Genetic Signatures - Investment Thesis

GSS is developing a Molecular diagnostic technology for infectious diseases.  It has a proprietary technology called 3base® which simplifies molecular targets.  The core product is called EasyScreen and can test for viruses, bacteria, and parasites.  The technology appears to offer advantages for pathology labs in terms of processing time, accuracy of results and profitability.  The challenges include laboratory developed tests offer more profitability for pathology labs while microscopy is still an available back up option.  Additionally funding in US heathcare is getting more challenging.  

EasyScreen has been approved in Europe and Australia (11 tests) with a US FDA approval expected in 2024.  EasyScreen is available in Europe today for respiratory, gastrointestinal, sexual health and antimicrobial resistance.  The technology has not really been adopted in a significant way in Europe, with Australia representing 90% of sales.  Its difficult to fathom while a technology with these slated advantages is not being actively adopted in Europe.

EasyScreen is in a clinical trial in the USA for respiratory, while its gastrointestinal application was lodged with the FDA on 4 September 2023 with approval expected by the June Quarter 2024.

GSS undertook 735K test kit sales in 2023, down from 1861K EasyScreen kit sales in 2022, with Covid testing explaining this decline.  

The core ex Covid revenues were $12.7 million in 2023 FY, which rose 38% on pcp.  These revenues should be regarding as recurring unless a more efficient diagnostic technology displaces it.  The problematic Flu B sensitivity test results first seen in the 2023 flu season resulted in a significant dent in 2024 Flu sales which questions the degree of recurring revenues and company credibility.

Its difficult to make any assertions about near term growth for EasyScreen kit sales given the concentration of sales with Australian Clinical Labs (ACL) in Australia, lack of progress with Sonic and Healius and limited traction in Europe.

The company targets 70% gross margins in Australia/Europe, with higher margins anticipated in USA.  The business still generated $4.3M in Covid only sales in 2023, down from $26.4M in 2022.  Covid19 sales have largely rolled off but the $4.3M figure could fall further.

As at 30 June 2023 including an expected R&D claim the company had $23.2M cash.  Technically net outflows were $20.5M in 2023, so the company has a 12 months runway to 30 June 2024 although the company argue its longer.  This runway was extended in late 2023 with $16M gross equity raised at 37 cents.  The arguments about a longer runway include no R&D receipted in 2023 (arguably cash burn is less by annual R&D rebate)  and an ability to slow some capex, and growing Australian/European non covid revenues (difficult to predict).  Post the 2023 raise (note retail component is not raised till 18 Jan 2024) on a proforma basis the company, inclusive of $7M R&D refund, $5M December quarter burn has $27.4M cash at 31 Dec 2023. 

The Sep quarter 2023 free cashflow was disappointing with $5.9 million cash burnt. 

The company spent $9.1M in 2023 with $4M on instrumentation and $5.1M in R&D.  The instrumentation spend is long dated with an anticipated product launch in 2026 (potential for slippage).  It looks like funding both the existing Australian/European businesses, advancing FDA approvals in gastrointestinal and FDA clinical trials in respiratory while progressing next generation instrumentation is greater than the company’s funding envelope.  The company will need further cash especially around the launch of its expected 2024 FDA approval of EasyScreen Gastrointestinal Parasite Detection Kits.

They filed a 510(k) application to the US FDA for EasyScreen Gastrointestinal Parasite Detection Kit on 4 September 2023 with guidance being an FDA decision can take 3-9 months.  The respiratory application will follow with lodgment post receipt of respiratory clinical data in 1H 2024, so maybe FDA respiratory lodgment in the 3rd quarter 2024 CY.  GSS respiratory test will involve several key respiratory viruses in a single test.  The TAM of this respiratory product is currently unknown and the competitiveness vs standard of care similarly an unknown. 

The market in parasite detection is said to be 5.5M tests per annum funded to the tune of $263/test (CPT code 87506). GSS can target 8 gastrointestinal parasites which is more than any other test.  There is a comment in their presentation “Once ordering physicians have used molecular for parasite screening, they become users. They are not going back to Ova (egg) and parasite testing using culture and microscopy".  

GSS are targeting a 30-40% share of the 5.5M tests within 5 years with $40/US a test a credible profit share for GSS.  This suggests peak sales for GSS in gastrointestinal parasite testing may be $66M - $88M USD, which should be generating a 80% GP margin or $53M - $70M gross profit.  The key targets are large hospitals (55%) and large commercial labs (30%). 

Genetic Signatures has commenced preparations for the anticipated commercial launch of its EasyScreen Gastrointestinal Parasite Detection Kit once it is cleared by the FDA, including the additional recruitment of direct sales and support staff, and investment in local warehousing and laboratory facilities.  We are yet to be updated around the opex base for GSS to launch and operate EasyScreen Gastrointestinal Parasite Detection Kit sales in the USA.

GSS has circa 10 small pathology operators ready to adopt the technology which could amount to $4M in 70% plus GP margin business.  The bigger USA pathology operators are waiting for FDA approval before seriously investigating the EasyScreen Gastrointestinal Parasite Detection Kit.