Seeking Alpha: Launch Delays The Wrong Prescription For GenMark Shares

Investors don't really have to look forward many years to value potential high-growth med-tech stories, but the consequences can be severe when those companies disappoint. GenMark Diagnostics (NASDAQ:GNMK) is certainly not the first or only diagnostics company to disappoint investors with delays in its commercialization timeline, but the confluence of a roughly half-year delay, ongoing progress at BioMerieux, and more risk aversion in the market has pushed the shares down about 40% since my last update.

The good news is that GenMark's ePlex system still compares quite favorably to systems from BioMerieux, Luminex (NASDAQ:LMNX), and Nanosphere (NASDAQ:NSPH) and the multiplex molecular diagnostics (or MDx) market is still very underpenetrated at hospital and reference labs. The bad news is that BioMerieux has done really well with system placements and the hospital diagnostics market is intensely competitive. GenMark does look undervalued today, but investors are looking at a wait of several years before there is meaningful revenue or cash flow and the risk here is well above average.

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Launch Delays The Wrong Prescription For GenMark Shares

Seeking Alpha: Ahead Of Major Launches, GenMark Diagnostics Still Has Some Value

This is shaping up to be a very big year for GenMark Diagnostics (NASDAQ:GNMK) as this molecular diagnostics company looks forward to the launch of its new ePlex multiplex molecular diagnostics system. With over 5,000 potential hospital and lab customers and over $2 billion in addressable annual market revenue, adoption of the ePlex could turn GenMark into a legitimate multi-year growth story.

GenMark Diagnostics has done okay since my last article, rising 26% as the company has come through on instrument placements, consumables pull-through, and (most importantly) the development timeline for its new ePlex system. To put that performance in context, though, investors should note that Cepheid (NASDAQ:CPHD) is up close to 50% over that same time, and Fluidigm (NASDAQ:FLDM) is up more than 70% (while BioMerieux (OTCPK:BMXMF) is up about 16% and Luminex (NASDAQ:LMNX) is down) - so it's not as though molecular diagnostics stocks haven't been doing alright.

Although these shares don't appear all that cheap on a discounted cash flow basis, the Street has shown over and over again that it will pay up for growing med-tech stories - sometimes to the tune of 8x or higher forward revenue multiples. While GenMark has its work cut out to prove that it can grow from roughly $30 million a year in revenue to a number almost seven times that over the next five years, success would support a fair value today in the high teens.

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Ahead Of Major Launches, GenMark Diagnostics Still Has Some Value

Seeking Alpha: GenMark Diagnostics Hoping To Make Its Mark In Clinical MDx

Molecular diagnostics is still a relatively new opportunity in the clinical diagnostics space - about $4 billion/year if Roche's (OTCQX:RHHBY) estimates of its market share are accurate. It remains a good growth opportunity, though, as molecular diagnostic technologies can in many cases offer faster and more accurate results for healthcare providers. GenMark Diagnostics (NASDAQ:GNMK) is looking to emerge as a leader in hospital/lab-based multiplex molecular diagnostics with a new system (ePlex) designed to deliver fast and accurate results with good throughput.

GenMark's existing business isn't going to take the business very far, so a great deal is riding on that new system. The performance specs look very competitive, but rivals aren't going to back it in and give up. This remains an exceptionally speculative story, but one with worthwhile upside from here if the 2015 launch goes well. While the stock has been weak since my last article (along with many other riskier med-tech stories), I think the name is still worth consideration.

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GenMark Diagnostics Hoping To Make Its Mark In Clinical MDx

Seeking Alpha: Cepheid's Results And Shares Are On Different Paths

Within the higher-growth molecular diagnostics segment of diagnostics, Cepheid (CPHD) remains one of the real up-and-comers. Roche (OTCQX:RHHBY) still has quite a bit more market share than Cepheid (and/or anybody else), but Cepheid stands shoulder to shoulder with big names like Abbott (ABT), Becton Dickinson (BDX), and Hologic (HOLX) and actually has leading share in terms of systems placement. Margins are still a "build it and they will come" sort of proposition, but as Cepheid continues to develop and launch high-volume tests, it should be in position to reap significant leverage down the road.

The concern here is that the market is already a long ways down that road in terms of valuation. Even if the company can more than double its share of the MDx market and generate FCF margins on par with the best companies, the shares are already well ahead of the implied value. Assigning Cepheid the typical top-of-the-range med-tech growth multiple of 8.0x forward sales produces a more attractive $55 target, more than 20% above today's price, but that multiple may be harder to maintain if the market really is turning away from aggressive growth stories in the healthcare space.

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Cepheid's Results And Shares Are On Different Paths

Seeking Alpha: OraSure Seems Too Cheap Relative To Infectious Disease Opportunities

Investors can be a fickle bunch. While they will happily reward strong growth stories with eye-popping valuation multiples, they can be demanding when it comes to the timing of that growth and the marketing/investment spending that the company has to do to generate it. That's my basic thesis on OraSure (OSUR), as the shares of this rapid point-of-care (or PoC) testing specialist seem undervalued relative to other diagnostics growth stories.

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OraSure Seems Too Cheap Relative To Infectious Disease Opportunities

The Motley Fool: A Whole New Opportunity For Hologic Inc?

Women's health specialist Hologic (NASDAQ: HOLX  ) has had a rough go of it. At a time when most companies in the medical equipment or diagnostics markets can look back on a great two-year run in their share prices, Hologic's shares have chopped around and gone nowhere fast (up just 2%). This isn't a mistake on the part of the market, as Hologic has underperformed due to slow adoption of 3D tomosynthesis, changing recommendations for cervical cytology testing, and fiercer competition in diagnostics.

In hiring former Stryker CEO Stephen MacMillan, though, the board may have put this company back on the right track. MacMillan's experience in improving sales efforts and integrating acquisitions both speak to areas where Hologic needs to improve, and there is certainly room for improvement here.

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A Whole New Opportunity For Hologic Inc?

The Motley Fool: Becton, Dickinson & Co Poised To Be A Large-Cap Growth Leader

When the worst thing you can say about a company is that its stock doesn't look very cheap, that's not a bad situation. It is challenging for me to see substantial undervaluation in Becton Dickison (NYSE: BDX  ) these days, even given the company's excellent share in safety devices, pre-filled syringes, and autoinjectors, and above-average growth in emerging markets. Although I'd be in no rush to sell, I would suggest investors keep an eye on the changes under way throughout the diagnostics industry.

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Becton, Dickinson & Co Poised To Be A Large-Cap Growth Leader

Seeking Alpha: For A Wild Ride, Consider GenMark Diagnostics

I really don't know if the next five years at GenMark Diagnostics (GNMK) are going to be more like Luminex (LMNX) or more like Cepheid (CPHD). If it's the former, the stock will chop around a lot as the company struggles to establish its system as a preferred option in multiplex molecular diagnostics testing. If it's the latter, GenMark will see strong adoption of a fast, accurate, easy-to-use system that becomes a new must-have in hospitals and reference labs.

I like GenMark's technology and I think there is room in the market for a strong automated multiplex MDx system. By no means does that guarantee success, though, and investors are going to have to put up with many years where valuation is based either on long-distant cash flows or very arbitrary multiples to forward revenue. For today, GenMark's value seems sandwiched in between a DCF approach that suggests the shares are overvalued (as it would have for Cepheid and Illumina before, and during, their huge runs) and a discounted EV/revenue approach that suggests the significant revenue growth potential isn't adequately reflected in the shares.

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For A Wild Ride, Consider GenMark Diagnostics

Seeking Alpha: Great Growth Doesn't Come Cheap With Cepheid

Investors looking for good plays in the diagnostics space have some difficult choices to make. High-quality companies like Becton Dickinson (BDX) or Trinity (TRIB) don't come all that cheap, while others like LipoScience (LPDX) have some serious issues to address. Cepheid (CPHD) is definitely in that former camp, as the company's GeneXpert system is an excellent automated molecular diagnostics platform that has garnered leading share in hospital-acquired infections and continues to leverage new test launches.

Cepheid is expensive by almost any metric, but med-tech investors are willing to pay for growth and Cepheid's strong share and differentiated platform could yet attract strategic buyers. These shares are definitely vulnerable to any operational stumble, not to mention a sudden shift in market sentiment regarding the appropriate premium for growth, but I wouldn't step in front of them (to short), nor would I rush to sell if I owned them.

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Great Growth Doesn't Come Cheap With Cepheid

Seeking Alpha: For Meridian Biosciences, Living Up To The Past Could Prove Challenging

Small-cap diagnostics company Meridian Bioscience (VIVO) is a curious study in quality and growth and how Wall Street processes those attributes. Meridian has built up a very strong testing business, with high-quality rapid point of care tests and a very cost-effective molecular diagnostics platform. Moreover, this company has posted a trailing compound annual revenue growth rate of 10% with returns on invested capital often above 20%. Yet, the stock has had some pronounced choppiness and is only up about 16% over the past five years - significantly lagging rivals like Cepheid (CPHD) and Quidel (QDEL).

I am concerned that there may be too much optimism baked into current expectations. I believe that Meridian is seeing more competition in its core C.dif and flu franchises than many sell-side analysts want to acknowledge and I am worried about the company's rivals launching additional automated platforms that can compete in Meridian's core market. Current expectations seem to be pricing in forward revenue growth of 9% per year, and I think that may be too demanding for this company.

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For Meridian Biosciences, Living Up To The Past Could Prove Challenging

Seeking Alpha: November Brings A Cold Gust Of Reality To Hologic

Diagnostics and healthcare imaging specialist Hologic (HOLX) has been an odd duck within my coverage list for some time. The company has a pretty mixed record of creating shareholder value, with a pronounced tendency to overpay for M&A deals and then under-develop the technology it acquires. And yet, investors and analysts have generally stuck by the company, likely afraid to turn their backs on the potential of 3D mammography and molecular diagnostics.

With fiscal fourth quarter results in hand and disappointing guidance for fiscal 2014 laid out in black and white, investors sold the shares off sharply on Tuesday. Even with the reset in expectations and valuation I struggle to see a major mispricing in these shares as there seems to be a piece of bad news to offset almost all of the bullish points. I am not really expecting this latest disappointment to puncture the optimism bubble around Hologic, but I can't get all that excited about a company that appears to need a lot of work to get back to fighting (i.e., "growth") trim.

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November Brings A Cold Gust Of Reality To Hologic

Investopedia: Becton Dickinson Already Priced For Excellence

It's pretty rare to see an “Underperform” rating on a med-tech stock these days, but Becton Dickinson (NYSE:BDX) carries more than Johnson & Johnson (NYSE:JNJ), Abbott (NYSE:ABT), and Cepheid (Nasdaq:CPHD) combined. I won't pretend to have read all the research reports out there, but it seems that most of those analysts who are cautious/negative on BD are so because of the stock's very robust valuation and concerns about both near-term and long-term growth in the diagnostics business. I too see these shares as overpriced relative to the likely growth trajectory, and wouldn't be a buyer at these levels.

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http://www.investopedia.com/stock-analysis/080113/becton-dickinson-already-priced-excellence-bdx-abt-rhhby-cphd-holx.aspx

Seeking Alpha: Luminex Has Both Many Opportunities And Many Questions To Answer

While I'm not opposed to paying up for a strong growth story, particularly in an area like molecular diagnostics (MDx), I think there are too many questions about the basic business model at Luminex (LMNX) to pay up for this stock today. The company does indeed have significant potential and large addressable markets, but the combination of inherent business model volatility, less than full control on product development, and rampant technological and commercial competition are all significant factors as well.

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Luminex Has Both Many Opportunities And Many Questions To Answer

Seeking Alpha: LipoScience - A Small Company Targeting A Large Market

Healthcare is arguably defined by a continual push for better mousetraps, and LipoScience (LPDX) may have a better mousetrap for diagnosing and characterizing heart disease. Not only does LipoScience provide information to doctors that other systems currently on the market do not, it does so with a platform that offers meaningful potential value for the hospital or lab using it. Diagnostics is a very crowded market and it is absolutely essential that LipoScience broaden its array of assays, but this looks like a small med-tech well worth keeping an eye on today.

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LipoScience - A Small Company Targeting A Large Market

Investopedia: Time For Hologic To Translate Technology Into Results

How does an investor profit if a company has the best technology in the world, but can't deliver market-beating returns? That's probably a harsh intro for Hologic (Nasdaq:HOLX) today, but the fact remains that the company has to demonstrate that it can drive tomosynthesis adoption and solid growth in diagnostics for this stock to really work over the coming years. That puts the shares in a challenging place for investors; bulls can likely see a lot of value here, while bears will point to the high debt and oncoming competition and likely conclude that the shares are best avoided for now.

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http://www.investopedia.com/stock-analysis/2012/Time-For-Hologic-To-Translate-Technology-Into-Results-HOLX-GE-CPHD-BDX1114.aspx

Seeking Alpha: For Exact Sciences, Approval May Be The Easy Part

Much as investors may wish it were true, it's not always the case that a great drug, test or medical device meets with real commercial success. Launching new med-tech products always involves an intricate dance between efficacy, patient control (in other words, doctors' "turf"), compliance, cost/benefit, and reimbursement. That could prove to be especially relevant in the case of Exact Sciences (NASDAQ: EXAS) and its non-invasive Cologuard colorectal cancer test.

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For Exact Sciences, Approval May Be The Easy Part

Seeking Alpha: Hologic Seems A Little Underrated

Big deals carry big risks, and Hologic (HOLX) does not have a great record with big deals. Couple that with a difficult hospital spending environment and I can understand why Hologic shares trade at a discount to fair value. That said, investors who want to buy into women's health and diagnostics could certainly do worse than to consider this name.

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Hologic Seems A Little Underrated

Investopedia: The Week Ahead In Healthcare

With earnings season now in swing, it looks as though the state of the healthcare market is "more of the same." Company executives have managed Wall Street expectations such that companies are technically posting above-expectation earnings, but a lot of this outperformance seems to be coming from lower tax rates, "other income" and lower operating spending. Overall revenue growth is still not impressive, and with the market-beating returns seen across the sector so far this year, there could be some risk to these stocks if revenue growth doesn't accelerate towards the end of the year.

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http://stocks.investopedia.com/stock-analysis/2012/The-Week-Ahead-In-Healthcare-JNJ-SYK-STJ-ABT0723.aspx

Seeking Alpha: Another Disappointing Quarter Still Doesn't Make Cepheid Cheap

So far, this has been a tough quarter for some of the growth darlings of the medical technology sector. It's still somewhat early in the reporting cycle, but Intuitive Surgical (ISRG) and MAKO Surgical (MAKO) have both disappointed, and Cepheid (CPHD) joins that unfortunate list for the second time in as many quarters. While the sort of operational disturbances that Cepheid is seeing are not at all uncommon with small, young companies, the cripplingly high expectations built into the stock give it little room to breathe.

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Another Disappointing Quarter Still Doesn't Make Cepheid Cheap

Seeking Alpha: Trading Margins For Growth Isn't Going To Help Becton Dickinson

Becton Dickinson (BDX) has been a single-digit grower for most of the past decade, and that really hasn't seemed to bother anybody. There's nothing wrong with consistent high-quality performance, particularly when accompanied by improving free cash flow conversion. Although one quarter, or even one year, proves little, I do wonder if the recent trends in margins are just an aberration or a sign that management is having to push harder to find more growth.

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Trading Margins For Growth Isn't Going To Help Becton Dickinson