The diagnostics company CombiMatrix Corporation (NASDAQ: CBMX) saw weak trading for the entirety of 2012 until last Friday (December 7, 2012) when company stock jumped 336.6% in reaction to a publication in the New England Journal of Medicine. While YTD (year to date) gains in the stock still sit at -57%, the recent move was a clear sign that investor perception on CBMX may finally be changing for the better.
CombiMatrix's history as a public company goes all the way back to its IPO at the end of 2002, when the company was initially listed on the NASDAQ at $326/share. While CombiMatrix has now developed an array of diagnostic tests for oncology as well as developmental disorders, the company has also been continuously diluting shares and has not made all that much progress in terms of growth in sales revenue considering how long it has been in operation. In the third quarter of 2012, the company reported total revenues of only $1.3 million. While a positive trend in revenue growth is a good sign for future quarters, $1.3 million is simply not enough for CombiMatrix to cover its operating expenses of over $2.6 million each quarter.
Judging by the action we saw last Friday, it seems that the market is considering the possibility that the recently published research mentioned earlier could provide a much-needed lift to CombiMatrix's sales volumes.
The NIH (National Institutes of Health) performed the largest head-to-head study comparing something known as chromosomal microarray analysis (CMA) to karyotyping for the analysis of genetic diseases in the prenatal diagnostic setting, as well as stillbirths. What got investors really excited were statements made by the renowned reproductive geneticist Dr. Ronald Wapner, calling for a replacement of the traditional karyotype-based genetic analysis with chromosomal microarray analysis. According to his statements, karyotypes provide less information than chromosomal microarrays and hence reduce the accuracy of genetics testing for diseases. Karyotyping has essentially become outdated, replaced by the vastly superior chromosomal microarray analysis.
Helping this statement were results from the study entitled "Chromosomal Microarray Versus Karyotyping for Prenatal Diagnosis," which enrolled a total of 4,406 women. Microarray analysis gave successful diagnostic results in 98.8 percent of women, and caught mistakes that were made with traditional karyotyping diagnostics. 755 women out of the population that had normal karyotypes were tested due to suspected growth or structural anomalies - 45 were found to have clinically relevant findings. Out of the total number of women that had normal karyotypes that implied standard indications for prenatal diagnosis, 1.7% of pregnancies were found to have clinically relevant information due to chromosomal microarray analysis.
It's also worth noting that a second study was mentioned in the publication, which showed that CMA is capable of performing genetic analysis on dead tissue. This allows for accurate genetic profiling of stillbirths, which is a big development for geneticists.
While CombiMatrix moved up over three times its previous market capitalization on this news alone, it's worth noting that the company is still quite small in terms of market capitalization, at $9.2 million. While the cash burn rate of the company (about $5.3 million per year) is eating away at shareholder value very quickly, the market was willing to drastically boost the value of CombiMatrix due to the notion that its sales revenue could jump quite significantly in 2013.
Many doctors are unaware that chromosomal microarray genetic analysis is vastly superior to karyotyping, but the publication in the New England Journal of Medicine will certainly draw a lot of attention to this realization. Since CombiMatrix is focused on diagnostic products that are based on CMA, we should expect sales volume to improve drastically next year as more labs switch from karyotyping to CMA tests. Another trend that could improve CombiMatrix's financial situation is its cost-cutting efforts. In Q3, the company's total expenses were 53% higher than they were this year. CombiMatrix has a good chance of becoming profitable as early as next year given that labs begin the switch from karyotype-based analysis to CMA analysis fast enough.
Investors who are interested in CombiMatrix should really be keeping their eyes on the sales growth of the company's diagnostic product line for genetic diseases next year, as well as the company's expenses to gauge the company's trajectory.