Why Quanterix Stock is Dropping Like a Rock
Last week’s news cycle was dominated by a headline that almost makes you shed a tear. No, we’re not talking about Jennette McCurdy finally revealing to the world why she doesn’t like Ariana Grande. We’re talking about the sheer beauty of DeepMind’s latest accomplishment – the ability to predict the structure of nearly all proteins found in nature.
It’s been just over a year since news broke of Deepmind’s ability to predict a protein’s 3D structure from its amino acid sequence. The day after that announcement, we published a piece on Quanterix Stock: A Way to Play the Proteomics Boom. Since then, shares of the life sciences company have fallen 70% with around 55% of that value lost today alone. Let’s start by looking at why investors rolled shares of Quanterix off a cliff. (The quotes used in this article come from the mediocre earnings call transcript provided by the Fool’s stoned NLP algorithms unless stated otherwise.)
Doing The COB Shuffle
The board of directors for any given company acts as the CEO’s boss which is why you should never have a chairman of the board (COB) who is also the company’s CEO. It’s an obvious conflict of interest. So, what does it mean when the CEO’s boss exits?
Our story starts in 2014 when Martin Madaus, the Executive Chairman of the Board at Quanterix at the time, handed over the reins to Kevin Hrusovsky. The reason for Martin’s departure was to take charge over at Orth-Clinical Diagnostics following their acquisition by Carlyle Group, though he remained on the Quanterix board over the years. Today, Madaus will resume his role as Chairman of the Board replacing Kevin Hrusovsky.
Mr. Hrusovsky has served as the Chairman of Quanterix’ Board of Directors (the “Board”) since June 2014 and as Quanterix’ President and Chief Executive Officer from January 2015 until April 25, 2022, when he was appointed Executive Chairman of the Board as part of its leadership succession plan.Credit: Company Press Release
This helps explain why something perceived as a promotion would have happened following a resignation less than three months later. We see Mr. Hrusovsky exit gracefully while making it all sound part of the master plan:
I am thankful to have helped establish the potential to impact human health at Quanterix. Given Masoud’s transition into the role of CEO, now is the time for the evolution of board roles to support future growth.Credit: Company Press Release
Yes, some evolution would be great to see now that the share price has been absolutely decimated because of quality problems that emerged on your clock Mr. Hrusovsky.
The current CEO – Masoud Toloue – arrived on the scene in May 2021 when he assumed the position of President of Quanterix and Diagnostics to “oversee Quanterix’ growing diagnostics business and assume responsibility for the Company’s Accelerator Lab Services, strategic partnerships and corporate development.” The Accelerator Lab Services segment is about the only place Quanterix is achieving growth and it’s coincidentally focused on quality.
In March of this year, Mr. Toloue became CEO while Mr. Hrusovsky moved on to assume the Chairman of the Board role as part of a “leadership succession plan” which didn’t last very long. Yesterday, Martin Madaus returned to the role he had back in 2014 – Executive Chairman of the Board while Mr. Hrusovsky exited stage left.
Consumables As a Proxy For Usage
In the previous chart, you’ll see what might be one of the biggest reasons Quanterix got slapped harder than Chris Rock today. Consumables plummeted 29% compared to the same quarter last year. Compared to last quarter, they’re down 36%. The Q2-2022 earnings call provided a root cause for this deterioration – quality problems. Mention is made throughout the call about rework taking place in manufacturing which limited output and couldn’t keep up with demand. The drastic drop in consumables implies that customers may have noticed quality issues as well.
Competent management teams get all the bad news out of the way in one go. Though they tried sugar-coating the call, it sounded like a funeral. Around 25% of the company’s workforce will be laid off – about 130 people – while they look to address internal quality issues that are preventing the firm from scaling.
“…operations and ability to scale have not kept up with growth and customer demand for our Simoa technology. This has manifested itself into quality challengers that will in the near term have impaired our growth rates.”
They then talk about “an assay redevelopment program” with the objective of “improving our ability to manufacture and deliver high quality assays at scale.” Going back to the drawing board and redesigning a product is expensive and complicated. With around $360 million in cash on hand and a significant reduction in headcount they should have enough dry powder to complete this exercise in 2023 (per company estimates), but investors aren’t buying it. With each Quanterix share representing $10 in cash on hand, and shares trading at $7.46, investors don’t think things will go as planned.
The aforementioned drop in consumables puts pressure on margins as we see Q2-2022 gross margins fall to around 28%. But that’s only half of the story. Some newly introduced accounting classifications put the true cost of goods sold (COGS) higher when they include items like rework and the cost of shipping not borne by the customer. That directly relates to their assay redevelopment program which should start bearing fruit in 2024 while this year we can expect revenues to be flat compared to 2021 – around $110 million.
Forward-looking, we now expect total year ’22 revenue to be flat compared to total year ’21. On a longer-term basis, we expect to return to double-digit revenue growth in 2024
There’s an opportunity cost associated with holding a stock that’s no longer showing the growth it once did.
Should We Sell Quanterix?
As they teach you in bee school, the ultimate goal of every business is to survive. After that, the ultimate goal for a growth company is growing revenues. We don’t take any growth company seriously unless they show us growing revenue streams. When growth falters, it is sufficient reason to exit our position.
The only reason we can see to stick it out would be Mr. Madaus coming back on board to clean up whatever mess he’s inherited. He might be capable of turning the ship around and has probably set everyone’s expectations as low as possible. Timelines that extend into 2023 might come together sooner, and the company might return to double-digit growth in 2024 as they claim. Still, you cannot stall growth for several years in a highly competitive industry while your competitors eat your lunch.
Last spring, we published A List of 7 Proteomics Stocks For Investing in Proteins and noted there are plenty of other options with which investors can play the proteomics scene. The list of names we covered can be seen below along with market cap and annualized revenues (company names link to our research pieces).
|Company Name||Market Cap||Annualized Revenues|
|Codexis, Inc. (CDXS)||$ 510||154|
|Quanterix (QTRX)||$ 275||94|
|SomaLogic, Inc (SLGC)||$ 724||92|
|Olink Holding (OLK)||$ 1,786||91|
|SEER (SEER)||$ 641||13|
|Nautilus Biotechnology (NAUT)||$ 354||N/A|
|Quantum-Si Inc (QSI)||$ 500||N/A|
Our decision to invest in Quanterix was based on their revenue leadership and quality of equipment more than anything. Now that both these factors have changed, it’s hard to justify wasting time and energy following a position that has lost its thesis and revenue growth. If we decide to exit our Quanterix position, paying subscribers will be sent an alert.
Strong leadership is critically important in any firm. The planned transition we learned about today implies some prior knowledge that Kevin Hrusovsky wasn’t the man for the job. Oftentimes, poor performance is met with attempts to correct behavior – performance improvement plans (PIPs) and the like – so this might have drug on for some time.
Today, the cat was let out of the bag. The platform in its present form is not economically viable and they need to go back to the drawing board. That’s not a good place to be when you have an established customer base and a handful of competitors breathing down your neck.
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So far proteomic stocks look like a horrible investment, but that might be different in the future.
I reviewed my various watchlists with different themes and the best performing one by a mile is with Green/ Renewable Energy stocks – great performance for the last 3 years. Example stocks in that watchlist: TSLA, ENPH, NEE, SEDG, FSLR, NEP, BEP, AY.
Green stocks also have some of the lowest gross margins (at least the ones we dabble in) so time will tell.
Since you may be going back to the drawing board on a proteomics name, I encourage you to take a second look at Somalogic. You did some research before and you said yourself they have the first mover advantage. They had to revise their annual earnings down a smidge yesterday, just like everyone else, but they have over 600m in cash on hand and only a 800m market cap. They’ve guided for 70-90m in revenue for the year. Cash burn is in single digit millions. I know that them being micro cap disqualifies them from your portfolio, but I think they’re the premier proteomics play.
Definitely worth a look. Not sure why their Q2-2022 revenues took a dump though. We’ll be taking another look at them along with Seer. Thank you for the heads up on this.