Medical software firm Echo IQ has seen its shares plummet after the United States drug authority rejected its application to commercialise its heart disease detection platform, leaving many investors nursing significant losses. Echo IQ is a medical software company that specialises in developing platforms for early and accurate detection of heart disease. Its flagship tool, EchoSolv, was designed to improve diagnostic capabilities in this critical health area. The decision delivered a windfall for hedge funds that had actively shorted the stock as it soared, with the company abruptly entering a trading halt on Monday before crashing 50 per cent on Wednesday and a further 11 per cent on Thursday to 57¢.
Prior to the announcement, Echo IQ began the week with a market capitalisation nearing $1 billion and was poised for inclusion in the S&P/ASX 300 Index, having surged 400 per cent since the start of the year. The stock’s post-rejection fall has reduced its market capitalisation to $413 million. Wilson Asset Management, which held a 10.1 per cent position, saw Echo IQ as a key contributor to a record 75 per cent return in the past financial year. Despite portfolio manager Shaun Weick having reduced the position, he viewed the sell-off as an opportunity, stating, “The FDA have made some procedural errors here. I was quite frankly stunned it didn’t get approved.”
However, a growing number of hedge funds, including Blackwattle Investment Partners and Plato Investment Management, had built short positions, citing concerns such as the low purchase price of the underlying technology, perceived lack of investment in research and development, and a significant delay in the FDA approval process. Blackwattle’s analyst Reece Frith noted the FDA had not deemed the product to have “statistically significant” outcomes. Plato highlighted 13 red flags, including the company changing names four times since 2014. Meanwhile, Echo IQ chief executive Dustin Haines and chief financial officer Andrew Grover were awarded bonuses totalling $US400,000 on July 9, partly for a recent $110 million capital raise.
Bell Potter analyst John Hester recommended clients sell Echo IQ stock, slashing its share price expectation by 82 per cent to 30¢ from $1.75. The company’s webinar, held by CEO Dustin Haines on Tuesday, left investors and analysts frustrated as management offered little explanation for the rejection, beyond stating an intention to seek immediate follow-up with the FDA. Hester cautioned that resolution would likely not be rapid, anticipating extensive delays of many months, if not years.
