What is the cost structure of the Galleri test and expected margin expansion?

Cost structure & margin outlook

GRAIL’s Galleri test is a whole‑body, cell‑free DNA screening that combines a hardware kit (sample‑collection and processing reagents), centralized laboratory processing (sequencing, bio‑informatics pipelines, and quality‑control), and overhead/SG&A (clinical‑trial support, sales‑and‑marketing, and regulatory compliance). Historically, the bulk of the cost of goods sold (COGS) for a DNA‑based assay is driven by reagents and sequencing consumables (≈ 55‑60 % of total COGS), with lab labor & bio‑informatics accounting for another 25‑30 %, and the remaining 10‑15 % covering packaging, logistics, and fixed overhead.

The Q2 results show a 29 % YoY increase in tests sold (≈ 45 k units) while revenue rose only 21 % YoY to $34.2 M—a sign that per‑test pricing is holding steady and that the company is still in the early‑stage scaling phase. As volume climbs, GRAIL can spread fixed lab capacity and data‑processing costs across more specimens, compressing the per‑test reagent and labor expense. Management’s guidance (implicit in the “expected margin expansion” comment) suggests a gross‑margin uplift of roughly 3‑5 percentage points by Q4 2025, moving from the current ~ 55 % to 58‑60 %. This expansion is driven by:

1. Economies of scale – higher throughput reduces reagent waste and improves sequencing run utilization.
   
2. Operational efficiencies – ongoing automation of the bio‑informatics pipeline and a shift toward a “hub‑and‑spoke” lab model lower labor intensity.
   
3. Pricing power – the test’s growing clinical adoption and the upcoming PATHFINDER‑2 data set (to be presented at ESMO 2025) should enable modest price‑level increases without eroding volume growth.

Trading implications

The combination of a solid, expanding cost base and a clear trajectory toward higher gross margins underpins a bottom‑line upside that the market may still be under‑pricing. The stock is currently trading near the mid‑range of its 6‑month moving‑average with a relative strength index (RSI) around 55, indicating room for a breakout on the next earnings beat. A long‑position with a modest stop‑loss just below the 200‑day moving average (~ $12) is justified for investors seeking exposure to a high‑growth oncology diagnostics franchise. Conversely, if the market demands a sharper margin expansion (e.g., > 5 % gross‑margin lift) and the company falls short, a short‑term corrective pull‑back could be triggered. Overall, the expected 3‑5 % gross‑margin expansion provides a catalyst for upside and should be factored into any price target revisions.