Here's Why Grail Shares Crashed in February and Why it Could Be a Buying Opportunity

Shares in the MCED test company Grail (NASDAQ: GRAL) declined by 45.6% in February, according to data from S&P Global Market Intelligence. There's little doubt about the cause of the crash. The healthcare company released disappointing top-line results from its multicancer screening test, Galleri, with the National Health Service (NHS) in England.

Galleri disappoints the market

Unfortunately, the three-year test, which involved a 142,000-person demographic, failed to meet its primary endpoint of demonstrating statistical significance of a reduction in Stage III-IV cancers. The aim of the test was to detect early stage cancers (which are easier and less costly to treat) before they progress to later stages, thereby reducing Stage III and IV diagnoses. The Galleri test itself won't reduce cancer, but patients should be treated earlier if the cancer is detected earlier, therefore reducing later-stage diagnosis.

Image source: Getty Images

The good news is that the Galleri test did discover a "substantial increase in the absolute number of Stage I-II cancers...that are typically found in late stages" in the tested group. However, this did not result in a statistical significant decrease in Stage III and Stage IV detections, and the failure to meet the primary endpoint will make it harder for insurers to approve paying for the test.

That's why the stock crashed in February. Investors quickly priced in not only the potential to fail to receive Food and Drug Administration (FDA) approval for Galleri, but also the likelihood that insurers would not pay for it.

Grail's pathway to success

Still, investors buying into the dip or holding it have cause for some optimism, and the stock may well be mispriced on a risk/reward basis.The optimistic case for the healthcare stock is that the trial could have been better designed, and the follow-up data may prove more useful in determining the efficacy of the Galleri test.

While there was an increase in Stage I and Stage II detection (good) and a significant decrease in Stage IV detection (good), the increase in Stage III detection (bad) meant that Stage III and Stage IV detection, combined, did not decrease in a statistically significant manner.

It's possible that Stage II cancers were caught in Stage III, and Stage IV cancers were detected earlier in Stage III. Discussing the trial on the earnings call, CEO Bob Ragusa outlined that the trial was designed six years ago using "the best information we had at the time", be he now believes "we probably should have allowed for a longer follow-up period" on top of the three rounds of screening with one year of follow-up.

Consequently, Grail will extend the trial's follow-up period by six months to a year. That could result in an even larger reduction in Stage IV detection in the test group. Furthermore, it's possible that, unfortunately, cancers will develop in the control group, making the overall trial data more significant.

There are no guarantees that the follow-up data will produce the intended result, and even if you believe there's enough evidence to demonstrate the efficacy of Galleri, it will still need to demonstrate it in a controlled trial. As such, buying Grail stock is a high-risk/high-reward proposition. That won't suit most, but investors with a risk tolerance may take an interest in the situation.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Grail. The Motley Fool has a disclosure policy.