Co-Diagnostics Is Losing Millions Per Quarter, Don't Buy On Cash Reserves Alone

Trending 1 year ago

Female expert taking swab trial of antheral diligent successful session during COVID-19

Maskot/DigitalVision via Getty Images

Co-Diagnostics (NASDAQ:CODX) is simply a developer of PCR and molecular diagnostics treatments.

The institution was successful nan early stages of commercializing its products earlier nan pandemic. It had negligible revenues and was very unprofitable. When COVID arrived, nan company was speedy to get permits to marketplace its PCR tests and made a killing.

Today, nan institution is backmost to unprofitability, but pinch a large difference; it now sits connected $85 cardinal successful cash, which, compared to a marketplace headdress of $90 million, implies an EV adjacent to $0.

CODX banal could look charismatic based connected its rate reserves alone. However, I reason that nan rate reserves tin only beryllium considered from nan position of a controlling shareholder, and moreover then, nan institution is not a bully opportunity astatine existent prices. For a number shareholder, nan institution has to beryllium considered from the operational position because guidance has not commented that it plans to return rate to shareholders successful nan shape of a dividend. When considered operationally, CODX is nary longer an opportunity.

Business description

Diagnostics development: Before nan pandemic, CODX was trying to commercialize its patented methodology for PCR and different forms of molecular testing.

Being unprofitable is thing normal for these companies, but what caught my attraction is that CODX spent much connected wide and administrative expenses than connected trading and R&D combined. In nan floor plan below, trading expenses is nan quality betwixt SG&A and G&A, aliases astir $1 cardinal for FY19.

ChartData by YCharts

The pandemic boom: The institution quickly realized nan opportunity opened by nan pandemic. By January 14th, 2020, CODX had developed a COVID PCR trial and was nan first institution to get support for manufacturing successful nan U.S., arsenic early arsenic February 2020.

The gross and profitability roar that ensued is still reverberating successful today's financials, though astatine a overmuch little measurement than during 2020 and 2021.

ChartData by YCharts

The rate mountain: The institution accumulated rate done nan rumor of shares astatine awesome prices (for nan company, not for shareholders) and operating profitability. Its rate and securities holdings now guidelines astatine $85 million.

ChartData by YCharts

Future of nan institution and valuation

Back to unprofitability connected a different level: As request for COVID PCR tests recedes, nan institution is backmost to unprofitability. Of course, nan business is very different from earlier nan pandemic, because location will ever stay a request for COVID tests, arsenic it is now an endemic disease.

ChartData by YCharts

The problem pinch a cash-based valuation: One of nan main bullish arguments down CODX is that nan investor is paying thing for nan institution because its marketplace headdress equals its rate holdings and nan institution has nary debt.

There are 2 problems pinch that reasoning. First, to administer nan cash, nan investor should power nan company, which is not nan lawsuit for astir readers, and moreover personification trying to power nan institution would request to salary a premium to get it. Second, because CODX is unprofitable connected a recurrent ground absent nan pandemic, nan institution requires rate to operate, astatine a complaint of $6.5 cardinal per 4th if existent unprofitability continues. So nan investor is paying 'nothing' for a institution that losses $26 cardinal a year.

For nan number shareholder, nan mobility of rate and institution valuation is tied to what guidance will do pinch that cash, and, therefore, to CODX's operations.

Management's shareholder return plans: The company's guidance has ne'er mentioned plans to return astatine slightest portion of its rate reserves to shareholders successful nan shape of dividends. CODX has been repurchasing shares, $13 cardinal arsenic of 3Q22, astatine an mean acquisition value of $3.6 per share, aliases 20% supra existent stock prices. The stock repurchase thought suffers from nan aforesaid problem arsenic nan controlling shareholder valuation. If nan institution repurchased each shares isolated from those of nan investor reference this, he would ain an unprofitable institution for free.

Management's operational plans: The institution does not person immoderate plans to liquidate, but alternatively to proceed arsenic a going concern. In particular, guidance believes successful a location PCR level that would let users to trial themselves, called Co-Dx PCR.

The level does not person FDA support yet. But moreover if it did, we would beryllium backmost to quadrate 2019, that is, trying to person nan marketplace that it needs this caller device. At nan existent rhythm, and considering that COVID-related request does not alteration moreover more, nan institution is losing millions per quarter.

Is nan patent portfolio valuable?: CODX is not nan developer of PCR, but alternatively of two methods for reducing nan tests' mendacious affirmative reactions. PCR tests are very delicate to contamination and thin to supply nonconclusive results.

These were nan methods that nan institution was trying to waste earlier nan pandemic, without overmuch success. There is simply a azygous publication not generated by institution labor aliases nan method's inventor commenting connected its effectiveness. In a press merchandise from past year, nan institution commented that nan method had been utilized successful respective world peer-reviewed papers. Still, nan only disposable nexus was to a single insubstantial studying COVID transmission among play players.

Finally, nan institution is successful nan process of patenting its home testing device. I commented supra that this product, moreover if successful, will return years to introduce.

Low managerial ownership: No head aliases executive has a meaningful information of nan company, pinch full board and executives ownership (including options and share-based payments) not reaching 1.5% of nan company. This is not needfully a antagonistic aspect, but it would beryllium reassuring to person managers successful nan aforesaid vessel arsenic investors successful a institution whose worth depends truthful overmuch connected early developments.

Upside risks

This is not a short recommendation. I only urge not purchasing nan stock. However, successful this section, I dainty immoderate affirmative catalysts for nan stock.

Another pandemic: Even nan rumor of different world pandemic would astir apt summation CODX's stock price, considering really good nan institution did successful nan erstwhile pandemic.

Costs reductions: CODX's guidance has said that existent R&D and SG&A costs are elevated for introducing nan location PCR kit. I judge nan preamble shape will past a while, and nan institution tin statesman processing and introducing a further product. Therefore I do not count connected a costs reduction. However, connected nan existent gross and gross profits level, nan institution could go profitable if it importantly scaled backmost G&A and R&D costs.

Acquisitions: CODX could usage portion of its rate to get different company. The worth of that acquisition has to beryllium judged based connected nan deal's specifics. However, it is communal for acquisitions to elevate a company's value temporarily. The institution could besides get acquired, astir apt astatine a premium to NAV.

Repurchase plans: The institution presently has a comparatively fierce stock repurchase scheme of $30 million, $13 cardinal of which person already been used. CODX could denote a caller plan, which could, again temporarily, thrust nan banal value up. I commented connected nan logical problems down repurchases, to nan utmost of repurchasing each but 1 share.


The main bullish thesis down CODX is its rate reserves. I judge these are difficult to entree for a number shareholder, and moreover if available, would connote that nan investors get an unprofitable, cash-losing institution for free.

On an operational basis, nan institution is already backmost to unprofitability, and I do not judge its technologies person tremendous prospects. Two person been tested passim nan pandemic without showing immoderate circumstantial advantage complete different methods (or astatine slightest nary important grounds published by nan company). The different 1 is successful nan early improvement shape and will return clip to make profits if it ever does.

For these reasons, I judge CODX is not an opportunity, neither based connected its rate reserves, nor connected its operational and technological prospects.

Editor's Note: This article covers 1 aliases much microcap stocks. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Tomas Andrade Campanini floor plan picture

I specialize successful world micro, mini and mean size companies that waste and acquisition successful nan US utilizing a Due Diligence approach, scrapping for arsenic overmuch accusation arsenic imaginable astir nan company, and making qualitative judgments. I speak 5 languages (Spanish, English, Chinese, Italian, Portuguese). I besides create written contented utilized successful various formats including blogs, emails, achromatic papers, and societal media for financial advisors and finance firms successful a cost-efficient way. My passion is putting a communicative to financial data. Working pinch teams that see elder editors, finance strategists, trading managers, information analysts, and executives, I lend ideas to thief make contented relevant, accessible, and measurable.Homo sum, humani nihil a maine alienum puto Disclaimer: All of nan author's articles are written connected an "as is" ground and without warranty. They correspond nan author's sentiment only and successful nary measurement represent master finance advice. It is nan work of nan scholar to behaviour their owed diligence and activity finance proposal from a licensed master earlier making immoderate finance decisions. The writer disclaims each liability for immoderate actions taken based connected nan accusation contained successful immoderate articles published.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

Read other contents from at
More Source