Response Genetics: An Earnings Primer

Includes: GSK, RGDX
by: Andrew Nava

Shares of diagnostic test maker Response Genetics (NASDAQ:RGDX) skyrocketed as high as 51% Tuesday on news that it signed a non-exclusive license agreement with GSK for rights to its technology to assess BRAF gene mutations in tumor samples.

GSK gains certain rights to RGDX’s proprietary PCR analysis technology and diagnostic expertise to assess BRAF gene mutations in human tumor samples. RGDX did not disclose financial details of the deal, but did mention it would receive milestones.

RGDX currently has three marketed diagnostic products: ResponseDX: Lung, ResponseDX: Colon, and ResponseDX: Gastric, each of which help oncologists choose among chemotherapy regimens to treat cancer patients.

ResponseDX: Lung for NSCLC is comprised of six tests: ERCC1 expression, RRM1 expression, TS expression, KRAS mutational analysis, EGFR amplification and EGFR mutational analysis.

ResponseDX: Colon for colon cancer comprises six tests: ERCC1 expression, KRAS mutational analysis, TS expression, EGFR amplification, and BRAF mutational analysis.

ResponseDX: Gastric for gastric and gastroesophageal (GE) cancer comprises RNA expression of ERCC1, TS, and RRM1 by RT-PCR from a patient's tumor tissue.

RGDX is set to announce its Q1 earnings this Thursday May 13, 2010, after close of market.

Earnings primer

RGDX's revenue for 4Q09 was up 81% to $1.7 million from $900,000 in 3Q09 on 1,700 ordered tests (RGDX has indicated that its revenues are primarily on a cash basis from certain insurance providers). Revenue for 1Q09 was $1.5 million. RGDX's total revenue for 2009 was up 28% to $9.1 million compared to $7.1 million in 2008. The company's genetic test revenue is largely (about half) comprised from sales of its ResponseDX: Lung test.

RGDX finished 2009 with $7.1 million in cash and completed a $4 million private placement in March 2010. In April, Ladenburg Thalmann initiated coverage with a buy rating and $4.25 price target.

I should also add that RGDX has zero debt and plans to increase its partnerships, both on a technology basis and by increasing its sales efforts.

Finally, RGDX is developing a recurrence diagnostic for non-small cell lung cancer (NSCLC) which has the potential to address a huge market. From its recent 10-K, RGDX states they:

have developed preliminary gene sets for predicting risk of recurrence in early stage non-small cell lung cancer after surgery through analysis of 80 patient specimens by microarray. This “product candidate” must be validated in a larger set of patient specimens in the research setting. Our plan is to use our proprietary technologies to analyze (these) archived patient specimens and to correlate the data with clinical outcomes so that we can develop diagnostic tests to predict likelihood of recurrence and responsiveness to chemotherapy.

After preliminary validation of the predictive gene set, a formal clinical trial will be designed to prove the ability of the gene set to accurately predict outcome in additional patients using reagents available from Affymetrix. Based on the current predictability of our gene set, over 90% accuracy, we estimate that the clinical trial will require an additional 100-200 early stage lung cancer patients. Additional trials may then be launched at various sites to continue to refine the accuracy of our assay.

The analysis of the first two series of patient specimens is complete and statistical analysis is being performed. Using these results, analysis of additional retrospective clinical trials may be performed. There are a number of diagnostic test developers available to partner with us during the clinical trial and test launch process. Roche, with whom we have a strategic alliance, is one of these providers.

A $51 million market cap company, RGDX closed Monday at $2.17, opened at $2.47 Tuesday and shot as high as $3.25 in intra-day trading.

Disclosure: No positions