It appears that the coronavirus tests provided by Co-Diagnostics (NASDAQ:CODX) are less accurate than many of their competitors. That, along with negative publicity that Co-Diagnostics has received, could create meaningful problems for the company and hurt the performance of CODX stock.
Assessments performed by Iowa’s State Hygenic Lab, located at the University of Iowa, indicated that the tests developed by Co-Diagnostics are not 100% accurate, as the company had previously claimed. Instead, the lab found that 95% of the test’s positive readings are accurate and 99.7% of its negative readings are correct.
In a recent e-mail to InvestorPlace, Stephen Pradarelli, the spokesman for Iowa University’s Vice President for Research, confirmed those figures and wrote that they were “both well within acceptable limits.”
But the test’s reliability appears to be meaningfully below that of many of Co-Diagnostics’ competitors.
Specifically, an evaluation of 26 other coronavirus tests conducted by a non-profit organization called The Foundation for Innovative New Diagnostics, or FIND, found that 18 of the negative tests had a 100% accuracy rate. Moreover, 23 of the 26 tests had a higher accuracy rate on positive results than Co-Diagnostics’ 95% rate identified by the University of Iowa.
The 5% false-positive rate of Co-Diagnostics’ test seems too high and too differentiated from most of the tests evaluated by FIND to be due to chance or an evaluation error.
And although false positives are less problematic than false negatives, false positives do create problems. False positives, for example, can unnecessarily sideline badly needed healthcare professionals and other essential workers. False positives can also result in unnecessary expenditures on medical care and lead to unnecessary hospitalizations that can further burden already strained hospitals.
Moreover, the high false-positive rate could undermine confidence in the accuracy of the negative results of Co-Diagnostics’ test. After all, the evaluation of the company’s test may not be 100% accurate. In other words, the actual reliability of Co-Diagnostics’ negative test could easily be 100%, but it could also easily be 99.3%.
In the latter case, the consequences could truly be devastating. For example, in a country whose hospitals employ 30,000 doctors and nurses, a 0.7% false-negative rate could result in over 200 healthcare workers with coronavirus interacting closely with patients without the coronavirus. Many of those patients are likely to be vulnerable and have multiple risk factors. That sounds like a recipe for disaster.
Further, if you were responsible for choosing a coronavirus test for your state, would you choose one that evaluators assess to be 100% accurate on both positive and negative tests (as was the case for 11 of the tests evaluated by FIND) or would you choose one whose positive results were judged to be 95% accurate and whose negative results were labeled 99.7% accurate? I think the answer is clear.
Other Red Flags
Multiple other red flags have arisen that make owning CODX stock quite risky. According to BioCentury, Co-Diagnostics’ test has a higher limit of detection than 16 other tests that were evaluated using the same criteria; only five tests came in below Co-Diagnostics’ offering.
And in Utah, as of April 30, Co-Diagnostics’ tests were showing that only about 2% of those with symptoms tested were positive, versus 5% positive rates for Utahns who were tested with other diagnostic equipment.
And disturbingly, TestUtah, which is administering Co-Diagnostics’ test in the state, “declined to join other major Utah labs in a joint experiment to confirm one another’s quality,” The Salt Lake Tribune reported on May 14.
TestUtah did agree to a comparison that was called “quick and dirty” by a state epidemiologist. But The Salt Lake Tribune reported that “the results of the more rudimentary accuracy check may not be made public.”
I was not able to find the results of the assessment online, and an e-mail I sent to the medical director of one of the labs that was supposed to assess Co-Diagnostics’ test was not answered.
The Bottom Line on CODX Stock
There’s a meaningful amount of evidence that Co-Diagnostics’ test is not as accurate as a majority of its peers. Further, the company’s reputation has taken a hit from negative publicity.
And the company reported revenue of only $18 million as of the middle of the second quarter after selling its test for about six weeks. That’s a run rate of about $3 million per week.
There’s a good chance that a vaccine will be available six months from now or that the virus will be much weaker in the fall. Either of those developments would Co-Diagnostics’ coronavirus test largely obsolete. If the company continues to average $3 million of sales per week for the next six months, its total 2020 sales through November will come in at around $100 million.
If there is litPosttle or no demand for its coronavirus test starting in December 2020, the company will likely go back to generating minimal revenue, as it did in 2019. Co-Diagnostics could, in theory, return some of its profits to shareholders or acquire another company.
But it will, in all likelihood, use the profits to bankroll its operations. At that point, CODX stock will probably plunge. And the tumble could start much sooner, when many investors start seeing the writing on the wall.
Given Co-Diagnostics’ red flags, reputational issues, and highly uncertain long-term future, I would recommend selling its shares.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned securities.
