Better Guidance Fails To Boost GenMark, As The COVID-19 Story No Longer Surprises (NASDAQ:GNMK)

One of the warning signs for me with stocks is when good news fails to move the shares. GenMark Diagnostics (GNMK) guided to a third-quarter revenue number that was 10% higher than expected, and the shares have done basically nothing on an otherwise good day for the stock market. While gross margin commentary was perhaps a bit soft, the growth in revenue and placements should have otherwise been good news.

At this point, I believe the COVID-19 opportunity is well-understood, and there are still substantial questions as to whether or not the systems installed to meet the surge in COVID-19 testing will remain in regular use once the pandemic fades. That issue may be tested sooner than some expect, as antigen-based testing is likely to grow considerably from here and become the dominant testing approach for COVID-19.

If the market is truly transitioning to a “post-COVID-19” view on GenMark, a forward revenue multiple of around 5x to 6x on 10% to 15% three-year revenue growth seems reasonable. That still leaves upside for GenMark, and this could be a worse-than-average flu season, but I believe upside is now increasingly reliant on the company’s ability to show follow-through adoption of the blood culture panels to maintain high levels of utilization and test consumption.

Another Strong Quarter

With COVID-19 infection rates still high across much of the country, GenMark continues to see strong interest in its ePlex multiplex diagnostic platform and its new RP2 panel (that includes SARS-CoV-2). Management announced that third-quarter revenue should come in at $42.6 million, up 104% year over year and 6% quarter over quarter, and about 12% above the prior average sell-side estimate. I’d also note that the $42.6 million figure is comfortably above the high end of the sell-side range ($41.5M) and above the cadence of the annual guidance management offered after the second quarter.

Revenue from ePlex rose 187% yoy and 8% in the quarter, with the average consumables annuity (a measure of testing volumes) up 92% yoy and 2.5% qoq to $193,000. The new RP2 panel made up 63% of consumables revenue, and gross margin was estimated between 38% and 39%, consistent with management’s prior guidance.

Management announced that it placed 70 systems in the quarter, almost identical to the system placements in Q2’20, bringing the total to 722 and staying a bit ahead of the pace suggested in annual guidance.

The company also announced it has received Emergency Use Authorization from the FDA for the RP2 panel.

Testing Is Likely To Shift From Here

GenMark’s RP2 panel allows clinicians to not only get a yes/no answer on whether a patient has COVID-19, but also what they have if it’s not COVID-19 that’s causing the symptoms – the RP2 panel simultaneously tests for 21 different common respiratory pathogens. While that is useful in a hospital setting when there are questions about the right course of treatment, it’s not the most efficient or cost-effective approach to basic COVID-19 screening, particularly given the cost (over $100 per test, depending upon the purchase agreement) and the time to results.

With the availability of rapid, low-cost antigen-based tests from Abbott (ABT) (BinaxNow), Becton Dickinson (BDX) (Veritor), and Quidel (QDEL) (Sofia), and others on the way, I believe this is going to become the dominant testing approach for COVID-19 screening. Even with some sacrifice in accuracy, the cost ($5 to $15) and time-to-result (15 minutes) arguments are just too compelling. There will always be a place for PCR-based testing, and I expect ongoing use of RP2 in the hospital setting, but whatever COVID-19 screening use there has been (which is frankly impossible to determine) is likely to fade.

That leads to the “now what?” question for GenMark. The COVID-19 pandemic has unquestionably accelerated the placement curve for GenMark’s ePlex systems, and there are now a lot more facilities familiar with the system and its capabilities than there would have been at this point without the pandemic.

The question remains, though, as to whether these labs will find the system compelling enough to use on a regular basis, and whether payors will cooperate. Prior to the pandemic, some payors had been pushing back on multiplex testing, arguing that it was being used too often and in cases where the results wouldn’t really drive a meaningful difference in treatment plans or outcomes. Those questions also apply to the company’s newer blood culture panels, which can identify pathogens far more quickly than traditional blood cultures and help reduce the 20% to 25% of sepsis patients every year who get the wrong treatment because the pathogen was either missed (conventional culturing can often miss the pathogen) or treated couldn’t be delayed for a test.

The Outlook

I’ve generally been bullish on GenMark over the years, as I believe there is a real need for the testing performance that the ePlex can offer. That said, I’ve also noted that bioMerieux (OTC:BMXXY) has a meaningful lead on the company, and there are a lot of multiplex testing options out there now. COVID-19 has certainly helped the company’s commercial launch of ePlex, but the follow-through question is still very relevant.

While GenMark’s guide was higher than the Street numbers, it was pretty much in line with what I was looking for, so I’m not making any major modeling changes ahead of the reported numbers. My modeling assumptions work out to a long-term revenue growth rate (from 2019) of around 20%, with FCF margins eventually reaching the low-to-mid-20%’s.

The Bottom Line

With GenMark shares well off their highs, I believe the market has started making that transition to the post-COVID-19 outlook for the company, where the system placement and system annuity growth rates are still very hazy. I believe 10% to 15% growth over the next three years post-2020 is a reasonable working range, and that supports a valuation range of around 5x to 6x forward revenue based upon what the market has historically paid for similar levels of growth. That still offers some upside from here, but I think getting back to $20 is going to require evidence of both strong ongoing use/adoption of the RP2 panel and the blood culture panel as well.

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.

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