Accelerate Diagnostics (Nasdaq: AXDX) might need to credit a “false positive” for making its stock price look so much healthier these days. Mistaken by some as a promising Ebola play, AXDX has skyrocketed in value over the course of the past few weeks – its share price, up almost 70%, escalating right along with fears of that horrific virus – even though its experimental device specifically focuses on the detection and treatment of stubborn bacterial infections instead.
“Everyone is looking … for the Ebola plays,” one bullish investor noted on StockTwits last week. “Rumor has it AXDX has the inside track on detection. Chart(s) don’t lie.”
They sure are subject to correction, though. You be the judge. Take a close look at the curious nature of the incredible rally that has AXDX just staged, and see if you still believe that its highflying stock can hang onto those inexplicable gains.
With no major developments on the horizon, AXDX actually spent most of September drifting steadily lower until Ebola began to dominate the national headlines and sent traders on a breathless chase for related investment opportunities. Down to $16.50 a share a few short weeks ago, AXDX suddenly reversed course and then proceeded to rocket all the way past $30 a share just a few days after Ebola officially surfaced inside the United States to pose a serious threat right here at home.
As a bleeding highflier that’s currently valued at more than $1.2 billion – the equivalent of 23,300 times its prior-year revenue – AXDX now looks rather dangerous itself.
Indeed, based upon any reasonable measure of its performance, AXDX actually looked wildly expensive even before it racked up those inexplicable gains. Little more than a development-stage company in spite of its lengthy 32-year history (tarnished by regulatory sanctions discussed in more detail below), AXDX has yet to even seek – let alone secure – government approval for the “BACcel” diagnostic testing system that became its primary focus at least a full decade ago. With little revenue and no expectations of actual profits anytime soon, AXDX has nevertheless managed to achieve a market capitalization so generous that it literally exceeds the estimated value that the firm once assigned to the entire market that it has long aimed to serve.
So don’t be surprised if AXDX suddenly takes a dramatic turn for the worse. With its highflying shares arguably priced beyond perfection at current levels, the stock could easily sink for all sorts of reasons. Just think of the brutal correction that AXDX might endure if the market simply discounted its stock to reflect the following:
Let’s start with the wild gains that AXDX has recorded throughout the current Ebola scare. Unless management can point to some kind of important news and/or developments capable of igniting such a breathtaking rally (and, no, that fluff about supporting the President’s initiative to combat antibiotic-resistant bacteria doesn’t qualify), AXDX most likely soared on misconceptions about the true capabilities – and crucial limitations – of its future diagnostic testing system instead. After all, outside of the wild and crazy penny-stock arena, companies rarely (if ever) skyrocket in value for no legitimate reason.
Now, let’s move on to the insider buying that helped inspire so much confidence in AXDX ahead of that remarkable surge. But first, go back and look at the prices that those AXDX insiders actually paid for most of their stock in the company. As you will discover, they spent less than $25 million to gain a controlling interest in the company – an investment that’s suddenly worth around $750 million just a couple of years later – by paying a measly $1.03 a share for two-thirds of that stock and a “whopping” $2 a share for the rest.
With those insiders sitting on such a tremendous paper fortune, they can easily afford to purchase some additional shares at higher prices every now and then. Even so, you don’t exactly see them pouncing on the stock at the sort of prices commanded by AXDX right now. While a couple of them did make a rare exception back in the summer, when they rushed to support the stock after it began diving from its all-time high, AXDX insiders purchased almost all of their remaining shares (beyond the massive stake that they really acquired on the cheap) at prices roughly 40% to 70% below those commanded by the stock on the open market right now.
Since they executed their most recent transactions right before AXDX suddenly caught fire -- and ultimately exploded -- during the Ebola scare, they obviously risked a whole lot less than ordinary investors who might have felt inspired to follow their encouraging lead. They paid so little for most of their AXDX shares, in fact, that they could unload that gigantic mountain of stock at a fraction of its current price and still walk away with an amazing fortune.
Maybe AXDX insiders have steered clear of the stock at current levels for a very good reason.
After all, records indicate, AXDX pegged the value of its total market opportunity at $1 billion – or $220 million BELOW its current market capitalization – before its current leaders control of the company (along with most of its stock) a couple of years ago. Let’s generously assume that AXDX somehow goes on to totally dominate that market by generating more business than all of its competitors combined. Even if AXDX eventually proves to be as valuable as half of the entire market that at company one day aims to serve, that estimate suggests, its stock should still fetch no more than $11.25 a share at the absolute most.
Generously rewarded for the mere promise of wild future success, however, AXDX has already managed to soar almost 150% above that price without even entering – let alone dominating – that market instead.
Of course, AXDX could always try to dismiss that market estimate as yet another mistake made by the former leader of its senior management team. Once AXDX finally got rid of its previous CEO Thomas Geimer – replaced more than a decade after federal regulators cracked down on him for alleged securities violations – the company seemed determined to reinvent itself under new leadership and wipe its previous slate clean. While AXDX may have booted that former regulatory target from its executive suite, however, the company still held onto the loyal sidekick who had served as his second-in-command and (on at least one occasion) vocally defended his actions when his record came under public attack.
The president of the company at the time, David Howson blasted an online critic who published a scathing report about AXDX and its tainted chief – even raising legitimate questions about his own credentials in the process – the year before most of its current leaders officially arrived on the scene. In a futile effort to limit the damage, Howson rushed forward to express his confidence in both the struggling company and the tarnished CEO who had inked a deal with securities regulators that prevented him from simply proclaiming his own innocence. With AXDX practically broke and its credibility now ruined, the former highflier spiraled all the way below $1 a share over the course of the following year.
Enter the current AXDX insiders who wound up with all of that dirt-cheap stock in the company. After supplying AXDX with a much-needed (if relatively modest) cash infusion that left them in control of the firm, they promptly replaced most of its leaders but decided to spare Howson and another veteran by simply reassigning them to new positions instead. With the former serving as its chief scientific officer and the latter (previously the head of its research department) overseeing the so-called “assay development” of its diagnostic testing system since 2012 – a full eight years after the company started working on that seemingly endless project -- AXDL has still yet to even conduct the official studies required to merely seek regulatory approval of its long-awaited device.
Who knows? Maybe “Truth Ignition,” the outspoken critic who sounded that loud alarm about AXDX a few years ago, will be proven correct yet again.
At the time, that skeptic clearly doubted that AXDX could transform itself from a failed software company into a successful medical technology firm – especially one capable of producing a breakthrough diagnostic test destined to take the market by storm. Indeed, he seemed to question whether that future device would even properly function at all.
“What strikes us is that, at its core – what we believe may be the most critical component of the BACcel diagnostic system, the component that is responsible for actually identifying the bacteria and determining antibiotic resistance for sick patients – appears to be based on custom proprietary software technology partially or completely developed by Accelr8,” Truth Ignition emphasized at the time. “Given what we’ve discovered about their software development history, we find it disturbing to think physicians may some day rely on their software in determining patient treatment.”
Three years later, AXDX remains unsure when – or even if – that day might finally arrive. While AXDX hopes to secure regulatory approval of its device the year after next, the company has also portrayed its diagnostic testing system as the sort of novel breakthrough that generally requires so much documentation that it can literally add years to the regulatory process.
Just ask that AXDX critic who now seems like such a proven expert on the company.
“We are concerned that a new diagnostic platform with no ‘equal’ will come under greater scrutiny by the FDA than a solution with technology comparable to other FDA-approved devices,” Truth Ignition noted several years ago. “Considering BACcel has not been approved by the FDA, we feel its unique position is not a positive but a potentially huge stumbling block in achieving FDA approval.”
As the chief scientific officer of the company, Howson hasn’t exactly displayed a whole lot of faith in the future of that diagnostic test, either. The last – and apparently only – time that Howson ever bothered to purchase stock in AXDX dates back five years ago, records indicate, when he bought a grand total of 1,400 shares at prices ranging from just $1.70 to $2.08 a share. That stock, worth almost $40,000 at current market prices, cost him less than $3,000 at the time.
As AXDX has grown more and more expensive, the stock has apparently lost some of its appeal for others as well.
When AXDX decided to raise some extra cash from its existing shareholders last year by inviting them to participate in a so-called “rights offerings,” a whopping 75% of those investors eagerly responded. Company directors bought almost 70% of that stock, priced at $8.04 a share, all by themselves.
No wonder AXDX felt confident enough to follow up with a second rights offering designed to raise a whole lot more.
This spring, after AXDX climbed all the way to $16.80 a share, the company announced plans to raise another $45 million – more than double the amount that it had just cleared eight months earlier – by selling stock to its current pool of investors yet again. The reception proved a bit cooler this time. While AXDX ultimately achieved its goal, thanks to some last-minute help from a pair of new related-party deals, the company found its ordinary shareholders far less eager to bolster their positions in the stock now that it cost so much more.
The participation rate fell by a significant margin, with close to half (43%) of all AXDX shareholders declining to purchase additional stock in the company. AXDX directors accounted for a much smaller percentage (58%) of the stock purchased in that new offering, too. With so much AXDX stock left over for sale, the original related-party firms that had agreed to purchase any leftover shares wound up arranging special deals that allowed them to meet their commitment and enabled the company to declare its latest offering yet another resounding success.
Thanks to the remarkable gains that its stock has achieved during the recent Ebola scare, AXDX has managed to generously – if, perhaps, temporarily -- reward the shareholders who participated in that rights offering with some extraordinary paper gains. Still, as a volatile highflier that’s vulnerable to dramatic price swings, AXDX has repeatedly demonstrated that it can also shoot in the opposite direction for no particular reason as well.
Go back to the beginning of this year for just one striking example. After spending 2013 on an unstoppable roll that had literally tripled its share price, AXDX suddenly shifted into freefall mode – without any sign of danger – and rapidly lost almost 20% of its entire value in the span of a few short days.
“What happened?” The Motley Fool understandably wondered after a fruitless hunt for possible clues. “Nothing. At least, there wasn’t any obvious bad news over the past few days” that might explain such a radical change.
Now that AXDX has shot all the way into nosebleed territory, the stock almost demands a brutal correction for its share price to simply make sense. Go ahead and choose a reason to explain that likely plunge right now, if you wish. Talk about a generous selection! Given all of the downside risks currently excluded from the company’s share price – starting with those outlined above and continuing with plenty more, disclosed by AXDX itself, in the section below – you’re bound to find all sorts of possibilities.
With AXDX trading at such ridiculous highs, virtually anything can take a heavy toll. Here. We can easily add another danger to that list. Let's keep this one simple. How about gravity?
“Since 2004, we have focused our efforts on the development of an innovative rapid diagnostic platform, the BACcel™ system, intended for rapid diagnosis in life-threatening infectious pathogens … In the latter half of 2013, we completed the design and build of our pre- clinical instrument. We have built 30 of these systems to use for continued development and pilot clinical studies … We anticipate initiating US clinical trials for BACcel™ in the first half of 2015, obtaining a CE mark registration in early 2015, and United States FDA approval in early 2016.”
“During the fiscal year ended July 31, 2008, the Company placed two identical development systems in collaborating research institutions: Denver Health, and Barnes-Jewish Hospital at Washington University in St. Louis, Missouri … In 2013, an additional instrument was placed at Geisinger Health System. We anticipate that the number of collaborating research institutions will grow significantly in 2014.”
“In 2013, three studies conducted using the BACcel™ system were published by peer-reviewed journals, and an abstract was also accepted. We believe these joint studies will expand significantly and will be presented periodically to the relevant scientific and medical communities.”
“Our products are subject to 510(k) clearance or pre-market approval by the FDA prior to their marketing for commercial use in the United States, and to any approvals required by foreign governmental entities prior to their marketing outside the United States. The 510(k) clearance and pre-market approval processes, as well as the process of obtaining foreign approvals, can be expensive, time consuming and uncertain. It generally takes from four to twelve months from submission to obtain 510(k) clearance, and from one to three years from submission to obtain pre-market approval; however, it may take longer, and 510(k) clearance or pre-market approval may never be obtained … We have limited experience in filing FDA applications for 510(k) clearance and pre-market approval.”
“During the fiscal year ended July 31, 2012, management determined that acquired technology amounts carried on our balance sheet are no longer recoverable or abandoned its plan to pursue marketability and accordingly reduced the amortized book values by $1,996,583 and recognized the loss in its reported net loss. Additionally, during the five-month period ended December 31, 2012 management determined that patent amounts carried on our balance sheet are no longer recoverable or abandoned its plan to pursue marketability and accordingly reduced the amortized book value by $333,487 and recognized the loss in its reported net loss.”
“We have spent a significant amount of resources developing the BACcel™ system and intend to spend a significant amount more in the future and there can be no assurance that we will successfully develop the BACcel™ system … During the fiscal year ended December 31, 2013, five-month periods ended December 31, 2012 and 2011, and fiscal years ended July 31, 2012 and 2011, we spent $10,673,016, $1,777,244, $163,340, $431,906, and $454,997, respectively, on research and development activities, and we intend to spend significantly more on research and development activities during the fiscal year ending December 31, 2014 and thereafter.”
“During the year ended December 31, 2013, total revenues were $48,285 as compared to $52,215 during the year ended December 31, 2012, a decrease of $3,930 or 8%. The decrease was due to fluctuations in partner sales volumes on which royalties were due the Company … Research and development expenses for the year ended December 31, 2013 were $10,673,016 as compared to $2,031,593 during the year ended December 31, 2012, an increase of $8,641,423 or 425%. The increase is primarily the result of increasing employee headcount and increased purchases of laboratory and instrument engineering supplies to support research and development efforts. During the year ended December 31, 2013, sales, general and administrative expenses were $4,312,281 as compared to $3,673,251 during the year ended December 31, 2012, an increase of $639,030 or 17%. The increase is primarily driven by salaries and related expenses as we ramp up our operations … As a result of the above factors, loss from operations for the year ended December 31, 2013 was $15,310,859 as compared to the loss of $8,166,320 during the year ended December 31, 2012, an increase in loss from operations of $7,144,539 or 87%. This loss was anticipated and is the result of planned growth.”
“During the six-month period ended June 30, 2014, total revenues were $27,000, as compared to $23,000 during the six-month period ended June 30, 2013, an increase of $4,000 or 17%. The increase was due to fluctuations in partner sales volumes on which royalties were due the Company. Research and development expenses for the six-month period ended June 30, 2014 were $8,125,000, as compared to $4,343,000 during the six-month period ended June 30, 2013, an increase of $3,782,000 or 87%. The increase was primarily the result of increasing employee headcount, an increase in non-cash stock based compensation expense of $1,435,000 and increased purchases of laboratory and instrument engineering supplies to support research and development efforts. During the six-month period ended June 30, 2014, sales, general and administrative expenses were $5,491,000, as compared to $1,864,000 during the six-month period ended June 30, 2013, an increase of $3,627,000 or 195%. The increase was primarily driven by salaries and related expenses as we ramp up our operations and includes an increase in non-cash stock based compensation expenses of $1,891,000 … As a result of the above factors, loss from operations for the six-month period ended June 30, 2014 was $13,912,000, as compared to a loss of $6,329,000 for the six-month period ended June 30, 2013, an increase in loss from operations of $7,583,000 or 120%. (Meanwhile), loss from operations for the three-month period ended June 30, 2014 was $8,165,000, as compared to a loss of $3,778,000 for the three-month period ended June 30, 2013, an increase in loss from operations of $4,387,000 or 116%. This loss and further losses are anticipated and was the result of our continued investments in research and development, expanded laboratory and operational space, increased employee headcount and other factors as we develop and prepare to commercialize the Company’s products.”
“Our primary sources of liquidity have been from sales of shares of our Common Stock … We may require additional capital in the future and you may incur dilution to your stock holdings … We have the authority to issue up to 55,000,000 shares of Common Stock (of which, as of 41,904,521 shares were outstanding as of February 25, 2014), to issue up to 5,000,000 shares of Preferred Stock (of which none were issued nor outstanding as of the same date) and to issue options and warrants to purchase shares of our Common Stock (of which 4,940,086 options and 571,160 warrants to acquire shares of our Common Stock were issued and outstanding as of the same date) … As of December 31, 2013 and December 31, 2012, 1,021,056 and 1,360,500 options outstanding were currently exercisable and carried weighted average exercise prices of $2.29 and $1.92 respectively.”
“On December 14, 2004 the Company’s stockholders approved the Omnibus Stock Option Plan and reserved 500,000 shares of its authorized but unissued Common Stock for stock options to be granted to employees, independent contractors, technical advisors and directors of the Company. The authorized shares in this plan were increased by 5,000,000 shares to an aggregate amount of 5,500,000 upon stockholder approval during the fiscal year ended July 31, 2012 … As of December 31, 2013, 268,000 options had been exercised pursuant to the 2012 Omnibus Equity Incentive Plan, 4,915,086 that remain outstanding, leaving 316,914 available for grant … On December 31, 2013, there were Common Stock options outstanding at exercise prices ranging from $1.04 to $13.30 per share with expiration dates between March 15, 2015 and November 5, 2023 … At the Company’s 2014 Annual Meeting of Stockholders held on May 29, 2014, stockholders approved an amendment to the Company’s 2012 Omnibus Equity Incentive Plan increasing the number of shares of Common Stock reserved and available for grant thereunder by 4,000,000 to 9,500,000 shares.”
*Important Disclosure: The owners of the StreetSweeper established a short position in AXDX ahead of the publication of this report and stands to profit on any future declines in its stock price. As a matter of policy, however, TheStreetSweeper prohibits members of its editorial team -- including the author of this report -- from taking financial positions in any of the companies that they cover. To reach Melissa Davis, the editor of this website and author of this story, please send an email to [email protected]