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I believe that we are on the cusp of FINALLY seeing the widespread adoption and commercialization of molecular diagnostics for cancers of all types. One small company that will help lead that trend is Response Genetics (NASDAQ:RGDX), an under-the-radar specialty lab company that has proven it can commercialize its tests by delivering very strong y/o/y sales growth and recently hit break-even, and is at the inflection point of turning profitable in 2011.

RGDX is a micro-cap cancer diagnostic company that has grown revenues rapidly over the last 3 years. Revenue: 2009 = $9m, 2010 = $21m; and after achieving $6.0m in revs for Q1 2011, RGDX is on a run-rate of approximately $25m+ in revenues for 2011. RGDX's main tests are very unique and address lung, colon and gastic cancers. All signs point to key metrics heading in the right direction on its most recent quarterly report.

Revenues increased 60% y/o/y, gross margins increased from 51% to 54% Q/o/Q and revenue per test increased from $1,350 to $1,380 Q/o/Q. RGDX's tests have been very sticky with a "re-order rate" by oncologists and pathologists of approximately 90%, according to the company. Given these solid trends, they have recently ramped up their sales staff to approximately 20 people. It usually takes 6 to 12 months for a new salesperson to begin to add meaningful revenue, so the new staff should start to benefit the company in the back half of 2011, or early 2012.

New tests to broaden their offerings:

Additionally, the company is intent on launching some new tests over the near to intermediate term. In their PPT presentation (page 11, they show a pipeline of 4 new tests coming with the market potential of $309m). These include tests for the cancers of: (the) head and neck, breast, ovarian and bladder with total incidents of 309,000.

See their presentation on RGDX's website under the Investor Relations tab.

No debt on balance sheet, ample cash:

They currently have $4.2m in cash, and NO DEBT and given RGDX is significantly reducing its cash burn, this should take them to profitability. With 19.5m shares outstanding (fully diluted), its EV (enterprise value) is $35m, so its trading at about 1.4x EV to 2011 revs (sales est. at $25m for 2011). Given RGDX lost (-257k) last quarter (or -.01c/share), it has essentially made it to break-even. I think they could turn profitable in the next 2 or 3 quarters, as the new sales staff additions are able to ramp up.

WHY it's so cheap vs its PEERS:

This company had a busted IPO in 2007, as it came out at $7+ per share at the top of the market. And it was all down hill for the stock price from there. Additionally, the CEO decided to focus on operations, probably with the assumption that the share price will eventually take care of itself. At this time, the company does NOT do quarterly conference calls OR go to investor conferences, thus investors have a hard time gauging management, and quite frankly, this company remains a true "under-the-radar" story.

There is no question this stock is cheap, especially compared to most other small/micro-cap stocks that as a group, appear richly valued. To address the under the radar issue, the company has expressed interest in ramping up IR in the back half of 2011, including doing quarterly conference calls and attending Investor conferences to help get the story out.

Catalysts:

As the newer sales force gains experience, I think RGDX will turn EPS positive in the next 2 or 3 quarters. If they can demonstrate successive positive EPS over an additional few quarters, the stock will likely trade to the $3 - $4+ range. Also, the industry is beginning to consolidate as there have been NUMEROUS buy-outs of small specialty labs over the last 6 to 9 months at very high multiples to sales with cancer diagnostic companies garnering a premium because of their growth profiles. See a few on the list below:

1) 2011: Athena Diagnostics (proposed) acquisition by Quest Diagnostics (NYSE:DGX) at 6.7x sales

2) 2011: Clarient Diagnostics acquired by GE Healthcare (NYSE:GE) at 5.3x sales

3) 2010: Signature Genomics acquired by PerkinElmer (NYSE:PKI) at 4.3x sales

Again, RGDX is trading for less than 1.5x sales by comparison. In a buy-out, it could easily be worth $4 to $5 right now, and possibly higher if they get consistently profitable.

The above is not an exhaustive list of recent acquisitions in the diagnostic industry, there have been other buy-outs of larger, more mature labs, at more conservative multiples, as consolidation is beginning to pick up in this industry. With the promise of molecular cancer diagnostics finally becoming a reality as companies demonstrate real revenue growth and their tests gain increasing acceptance in the marketplace, I think it is likely that RGDX ultimately gets taken-out at a significant premium to today's market price of $2.10.

Currently, this stock is thinly traded due to a low float and no IR. There are two large institutional shareholders that own a HUGE percentage of this company, about 7m shares or 35% together, and insiders own another big chunk as well, so the float is relatively small. I think this stock is a good long term hold to capitalize on the strong trends in molecular cancer diagnostics gaining widespread adoption.

Source: Response Genetics: An Under the Radar Company With Strong Growth