Last week’s news cycle was dominated by a headline that almost makes you shed a tear. No, we’re not talking about Janet McCurdy finally revealing to the world why she doesn’t like Ariana Grande. We are talking about pure beauty DeepMind’s the last achievement is the ability to predict the structure almost all proteins occurs in nature.
It’s been just over a year since news broke of Deepmind’s ability to predict the three-dimensional structure of a protein from its amino acid sequence. The day after this statement, we published an article on Quanterix stock: a way to play on the proteomics boom. Since then, the company’s shares have fallen 70% about 55% of that value has been lost today alone. Let’s start by looking at why investors have driven Quanterix stock off a cliff. (Quotes used in this article are taken from a mediocre earnings call transcript provided by Fool’s stoned NLP algorithms, unless otherwise noted.)
Doing the COB Shuffle
The board of directors of any company acts as the CEO’s boss, so you should never have one chairdresser oe bard (COB), who is also the CEO of the company. This is a clear conflict of interest. So what does it mean when the CEO’s boss leaves?
Our story begins in 2014, when Martin Madaus, then the executive chairman of Quanterix, handed over the reins of management to Kevin Hrusowski. The reason for Martin’s departure was that he led Orth-Clinical Diagnostics after it was acquired by the Carlyle Group, although he remained on the Quanterix board for many years. Today, Madaus will return to the position of chairman of the board in place of Kevin Hrusowski.
Mr. Hrusowski served as Chairman of the Quanterix Board of Directors (the “Board”) from June 2014 and as President and Chief Executive Officer of Quanterix from January 2015 until April 25, 2022, when he was named Executive Chairman of the Board. as part of the leadership succession plan.
Author: press release of the company
This helps explain why something perceived as a promotion happened less than three months after the resignation. We see Mr. Hrusowski gracefully exit, but it all sounds like part of a master plan:
I am grateful for helping to identify the potential for human health effects at Quanterix. Given Massoud’s transition as CEO, now is the time to evolve the roles on the board of directors to support future growth.
Author: press release of the company
Yes, it would be nice to see some evolution now that the stock price has been completely destroyed by the quality issues that occurred on your watch, Mr. Grusowski.
The current CEO – Masoud Tolu – arrived on site in May 2021 when he assumed the role of president of Quanterix and Diagnostics to “oversee Quanterix’s growing diagnostics business and assume responsibility for the company’s accelerated laboratory services, strategic partnerships and corporate development.” The Accelerator Lab services segment is the one place where Quanterix is achieving growth, and it happens to be focused on quality.
In March of this year, Mr. Tolu became CEO and Mr. Hrusowski moved to the position of chairman of the board as part of a short-lived “management succession plan.” Yesterday, Martin Madaus returned to his role in 2014 – executive chairman of the board, and Mr. Hrusovsky left the stage.
Consumables as a proxy for use
In the previous chart, you’ll see what might be one of the main reasons Quanterix got slapped harder than Chris Rock today. Consumables fell by 29% compared to the same quarter last year. Compared to the last quarter, they decreased by 36%. The Q2 2022 earnings estimate was the main reason for this deterioration — quality issues. Throughout the call it is mentioned that there is a rework going on in the production which is limiting the production volumes and cannot keep up with the demand. The sharp drop in consumables means that customers may have noticed quality issues as well.
Competent management teams shoot all the bad news at the same time. Although they tried to sound the bell, it sounded like a funeral. About 25% of the company’s workforce will be laid off — about 130 people — while they seek to address internal quality issues that have prevented the company from scaling.
“… operations and scalability have not kept pace with growth and customer demand for our Simoa technology. This has manifested itself in quality issues, which will hamper our growth rates in the near term.”
They then talk about an “assay redesign program” to “enhance our ability to produce and deliver high-quality assays at scale.” Going back to the drawing board and redesigning a product is expensive and difficult. With about $360 million in cash on hand and significant downsizing, they should have enough dry powder to complete this exercise in 2023 (according to company estimates), but investors aren’t buying it. With each Quanterix share worth $10 in cash and the stock trading at $7.46, investors don’t think things will go as planned.
The aforementioned drop in consumables is putting pressure on margins as we see 2Q2022 gross margins falling to around 28%. But that’s only half the story. Some recently introduced accounting classifications put the truth cost oe Mrud pold (COGS) above if they include items such as handling and shipping costs that are not borne by the customer. This is directly related to their assay reconstruction program, which should begin to bear fruit in 2024, while this year we can expect revenues to remain flat compared to 2021 at around $110 million.
Going forward, we expect total revenue for 2022 to be flat compared to total revenue for 2021. Longer term, we expect to return to double-digit revenue growth in 2024
There are opportunity costs associated with holding stocks that no longer show the growth they used to.
Should we sell Quanterix?
As taught in bee school, the ultimate goal of every business is to survive. After that, the ultimate goal of a growing company is revenue growth. We don’t take any growth company seriously unless it shows us revenue growth. If the growth stops, this is reason enough to exit our position.
The only reason we can see is that Mr. Madaus will come back on board to clean up the mess he inherited. He may be able to turn the ship around and has probably set everyone’s expectations as low as possible. The terms, which extend to 2023, could come together sooner and the company could return to double-digit growth in 2024, they claim. However, you can’t stop growing for a few years in a highly competitive industry while your competitors eat your lunch.
Last spring we published List of 7 Proteomics Stocks to Invest in Proteins and noted that there are many other options for investors to play in the proteomics scene. The list of names we reviewed can be seen below, along with their market capitalization and annual returns (company names refer to our research).
|Company name||Market capitalization||Annual income|
|CODEXISINC. (CDXS)||510 dollars||154|
|QUANTERIX (QTRX)||275 dollars||94|
|SELF-LOGICALINC (SLGC)||724 dollars||92|
|Olink Holding (OLK)||1786 dollars||91|
|PROVIDE NAME (SEER)||641 dollars||13|
|NAUTILUS BIOTECHNOLOGY (NAUT)||354 dollars||N/A|
|QUANTUM-SI INCORPORATED (QSI)||500 dollars||N/A|
Our decision to invest in Quanterix was based mostly on their revenue leadership and quality of hardware. Now that both of these factors have changed, it’s hard to justify spending time and energy on a position that has lost its thesis and revenue growth. If we decide to leave our Quanterix position, a warning will be sent to paying subscribers.
Strong leadership is essential for any firm. The planned transition we learned about today implies some prior knowledge that Kevin Grusowski was not the man for the job. Often poor performance is met with attempts to correct behavior – oldproductivity iimprovement oldLana (PIPs) and the like – so it can have a drug for a while.
Today the cat was let out of the bag. The platform in its current form is not economically viable and they need to go back to the drawing board. It’s not a good place to be when you have a good customer base and a handful of competitors breathing down your neck.
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