Important points
CNBC’s Jim Cramer said Tuesday that Grail stock may have more room to play as the biotech company’s cancer blood test approaches a pivotal decision by U.S. regulators. But Cramer said investors should be aware of Grail’s significant progress this year, and that some questions surrounding the validity of the Galleri test make Grail a more speculative investment. Now, buying Grail stock is not the same as, say, buying Johnson & Johnson, the blue-chip health care company owned by Mr. Cramer’s CNBC investment club. Understanding the differences in risk profiles is paramount. “I think Grail stock could go higher, but it’s already gone up so much that it’s so high that it’s becoming speculative,” the “Mad Money” host said. “We start with a small position and gradually increase the weakness.” There was already some weakness in Tuesday’s trading, with Grail stock down 10.9% while many biotech and health care stocks rose. This includes Moderna, which fell 7.75%, and Novavax, which fell 9.9%. Cramer blamed Grail’s decline on Tuesday on profit taking. Still, Grail is up 60% for the year. The stock has been particularly buoyant since mid-September on a series of positive updates from the Food and Drug Administration on the approval process for Galleri, the company’s blood test designed to screen for signals from dozens of cancers at once. The green light from U.S. regulators could be given early next year after a majority vote in favor of the FDA’s advisory committee. GRAL YTD Mountain Grail’s year-to-date stock performance. “The FDA advisory vote makes it likely that Grail’s test will receive full FDA approval,” Kramer said, but added that “the test is already selling well without many insurance coverages.” Because Galleri is a lab-developed test and not a drug, Grail is allowed to sell it in the U.S. without formal FDA approval. The downside is that most Americans will have to pay for the test out of pocket, and the list price is more than $900 before discounts are taken into account. Although the company remains unprofitable, its film division’s revenue rose 24% in the most recent quarter. FDA approval would be a “game changer,” Kramer said. “Right now, insurance companies see it as unproven. If it gets FDA approval, that’s the clearest sign that it’s going to work, and then they’ll start getting coverage.” Kramer said the opportunity is potentially huge. Galleri analyzes DNA circulating in the blood to detect patterns that may indicate cancer and predicts where detected signals originate, including cancers that are not currently routinely screened. The test is intended to complement, rather than replace, existing screenings such as mammography and colonoscopy. Kramer noted that while there is debate about the effectiveness of Grail’s test, investors should keep this in mind as it increases the risk profile of stocks. “The evidence for Grail experiments is better, but not great,” he said. Most notably, Grail stock plunged more than 50% in February after a large three-year study conducted with the UK National Health Service failed to meet its primary endpoint. Although the British study did not derail the FDA’s approval process, last month’s advisory committee was not universal in supporting Garelli in all categories under consideration. Panel members unanimously voted that Garelli was safe. 6-4 It was effective. 7-2, one person abstained, but the benefits outweighed the risks. Kramer said investors should also be mindful of Grail’s valuation as a loss-making company. The stock trades at around 34x. “It’s very expensive,” he said. “Stock prices will probably continue to fall as low as they are today,” Cramer said. “I’m betting that unless the FDA issues an overly restrictive warning label, it’s a buying opportunity.” Subscribe to CNBC Investing Club now to follow Jim Cramer’s every move in the markets. Questions about Cramer’s disclaimer? Call Cramer: 1-800-743-CNBC Want to delve deeper into Cramer’s world? Punch him! Mad Money Twitter – Jim Cramer Twitter – Facebook – Instagram Have questions, comments, or suggestions about the Mad Money website? madcap@cnbc.com
