GenMark Diagnostics (GNMK): Seven Signs of Sickness

GenMark Diagnostics ( GNMK ) stock is just about to get a shot of reality. And the jab will go straight into stockholders' hearts and wallets.

GenMark is a never-profitable Carlsbad, California company that sells diagnostic testing equipment used to sniff out viruses, bacteria and problems such as Warfarin sensitivity. The company is struggling with:

*Financing is already registered and dilutive stock selling could be imminent.

*Event fueling the company's stock rally - CE Mark designation - is now worthless to GenMark.

*A common, virtually indistinguishable product.

*Wealthy dog-eat-dog competitors, much more favorably valued.

*Highly compensated, low-performing management.

Investors may find other viewpoints here . Meanwhile, TheStreetSweeper has detected seven signs of sickness poised to drop this stock:

*1. Wait For It, Wait For It: Stock Offering

The last thing investors want to see is a big stock offering that will dilute the shares they're holding.

But that's exactly what GenMark has ready to go. Stock worth $30 million (over 3 million shares) may now be sold at any time:

(Source: Company SEC filing)

Shareholders won't have long to wait to feel the sting of dilution ...

What's more once those 3 million or so shares are sold, GenMark can always go back and clean off the shelf. An overhang of another $95 million worth of potentially dilutive stock - about 10 million shares or so - is just waiting to be sold at the drop of a hat.

The timing is perfect because shares have been flirting around the year's record for some time.

Why has the stock popped?

Ah, that's another story. It's a story that ultimately turned on GenMark like some kind of mad scientist ...

*2. Company's CE Mark: Now Worthless

The company desperately needed good news after investors fled the stock in early May. People were irritated by the earnings report showing revenue had slightly beaten consensus as it sluggishly moved to ~$11 million. Earnings had missed consensus, falling more deeply into the red at $ - 12.96 million .

The stock reflected company struggles as the price dropped from around $5.70 to $5.25 per share.

(Source: Yahoo Finance )

Meanwhile, GenMark had been chasing the CE Mark since 2012 . Managers could have expected CE news to drive up the stock as it cleared the way for ePlex testing system sales in Europe.

Seemingly fortunate at the time, GenMark announced on June 8 , 2016 that it had received its CE Mark designation. Sure enough, the stock smashed above $9.40 per share.

Then the unexpected happened. Less than three weeks after GenMark got its CE Mark, Britain shocked the world by voting to exit the European Union.

The historic trade barriers previously knocked down by the CE Mark have now jumped back up. GenMark wasted all those years and millions (~$3 million) pursuing the designation.

Unfortunately, Britain hasn't negotiated a trade deal since the European Union materialized in the 1970s. So now the sovereign state is scrambling ... at wit's end, apparently, to negotiate new trade arrangements. 

So everyone had pinned great hope on the newly CE Mark-approved ePlex launch in Europe in the third quarter.

But the CE Mark is now essentially worthless.

*3. The Big Sting: Executive Compensation

While the company loses millions, executives are raking in millions. Our chart shows top executives' compensation.

(Source: Company SEC filing )

Nearly $9 million - including $3 million for the chief executive alone - seems generous.

After all, GenMark lost more than that last quarter ... nearly $13 million.

The company has never made a profit in six years of existence and doesn't expect to make money into the foreseeable future .

At this point, should shareholders pick up the tab so executives can keep nibbling caviar and sipping champagne each morning? Well, read on...

*4. Uh-Oh!: What Numbers Say About GenMark's Worth

GenMark's money-makers overshadow the money made.

Indeed, investors may look at different ways of valuing GenMark. We could check P/E but earnings, including future earnings, are just not in the works:

    (Source: Yahoo Finance)

So let's look at book value. Here's the company's total asset value that shareholders would receive if GenMark were liquidated ... $0.91. That's right, 91 cents :

(Source: Yahoo Finance )

So today's investors are paying 10-plus times again for the stock!

*5. Uh-Oh II: What Some Analysts Say About GenMark's Worth

But what do analysts think?

They are usually an overwhelmingly optimistic bunch, so analysts placed an average $12 target. But the chart below shows what they think GenMark stockholders might earn for each share. Keep in mind that these optimists factored in hoped-for European sales that are now in limbo.

(Source: Yahoo Finance )

TheStreetSweeper agrees with aspects of a May report by Cowen, which likewise based projections partially on the ill-fated ePlex launch in Europe. The rather cautious analysts baked in optimism and selected a conservative one-year price target:

(Source: Cowen and Company)

Yes, that estimate is about 3 bucks below today's share price. Cowen has lowered the target repeatedly. Now they're aiming almost 10 bucks lower than the January 2014 target of $16.

That $6.50 price target is yet another factor indicating the stock's ridiculously outsized price point. And we still need to consider the "Big C" ....

*6. Competitors to GenMark: Sorry, Old Boy

GenMark's competition is fast and furious. And well-funded.

By GenMark's own words, its product line is a lower risk medical device that is "substantially equivalent to other" similar products.

Therein lies a big problem. GenMark offers two products. First is the old-timer diagnostic tool called the XT-8. Second is the ePlex, basically the easier to use, faster "sample-to-answer" model.

But the old-timer has had only about 633 installations even though it's been FDA approved since 2012. Adoption has been so sluggish that GenMark has a "reagent rental" system that hands customers the equipment for free . Customers are charged rent for the reagents and test cartridges. The company books the rental fees as product revenue.

But thanks to low barriers to entry, similar products can breeze past the Food and Drug Administration and get to market fast.

The most formidable rival, the one that probably keeps GenMark execs awake most nights, is BioFire Diagnostics.

A subsidiary of the $1.965 billion French company Biomerieux ( BIOX.PA , 2.38 P/S), BioFire offers numerous products including a similar, FDA-cleared testing system called "FilmArray."

As GenMark awaits clearance for ePlex, so does BioFire expect imminent FDA clearance of its improved model, "FilmArray Torch:"

(Source: BioFire , YouTube)

The list of rivals goes on and on. Below are a few comparisons of GenMark and competitors with similar technology, such as Luminex and Nanosphere.

(Source: Bloomberg)

The chart below compares GenMark with companies that offer shareholders earnings rather than losses.

(Source: Bloomberg)

GenMark trades for 7 times future sales and 9 times past sales. So the stock is 2 or 3 times more expensive than its peers.

*7. Insiders: Sell, Sell, Sell!

Insiders have been unloading their company stock like mad this year. The stock price doesn't seem to matter much to GenMark leaders.

(Source: insidertrading.org, click for details )

Though there was some insider buying in 2015, company leaders have repeatedly sold stock ( here ) since 2014 ... never mind whether the stock traded for ~$4 or ~$13 per share.

*Conclusion:

Management has injected GenMark with a stinging near-term catalyst ... those millions of potentially dilutive shares begging to be unleashed. But the risks continue into basic business problems that unrealistic analyst expectations can no longer obscure.

Our own diagnostic tests on GenMark show the company's mild rash has grown into pitiful complications that could hit shareholders. So TheStreetSweeper expects these hot shares will quickly swoon and slide down by about 45%.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in GNMK and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org .