Genetic Signatures (ASX: GSS) is a company that has developed a novel way of testing samples for diseases, which it calls its 3base technology. As Genetic Signatures tells it, their mechanism has certain advantages over the traditional ways of testing for the presence of pathogens, because supposedly the system requires less frequent updates in response to disease mutations, and tests can be run for lower cost at scale. At the current Genetic Signatures share price of 63.5 cents, Genetic Signatures has a market capitalisation of about $143 million, and an enterprise value of just over $100m.
Genetic Signatures was temporarily profitable when the Australian government was mandating mass-testing for Covid-19, but remains subscale today. It trades on a market capitalisation over 10x FY 2024 revenue, which was $9.8 million, so anyone buying shares here must believe that it will gain significant scale launching new products. The main focus of its growth ambitions is to sell its gastrointestinal syndrome testing product to US customers, and failure here would almost certainly mean a painful time for shareholders. On the bright side, Genetic Signatures proved the versatility and adaptability of its technology when it managed to quickly develop a test for Covid-19 at the beginning of the pandemic. The huge demand for testing in Austraia sent revenue skyrocketing.
However, rather than using the millions of dollars of profits it received to focus on its most advanced test for gastrointestinal diseases, Genetic Signatures made the hubristic decision to try to develop a brand new respiratory test for launch in the USA, before it had even established a presence in that market, and despite widespread competition. On top of that, the company failed to maintain the standards of its core respiratory test in Australia, which was temporarily blocked from sale when the TGA discovered that it might fail to identify the presence of low levels of influenza B in a given sample. Talk about taking your eye off the ball.
Subsequently, the company rectified the issue, and sales of that test resumed in the June 2024 quarter. You can see how first the covid-19 testing demand, and then the TGA action, impacted its receipts from customers in the chart below.
In April 2024, the long-serving CEO who oversaw the rapid response to the covid pandemic, subsequent cash burn, and sanction by the TGA stepped down from his role in April 2024. While his tenure was not a good time for shareholders, under his leadership the company proved that the technology actually works at scale on a novel virus; and his timely exit paved the way for a new chapter.
In May 2024, the company abandoned its US respiratory product, confessing that it did “not believe its benefits over established and recently cleared incumbent automated products are sufficient for it to secure a commercially meaningful share of this increasingly crowded market.” This was costly for shareholders but provided evidence of an ability to course correct.
In June 2024, the company announced the FDA had cleared its Gastrointestinal Parasite Detection Kit. Off the back of that clearance, the company raised around $30m at a Genetic Signatures share price of 75c. As a result, it had just over $41m in the bank at the end of September 2024, the last date that the balance sheet was reported.
More recently, a new CEO, self-proclaimed budding ballerina Allison Rossiter, has taken over the role. Rossiter has made her name climbing the ranks at Roche and coincidentally, seems very proud of introducing staff to a book I know almost by heart: “Oh The Places You’ll Go!” by Dr Seuss.
It was a gift from my grandma, straight from her heart,
Its rhymes and its lessons, I’ve known from the start.
My mum read it often when I was quite small,
The wisdom within it? I’ve heard it all!
However, as a management technique, I think that teaching staff important lessons in rhyme is clever because we remember rhymes more easily than prose. And the quirkiness of the move has obviously been good for Rossiter’s career.
At the end of June 2024, board members of Genetic Signatures collectively only owned about 3.6 million shares, and the recent board renewal (plus the new CEO, who I assume owns minimal if any shares) will mean that board and shareholder alignment is even worse than before. Indeed, I would say the most obvious red flag about Genetic Signatures is the lack of alignment between the board and shareholders. For this reason, I would consider the stock extremely speculative, because one cannot be sure whether leadership and shareholder incentives are aligned.
However, there are a few reasons why I think the Genetic Signatures share price could trade higher in the future.
First of all, the approach of trying to sell the Gastrointenstinal Parasite Detection Kit makes a lot of sense. You see, the current gold standard testing for these parasites is expensive and slow. Therefore, the labs doing the testing have to tie up a lot of capital in the process, and also, the tests are not as useful as they could be, because results take too long. Therefore, I hypothesise that a cheaper, faster test would not only have a good chance of taking market share,but might actually increase the frequency that doctors order these tests in the long run.
Secondly, even though I don’t think management are well aligned with shareholders, I do think that the new CEO sounds like a real saleswoman. Her self-congratulatory LinkedIn post about “changing the culture” of a company makes me think that this is a woman who knows a thing or two about the dark art of sales, even if I’ve only see her sell herself. Since she is now the top leader at a corporation, she may view success at Genetic Signatures as the potential pièce de résistance of a high flying career. That’s a hypothesis of why she might do well in the role, but I’d call it a speculative hypothesis at best.
Thirdly, the AGM presentation claimed that the company has “several customer experience sites at final contract stage” and that it has “a strong sales pipeline, including major US reference labs.” Now, I could be jumping the gun to assume that any of these prospects will turn into actual customers, but the company’s track record in successfully supplying the Australian government with tonnes of covid testing kids during the pandemic makes me think that the actual technology they are touting has real potential. The long-term backing of former fund manager and current nonagenarian Chris Abbott bolsters this view, but there is a risk that Abbott views Genetic Signatures as more of an “ethical investment” or “legacy building investment” rather than a financial play.
Finally, I do think there is a real chance that the June 2024 quarter will be the worst the company submits for quite some time. On a sociological level, that might mean that sentiment around the stock can now improve, assuming that it doesn’t inflict any more own-goals in the future. You could argue that the opportunity will be better once the company actually does win its first big contracts for its new gastrointestinal syndrome product in the USA. In that case, the share price might be a bit higher but also the risk of wipe-out would be lower.
For now, I cannot escape the Genetic Signatures share price will only trade meaningfully higher if it can sell a lot of its new product in the USA. In the absence of that kind of growth, I think the Genetic Signatures share price will stagnate at best.
My gut feel is that given the CEO can win widespread praise for forcing staff to read a children’s book, she can probably sell a superior product to a slow-moving and risk-averse customer base, even though that is not an easy task.
Overall, I like Genetic Signatures as a speculative idea, but I don’t generally make an investment based on gut feel. After all, my gut feel might be misguided because a battered old copy of “Oh The Places You’ll Go,” given to me by my grandmother, sits on my son’s bookshelf today.
“You will come to a place where the streets are not marked. Some windows are lighted. But mostly they’re darked. A place you could sprain both your elbow and chin! Do you dare to stay out? Do you dare to go in? How much can you lose? How much can you win?” — Dr Suess.
This article was published as part of our “Small-Cap Mailbag” Series. If you’re a subscriber, you can suggest any small-cap for coverage, and we will try to publish an article about it in time.
Disclosure: The author of this article does not own shares in GSS and will not trade GSS shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).
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