Discount After Earnings Creates An Attractive Entry For Combimatrix

| About: CombiMatrix Corporation (CBMX)

(Editor’s Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)

Earnings Release and Earnings Call

On February 19th Combimatrix released positive earnings and future outlook. Revenues for the 4th quarter and full year increased to $1.75 million and $6.37 million respectively, (18% and 19% growth from 2012). Revenues from the company's core product, prenatal microarray testing, increased 22% from the 3rd quarter of 2013 and 112% year over year. Sales volumes for prenatal microarray testing increased 74% and 126% for the 4th quarter and year comparable to 2012. As sales volume increases the company has acquired, and is actively pursuing additional payer contracts to increase the reimbursement per test, as the company currently isn't fully reimbursed for every test. Current testing revenue brings in $1,600 per test on average with about a 50% margin per test.

Total operating expenses increased from 2.8M - 3.6M from 4th quarter 2012 to 4th quarter 2013 and the company experienced a net loss of 1.85m. However, it was noted that the increased costs occurred from increased sales and marketing expenses to expand the company and general and administrative costs incurred due to one time executive relocation costs not to repeat in future periods. The company also mentions that they maintain $14 million cash which will be easily sufficient to fund expenditures well passed 2014, and with warrants included will likely support the company until profitability. Combimatrix's current cash burn rate is about $1.4-$1.8m per quarter, giving the company enough cash to fund operations for close to 2 years (not including warrants).

The company held a conference call that clarified and expanded upon some points mentioned in the earnings release, as well as discussed some current events and future prospects. Some highlights from the call included:

· Mark McDonough President and CEO of Combimatrix states that microarray testing market is a large and rapidly expanding market. Supported by recent scientific studies that support Microarray testing results and efficiency over current standard karyotyping test.

· Company expects to form many partnerships and payer contract deals in 2014.

· Doubled their sales force team since 3rd quarter 2013 to expand their sales and exposure.

· Highlights Sequenom partnership and states that the company sees a lot of upside from this partnership. CEO expects large revenue increases from this partnership to materialize in 2014 (heavily in the second half).

· Combimatrix had $6.37m revenue in 2013, which makes up less than 2% of the market share of the currently $350m annual marketfor their products. They have a huge opportunity for growth in this market as they are the only publicly traded company focused on this niche.

Institutional Ownership

Over the last few months institutions have been loading up on shares of Combimatrix. This provides some validation of our opinion of the undervalued share price of the company. During our last article we mentioned Longwood Capital Partners disclosing a 13G SEC filing on January 3, 2014 with the purchase of 501,262 shares of Combimatrix a 5.08% stake in the company. As was stated as a catalyst for the company in our last article, many institutions have over the recent months since:

  • 1,096,541 shares (~10% of Combimatrix Shares Outstanding) beneficially owned by Great Point Partners, LLC. 13G filed on February 14, 2014. Great point partners beneficially owns shares on behalf on BVF, BOVF, and BIVF, all biomedical institutional value funds.
  • 194,175 shares (~2%) purchased by Perkins Capital Management (a top biotech investor) in the 4th quarter.
  • 145,631 Shares (~1.5%) purchased by Verition Fund Management in the 4th quarter.
  • 55,664 shares purchased by Morgan Stanley in the 4th Quarter.
  • 55,443 shares purchased by Vanguard Group Inc
  • 51,947 share purchased by Susquehanna International Group, LLP in 4th quarter
  • 44,525 shares purchased by Jane Street Holding, LLC in 4th Quarter
  • 22,692 shares purchased by Credit Suisse AG in 4th quarter
  • 19,200 shares purchased by Millennium Management in 4th quarter
  • 17,400 shares purchased by Citigroup in 4th quarter
  • 5,186 shares purchased by Tower Research Capital LLC in 4th Quarter

These institutional buys over the course of the 4th quarter 2013 and current year equate to ~20% of Combimatrix's shares outstanding.The increase in institutional ownership represents smart moneys belief in the continued growth and success of Combimatrix, and will likely provide a vote of confidence to retail investors. (Institutional buying numbers were found in 13G sec filings and 13F fund filings)

Why Then Did The Stock Pull Back?

February 19th, the day of their earnings release, Combimatrix stock pulled back nearly 8%. The day before earnings the shares traded up on over average volume. We believe this was due to short term traders trying to play a pop after earnings, as has been seen many times before with this low float share company. When the stock struggled to break out in early morning trading many day traders exited their positions causing a dip, this dip likely caused stop loss orders to hit and impatient investors to sell. This company's past has been filled with "pop and drop" trading on good news, which can be easily seen by looking at their stock price fluctuations. This company, however, has transformed itself recently and has created a new direction that we believe will lead to a sustainable growth story.

In Conclusion: Why we Believe this is the Prime Time to Buy

Combimatrix is currently valued around a 24m market capitalization performing in a market of around 350m annual revenue. They have experienced triple digit growth in sales volume from 2012-2013 and have forecasted that growth will continue at this rate for 2014 and beyond. We believe they will continue to present high growth rates and improve their revenue to cost ratio through the various insurance and payer contract deals they have made, and will likely continue to make in the near future, and thus will soon be operating at a profit. Mark McDonough stated that the company has enough cash to reach profitability, which should reduce fear of future dilution.

Potential Future Positives that will Help Appreciate Combimatrix's Share Price:

  • Showing continued rapid growth and declining costs as will be seen in future earnings numbers as the company heads towards profitability.
  • Future contracts and partnerships that McDonough mentioned in the company's recent conference call to occur in 2014.
  • Continued increase institutional ownership as institutions realize the turnaround potential for this microcap company.
  • Possible analyst coverage with price targets well above current valuation as the company gets more attention from institutions and investors. During their conference call questions were asked by a member of Laudenberg a financial company providing equity research and investment support. This is our speculative belief and as such should not be considered fact, the company has been experiencing a lack of coverage for a while.
  • Potential for a future buy out of the company, if earnings growth rate continues and attention to microarray testing gain more traction, bigger biotechnology firms may see Combimatrix's low market valuation as an opportunity to enter this market. One such candidate could be Sequenom (NASDAQ:SQNM) a company in a current partnership with Combimatrix. SQNM's non invasive tests that confirm any positive findings from MaterniT21 PLUS (SQNM product) should be followed up with Combimatrix invasive CMA testing. If microarray testing market continues to gain traction SQNM may buyout the company rather than lose additional revenue to Combimatrix's invasive tests. The opportunity cost over an extended period of time may become greater than Combimatrix's current valuation. CBMX currently bolsters a $24M market cap in a $350M market. Opportunity for large growth is present and this could lead to potential partnerships or the acquiring the company in the future.

We believe this follow up article on recent events that occurred after our article on Combimatrix's turnaround story helps solidify our position on the undervalued nature of Combimatrix. From the prospective catalysts we mentioned in our last article, large institutional buying, a new contract with Galaxy health network, and continued growth in the 4th quarter of 2013 have all occurred. We believe the company will continue rapid growth on its current path to profitability. We maintain our belief that the stock could be trading around $4-5 per share by 1st quarter 2014 earnings release and believe over the next several years Combimatrix will become a multi bagger capturing 4-5 times current valuation. We believe Combimatrix may be able to attain 10% of the 350M market as Microarray testing starts to replace current karyotyping. This would represent 35M a year in revenue, and with their current costs (9m operational costs, 50% margin per test), around 9m profit per year. At a P/E ratio of just 12-14 would bring this companies market cap to 4-5 times current valuation. (Costs are subject to change as expansionary measures are increased or decreased)


Small cap biotech stocks are very volatile and any negative change to their story can send the share price down quickly. Combimatrix has had a history of declining share prices, but we believe this company is on the verge of a turnaround. Small cap stocks in general carry larger risk because lack of insight and news as Wall Street analysts tend to only focus and report on the biggest firms, and lack of personal experience as these are companies we don't normally interact with on a day to basis. Also, the small float of shares outstanding for Combimatrix leads to more volatile price fluctuations up on positive news or down negative news. Although we believe the future for CombiMatrix is very bright, there are some risks that potential investors should take into consideration before taking a position in this company. Some of these risks include bad earnings reports, termination of partnerships, and increased competition, which could all negatively impact their share price. Conversely, good earnings reports, and the addition of new partners and contracts can send this stock up in a hurry. As always make sure to perform your own due diligence before initiating a position in any stock.

Disclosure: I am long CBMX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.