Co-Diagnostics Coronavirus Test Is Likely Ineffective - $1 Price Target
Summary
- We’re skeptical that Co-Diagnostics (CODX) new coronavirus test works, as news came out that the CDC’s test may be flawed.
- There is nowhere for CODX to test the coronavirus COVID-19 strain except China or a government lab in the US.
- There is no committed institutional ownership of CODX and a major holder recently liquidated its entire position.
- CODX' enterprise value to sales ratio is an eye-watering 608, making it one of the most overvalued medtech companies that we have ever seen.
- CODX traded at below $1 before the coronavirus hype happened. We predict it will sell-off towards that level as coronvirus news fades.
When news started hitting the headlines that the coronavirus was rapidly spreading in China, Co-Diagnostics (NASDAQ:CODX) was one of the first healthcare companies to issue a PR about it. However, our research found that there isn’t very much substance behind the company, and their technology isn’t useful compared to the competition. CODX has only sold two of their diagnostic machines for the Zika virus over the past year since it has been available in the US and EU.
Its coronavirus test is currently sold on a RUO (research use only) basis, and CODX hasn’t released any data whatsoever that suggests the test works or is an improvement to what’s already available. Larger, more established diagnostic companies than CODX and government research organizations are distributing coronavirus tests.
The Centers for Disease Control and Prevention (CDC) has created testing kits for the coronavirus. They have access to the COVID-19 strain in Atlanta in order to do tests. And even then, they still have reported problems with the test. CODX doesn’t have access to the COVID-19 strain to do testing on it which is necessary to create an effective test. As far as we know, they aren’t getting access to it in the US, and they aren’t going to China either to test the virus. Those are the only places to find it.
While CODX may sell a token amount of its diagnostic tests of the coronavirus for research purposes, enough for a press release ("PR"), we don’t believe it will be anything material that would increase the fundamental value of the company.
Once the coronavirus is contained and disappears, most of the stocks that got a boost from the panic will return to close to their share values before the coronavirus headlines started. We saw this phenomenon happen with many other temporary hyped-up sectors over the past few years. Some examples are Ebola, Zika, artificial intelligence, fintech, blockchain, and cannabis. For a temporary amount of time, stocks in those sectors, especially pure plays, rose 2x to 20x their previous value. But once the sector buzz wore off, those stocks returned to their fundamental values, and some even went bankrupt because they never had a viable business with cash flow.
In CODX’s case, we don’t believe it has a good, fundamental business. We expect it to return to sub $1 when the coronavirus passes, which is said to be in April by some experts. CODX was trading at below $1 for most of last year.
The Zika Test Is Co-Diagnostic’s Real Product, Not The Coronavirus Test
On 2/13/20, CODX issued a PR titled: “Co-Diagnostics, Inc. to Present its Rapid Response to New Coronavirus in Washington DC Conference”.
We find this PR strangely written. There’s no link to the conference in the PR, so we had to do a Google search to find the website. The conference is called the “3rd International Conference on Zika Virus and Aedes Related Infections”, and its website is: “zikaconference.com”.
First, we found it a little strange that the title states that the company is presenting in "Washington DC" instead of saying the name of the conference. This is strange to us, because for example, when a company presents at the JP Morgan Healthcare conference, the company usually says that they are presenting at the JP Morgan Healthcare conference in the PR, like here. Not "the company is presenting in San Francisco".
In this case, the conference just happens to be located in Washington DC, it could've been in any other city. The conference isn’t run by a government organization, but by a for-profit Israeli company called Target-Conferences.
Second, the PR states:
“Co-Diagnostics, announced today that it has been invited to be a featured speaker to present its rapid response to the new coronavirus (Covid-19) global health concern, as well as its multiplex PCR solutions for mosquito-borne diseases, at the 3rd International Conference on Zika Virus and Aedes Related Infections. “
On the conference website, it shows that CODX is a sponsor of this event, not an “invited featured speaker”. We believe that claiming that the company is an invited speaker makes it appear that the company is an authority on the coronavirus, which we don’t believe it is.
Looking at the invited speakers section of the website, all of the speakers are professors from Universities, none from companies. So of course, nobody from CODX is listed. However, you can find the CODX logo under the sponsorship section. This means that CODX payed to be in the conference, and wasn’t “invited” except to open their wallet. As shown below:
Third, CODX got into the conference to pitch its Zika virus test, not the coronavirus. The PR reads:
“However, in the time that the novel strain of coronavirus has captured the world’s attention, thousands more have continued to become infected, suffer, and even die from mosquito-borne illnesses that are often unknown in the developed world until outbreaks occur. Our catalog of highly-specific assays includes multiplex solutions for both vector control as well as in vitro diagnostics for human testing, and I am pleased to be able to present the quality of our technology to the dedicated, multi-disciplinary participants at this conference."
The way we interpret this statement, is CODX’s real product is its Zika test, not its coronavirus test. The PR mentioning the coronavirus was just feeding into the hype in our opinion. And CODX’s Zika test sales have been very meager over the past couple of years. We believe its Zika test sales are the true measurement of value for the company, not a coronavirus test.
CODX’s key scientists don’t appear to have any experience with any strain of the coronavirus. Looking at its three scientists profiles from Linkedin: Israa Alshamy, PHD, Jana Kent, and Brent Satterfield, none of them list any experience or have written any publications on the coronavirus.
We emailed the company to ask about this strangely worded PR. They immediately responded that they are presenting at the lunch symposium on Saturday in a presentation titled:
"Revolutionary Molecular Diagnostics: multiplex tests for mosquito borne diseases and coronavirus emergency response."
Here is the conference schedule.
To Verify The Accuracy Of A Coronavirus Test, A Clinical Sample Is Needed
As we stated earlier, we don’t believe CODX has a clinical sample of the coronavirus strain in order to verify the accuracy of their test. The coronavirus isn’t new, it has always been in the US. For example, this tweet shows a picture of Lysol disinfectant spray, and it shows the Human Coronavirus as one of the viruses it can kill.
But the particular strain that is causing the epidemic in China, COVID-19, is new. The CDC has been testing the strain in its headquarters in Atlanta. Since late January, the CDC has rushed to distribute the kits to allow states to do their own, faster testing rather than having to ship all samples to the CDC. However, on 2/12/20, the WSJ reported that the CDC tests may be flawed. The CDC said that it will ship new ingredients to labs that encounter problems. Nancy Messonnier, director of the CDC’s National Center for Immunization and Respiratory Diseases, said in a press conference:
The problem is likely reagents, or enzymes, needed to carry out the tests. Things may not always go as smoothly as we may like.
The CDC has a lot more resources and motivation to create a successful coronavirus test than CODX. According to Wikipedia, the CDC had an annual budget of $11.9B in 2018. 85% of that budget is awarded through grants. This leaves 15% of the budget, or $1.79B, for the CDC to conduct their own R&D and create new tools and devices like this coronavirus test kit. Compare that to CODX’s R&D spending of only about $1.3M per year. Clearly we can expect the CDC to come out with a better, more thoroughly tested, product.
This article features Charles Chiu, a medical researcher at UC San Francisco, and his work developing a coronavirus test kit. The following dialogue from the article shows the difficulty of creating an effective test:
CHARLES CHIU: We're developing a test that is going to be fast, portable, cheap and suitable for point-of-care settings.
PALCA: Chiu is at the University of California, San Francisco. His test uses a new technology called CRISPR. It could be ready in months.
CHIU: We do need clinical samples from infected patients to be able to validate, essentially verify the accuracy of the test.
PALCA: And those are not easy to come by at the moment, so proving the test works will be tricky.
We have not heard CODX express any of these challenges with its coronavirus test. The company also hasn’t shared any data. This makes us skeptical that it may not have a working product.
Co-Diagnostics’ Revenues Are Miniscule, Which Suggests A Lack Of Interest In Its Technology
CODX sells the Logix Smart CoPrimer polymerase chain reaction (PCR) diagnostic test. This PCR test is a way to detect a virus, and this technology isn’t new. Many other diagnostic companies sell PCR tests, as you can find from a simple Google search.
Despite consistent big words and optimism from CODX’s management, the company has failed to generate any meaningful revenues or interest in its diagnostic products.
From a CODX PR from 2/28/19 (emphasis ours):
Often overlooked in this space is the fact that a test used for mosquito abatement by definition is not testing human samples, and therefore is not bound by the strict regulatory requirements governing the use of in vitro diagnostics (IVDs). This basically means that Co-Diagnostics can begin selling in-demand tests currently being developed in advance of regulatory approval, including to testing centers throughout the United States without first obtaining a 510(K) or Premarket Authorization (PMA) approval from the FDA. This potentially represents an exciting revenue opportunity for the company.
The following are select financials from the company over the past seven quarters, that show CODX's "exciting revenue opportunity":
Source: SEC filings
The above results are in contrast to the CEO’s optimistic outlook over the past year and a half. In all of 2018 and Q119, CODX didn’t sell any diagnostic devices. Revenue did rise a little in Q219 and Q319, but it’s still an immaterial amount in relation to the company’s $50M+ market cap.
The following are CODX’s expected and reported revenues shown on Bloomberg:
Source: Bloomberg
As shown above, CODX missed its revenue estimates by a whopping 88% and 86.5%, respectively, for Q219 and Q319. With the company’s recently added shares, the outstanding share count is now 27.6M. At $3.20 per share, its current enterprise value (EV) is about $73M. With a trailing 12 month sales of about $120K, CODX is trading at an EV/S ratio of an eye-watering 608!
The company stated in its Q219 quarterly report that $50K of the $61.6K of revenues was from the sale of two MDx Devices, primarily to test for Zika, to mosquito abatement districts. A mosquito abatement district is in charge of controlling the number of mosquitos in the area and limiting the transmission of mosquito-borne disease. The remainder of the revenue was service revenue from designing custom tests for a large agricultural company. The cost of sales for the two MDx Devices was $38,809, which leaves the gross profit only about $12,200 for the devices, which is a gross profit margin of only 24% for CODX.
The Q319 report stated that CODX’s $41K in revenues came from sales of diagnostic tests, fees charged for design services, and $14K for equipment sales. The company didn’t sell any MDx devices that quarter.
Co-Diagnostics Does Not Have Any Committed Healthcare Funds As Shareholders
Looking at CODX’s institutional holders shows that the majority of its top institutional holders are Index funds, as shown below:
Source: CODX Major Holders On Yahoo Finance
As shown above, the Index Fund Vanguard is the largest shareholder, the rest of the holders listed are also primarily index funds, and own below 1% of the company.
A fund that was a major holder that isn’t listed above is CVI Investments. On 2/11/19, CVI filed an SC 13G filing showing that it owned 1.3M shares, or 7.8% of CODX. Then, just recently, on 2/10/20, CVI filed an amended SC 13G/A filing that it doesn’t own any shares of CODX. What that tells us, is a former major holder of CODX took this coronavirus rally as an opportunity to liquidate its position. This is an indication that, in the fund manager’s opinion, the company’s coronavirus test won’t take the company to the next level of value.
Additionally, CODX has done two equity raises over the past three weeks. One for $5M on 1/24/20, and one for $10M on 2/11/20. Since they were done, there haven’t been any new investors filing an SC 13G filing. That tells us that all of the investors in the offering quickly sold their shares for a profit and have no interest in being long term investors in CODX.
Co-Diagnostics Recent Rally On A Coronavirus Test Sale Is A Selling Opportunity
In the afternoon of 2/10/20, CODX announced that they have sales of their new coronavirus test. We are skeptical of this PR for a few reasons. First, as we’ll show in this report, this company is very promotional. The CEO goes on many investor shows to pitch the stock to investors. If any good news happens for this company, they usually shout it from the rooftops.
Yet, in this PR, details are lacking. It states:
The order calls for delivery of tests to be distributed to various international markets and included payment for the initial shipment of assays… We are pleased to be able to offer a product to this market that excels in being both sensitive and specific, the two benchmarks for accuracy in molecular diagnostics.
The language used above is very vague. CODX doesn’t say how much money CODX is receiving for selling its test. It doesn’t say who the customer is who made the order. It doesn’t explain why the customer wants to buy the test, or where the tests will be taking place. It says the test “excels in being both sensitive and specific”, which are broad buzz words in regards to diagnostic tests. How sensitive and specific? There is no scientific data included in the PR or anywhere else.
In our opinion, we can assume that the answers to these questions aren’t good news to the company, or we believe they would’ve been answered.
Current logistics challenges make it hard to deliver to China
With limited flights going to and from China, it is very difficult to deliver diagnostics tests there, or most other products. Every airport is on lockdown and everyone must go through a screening process.
On 1/30/20, Roche reported that it is struggling to deliver coronavirus diagnostic tests to China. From the article:
Swiss drugmaker Roche is struggling to deliver diagnostic tests for the coronavirus to large Chinese cities after Communist Party rulers halted people from entering and leaving in a bid to halt the spreading outbreak.
Roche does not anticipate rising business from its coronavirus tests, as they had to be delivered quickly, making any negotiations over price impossible. To start, Schwan said, the company just gave the tests away for free.
"You can forget this as a business opportunity,” he said, adding that the company had been able to build up its goodwill with public health authorities.”
Roche (OTCQX:RHHBY) is a $300B diagnostics and pharmaceutical company, one of the biggest in the world. Any problems that they have delivering coronavirus tests to China would be even harder for tiny CODX.
Conclusion
In our earlier report on NanoViricides (NNVC), published on 2/3/20, we stated that we believe it would be trading at $3-$5 as the coronavirus newsflow fades. It’s a similar story to CODX, as the company tries to convey to investors as positive a picture as possible of how it can contribute to helping coronavirus patients. While at the same time, not sharing any setbacks or difficulties, and revealing very little data and details.
The reality is, we don’t believe either company will contribute a product that helps coronavirus patients, but they will continue to play on coronavirus hype to try and keep their stock up. However, once the coronavirus isn’t a play that traders react to, then both of these stocks will fall closer to their fundamental values, which is a fraction of their current prices.
We think coronavirus headlines will likely continue through February. But already, we are seeing the news starting to fade, and the coronavirus updates aren't affecting the market in a negative way anymore. Some experts suggests that the coronavirus may disappear completely in April.
This Reuters article, published on 2/11/20, states: “Coronavirus outbreak may be over in China by April, says expert.”
The article quotes China’s foremost medical expert, Zhong Nanshan, who is an 83-year-old epidemiologist who won fame by combating the SARS epidemic in 2003.
From the article:
Wearing masks outside contagion zones was not always necessary, he said, and the United States' and others' entry ban on Chinese was an over-reaction. Furthermore, it appeared children were less vulnerable, he added.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I am/we are short CODX. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (87)
I am now shorting it at $13 ..
Current price: $11.90 (Extended hours)
How many wealthy Chinese will leave the country after this?
Shorts are one of the reasons that we miss a lot of medical advances because they choke small biotech companies out of existence.
