Response Genetics (RGDX) Offers Good Value and Is Positioned For Revenue Growth
In April we compared two emerging companies focused in biomarker diagnostics, BG Medicine (BGMD) and Vermillion (VRML) offering a challenge to readers as to which stock would be the winner in 2012. Both companies received FDA approval for their tests and revenues were expected to build throughout the year. Although there are still two months of trading left in the year, VRML is the clear "winner" declining only 33% compared to over 80% for BGMD. BG Medicine has a strong strategic partner in Abbott Diagnostics for their Galectin-3 test so look for sales progress in 2013 with a new commercialization strategy announced this week including a CLIA Lab. Vermillion is marketing its product through Quest Diagnostics, Inc. (DGX), which has helped finance the company. Recently the CEO of Vermillion was terminated by the BOD and a search is underway for a new CEO as well as an evaluation of strategic alternatives.
Earlier in the year in February we recommended Response Genetics to our Dx and Tools Portfolio at a price of $1.50. Response Genetics has a broad portfolio of genetic tests that show promise as companion diagnostics to predict success in cancer therapy. The market for cancer biomarker tests is expected to grow to $11.46B by 2017 as companion diagnostics get incorporated into clinical guidelines. The Company hired a new CEO and raised more than $7.8M with institutional investors to bolster its balance sheet. In September the Company announced an additional financing of $8.8M in a deal with GlaxoSmithKline plc (GSK) and one of their institutional investors. With the arrival of the new CEO the stock soared briefly above $2.00 but is now trading at 24% below $1.50. The shares are quite volatile due to trading by major institutional holders and expected dilution from the financings.
Although the biotechnology sector has been strong in 2012, up 22% YTD, smaller cap stocks have grossly underperformed larger cap biopharmaceutical stocks. Investor risks for micro-cap stocks are much higher because of thin trading volume, need to show revenue growth and a difficult funding environment.
All of these "micro-cap" companies are trading at venture capital valuations and have the potential to be acquired or merged with more mature diagnostic companies seeking test menu and technology. All are currently at comparable $25M+ market valuations so the major issue is the potential for revenue growth. Both Response Genetics and BG Medicine (BGMD) have 90% ownership by institutions so at least they have some sponsorship. RGDX currently offers the best value at a Price/Sales under 2 with sufficient cash to execute their business plan with a new management team.
Comparison of Three Emerging Biomarker Diagnostic Companies
|Company||BG Medicine||Response Gene||Vermillion|
|Rev Est 2012$M||2.9||16.5||2.7|
|Q3 Rev $M||1.74||5.4||0.319|
|EPS Est 2012||($1.30)||($0.10)||($0.61)|
|Lead Product(s)||Galectin-3||ROS1,KRAS, BRAF||OVA1|
|Disease focus||Cardiovascular||Cancer||Ovarian cancer|
Additional disclosure: All of these "microcap" stocks are highly dependent on revenue growth.