GenMark Receives FDA Nod, Guides Revenue Higher—But Stock Gets Cheaper

Sometimes a company issues positive news and its stock price inexplicably goes down. Investors that take advantage of these situations can come out ahead when the market catches up with reality.

Last week GenMark Diagnostics (NASDAQ:GNMK) provided better than expected revenue guidance and announced a favorable FDA decision regarding one its products.

Initially GenMark's stock climbed to its highest level since mid-August but has since pulled back in low Columbus Day holiday trading volume. This has created an attractive entry opportunity for a health care testing company with a compelling growth diagnosis.

What Did GenMark Diagnostics Announce?

On October 8^th GenMark said that it sees third-quarter revenues coming in around $42.6 million. This figure represents more than double the revenue from the same period last year and accelerating sequential growth of 6%.

Management's third-quarter guidance was also well ahead of the analyst consensus of $38.1 million. This was a convincing preliminary top line beat.

GenMark also noted that its gross margin will expand from 34% last year to 38% to 39%. When GenMark reports its much anticipated third-quarter results on November 4^th, look for the stock to gap higher in heavy trading volume.

On the same day, the company reported that it received Emergency Use Authorization (EUA) from the FDA for its ePlex Respiratory Pathogen Panel 2, or RP2. This product comes on the heels of GenMark's ePlex SARS-CoV-2 analyzer which is focused on testing for COVID-19. It too tests for COVID-19 but is a more comprehensive diagnostic tool for detecting over 20 viruses and bacteria that are commonly associated with respiratory infections.

Aside from the diagnostic range, it is the speed that matters here. The RP2 panel can generate test results in under two hours making it an effective way for physicians to diagnose an illness and move forward with treatment.

GenMark's ePlex revenue is the main component of its business and is expected to account for nearly 90% of third quarter revenue. The company placed 70 ePlex analyzers during the recent quarter bringing its total installed base to 720-plus ePlex analyzers, a 47% year-over-year increase.

And there's more good news within the news for GenMark. Its customers are transitioning from the ePlex COVID-19 analyzer to the new RP2 panel product in quick order in anticipation of the fall and winter flu seasons. The RP2 product accounted for around 63% of ePlex consumables revenue last quarter giving credibility to the adoption of GenMark's latest offering.

Is GenMark Simply a Pandemic Play?

GenMark has been somewhat type cast as a COVID play, but there's far more to the company's growth story. Global demand for respiratory disease testing will only get stronger over time as the world becomes more in tune with the devastating health (and economic) effects of airborne diseases. There will undoubtedly and unfortunately be more pandemics and epidemics in the years ahead in a world that has become interconnected through trade and travel.

Hospital settings will be a key source of demand going forward. The need for fast, in-house diagnostics for symptomatic inpatients as never been more apparent. Time spent waiting for results to come back from a third-party lab is time wasted so hospitals will make rapid test kits a spending priority following the lessons learned from the current pandemic. This falls right into GenMark's lap because hospital lab customers are its main sales target.

What's also compelling about GenMark from an investment standpoint is its business model. The company takes a page out of the Illumina 'razor-razor blade' model. After selling its diagnostic kits to customers, it makes money from the sale of consumables, i.e. the disposable plastic cartridges used to conduct the tests.

Each ePlex analyzer generates an annuity stream that is expected to increase 82% to $193,000 in the third quarter. This type of recurring revenue setup bodes well for sustainable growth over the next several years. And although GenMark is still operating at a net loss, with this kind of growth, expect it to turn a profit soon.

Is GenMark Diagnostics Stock a Buy?

The market's immediate reaction to the latest GenMark news sent the stock up as much as 10% from the opening bell on October 9^th. This was the appropriate response. Since then an unwarranted selloff has unfolded. Was the market secretly hoping for even better third quarter performance? Or have traders simply rotated to the latest hot COVID stock-of-the-day?

With GenMark shares now trading approximately 37% off their August 5^th all-time high of $20.88 investors should buy in before the next leg of the rally begins. The long-term investment thesis hasn't changed here and has arguably been strengthened by the recent announcements.

GenMark is a company that has a lot going for it right now both in terms of COVID-related developments and other promising growth areas. Its stock trades at a low multiple relative to its rapidly increasing sales and growth outlook. The market will have some catch up to do in the weeks ahead.