EMR And Reimbursement Risks Will Challenge Diagnostics Expansion Yet Long Term Potential Will Persist

Catalysts

About BillionToOne

BillionToOne is a molecular diagnostics company focused on prenatal testing and oncology using its single molecule next-generation sequencing platform.

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

• Although UNITY prenatal tests are benefiting from growing payer coverage, the need for costly EMR integrations, such as the Epic Aura implementation, could slow the pace at which large health systems route higher volumes through BillionToOne. This may temper the rate of revenue growth and delay operating leverage benefits on earnings.
• While management highlights a large U.S. opportunity in cell free DNA testing, the rapid emergence of competitive fetal risk assessment and MRD offerings means pricing pressure or slower share gains could offset ASP tailwinds from PLA codes and true up collections. This may limit future expansion in gross margin and net income.
• Although the company’s oncology franchise is building on rising liquid biopsy adoption, the current reliance on a smaller Medicare reimbursed test and pending MolDX decisions for Northstar Response create a risk that coverage takes longer than expected. This could restrain oncology revenue mix and keep oncology gross margins below prenatal for an extended period.
• While BillionToOne has shown discipline in R&D and clinical spend relative to peers, the push into tumor naive MRD and larger response monitoring studies may require meaningfully higher trial investment without immediate payback. This could compress operating margins even if top line trends remain favorable.
• Although the company currently runs at only about one quarter of lab capacity, scaling to higher utilization will likely require sustained hiring in sales, support and reimbursement. If new representatives are less productive than the early cohorts, the added SG&A burden could limit further improvement in operating margin and earnings per share.

Assumptions

This narrative explores a more pessimistic perspective on BillionToOne compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming BillionToOne's revenue will grow by 37.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.4% today to 10.5% in 3 years time.
• The bearish analysts expect earnings to reach $70.0 million (and earnings per share of $1.26) by about January 2029, up from $-11.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $113.9 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 107.8x on those 2029 earnings, up from -392.1x today. This future PE is greater than the current PE for the US Healthcare industry at 23.3x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Liquid biopsy and prenatal testing are crowded areas, and competitors are launching fetal risk assessment and MRD products that target the same long term opportunities, which could slow UNITY and Northstar volume growth and limit the ability to sustain current revenue trends and ASP levels, ultimately weighing on revenue and gross profit.
• The oncology franchise currently depends on a smaller revenue base and future reimbursement decisions, and management indicates that first Medicare coverage for Northstar Response is only expected before the end of 2026. Any delay or less favorable coverage outcome could keep oncology ASPs and gross margins lower than hoped, which would cap earnings contribution from what is framed as a key long term growth area.
• The company is leaning into higher spending for EMR integrations such as the Epic Aura implementation and into larger oncology and MRD clinical studies. If these investments do not translate into proportional volume or pricing benefits, the result could be structurally higher operating expenses that compress net margins and earnings even if top line growth continues.
• Oncology tests currently carry higher cost of goods per test than prenatal, and management expects oncology revenue to grow faster over time. A sustained shift in mix toward lower margin oncology without enough improvement in ASPs and COGS could make it harder to maintain 70% gross margins, which in turn would pressure operating margins and net income.
• The business model relies on payer coverage expansion, Medicaid adoption of UNITY Carrier Panel PLA codes and ongoing true up revenue from higher cash collections. If reimbursement policies tighten or true up amounts fall from the current 3% to 5% of revenue range, long term ASP improvement could stall, which would slow gross margin expansion and earnings growth.

Valuation

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

• The assumed bearish price target for BillionToOne is $110.0, which represents up to two standard deviations below the consensus price target of $137.83. This valuation is based on what can be assumed as the expectations of BillionToOne's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $160.0, and the most bearish reporting a price target of just $110.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $665.7 million, earnings will come to $70.0 million, and it would be trading on a PE ratio of 107.8x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $95.0, the analyst price target of $110.0 is 13.6% 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.