Co-Diagnostics (CODX) has already benefited from the fight against COVID-19 through its Logix Smart COVID-19 tests from March this year. The testing mechanism which uses a single step RT-PCR process provides results in less than two hours.
Revenues which were practically non-existent last year have sky-rocketed by more than 40,000% in Q2-2020. The stock price also followed suit shooting up by 100% but has since then fallen down to a more modest level of $13.5.
Figure 1: Stock price performance to date and revenue progression until the second of 2020:
Many who jumped aboard the upside story are now rich and the question in most minds now appears to be whether the $28-30 levels can be reached again.
In order to provide an answer, an analysis of the market for COVID-19 diagnostics becomes mandatory including growth drivers as well as competition.
The diagnostics market
The COVID-19 epidemic continues to progress rapidly throughout the world with testing, quarantine measures for asymptomatic persons and admission to hospitals for those with symptoms seen as the only viable solutions till the availability of a viable magic bullet vaccine.
Also, despite the availability of optional antigen and serological testing kits, RT-PCR tests like the one offered by CODX’s Logix Smart test kit remain the surest way to confirm COVID-19 infection.
Exploring further, antigen-based testing has a relatively poorer performance, particularly in the event of a low viral load whereas serological tests detect specific antibodies produced by the body as an indirect sign that the body is fighting against the SARS-CoV2 virus.
Therefore, the recommended more direct viral detection method for diagnosing infection still remains RT-PCR tests (also called molecular tests).
Now, even within PCR testing itself, competition has grown fierce due to the high number of diagnostic companies involved.
Figure 2: FDA-approved testing kits for COVID-19:
Still, anyone who has been tested for COVID-19 using RT-PCR tests knows the difficulty in getting a sample extracted from deep inside the nasal entry (swab method). There are infection risks for the medical personnel undertaking the extraction too.
Furthermore, due to the amount of respiratory tract fluid samples required to be collected, the strict transportation conditions required to transport these, there are significant constraints in the management of testing, especially when there are thousands of specimens.
Figure 3: Extraction of sample for testing:
Hence, new types of tests are gradually emerging which make it possible to envisage improvements at the sample collection stage and later, facilitating the analysis of the samples collected.
These alternative solutions enable quicker, less painful extraction and are less risky for the medical personnel.
One such solution is provided by OralDNA Labs which has developed an oral rinse saline technique with an amended emergency use authorization received from the FDA earlier this month.
This is a possible game-changer in COVID-19 testing.
Figure 4: Features of the oral rinse saline tests:
Source: Table compiled by author from contagionlive.com
Looking deeper, OralDNA Labs uses CODX’s Logix kits and this is the first such approval in the U.S.
As per a remark by Dwight Egan, CEO of CODX:
We are pleased that Co-Diagnostics technology is being used in the first FDA EUA for a test using a simple saline 30 second swish and gargle collection. Because it eliminates the need for a nasal swab, oral rinse technology has the potential to dramatically improve comfort and accessibility of testing in our communities and we believe this authorization by the FDA provides additional confirmation of the quality, versatility, and adaptability of our CoPrimer™ platform.”
Also, as CODX’s certified customer, OralDNA Labs has to purchase additional kits for expanding capacity.
Still, this remains a dynamic market with some competitors offering alternative solutions aimed at facilitating extraction of samples for testing. Thus, there are risks of CODX being subject to pricing pressures.
Another diagnostics play, Fluidigm (FLDM) chose saliva as an alternative to oral rinse to facilitate collection. Hence, the saliva specimen is extracted using a pipette or by spitting.
Due to the test being faster, non-invasive and painless, it is an alternative to nasopharyngeal samples and this is the reason Fluidigm has received the FDA’s Emergency Use Authorization (EUA) for its Advanta Dx SARS-CoV-2 RT-PCR Assay in late August.
Figure 5: Advanta RT-PCR kit:
In addition, the company’s saliva-based tests have been selected by the U.S. Department of Health in mid-October for accelerated testing at the federal government level.
Taking finances, the company has been granted funding for a total contract value of $34 million, aimed at expanding production capacity capability for COVID-19 testing.
Therefore, while Fluidigm has yet to expand capacity, CODX started shipping Logix Smart COVID-19 tests back in February this year and its Salt Lake City’s facility can produce 50,000 test kits per day.
In addition, the company has another 100,000 daily production capacity with its Indian JV partner, CoSara Diagnostics and has entered into an agreement with Promega, a manufacturer of products for biotechnology and molecular biology in Wisconsin for additional production.
CODX’s total manufacturing capacity stood at about 3 million tests per week in August and, in addition, has licensed its CoPrimer technology to LGC Biosearch Technologies, an international company whose footprint covers over 200 countries.
Last but not least, CODX has also developed saliva-based testing and, in this respect, has already received the FDA nod for emergency use of its testing kit at the beginning of August.
Figure 6: The CoPrimer technology used to build the CRL Rapid Response, a saliva-based COVID-19 testing kit:
Quidel used to produce flu vaccines before diversification into COVID-19.
Now, when a person has symptoms of flu, which are similar to those of COVID-19, it is important to know whether the infection is a routine flu or a potentially deadly case of COVID-19.
CODX is also addressing this problem through the development of a multiplex test designed to differentiate between COVID-19 and flu.
In this context, CODX has a first-mover advantage in COVID-19 diagnostics and the multiplex testing kits could be another milestone for the company as a developer of disease detection kits, the reason being that health experts expect the U.S. alone to have about 100 million cases of flu and flu-like symptoms in the coming fall and winter months.
Therefore, by expanding horizontally across different geographies and vertically along the diagnostics value chain, CODX is rapidly outsmarting its competitors and the valuations should be impacted accordingly.
Valuations and key takeaways
First, CODX has the potential to continue its revenue growth trajectory.
In that regard, as of August 17, the company had already received total orders approaching the $50 million mark. These were inclusive of revenues obtained in the first two quarters of 2020 as well as sales from the India joint venture.
Second, in addition to the U.S. and India, the Logix tests have also been granted clearance in several other markets, including the EU, Mexico, Australia, Colombia, Argentina, and South Africa with others in progress.
Therefore, assuming a doubling up in sales figures from the second quarter’s $24 million to $48 million for the rest of the year, the current trailing enterprise to sales valuation of 14.55 looks to be on the lower side.
Also, CODX does not have any long-term debt with an EV (enterprise value) at $375 million.
Figure 7: Comparison with peers:
Source: Seeking Alpha
The company ended the second quarter with $18.6 million of cash including approximately $14.2 million from the sale of common stock (equity offering).
Still, excluding financing activities, CODX generated its first positive cash from operations ($1 million) in Q2-2020 since the last three years.
Exploring profitability, same as Quidel, CODX has the highest gross and EBIT margins when compared to the very large caps pointing to differentiated manufacturing and operating models.
However, in contrast to Quidel, CODX does generate positive earnings.
Moreover, as for the latter’s operating expenses, these were $3.4 million, representing an increase of about 58% over the second quarter of 2019. Of the increase, approximately 24% consisted of staff cost and 10% represented expenses incurred in packaging of the environmentally sensitive testing products for shipping purposes.
However, the remaining 24% (58 minus 34) was “reserve for doubtful accounts”. Now, 24% appears to be on the high side as reserve for doubtful accounts is normally 4%.
On investigating deeper, this increase in allowance for bad debts may be in relation to reputation damage after a complaint by investors who feel that the company may have made some overly optimistic claims about the efficacy of its COVID-19 test results.
As per an extract of the complaint (proposed class action) made by GELT TRADING LTD, the plaintiff on June 15, 2020:
There are, however, some companies and corporate executives who have sought to unfairly exploit this novel pandemic for their financial gain-including by, among other things, misleading the public about the efficacy of their products in combatting the pandemic. Defendant Co-Diagnostics is one of those companies.”
Moreover, the plaintiff refers to the stock action in the mid-May period when there was an abrupt fall in the share price from $24 to $20 following adverse information about CODX’s test results in the media.
Upon verification, there was indeed some intensive insider selling as per Marketbeat.com from May 20 to May 28 for a total amount of around $1.35 million.
However, the market seems to have largely ignored this news as afterward, CODX’s stock pursued a steady rise to the $30.80 level. This peak coincided with the company obtaining the FDA’s approval for its saliva-based COVID-19 test at the beginning of August.
Most importantly, the Logix Smart kit is present alongside other similar products on an FDA list entitled “COMBATING COVID-19 WITH MEDICAL DEVICES“, updated on August 25, 2020.
Therefore, the company faces a lawsuit this could possibly drag for years and induce volatility risks in the share price. Also, in case found guilty, there could be large fines imposed by the courts and, therefore, implications on the financial results.
However, I have not been able to obtain evidence that the CODX testing kits have been penalized by the health authorities.
Furthermore, with COVID-19 infection rates on the rise and the flu season coming, the company has plenty of work.
Figure 8: Daily new cases of COVID-19 infection:
Therefore, the company should generate double-digit sales growth for the third quarter and there could be an upside. CODX could again flirt with the $20-25 levels by the end of this year, but it will also depend on how many investors join the lawsuit.
In this context, short interests currently stand at 26% and the stock is likely to fall to the $11-13 levels in the coming weeks.
It is important for investors to obtain further updates concerning the legal issue.
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.
Additional disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.
I am long XLV.