Of late we have been focusing our attention on the evaluation of under followed smaller capitalization stocks set to benefit from certain structural changes in their respective industries, notes Matthew Castel, a Montreal-based money manager at Logos LP.
We believe Biodesix (BDSX) offers an interesting risk/reward. This is a data-driven diagnostics company that has developed a proprietary AI platform called the Diagnostic Cortex to discover innovative diagnostic tests for clinical use, with particular focus on the lung.
The particular problem that their platform solves is what researchers call ‘overfitting’: this is when machine learning-based biological discoveries cannot be repeated or assessed in additional specimen cohorts (ie. the machine can identify something in a genomic dataset but not in a proteomics dataset).
We recently had a call with management and believe the company is hitting an interesting inflection point over the medium term as the company is facing a few key catalysts into 2022:
1. Re-ignited volumes: As pulmonologists and clinics open up, this will reignite lung based diagnostic testing volumes away from Covid tests.
2. Salesforce expansion: The company raised $64 million in its IPO on Oct. 2020 which will be used to double the salesforce by the end of the year. Travel restrictions and delayed ramp up were all headwinds in the beginning of the year but that should subside in the back half.
3. Biopharm services: The reopening of clinics and non-Covid testing means the reopening of clinical trials at biopharmaceutical companies. The biopharm segment is a higher margin segment than their diagnostic business.
4. New innovative tests: The more data collected from patients and biopharm companies means more data into their AI platform which means more tests. The company has launched multiple new tests since the beginning of the year and launched a Covid test in record time late last year. This also means they will be able to collect new data and create partnerships with other providers (ie. Datavant).
5. Competition: Most of their tests have no real competition from other diagnostic companies.
On the back of a near 60% drawdown a few weeks ago, the company traded at a little under 7.9x next year's revenues; Guardant Health (GH), which is somewhat of a comparable, trades at a much higher valuation) and should see meaningful revenue growth in the coming years.
Their unique platform flywheel coupled with their agility when launching new tests and upcoming catalysts should lead to a much higher valuation as the company progresses up its S-curve growth runway.
