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Original post, Bio-Wire (9/5/2013)

Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

CGI: Overview

Cancer Genetics Inc. (NASDAQ: CGIX) is a rapidly growing genetics company that specializes in cancer diagnostics and the process of creating personalized cancer therapies for patients. The company's IP-protected products include proprietary FISH probes and a wide variety of CGH Microarrays that are designed to identify genetic mutations present in particular types of cancer cells.

The company is also developing next-generation DNA sequencing and offers diagnostic services from its headquarters in Rutherford, New Jersey. CGI clients include prestigious cancer centers like Memorial Sloan-Kettering, Mayo Clinic, the National Cancer Institute, Dana-Farber, Hackensack University Medical Center, The Cleveland Clinic and others.

CGIX Since IPO

Cancer Genetics announced its initial public offering of 600,000 shares priced at $10.00 apiece on April 4th, 2013, with the ticker "CGIX" on the OTC markets. The IPO was completed on April 10th, 2013, with a total of 690,000 shares sold (90,000 extra from overallotment). Proceeds from the IPO were $6.9 M prior to underwriting discounts and commissions. Shares of CGIX traded in the $7.00-17.00 range since April, and recently settled close to the $10.00 level after the recent 1.5 M share offering. CGIX was also uplisted to the NASDAQ on August 14th, 2013. (Source: MarketWatch)

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CGI: Financials

Recent uplisting to the NASDAQ, and the successful close of a 1.5 M share public offering (raising $15 M for the company) puts CGI at a much more comfortable position going forward.

Top-line growth for the company has been very strong, reflecting high demand for cancer diagnostics in recent years. In the first half of 2013, revenues were 54% higher than they were in the first half of 2012. Gross margins have also improved quite dramatically, reflecting the impact of higher sales.

The bulk of the company's revenue was derived from hospitals and clinics (including the names mentioned earlier), as well as insurance companies, Medicare and pharmaceutical companies. These revenues are generated from the sale of products used in clinical and research settings, and various services performed by the company's specialists.

The Role of Modern Cancer Diagnostics

Recent advances in biology have created a golden age for cancer research and development. FDA approvals for cancer drugs have surged in recent years, and institutional grants for cancer research are at an all-time high. Financial incentives have also encouraged a number of companies to pursue rare ("orphan") drug indications, many of which are cancer indications that were historically deemed "unattractive" by the pharmaceutical industry. Patients with late-stage disease have also done better due to an inflow of specialized drugs typically used after first and second line therapy.

In recent years there has also been an enormous effort to improve patient outcomes with early detection. It is often the case that a cancerous growth will start off simpler (and in a smaller area) and with fewer mutations in the tumor cells. If left untreated, malignant cells can breach membranes and spread to other areas of the body - sometimes developing new, harmful mutations in the process. Because of the progressive nature of the disease, early detection is usually the best weapon.

Until recent advancements in diagnostic technology, biopsies of malignant tissue would be examined under a microscope by a pathology lab in an attempt to predict the course of the disease. We now have very powerful tests that can not only identify the presence of important proteins in malignant tissue, but monitor the expression of specific oncogenes by cancer cells. To do this, mRNA is isolated from the cells and introduced to something known as a DNA microarray. This device maps the activity level of genes, and produces a simple color-coded map that allows researchers and physicians to interpret genomic activity of cancer cells on a very fundamental level.

Knowing more details about the genotype of a patient's malignancy allows physicians to employ highly personalized therapeutic regimens, which target the vulnerabilities of malignant cells much more effectively. With this we can also determine the course of each patient's malignancy more accurately, which allows oncologists to adjust the intensity of damaging treatments like chemotherapy.

Advanced cancer diagnostics will also reduce our current reliance on outdated phenotypic analysis of malignancies, which are less accurate and much more time intensive. In coming years, widespread adoption of new diagnostics is not only expected to improve patient survival rates, but to reduce the overall costs of cancer treatment.

CGI: Diagnostics Pipeline

Cancer Genetics produced two main kinds of diagnostic tools - fluorescent in situ hybridization ((NASDAQ:FISH)) probes, and comparative genomic hybridization (CGH) arrays.

Fluorescent in situ hybridization

FISH is based on older technology that can identify and bind onto the location of certain DNA sequences on individual chromosomes. Fluorescent molecules are attached to the probes to reveal their exact location during analysis. When used clinically, FISH probes can quickly identify specific chromosomal abnormalities that are associated with certain cancers and other genetic disorders.

CGI developed and patented FISH probes for eight major types of hemotologic malignancies: Anaplastic Large Cell Lymphoma (ALCL), Acute Lymphoblastic Leukemia (ALL), Acute Myeloid Leukemia (AML), Chronic Lymphocytic Leukemia (CML), Multiple Myeloma (MM), Myelodysplastic Syndromes (MDS) and Non-Hodgkin Lymphoma (NHL).

Four other FISH probes were developed for breast, cervical, colorectal and lung solid tumors. CGI also developed a novel probe for cervical cancer called FHACT, which looks for four specific chromosomal aberrations associated with Human Papillomavirus (HPV) and cervical cancer.

The FISH probes are manufactured outside of the US and distributed in Europe under CE marking, although the FISH probe portfolio is only cleared for use in research labs in the United States.

Comparative Genomic Hybridization (CGH) Arrays

CGH arrays are based on the fluorescent marking technique used with FISH probes, although they are much more sophisticated. Note that CGH arrays are not DNA microarrays because they specifically track the gain and loss of genetic material in a test sample of DNA relative to a reference sample. This allows for more accurate, in-depth analysis of the genotypic differences between the DNA of a tumor cell and healthy cell DNA.

CGI currently markets three CGH arrays which provide a highly detailed diagnostic profile for three types of blood cancers: Chronic Lymphocytic Leukemia (CLL), Diffuse Large B-Cell Lymphoma (DLBCL), and Mantle Cell Lymphoma (MCL). The company also markets a test specifically designed to classify kidney cancers into one of three subtypes - clear cell, papillary and chromophobe renal cell carcinoma (RCC).

Recently presented data from a 322 specimen study performed by Dr. Kanti Rai and Dr. Nicholas Chiorazzi at North Shore LIJ showed that the Cancer Genetics MatBA® test for Chronic Lymphocytic Leukemia (and Small Lymphocytic Leukemia) was able to identify genomic abnormalities associated with "unfavorable" CLL/SLL outcomes that were missed by FISH probes (8% of total specimens). The CGH array was also able to differentiate between "favorable" and "intermediate" outcomes with statistical significance. In a clinical setting this would allow an oncologist to adjust a patient's therapy in accordance with his or her expected outcome.

Source: Cancer Genetics Inc.

Next-Generation DNA Sequencing

Cancer Genetics' technology pipeline includes DNA sequencing technology which would allow for genomic maps that display individual base pairs. These maps would allow geneticists to "see" a genotype with 1000x the resolution of DNA Microarrays, which paves the way for even more sophisticated interpretation of cancer cell genotypes and their likely outcomes.

Opportunity in Cancer Diagnostics

Although the cost of cancer diagnostics pale in comparison to the cost of novel therapies, genetic assays are being used more frequently due to their usefulness. Pharmacoeconomic benefit has also supported strong and growing demand for new and high-end tests.

Cancer Genetics is on track to process around 10,000 tests by the end of 2013, which should produce revenues of roughly $6 M for fiscal year 2013. Expected improvements in manufacturing efficiency should also improve the company's margins.

CGIX, at a market capitalization of $57 M at time of writing, is valued at approximately 10x its revenues. This is inexpensive if you factor in the company's trailing rate of sales growth, which has been faster than the industry average.

The company's CGH diagnostic products target blood and kidney cancer indications, which are currently more attractive than crowded indications like breast cancer.

Based on US statistics for blood cancers and costs for diagnostic products and servicing, about 40,000 newly diagnosed patients creates ~$40-50 M in opportunity for MatBA® in currently targeted indications. More potential is found in ex-US markets and in cancer patients that already have a diagnosis. The figure grows dramatically after including the market potential of other hematologic indications. In the US alone, the market opportunity for the newly diagnosed approaches $200 M.

UroGenRA for renal cell carcinoma classification also has huge potential and a ~$60 M opportunity on currently targeting indications. This figure grows dramatically when factoring in potential use in bladder and prostate cancers, which would bring the market size closer to $400 M.

The novel FISH probe for HPV mutation, FHACT , has an approximate $10 M US opportunity while targeting cervical cancer, although this could expand significantly with use in endometrial and ovarian cancers. $80 M is realistic given incidence of HPV-induced cancer.

Source: Cancer Genetics: High-End Diagnostics For Personal Cancer Treatment