It’s at least a little ghoulish to read the reports of the coronavirus outbreak in China and think “how can I profit from this?”, but the reality is that outbreaks like these can be stock drivers. While I think the financial impact to GenMark Diagnostics (GNMK) will be limited, it may drive more investor attention toward the stock and shrink some of the valuation gap I see.
The big challenge for GenMark remains driving sales and profitability of its core ePlex offering. A limited testing menu is definitely a challenge to adoption, and management has not been producing the sort of beat-and-raise guidance you’d like to see, but the Street is not factoring in much chance at of long-term success.
Coronavirus And A Busier Flu Season
While a few cases of coronavirus have been reported in the U.S., it looks as though China’s efforts to contain or limit the spread of the contagion are working relatively well, reducing the chances of a global outbreak. Nevertheless, given the media attention, I would expect to start seeing an increase in doctor visits from people concerned about respiratory symptoms. This has happened many times before – people hear about a new virus or sickness, they feel (or think they feel) symptoms, and so they head to their doctor.
How that will impact testing volumes for GenMark remains to be seen. While recent new ePlex system placements have been driven largely by the company’s blood culture panels (or BCID), respiratory panels do still make up the majority of the company’s panel volume. If more people go to the doctor with flu-like symptoms, and particularly if more patients are admitted to hospitals with flu-like symptoms, test volumes could have upside for the first quarter of 2020.
With or without the coronavirus, it would seem that the U.S. is already on pace for an active flu season. Visits for flu-like symptoms have accelerated from 3.2% of visits in early December to 4.7% of visits for the week of January 18 (and 5% the week before that). As the charts below (from the CDC) indicate, this season is on pace for an above-average season … which should translate into above-average volume for GenMark (as well as competitors like bioMerieux (OTC:BMXXY) and Luminex (LMNX) ).
More Momentum Needed
GenMark updated investors with preliminary fourth quarter results ahead of the JPMorgan Healthcare Conference, and the results were only just “okay”. Revenue was basically in-line with expectations ($27 million versus $28 million), as were placements (48 ePlex placements versus a sell-side target of around 49 or 50), but I don’t think investors are eager to hear about “in-line” results, when one of the chief concerns overhanging the stock is whether the company can really catch up with the likes of bioMerieux given that company’s headstart and considerably larger resources.
The average annual annuity figure of $148K was solid, suggesting qoq growth of 40% and yoy growth of about 6%, but the gross margin guidance of “high 20%’s for the ePlex was a little disappointing. Likewise was the initial suggestion of 20% to 25% revenue growth in 2020 against a sell-side outlook over 26% (I was modeling over 28%).
I don’t want to bash GenMark for coming in in-line with expectations, but the reality is that the Street is not particularly excited or bullish about the stock. Investors worry that reimbursement pressures are going to limit the revenue opportunity for testing panels that cover a broad swath of pathogens, possibly giving an edge to Luminex’s “flex testing” offering.
Investors likewise worry that bioMerieux, Luminex, and others are just too far ahead for GenMark to carve out a worthwhile footprint. I’m less concerned about this possibility, as labs are still chronically understaffed and GenMark has a system that works well from a time-to-result, hands-on time, footprint, and total cost perspective. Even so, it would be a lot easier to make a bullish argument for GenMark if the orders were exceeding management expectations and we were hearing updates about the company struggling to keep up with demand.
GenMark will report full results for 2019 and provide guidance for 2020 later in February (probably in the last week), but it looks like a significant upgrade to the near-term launch trajectory is off the table for now. With that, the biggest source of upside may be greater adoption/uptake of BCID panels and more respiratory testing activity from this year’s flu season.
I’d also hope to hear management give more information about its timeline for the gastrointestinal pathogen panel. The GI panel is the next R&D priority for the company and would address a market likely worth $600M/year in panel sales. Given management’s past challenges with sticking to timeline projections, I can understand why they’d be reluctant to offer much specificity, but the reality is that investors need something to get excited about with this stock.
I still believe that respiratory, BCID, and GI testing, as well as more distant opportunities like meningitis can drive long-term revenue growth in excess of 20% for GenMark. I’d like to see more near-term momentum, though, and investors are going to remain keenly focused on any data relating to usage patterns (consumables annuity revenue) and customer interest (system placements).
The Bottom Line
I’ve trimmed back my expectations a little, but my model still supports a fair value of over $8 and the shares still trade well below what med-techs with this sort of near-term growth trade for in terms of forward multiples. That tells me that there’s still ample skepticism about GenMark’s ability to drive system placements, system usage, and attractive gross margins – and all of those are valid questions/doubts. While I’m still bullish on GenMark, this is a year where the stock really needs to see the company start exceeding expectations for placements, usage, and profitability.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.