Early Cancer Detection And MRD Leadership Will Deliver Outsized Long-Term Oncology Testing Upside

Catalysts

About Caris Life Sciences

Caris Life Sciences is a precision medicine company that leverages Whole Exome, Whole Transcriptome and whole genome sequencing, cloud computing and AI to transform cancer diagnostics, treatment selection and prevention.

What are the underlying business or industry changes driving this perspective?

• Scaling Whole Exome and Whole Transcriptome profiling in both tissue and blood, supported by FDA approval, expanding coverage and rapidly building a nearly one million profile data asset, positions Caris to capture rising demand for comprehensive oncology testing and sustain outsized revenue growth.
• Early leadership in multi cancer early detection and MRD, underpinned by ACHIEVE studies with over 18,600 subjects and strong colorectal MRD performance metrics, creates meaningful optionality to open entirely new testing markets that can add high incremental revenue with attractive long term margins.
• Growing reimbursement strength, including a CMS rate of $8,455 for tissue testing, a codified PLA code and improving commercial contracts, is structurally lifting ASPs across tissue and blood, which should drive continued expansion in gross margin and operating earnings.
• High operating leverage from a unified sequencing platform, EHR integration at approximately 2,800 sites and a stable, scaled oncology sales force reaching around 6,000 physicians, supports profitable volume growth without proportional cost increases, enhancing net margins over time.
• Large, underpenetrated precision oncology markets, with comprehensive genomic profiling still used in only about 30 percent of eligible cases and increasing concurrent blood and tissue testing, provide a long runway for double digit volume growth that can compound revenue and free cash flow generation for many years.

Assumptions

This narrative explores a more optimistic perspective on Caris Life Sciences compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Caris Life Sciences's revenue will grow by 31.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -105.1% today to 26.3% in 3 years time.
• The bullish analysts expect earnings to reach $388.2 million (and earnings per share of $1.34) by about December 2028, up from $-681.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $54.8 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 42.1x on those 2028 earnings, up from -11.0x today. This future PE is greater than the current PE for the US Biotechs industry at 18.8x.
• The bullish analysts expect the number of shares outstanding to grow by 1.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current acceleration in average selling prices is heavily supported by a new CMS rate, rapid commercial payer uptake and a sizable $37.9 million revenue true up. If these reimbursement trends normalize faster than expected or payers push back on rates, Caris could see slower revenue growth and pressure on gross margins and earnings.
• The long term bullish case assumes continued double digit therapy selection volume growth in a market that is only about 30 percent penetrated today, but recent volumes are growing in the high teens against tough comps. If adoption of comprehensive genomic profiling or concurrent blood and tissue testing slows as competition intensifies or hospitals constrain budgets, revenue expansion and free cash flow could decelerate materially.
• The strategy depends on scaling capital intensive technologies such as Whole Exome, Whole Transcriptome and now whole genome for early detection and large ACHIEVE studies. If these investments fail to translate into reimbursed products on the expected time line, Caris may be forced to increase operating and R&D spend without matching revenue, eroding net margins and delaying sustainable profitability.
• The MRD and multi cancer early detection opportunities are central to the growth story, yet reimbursement for MRD is still pending and early detection is expected to start as self pay. If MolDX or CMS establish lower than anticipated pricing, require more evidence, or if self pay demand is weaker than assumed, the long term contribution from these platforms to revenue and earnings could fall short of current expectations.
• The company is explicitly choosing to cap adjusted EBITDA margins below 30 percent in order to reinvest aggressively in early detection, MRD and commercial expansion. If competitive dynamics or macro conditions later require higher spending than planned, the combination of elevated OpEx and any slowdown in ASP or volume growth could compress net income and reduce the valuation multiple investors are willing to pay.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Caris Life Sciences is $45.0, which represents up to two standard deviations above the consensus price target of $37.89. This valuation is based on what can be assumed as the expectations of Caris Life Sciences's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $28.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $388.2 million, and it would be trading on a PE ratio of 42.1x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $26.7, the analyst price target of $45.0 is 40.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.