for cancer treatment and higher investment in testing.

Here we may talk about another Zacks Rank #1 stock, QIAGEN (QGEN - Free Report) . Sales of its QuantiFERON latent tuberculosis test increased over the past 3-4 months, following an initial debacle at the start of the pandemic. You can see the complete list of today’s Zacks #1 Rank stocks here.

Another molecular diagnostic testing company, Exact Sciences (EXAS - Free Report) plans to make its liver cancer test available in the second half of 2020. Management looks forward to offering its test to 3 million eligible Americans. The company carries a Zacks Rank #2 (Buy).

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