WINDSOR, ONTARIO – May 13th, 2015 — Molecular diagnostics and testing equipment is a growing sector within medical equipment that has and should potentially continue to outperform the market. There are different technologies and companies that stand to benefit from strong fundamentals. They have higher than average long-term growth outlooks and could experience a rapid increase in sales over the next few years. These stocks with strong market positions or leading technology will benefit. We expect stocks like PositiveID (OTC: PSID), Sequenom (NASDAQ: SQNM), Bio-Rad Laboratories (NYSE: BIO), and Cepheid (NASDAQ: CPHD) to outperform potentially. In particular, PositiveID is undervalued according to some analysts and trades at discounted valuations versus their peers due to the lower visibility of the OTC exchange compared to national exchanges like the Nasdaq—but that can change rather quickly.
The Ebola outbreak, increasing frequency of hard-to-treat superbugs, outbreaks of disease, and threats from biological weapons around the world have the clinical and security communities more focused on early detection (PositiveID’s (OTC: PSID) technology in this space is potentially game-changing,). The ability to use the right drug for the right disease is often the difference between life and death. In addition, with endemics like SARS or Ebola, detection can prevent the disease from spreading on a much larger scale. It allows organizations like the National Institute of Health to more quickly make decisions and respond to threats. In order to achieve nationwide readiness levels, the healthcare system and homeland security need to invest in expanding and upgrading the testing equipment. We view SQNM, PSID, BIO and CPHD as good stocks to play on the capex cycle in this area.
PositiveID’s new product, the Firefly Dx, which is under development, could be a game changer for this enormous market because it is planned to do what none of these billion dollar competitors have—in a handheld unit, they can test someone for almost ANY disease, pathogen or basically any threat IN 20 MINUTES! The other commonly used option is to send off samples to a lab which can take about 24 – 48 hours.
PositiveID Shares Can Benefit from Sector Growth and New Products
PositiveID Corporation, based in Delray Beach, FL, with labs in Pleasanton, CA, develops molecular diagnostic systems for bio-threat detection and rapid medical testing. The organization has a line of fully automated pathogen detection systems and assays to detect a wide range of biological threats. Its Microfluidic Bio-agent Autonomous Networked Detector (M-BAND) was developed for the homeland security industry to identify weapons of mass destruction- this product is exclusively licensed by the defense giant Boeing, not bad company for a $5 million market cap company. PositiveID’s Firefly Dx system is an automated pathogen detection system for rapid diagnostics in both clinical and point of need applications, as mentioned above, this product looks to be a game-changer and what we feel is the real up-side to this ticker.
Recent News: Positive Test Results for Firefly DX
On May 6th, 2015 (last week) PositiveID (OTC: PSID) announced that it is now able to test for Escherichia coli (E. coli) using the PCR chip of its Firefly Dx handheld prototype. The Firefly Dx PCR chip was able to detect E. coli in less than twenty minutes in recent tests. E. coli is typically a water or food-borne pathogen that causes illness and diarrhea. There are an estimated 265,000 infections with E. coli in the United States alone. In some cases, it can cause kidney failure and be fatal. The Firefly could possibly help with water safety in third world countries by testing well water as lab testing for this is not very realistic.
The ability to detect the disease through a handheld device allows first line responders, like EMS, but also operators of farms and food processing facilities to test for the disease frequently and with relative ease. It can also cut the cost of sending samples out to a lab, a testing process that can take days. Food processors can incur huge costs due to negative publicity from a recall, and the Firefly Dx could help to eliminate this problem we hear on the news far too much. The global market for food testing equipment like Firefly Dx is expected to reach $15 billion in 2019 according to a report from MarketsAndMarkets.
In addition to E. coli, PositiveID is expanding its PCR chip in the Firefly Dx device to test for more pathogens. As it moves through the testing phase and has successful trials with other pathogens, we expect them to act as a positive catalyst for the shares of PSID. Although it was quasi-fictitious, a recent episode of Netflix’s House of Cards showed the president held hostage in his own office for what seemed like half a day while the secret service tested a white powder that was delivered by mail to the White House, presumed to be anthrax. We feel this type of use could be a possibility for the unit as it is planned to test for any pathogen in under 20 minutes.
Another potential large market for the Firefly Dx is hospitals, Doctor’s offices and clinics. Intake nurses could be able to test arriving patients for pathogens from the common cold to Ebola in under 20 minutes, helping assess situations which need immediate attention and preparing the other healthcare professionals for what to anticipate.
It’s difficult to ascertain what the exact market size will be for a new and disruptive product like the Firefly (we give it a conservative rough estimate between $3 billion – $5 billion), but if it works as anticipated and is cost-effective the Wealthy Venture Capitalist sees it as something that will be widely adopted and eventually become ubiquitous—and PSID could become worth quite a bit more than only $5 million in the market (currently $0.02 per share).
Sector Fundamentals in Molecular Diagnostics are Strong
Cepheid is a molecular diagnostics company that develops and markets integrated systems for the clinical and non-clinical markets. Its recent 1Q 2014 results were ahead of analysts’ expectations. The fundamentals in its underlying markets were strong and led to revenue and profit both beating estimates for the quarter. In particular, the company noted a better-than-expected bio-threat and research grant revenues.
Shares of Sequenom are up 14.3% over the past month, also on a strong sales outlook. The company develops molecular diagnostics testing equipment for women’s health and oncology markets. Earnings at the company grew by 64% in 2014 and forecasts are for 89% growth in 2015. This reflects both the company’s technology and industry fundamentals.
Bio-Rad Laboratories manufactures and supplies equipment that separates complex chemical and biological materials, as well as identifies and analyzes their components. They posted 1Q EPS of $0.61 yesterday. The shares are up 17% year-to-date and are another example of outperformance by the molecular testing sector.
Valuation Multiples of PSID Could Expand
The stocks in the sector trade largely off future sales potential.Each of the companies we mentioned is at a different phase of product development–The shares of SQNM trade at 3.5x sales and CPHD at 7.94x sales. On the other hand, BIO trades at 1.8x due to a more muted growth outlook. PSID trades at 4.4x sales currently. It is an early phase company and has products that are pre-revenue. The Firefly Dx is still in the prototype phase and has significant market potential, and additional positive test results and subsequent commercialization could drive share prices and valuation multiples upwards.
In addition, another outbreak of Ebola or similar disease tends to expand multiples in the sector.While the timing of an outbreak is uncertain, it is more than likely another situation will arise that draws attention to companies in this business. PSID, SQNM, BIO and CPHD shareholders could benefit in this scenario.
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