SQI Diagnostics (TSX: SQD / OTC: SQIDF)
By Keven Young, analyst
|I. Investment Thesis
- Investment Thesis – An investment into SQI Diagnostics is based on two key beliefs.
* First, that their TOR-dx lung panel test will enable surgeons to assess if an organ is healthy for transplant. TOR-dx lung panel detects inflammation at the molecular level to assess the health of the donor lung. This would be a breakthrough diagnostic that would improve the chance of successful lung transplant and increase the number of available donor lungs.
* Second, that the COVID-19 virus will continue to be a concern for years to come; with multiple variations of the original strain being discovered over the last few weeks more and more experts are theorizing that the pandemic is evolving into an endemic resulting in endless outbreaks, creating a clear need for SQI’s antibody test which measures IgM, IgA, and IgG antibodies to monitor your level of immunity to and your risk of becoming infected. SQI also has a COVID-19 severity test that measures the critical IL-6 biomarker to determine if someone who has contracted the COVID-19 virus is likely to have a severe inflammatory reaction and should be admitted to the hospital or if they are safe to return home.
SQI also has diagnostic test products that are meant to manage potential inflammatory disorders like Celiac and Rheumatoid Arthritis proactively.
- Scalability – SQI’s existing manufacturing center in Toronto has the capacity to produce 4 million antibody tests and 2 million RALI-dx triage tests and in addition has a NY State certified Lab in Buffalo, NY. It is estimated that by end of Q3 of 2021, SQI will have a functioning manufacturing plant in the U.S. with a CLIA certified laboratory that will have the ability to produce and test an additional 20 million antibody tests, 2 million RALI-dx triage tests and 10 million RALI-fast Point-of-care (POC) test cartridges.
- Valuation – SQI Diagnostics is trading at an Enterprise Value (EV)/EBITDA ratio of -20.33.
- Catalysts – There are many potential catalysts that could cause a sudden and significant increase in the SQI share price. SQI plans to file for FDA approval under Emergency Use Authorization (EUA) in Q1 of 2021 for RALI-dx. They also plan to file for FDA approval under EUA in Q2 of 2021 for the COVID-19 home antibody test and Q3 for RALI-fast. The company should get clarity for TOR-dx Lung diagnostic FDA filing in Q2 2021.
- Price Target – Our unleveraged discounted cash flow (DCF) model has bullish, baseline, and bearish price targets of $0.87, $0.47, and $0.39 respectively. The probability weighted price target for SQI Diagnostics is $0.57 by year end with a strong probability of climbing over $3 a share within the next 3 years. Continued coverage of these price targets will be available with material changes and updates from the company.
|II. Business Overview
- Company Description – SQI diagnostics is a precision medicine company that discovers, develops, and commercializes innovative rapid diagnostic testing for healthcare professionals, patients and consumers worldwide.
- Products & Services – SQI is now expanding its business model into the rapid diagnostics testing market. The company’s proprietary advanced diagnostics will target organ transplant, autoimmune disease and COVID-19 testing.
* TOR-dx Lung Panel Test: Detects inflammation at the molecular level to assess the health of the donor lung. This enables surgeons to identify healthy lungs for transplant which otherwise would have been rejected. Roughly 12 to 15 thousand donor lungs become available for transplant every year but only 2 to 3 thousand are actually transplanted because currently surgeons make a judgement call to ascertain whether the lung is healthy enough to be transplanted. Many surgeons tend to be overly cautious considering reservations about their reputation, the hospital’s reputation, the patients life, and several other factors. The TOR-dx lung panel test has the potential to considerably increase the number of available lung transplants as well as hospital profits because lung transplants are their highest revenue generators (currently about $500k profit per surgery). How much do you think a hospital would pay to double their number of lung transplants?
* RALI COVID-19 Severity/Triage Tests: The RALI-dx (50-minute lab test) and RALI-fast (15-minute POC test) measures critical biomarker IL-6, predictive of “cytokine storm” adverse respiratory event. These triage tools help inform clinicians to send patients home or admit them to hospitals for advanced respiratory care depending on their test results. Importantly, this test will help identify which people should be admitted to the hospital or be sent home whether they have Covid-like symptoms or flu-like symptoms; the test will continue to be relevant and treat a large population even if COVID-19 fades away. This technology can save lives, maximize resources by preventing unnecessary hospital admissions and a reduction of costs on healthcare system.
* COVID-19 Home Antibody Test Kit: Measures the quantitative presence of all 3 antibodies IgM, IgA, IgG related to SARS-CoV-2. The tests can be shipped to households, businesses, schools, sports teams, governments, etc. with a finger-prick blood sample from home sent (pre-paid) to SQI lab (avoiding trips to clinic, hospital, or lab) which can provide results that are more than 99% accurate within 24-48 hours. It helps confirm vaccine effectiveness and importantly provides potential immunity status over time; it is a repeat test. It also can provide confirmation of the virus from false-negative PCR test results. This test enables a return to work, school, travel, along with the peace of mind knowing you are not infecting others.
* Autoimmune Disease Testing: These tests target Celiac and Rheumatoid Arthritis (RA). Both of these tests are offered direct-to-consumer (DTC) on SQI’s ecommerce platform and require a similar finger-prick blood sample from home sent (pre-paid) to SQI lab. The Celiac test confirms the presence of the disease, can validate effectiveness of a gluten-free diet and confirmation that the autoimmune response is improving; another repeat test. The RA test can confirm and identify early symptoms for timely care and treatment.
- Customers & End markets – SQI is targeting all hospitals and universities that perform lung/organ transplants with their TOR-dx lung panel test. RALI-dx & RALI-fast are targeting hospital Emergency Departments and triage/urgent care centers to assist them with COVID-19 severity/triage testing.
- Competition – Although, currently, there is no competition for Home antibody tests SQI in the COVID-19 testing space such, we expect their will be over time; Co-diagnostics, BND Inc, and others. This is of little concern however because of the massively enormous market that encompasses COVID-19 testing 220 million adults in the U.S. alone. SQI currently has no direct competitors for their TOR-dx panel lung test and this diagnostic is proprietary. CareDx, inc (CDNA) is a global transplant diagnostics company with products targeting pre- and post-transplant tests. Currently they are focused on kidney and heart transplantation diagnostics but they plan to use their technology for lung transplants as well. Their products AlloMap and AlloSure are benefiting the same recipients of transplants as SQI’s lung panel test but these are not direct competitors of SQI’s panel test because both of these products are complimentary diagnostics tests.
- Geographic Exposure – SQI is currently located in Toronto, Canada and in Wixom, Michigan and is expanding in its U.S. footprint. SQI is targeting the entire North American diagnostics market.
CEO Robert L. Chioini
- Track Record – Mr. Chioini before stepping into his role as CEO of SQI Diagnostics in August 2020, he was the founder and CEO of Rockwell Medical, Inc (NASDAQ: RMTI) from January 1995 to May 2018. Mr. Chioini is responsible for the transformation of Rockwell from inception into a vertically integrated, publicly traded pharmaceutical drug & medical device company servicing the U.S. and global dialysis healthcare market. He also served on the board of Medical Main Street, an alliance of world-class hospitals, universities, medical device and biopharmaceutical companies creating a global center of innovation in health care, research and development, education and commercialization in the life sciences industry from 2000-2018.
Chief Scientific Officer Eric Brouwer, PhD
- Track Record – Eric Brouwer, PhD, 53, is the Chief Scientific Officer of SQI Diagnostics, Inc. and has served in that position since October 2017. From April 2015 to May 2017, Mr. Brouwer was the Chief Scientific Officer of Trinity Biotech, PLC and then CEO of its subsidiary, Fiomi. From 2003 to 2015, Mr. Brouwer held various positions in Research and Development at Abbott Point of Care, including Senior Manager Research and Director of Assay Research and Development. While at Abbott, Mr. Brouwer developed and help launch a number of point-of-care diagnostics products, was the recipient of two Divisional President’s Awards (2006, 2008) and the prestigious Chairman’s Award in 2007 and he served as a member of the Abbott Scientific Governing Board, and was a member of the Ottawa Life Sciences Council 2013 to 2014. From 2000 to 2003, he was a Senior Scientist at the point-of-care diagnostic innovator and industry leader i-STAT prior to the acquisition of i-STAT by Abbott. Mr. Brouwer holds three U.S. patents and has authored over 30 peer-reviewed Journal articles. Mr. Brouwer holds multiple Degrees in Chemistry from Queen’s University (BSc (Hons)), University of British Columbia (MSc) and Carleton University (PhD) and a Post-doctoral Fellowship at the University of Durham (UK).
CFO Morlan Reddock, CFA, CPA, MBA
- Track record – Morlan Reddock, 51, is the Chief Financial Officer of SQI Diagnostics, Inc. and has served in that position since March 2020. From July 2017 to October 2019, Mr. Reddock served as the Director of Finance for the Greater Toronto Airports Authority (GTAA) and from December 2017 to October 2019 served concurrently as Acting CFO for the GTAA subsidiary, Malton Gateway. From May 2016 to July 2017, he served as the Vice President of Finance for Ronnex Distribution. From 2008 to 2015 he was the Director of Finance, Treasury and Investor Relations for SiriusXM Canada. From 2005 to 2008, Mr. Reddock was Manager of Finance, Acquisitions and Planning for Direct Energy. From 1999 to 2005, he held positions in Accounting and Finance. Mr. Reddock is a member of the Chartered Professional Accountants of Ontario, The CFO Leadership Council (Toronto Chapter) and Financial Executives International (FEI).
Vice President Russell Peloquin
- Track record – Russell A. Peloquin, 41, is Vice President, Global Commercial Operations at SQI Diagnostics, Inc. and has served in that position since May 2012. Mr. Peloquin oversees sales, marketing, business development, customer solutions, field technical support and partner relations. From 2010-2012, Mr. Peloquin was the Director of Sales and Marketing for NorDiag Inc., a Sweden-based biotechnology company focused on nucleic acid extraction technologies within the field of molecular diagnostics. From 2008-2010, Mr. Peloquin oversaw one of the clinical diagnostic business units of Luminex Corp., the world leader in multiplexed assay technology where he led teams to successfully create the market for and launch several molecular diagnostic assay products and automation systems. From 2003-2008, Mr. Peloquin held several roles and responsibilities at Quest Diagnostics, Inc., the world’s largest clinical reference laboratory where his responsibilities included contract negotiations, new laboratory technology evaluation, sales and logistics management, and experience in M&A. Mr. Peloquin graduated from the University of Kansas with a Bachelor of Science in Advertising and Marketing from the William Allen White School of Journalism.
|IV. Risks & Considerations
- Risk 1 – There is no guarantee that SQI will receive regulatory approval of any of their products in their pipeline.
- Risk 2 – SQI has been unprofitable since inception and cannot currently cover its operating expenses from its core business functions. Because of this SQI runs the risk of having to further raise capital through debt or equity. Raising capital through equity could potentially dilute existing shareholders.
- Risk 3 – The Altman Z score of SQI Diagnostics is -13.09. This is an indication of insolvency but you can refer to consideration 2 for a reference of funding for the company.
- Consideration 1 – 78% of the issued and outstanding common stock of SQI Diagnostics are held by 3 insiders of the company. This can create supply shortages in the short term for the stock driving the price up.
- Consideration 2 – These majority shareholders have informed the company that they intend to continue to fund the company through the exercise of their warrants until their respective warrant holdings are extinguished and $19,132,373 has been invested in the company. From time-to-time sales of shares may occur with proceeds used to fund the exercise of their warrants
- Consideration 3 – SQI became a legitimate turnaround stock after Mr. Chioini, a proven winner, who built a company from inception to a NASDAQ listed company with over a $900 million market capitalization, took over. With the new CEO, the probability is high for SQI shares to eventually eclipse their January 2011 all-time high of $3.44.
- Consideration 4 – SQI is currently trading on Toronto Stock Exchange and OTC market in the U.S. on relatively small volume but plans to up-list to the NASDAQ in the future.
- Consideration 5 – The healthcare sector, and especially the diagnostics sector, has been doing well recently and valuations are increasing significantly. There are many big players in this space that are looking for smaller innovative companies to acquire. SQI, trading around a US $120 million market capitalization, looks like a very attractive candidate for this type of acquisition.
- Consideration 6 – SQI is launching their own ecommerce direct-to-consumer (DTC) business with their home test kits for COVID and autoimmune diseases. This is a very large addressable market where even a small percentage of market share can convert into large increases in revenues.