Pullback in GenMark Diagnostics Gives Investors Another Chance

When a clothing retailer offers a 25% clearance sale, shoppers take notice. Similarly, investors should view the 25% pullback in GenMark Diagnostics (NASDAQ:GNMK) from its $20.88 high as a good bargain.

While a myriad of vaccine developers have been on investors' radar this year, the Carlsbad, California-based diagnostic company has flourished amid surging demand for its COVID-19 testing systems.

The global need for rapid diagnostics has been apparent since the onset of the pandemic. But this need existed well before the current crisis.

According to GenMark, approximately 30 million people worldwide are affected by bloodstream infections and sepsis. These are among the most expensive of medical conditions resulting in hospital care costs of around $18,000 per case.

GenMark has conservatively estimated global infectious disease testing to be a $2.5 billion market. It is a market that is less than 40% penetrated and includes diagnostics for respiratory, blood culture identification, gastrointestinal, meningitis/encephalitis, hepatitis c, and other disease categories.

Back in May GenMark's share price dipped largely due to a $75.4 million secondary share offering. The latest low volume pullback to the 50-day moving price average is offering investors another chance to get in on a rapidly growing company whose growth prospects extend well beyond COVID-19.

What Does GenMark Diagnostics Do?

GenMark's roots date back to 1993 when a research team from CalTech invented a technology for DNA detection called eSensor. Today, the company offers a range of medical diagnostic solutions backed by a pair of comprehensive testing systems -- the legacy XT-8 and the next generation ePlex systems.

Traditional diagnostic methods can delay lab results by up to three days and miss over 80% of the viruses and bacteria associated with flu-like illnesses. GenMark's rapid diagnostics solutions reduce mortality in high risk-groups and improve overall patient care.

The ePlex sytem is an instrument and software platform that delivers fast laboratory results. It integrates the entire testing process from physician order to result.

GenMark also makes a range of multiplex panels that hold testing samples and are inserted into its machines. The cassette-like products include blood culture identification (BCID) panels and respiratory pathogen panels.  

Earlier this year GenMark launched its ePlex COVID-19 test panel. The test can provide results for as many as 384 specimens per day and has received FDA emergency use authorization (EUA). This week the company submitted a EUA request for its eSensor COVID-19 test for customers that are still using its older XT-8 system. FDA emergency use approval of this test although widely assumed could spark the next GenMark rally.

Why is GenMark Diagnostics Growing?

Investors should first know that GenMark was experiencing strong growth prior to the pandemic. Revenues from its ePlex system rose 60% in 2019.

This year's growth has been accelerated by strong demand for COVID-19 testing. In the second-quarter revenue was up 118% to $40.1 million. This was driven by ePlex revenue growth of 195% that was mostly tied to COVID-19 purchases.

Although it reported a net loss of $4.7 million, this marked a significant improvement from the $13.3 million loss in Q2 of last year. Profitability is not far away given the company's proven ability to reduce costs and improve margins.

GenMark's gross margin was next to nothing a few years ago but has taken off over the last few years along with the launch of the ePlex system. Its gross margin has doubled since mid-2018 to 40% and there is room for further improvement. The company is targeting ePlex margins to reach 60% over the next two to three years.

Earlier this month management raised guidance for the second time this year. It now expects full-year revenue of $155 million to $165 million. At the midpoint this represents 82% year-over-year growth.

What are GenMark's Growth Prospects Outside of COVID-19 Testing?

Although the 2020 rally has been spurred by its COVID-19 test product, GenMark has a pipeline of other growth opportunities. It has two ePlex panels under development -- a central nervous system (CNS) panel that tests for CNS infections and a gastrointestinal (GI) pathogen panel that targets GI infections. Both products have the potential to drive further growth.

A major part of GenMark's success is that it hasn't confined itself to a niche part of the diagnostics market. Because it offers five different sized instruments and price points, it can cater to a range of customers from small rural hospitals and community hospitals to commercial reference labs and large academic centers and hospital systems.

Testing lab customers are adopting GenMark's solutions because they allow for high-throughout at reduced labor costs thereby driving productivity gains. Hands-on time with the instruments is minimal and batch processes can run overnight. GenMark's integrated software links the diagnostic results to actionable therapy.

Global expansion is another growth opportunity as GenMark has just scratched the surface. The U.S. is its only market supported by a direct sales force. It has partnerships with distributors in parts of Europe and other international markets. It plans to expand into Canada, Mexico, Brazil, and other parts of South America over the next few years.

What Makes GenMark Diagnostics a Good Investment?

Amid the surge in demand for COVID-19 testing capabilities, last quarter GenMark placed 71 ePlex analyzers. This brought its installed base to over 650 units, 48% higher than the year before. Three years ago, the installed base was 51.
System placement is an important performance metric for GenMark not only because of the revenue generated by the sale of the instruments themselves but due to the future revenue streams they represent.

GenMark makes money on the sale of its panels and other product accessories. The sale of these consumables is what should get investors excited because it provides the company with an annuity-style revenue stream. In the recent quarter, the average annuity per analyzer increased by 74% to $188,000.

Like a SaaS technology company, this is an attractive business model for growth investors because the panel revenues require little incremental cost-driving margin expansion. They also provide visibility into company performance.

So, when we hear that management upped its ePlex placement forecast to 230 to 250 this year and annuity per analyzer to a maximum of $200,000, this is a winning combination. Increasing system placement and increasing annuity streams should drive growth for the remainder of the year.

Looking beyond 2020, GenMark's growth prospects are bright. Aside from ongoing COVID-19 testing demand, the company has multiple growth levers at its disposal that should allow it to build off its recent momentum.

It has a strong presence in the fast-growing global diagnostics market that addresses a wide range of infectious diseases and medical conditions. New ePlex opportunities in GI and CNS testing as well as global expansion should support growth for the next several years. As the stock moves back to 'test' its 50-day support level, investors who buy here will have a positive money-making 'result'.