@Bradbury you may be interested in this report I came across. Still looks like they will need a cap raise but if the FDA approval goes through GSS will probably make a run.

GSS-20200912-FDA-submission.pdf

The Good:

• Not much

The Not So Good:

• Continued declines in revenue with only $2m for the quarter. This is the lowest since FY20.

• Negative cashflows continue to erode the significant cash balance that the business was left with after the pre-covid capital raise

• FDA submission has still not been announced. All the data has been collected and is going through independent verification, so GSS does not have control of this timeline. What may also impact the verification timeline is the fact that GSS had to develop in-house tests to validate the study data.

What To Watch:

• FDA submission was expected in coming weeks in the 4C announcement at the end of April. This should happen by the end of May or this will be the final busted timeline.
• Reported improvement in sales for Q4, with $1m in April.
• Essentials Respiratory Kit clinical testing at 50% with testing to be completed in H2CY23. Emergency clearance for Covid testing in the U.S is ending in May. GSS hopes to reenter this market after gaining FDA approval which likely won’t be until H1FY25.
• TGA approval for STI testing still ongoing (No update. Carried over from last quarter)

GSS has announced today that it has finally completed the recruitment for the collection of the 1500 samples required by the FDA as part of their application for approval of the Enteric Protozoan Diagnostic Kit. The application is forecast to be completed in Q4 CY22 with an expected 90 day review period, which puts FDA approval (if approved) in CY2023.

This process has been underway since 2018 and FDA approval was first forecast to be completed in CY2019 and forms a core segment of Genetic Signatures commercial growth strategy.

Now that samples are completed there shouldn’t be any reasons for the progress of the application to be delayed any further. (Covid has been the “reason'' behind previous delays) If the application isn’t completed by CY22 this will be a significant red flag for my investment in this company.

What can be taken as a positive sign that there is a viable commercial product at the end of the lengthy FDA application is that in March, Public Health Wales awarded GSS the contract for Enteric testing for 7 hospitals across Wales.

The next regulatory update that news is needed on is TGA approval of the STI Test Kits.

GSS released their quarterly update today meeting their recent forecast with a record half year revenue of $21.8m. Generally it was a positive update with continued benefits from covid PCR testing requirements.

First the good:

• Revenue outside the Pacific region has grown to 10% this quarter which is an increase on the 5% in Q1 (and value wise accounting for decreased overall revenue). There was a mention of a second facility placing first orders of Enteric tests with further labs completing trials with potential to convert to sales. GSS needs to continue to convert contracts like these to demonstrate there is a market need for their product.
• Management have announced a roadmap of how they intend to use some of the $30m+ in cash they have been sitting on for over a year now. It is reassuring to hear that there is a plan in place on how to use the capital rather than sitting on it after the raise in 2020.
• $10m-$12m for development of new sampling instrument
• $6m+ for FDA applications for 3 or more products (My guess is STI, Anti-Microbial resistance and Meningitis tests based on previous product roadmaps)
• Growth in team across all areas of business

Now the not so good:

• Clinical trials / samples for the FDA application are still not complete. With a target for recruitment for these trials by the end of this quarter which will mean approval is getting pushed back further over the horizon. Given the struggle they have had with the FDA approval process, rather than waiting for this one to complete before starting the next test, management have likely decided to get the rest of their suitable tests into the process knowing it will take more time and resources than normal. 
• No sales from the US this quarter as supply chains have opened up. This is a bit of a warning sign as it implies that customers may be switching back to cheaper products that may be just as effective. The respiratory / Covid tests were never GSS’s flagship product, however it is worth noting.
• There has been no further updates on the progress of the TGA approval for the STI test in Australia. An announcement last time this year anticipated approval soon. Given Australia is their largest market, this is another product that could potentially contribute to revenue.

There isn’t anything to demonstrate that my thesis for the company is broken, however there are definitely a few things to keep an eye on over the short term.

Disclosure: Held

With Covid-19 testing centers currently shutting down due to capacity issues and ongoing high demand due to mandated testing requirements, there may be further opportunities for GSS to expand market share in this area.

In their October Investor update (link) it was announced that they have recently developed a new "fast" PCR test that reduces processing times and that this has been incorporated into their SARS-Cov-2 Detection kit.

I am unsure how this directly compares to competitors products and will need to investigate further, however any increased efficiency that can be gained in the testing chain would be beneficial to labs and testing clinics at this time.

Evidence of increased market share would likely be demonstrated by further contracts announced in the states outside of NSW and VIC which are GSS main markets.

Disclaimer: Held

GSS announced to the market a revenue projection for HY22 of $21m+, which following on $12.4m in Q1 puts Q2 revenue somewhere >$8.6m and ahead of Q2FY21.

This is a positive update as the company continues to benefit from the ongoing Covid testing tailwinds. My previous estimates had sales from their Covid testing dropping off much more significantly after the record Q1 due to vaccine rollouts reaching significant levels but as with everything Covid there is always some fresh twist.

With the new Omicron strain providing extra concern and more recently PCR tests required for interstate travel, test levels are reaching new all time highs as seen in graph from ABC below. (Last time I used this graph as an indicator for revenue it wasn’t very accurate, likely due to the lag between orders and actual tests conducted. It does however provide an indication of the overall demand.) 

Source: https://www.abc.net.au/news/2020-03-17/coronavirus-cases-data-reveals-how-covid-19-spreads-in-australia/12060704#testsvcases

An update confirming initial enteric test sales in Europe was also included and although these are unlikely to provide any significant cash inflows at this stage are a step in the right direction of replacing the current covid testing revenue stream.

What GSS have tried to sneak through with the shiny revenue headlines is that the clinical trial data for the FDA submission will be delayed again with expectation to be completed by Q3. This means that actual FDA approval to market the product will likely not be received until the end of CY22. FDA approval of Enteric testing is the keystone to GSS’s future revenue streams so the ongoing delay of the submission is concerning.

Based on this latest update I will need to update my valuation to more accurately reflect the company's current position.

GSS quietly posted a record revenue result with $12.4m for Q1 which exceeded my estimates in my valuation, however it hasn’t really had much of a market response. A few factors likely to play into this:

• 95% of sales are from Asia Pacific which shows a decline in global sales.
• There appears to be reduced confidence from the company that the required lab trials for the FDA application will be completed by the end of the year. Which then adds doubt on FDA approval within FY22.
• The reopening post Covid will likely result in a significant reduction in Covid testing which is the company’s main source of revenue, however I believe it is unlikely to go away completely for a long time. It was indicated sales have still been strong at the start of this quarter.

There are still things to like and watch which hasn’t resulted in my thesis being broken yet:

• Solid cash position of $33million
• The company is using this cash and the time it gives them to improve their offering, reporting improvements to test result times and progress on the instrument in development.
• There was mention of first sales of the Enteric tests in the UK, which means some of their other offerings may be getting traction.
• 5 new product groups in development

I will want to see some further updates on the last two items and the FDA application by the next quarterly.

Disclosure: Held

Prior to the release of the latest 4C, I decided to throw together a rough forecast on quarterly revenue for GSS.

Since the start of Covid, revenue for GSS has nearly completely been driven by sales of their Sars-Cov-2 test, so my forecast will be based off national testing data found on the abc website. (https://www.abc.net.au/news/2020-03-17/coronavirus-cases-data-reveals-how-covid-19-spreads-in-australia/12060704)

Testing trends for Q4FY21 closest match the trends of Q2FY21, which from previous quarterly reports indicated test pre-orders due to outbreaks over the holiday period. Revenue from this period was ~$6.3 million. From this I will assume a slight increase in revenue to $7 million for Q4 due to the increased transmissability of the Delta variant.

For international revenue, the recent newsletter from 30 June was quite subdued on international tests, which leads me to believe that the original forecast in increased sales from the Q3 update hasn't been as significant as expected. Therefore, I will maintain sales revenue from previous quarters of $1.8 million.

This puts my forecast for Q4 revenue at $8.8 million. (Forecast $8 million in my research summary)

Following on from my research straw, I previously forecast total FY21 revenue for GSS of $36.7 million. Based off this estimate, FY21 will be closer to ~$31.8 million. I will need to revist my thesis and valuation at the release of the actual numbers.

What does potentially provide a short term benefit for the coming quarter is the significant uptrend in testing figures since mid June, with the current 7 day average at 164k tests per day which is double that of any testing peaks since the pandemic began.

Disclosure: Held

After coming across Samurai’s straw, I decided to have a bit more of a look at GSS.

What do GSS do?

Genetic Signatures is a molecular diagnostics company founded in 2001 that is focused on commercialisation of a suite of detection kits under the EasyScreen brand. The companies “3base” technology allows for simplification of genomes for microbial detection by treating naturally occurring nucleic acids with bisulphite and using the resultant modified nucleic acids to detect pathogens and disease. This allows for the detection of a  larger range of pathogen targets in a shorter amount of time. The detection kits are compatible with most existing automated sample preparation systems.

How has the company performed?

Since listing in 2015 the company has been growing annual revenue steadily each year with only a limited product range available for sale. Predominantly sales revenue have been generated from their Enteric pathogen detection kits.  

In 2018, the product range expanded with TGA & CE approval received for their ESBL & CPO test. This test detects a spectrum of Antibiotic resistant bacteria. Respiratory pathogen test kits were added to the range after receiving TGA & CE approval by May 2019. 

(Note: TGA is the Therapeutic Goods Administration approval for sale of medical products in Australia and CE is the approval for sale in Europe)

The company has run into some issues with getting approvals for other products in their testing suite with the forecast FDA (Food and Drug Administration) approval for sale of the Enteric test kit in the U.S continually being pushed. The original approval forecast for approval was 2019 and to date approval has still not been granted. This previously has been the flagship test that GSS has been aiming to carry international growth. Other test kits that were forecast to receive approval in 2019 were STI & Flavivirus test kits. (CE approval for the STI test was granted in Jan 2021.)

In October 2019, the company carried out a $35 million capital raise for funds to global expansion global sales and distribution teams. This was then followed by the global outbreak of the Covid-19 virus at the end of that year. After being recently cashed up, Genetic Signatures well placed to pivot the company strategy, with the recently approved respiratory test kits able to detect the virus. Only minor modifications were required for the test to specifically identify the Covid 19 strain, and TGA & CE approval received in April 2020. 

This was a turning point for the company with FY20 revenue up 131% to $11.3 million. Revenues of $18.7 million for HY21 have already exceeded FY20 total revenue by 65% and the company has reached profitability.

Valuation?

At the current share price of $1.55 GSS has a market cap of $225.76 million. Forecasting a revenue of $36.7 million at FY21 (Assuming same sales as Q2 for the rest of the year) with an estimated profit of $7.3 million gives a forward P/E of ~30.7 and P/S of 6.1 which is lower than the average of other ASX healthcare / biotech companies

GSS also maintains most of the cash balance of $36,300,000 from the capital raise with no debt.

Opportunities?

A significant portion of the boost provided by the sales of the Sars-Cov-2 test kits has been from Australian sales. International sales made up 13% in Q4FY20, increasing to 24% inQ2FY21.   Two US contracts were signed in December 2020, one of the contracts with Boston Medical for an estimated 1000 tests per day.The company also announced in the half year results that several European agreements were signed in December and January. With Australia currently performing around 49,000 tests per day, compared to ~ 430,000 in the United States alone there is still a significant market opportunity for the company for the Sars-Cov-2 tests even with the roll-out of vaccines and potential reduction in testing rates. Given an entire quarter with these contracts in place, I think there will likely be an increase in sales compared to previous Qtrs.

The ongoing revenue and contracts from the Sars-Cov-2 test kits offers GSS opportunities to leverage those contracts into sales of other products from the companies portfolio, such as the recent CE approved STI test (Global market approx $1,900,000,000) and Enteric tests. (Within 2 years of FDA approval, GSS targeting annual revenue of ~$20 million in the US from Enteric tests alone, based on 10% market share)

The company has also maintained a 100% customer retention rate, demonstrating the value in their products and services.

Risks?

Although the company advises that their products provide a wider range and faster throughput for testing, none of the testing kits currently available are unique in the items they test for. This means that the company is relying heavily on marketing, sales and price points to ensure contracts are won and renewed with labs.

Timelines on further product approvals continue to be delayed and impacted by Covid. The ongoing growth of the company is dependent on the continued growth and evolution of their testing range, which although is expanding through R&D, still needs to receive regulator approval.

Final Thoughts?

I was unable to determine an exact catalyst for the steady share price decline since its high of $2.88 in July 2020 to the current price of $1.55, however I believe the following have contributed. Firstly GSS was overbought on the initial prospects of having a readily available Covid test, which then didn’t receive outright FDA approval but an exemption. The company announcements are very sparse, with typically only regulatory approvals being announced outside of the required periodic updates. The lack of news would impact many investors who jumped in on the initial Covid plays. I am however optimistic on the company's continued growth in the short term and am very interested to see if the company can continue that across the rest of their product range.

Disclosure: Hold