GenMark Facing New Challenges Going Into 2019

I can understand if long-term GenMark (GNMK) shareholders feel a little cursed. Although there have been plenty of self-inflicted issues that have dented management credibility and pushed back development and revenue timelines, even when management execution has been good, new challenges have emerged to threaten the company’s longer-term revenue ramp. To that end, adverse coverage decisions, prospects for a more mild flu season, and threats of/from new competitive entrants have cut these shares almost in half from their late summer peak.

GenMark shares do seem undervalued, and I believe the company’s core ePlex platform does address real and legitimate needs in the hospital testing space. I also believe, though, that competitive and reimbursement pressures are unlikely to abate and the company is likely to face some hard choices with respect to funding/liquidity before achieving cash flow breakeven. Accordingly, I have to consider this a pretty high-risk opportunity.

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GenMark Facing New Challenges Going Into 2019

GenMark Diagnostics Starting To Deliver, But Consistency Is A Key Issue

If you tried to play a drinking game with the number of times I've mentioned consistency and/or execution in relation to GenMark Diagnostics (GNMK), you would risk serious damage to your liver. Even so, the ability of this company to deliver on the promise of its ePlex multiplex diagnostic system is arguably the key variable in the entire investment equation. The question of whether or not multiplex testing delivers value for health care systems is more or less settled, but whether GenMark can generate adequate commercial interest in its system, manufacture them profitably, and develop an adequate test menu in time are not settled.

With good flu-related demand in the first quarter and the recent submission of the gram-positive sepsis to the FDA, I think things are looking better for GenMark, and the shares are up about 50% from last update in March. If management continues to deliver, this could only be the beginning, as GenMark serves a market that can support hundreds of millions of dollars in revenue at better multiples than the shares currently enjoy.

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GenMark Diagnostics Starting To Deliver, But Consistency Is A Key Issue

Yet Again, Investors Have To Readjust Expectations For GenMark

The past 12 months have been rough for GenMark Diagnostics (GNMK), as this molecular diagnostics company has struggled to meet its own timelines and live up to Wall Street expectations. While better-than-expected fourth-quarter results gave investors a little renewed confidence, guidance for 2018 brought that honeymoon to a quick end.

GenMark remains a high-risk, high-reward speculative play in molecular diagnostics. This recent flu epidemic has solidified the place of multiplex systems in clinical practice, but GenMark is facing an increasingly difficult competitive market, and there doesn't seem to be as much excitement in the channel as there once appeared to be. A revenue figure of $200 million in 2022, growing to over $400 million in 2027, with double-digit FCF margins can support a meaningfully higher share price, but the company's cash situation is far from ideal, and it really needs to start posting beat-and-raise quarters soon.

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Yet Again, Investors Have To Readjust Expectations For GenMark

GenMark's Credibility Is Dented, But The Sell-Off Is Excessive

If anything has been consistent about GenMark (NASDAQ:GNMK) over the past couple of its years, it has been this small diagnostic company’s difficulties in meeting its own development timelines. While the company did see the approval of its key ePlex multiplex molecular diagnostics system this June (after a roughly two-year delay), the company recently missed earnings expectations in a big way, lowered guidance for both revenue and system placements, and announced further delays for its blood culture cartridge.

GenMark is the kind of stock that will make investors prematurely grey as they wrestle with the meaningful potential of the system (and the molecular diagnostics market more generally), management’s execution issues, and the competitive landscape. I do believe the major downward move in the stock since August has created another opportunity for aggressive investors, but that opportunity has to be balanced against the very real risk that this is a company that will never get its ducks in a row and/or will not be bailed out by a buyout at an attractive multiple.

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GenMark's Credibility Is Dented, But The Sell-Off Is Excessive

Closer To "Go Time", GenMark Diagnostics's Ability To Execute Is Still A Key Question

Hard as it can be to develop a new diagnostic system and get it though the FDA approval process, that's only part of the battle in achieving success in the diagnostics market. GenMark (NASDAQ:GNMK) has weathered some ups, downs, and delays on its path to market for its new ePlex system, but the company should receive FDA 510(k) approval for the system within weeks and begin launching a system that could deliver over (and perhaps well over) $1 billion in revenue to this small-cap med-tech company.

Of course, it's never quite that simple. GenMark has had its issues reaching the milestones laid out by management on time, and that still remains the case. With U.S. approval looming, significant questions remain regarding management's ability to execute on manufacturing and sales, to say nothing of how the ePlex will fare in the real world against competing systems from bioMerieux (OTC:BMXXY), Luminex (NASDAQ:LMNX), Danaher's (NYSE:DHR) Cepheid, and other existing or would-be players in the market.

I'd still describe myself as cautiously bullish on GenMark, as I believe ePlex is a good platform that answers many of the challenges and needs of hospital and lab customers. The shares have continued to head higher since my last update (though it has been a bumpy ride), though, and the risk/reward isn't quite as favorable as it has been.

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Closer To "Go Time", GenMark Diagnostics's Ability To Execute Is Still A Key Question

GenMark Has Put A Lot Of Doubts To Rest, But There's Still More Work To Do

I've been bullish on GenMark (NASDAQ:GNMK) for a while, but that hasn't always (or even often) been a particularly easy or rewarding position to hold. The shares bounced between $9 and $14 for the first year or so after my first piece on this small diagnostics company and slid down to below $5 in the following year before starting a climb this year that peaked at over $13.

The reason for the quick turnaround in sentiment isn't hard to find - the company finally got its CE Mark for its new ePlex system, and with that laid to rest most of the lingering concerns about system reliability. The company still needs to submit its application to the FDA and actually launch the device, but the company's path to $500 million-plus in sales now looks more "when" than "if" than it has in a very long time.

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GenMark Has Put A Lot Of Doubts To Rest, But There's Still More Work To Do

Seeking Alpha: The Excruciating Wait At GenMark Drags On

When I last wrote about GenMark Diagnostics (NASDAQ:GNMK) in October of 2015, I said things like "barring another significant delay" and "can ill-afford further disappointments on the commercial timeline" with respect to the value to be gained from the ePlex system. Well, to pull a page from the writers of clickbait, "you'll never guess what happens next..."

Yep. More delays. Instead of getting the ePlex on the market in Europe before year-end of 2015 and on the U.S. market in mid-2016 (ahead of the key flu season), European commercialization has slipped out of the first quarter of 2016 and U.S. approval may not come until November or December of this year - which will mean that the company misses the large U.S. flu season almost entirely.

This isn't the end of the line for GenMark, but I can wholeheartedly understand why it may be past that point for the patience of many investors. These seemingly endless delays have given GenMark's prime rival (bioMerieux (BIM.PA)) the opportunity to get more of its own devices into the field and it also increases the future dilution GenMark is likely to experience as it incurs more cash outflows during the earlier commercialization process. There does still seem to be value here, but it the numerous disappointments mean that it takes a nearly masochistic level of patience to see that value come to fruition.

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The Excruciating Wait At GenMark Drags On

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