The excitement surrounding Moderna and Merck's personalized mRNA cancer vaccine added more than $50 billion in combined market value for the two drug companies. But it is also creating a gold rush in a growing corner of healthcare: tumor sequencing.

Personalized cancer therapies require a genetic road map for each patient. The tumor has to be sequenced to identify the mutations the vaccine should target. If these therapies become blockbusters, the diagnostic companies doing that sequencing could hold a lucrative tollbooth on every dose.

Enter Tempus AI and Personalis, two diagnostics partners suddenly sitting at the center of the opportunity. Personalis has been involved in the tumor sequencing for Moderna's clinical program. On July 20, Tempus agreed to acquire Personalis for $16.25 a share, valuing the deal at $1.5 billion net of Tempus's existing stake. Weeks later, when Merck and Moderna reported positive late-stage melanoma results, Tempus stock surged 24%.

Then came a rare market anomaly: Personalis shares shot past the acquisition price, reaching as high as $18. Target stocks usually trade at a slight discount to an acquisition price to account for the risk that a deal falls apart. A premium suggests investors are betting on a sweetened offer or a bidding war. Tempus's newly released proxy for the deal this week confirmed there was reason to think that way. It revealed that Personalis had entertained multiple suitors, including a verbal proposal of $17 a share, before agreeing to the Tempus deal. Wall Street analysts have speculated that rival diagnostic companies such as Natera or Guardant Health could be among the interested parties.

Tempus has its existing 12% stake, combined with Merck's agreement to vote its 13% holding in favor of the deal. That puts roughly a quarter of Personalis shareholders' voting power behind the transaction. Other shareholders could push for a sweeter price, though, especially given how much is riding on the deal for Tempus.

A Tempus spokesperson said that, "as provided in Personalis' disclosure about this transaction, other independent parties performed extensive due diligence and either declined to participate or presented a bid that the Personalis board found less compelling."

Founded by Groupon billionaire Eric Lefkofsky, Tempus has struggled to command the same valuation as rivals such as Guardant Health, Grail and Natera, whose cancer detection businesses are more established and easier for investors to value.

The company rebranded from Tempus Labs to Tempus AI ahead of its 2024 IPO, perhaps hoping it could be valued as a technology company rather than a diagnostic lab. That hasn't stopped it from being one of the most shorted stocks in healthcare. It trades at roughly six times expected sales, versus about 13 times for some of its faster-growing peers. And Lefkofsky carries some baggage from Groupon, which saw its multibillion-dollar valuation evaporate soon after its IPO. (Lefkofsky cashed out more than $300 million from the IPO.)

Personalis offers Lefkofsky a bridge out of that valuation trap. The strategic prize isn't just the upfront sequencing fee. It is minimal residual disease, or MRD-a blood test that looks for tiny traces of circulating tumor DNA after treatment, potentially detecting cancer recurrence before it shows up on a scan. Personalis and Tempus are already tiny players in this business. But investors see MRD as a huge, multibillion-dollar opportunity, most of it dominated by Natera, a $45 billion giant in the space.

If the mRNA business takes off, Tempus could have a powerful new entry point into MRD, explains Douglas Eby, CEO of Bioaxia, a life sciences value investment firm that owns Tempus and Personalis shares. After a tumor is sequenced and a therapy given, patients still need to be monitored for signs the cancer has returned. Who better to do that testing than the company that already has the patient's tumor sequence? Eby sees the mRNA vaccine business as a potential customer-acquisition funnel: The initial sequencing brings the patient into the Tempus ecosystem, while recurring MRD testing could bring them back for years of monitoring.

Piper Sandler estimates at least $50 million in annual sequencing revenue if the vaccine is approved for melanoma. If the approach expands to lung, bladder and kidney cancers, BTIG analyst Mark Massaro projects that revenue could eclipse $600 million, an opportunity that is barely reflected in the stock today. If the MRD business takes off, the opportunity could be far bigger.

The mRNA cancer-treatment space is still no sure bet. Just weeks after Moderna's positive news, rival BioNTech suffered a setback in a mid-stage colorectal cancer vaccine trial, underscoring the risks. Tempus said it has been chosen to be the sequencing partner if the Moderna-Merck vaccine is approved. Yet plenty remains unknown about the long term, including whether pharma companies could eventually bring some sequencing in-house or split the work among competing diagnostic labs.

Personalis gives Lefkofsky a legitimate seat at the precision cancer-treatment table. But first, he has to get the deal done-and the market is betting it won't be a smooth ride there.