Genoptix: An Outstanding New Biotech

Wildly successful biotech IPOs are few and far between.

That’s why Genoptix, Inc. (Nasdaq: GXDX), a specialized laboratory service provider out of Carlsbad, Calif., is emerging as a stand-out not only in its sector, but among small caps as a whole.

The company has several characteristics that would make many other companies drool: profitability, strong revenue growth, a better-than-expected IPO, cash reserves and the potential to gain significant market share in a niche area.

Founded in 1999, Genoptix analyzes blood and tissue samples in order to diagnose diseases. It then markets those services to community-based hematologists and oncologists treating malignancies of the blood and bone marrow, such as leukemia and lymphoma, as well as other types of cancer.

Since such diseases require patients to provide painful bone marrow samples, it’s even more crucial that a diagnosis is accurate.

The company also offers software applications that facilitate the administration of diagnostic tests.

In early 2007, before going public, Genoptix ranked number four on the new Inc. 5000 list of the nation’s fastest growing privately held companies. From 2003 to 2006, its revenue grew a whopping 11,391.9% — from $209,000 to $24 million.

In its report of the company, Inc. magazine noted the firm’s “highly specialized focus on the hematology/oncology niche, backed by software tools that facilitate and speed up patient care.”

The publication also pointed out that Genoptix is one of two laboratories in the country to offer the CellSearch System, the only FDA-approved test to identify circulating tumor cells in patients with metastatic breast cancer.

Founder Dr. Tina Nova also co-founded San Diego-based life science companies Ligand Pharmaceuticals Inc. (Nasdaq: LGND) and Nanogen, Inc. (Nasdaq: NGEN).

If the company’s IPO is any indication, there is indeed some promise. Genoptix initially set a price range of $14 to $16, which was too low. The offering was priced at $17 but it opened and closed at more than 50% higher — at around $25.

Since then, the stock has traded as low as $23.40 on Oct. 30 (its first day of trading) and as high as $36.96 on January 8. On Monday, shares of Genoptix closed at $33.56.

Raising some $73 million in net proceeds from the IPO, Genoptix said it planned to aggressively expand its sales force, construct a new facility on the East Coast to optimize logistics, expand its pharmaceutical manufacturer relationships, and pay down its outstanding debt.

In December, the 134-person company reported an impressive third-quarter performance that prompted several analysts to initiate coverage of the stock with positive ratings.

For the three months ended September 30, Genoptix's GAAP net income climbed to $3.6 million, or $0.20 per share, on revenue of $16.2 million. Pro forma cash on the balance sheet stood at a whopping $82 million.

Lehman Brothers, which served as the lead underwriter on the IPO, initiated coverage on the company on December 10, 2007, with an “overweight” rating and a price target of $34.

Banc of America Securities also initiated coverage that day with a “buy” rating and a 12-month price target of $38. In a report dated December 13, Banc of America analysts described Genoptix as a “bone-crusher” due to its “handily” topping revenue and profitability estimates in the third quarter.

Adam Feinstein of Lehman Brothers believes Genoptix is poised for “significant market share gains in the bone marrow and related blood-based testing segments.”

So optimistic is Lehman Brothers that the firm says the biotech company has the potential to generate average earnings-per-share growth of 50% over the next three years.

Specifically, the firm raised its 2007 fully taxed EPS estimate to $0.51 from $0.40, increased its 2008 estimate to $0.63 from $0.55 and raised its 2009 estimate to $0.95 from $0.89. It also adjusted its 12-month price target to $37 from $34.

The key to Genoptix’s story, according to Lehman, is its ability to dramatically expand its relatively small market share of the high growth bone marrow and related blood-based testing market, due to its “differentiated service offering and recent sales force expansion.”

Meanwhile, Banc of America analysts raised their 2007 and 2008 EPS estimates to $0.66 from $0.55 and $0.90 from $0.84, respectively.

Genoptix’s impressive third-quarter performance suggested to the Banc of America analysts that Genoptix “is doing an outstanding job without the capital” raised in its IPO.

They wrote: “Our buy rating reflects what we view as a valuation that under appreciates the company’s compelling revenue and earning growth prospects … our enthusiasm for its outlook has only gotten stronger.”

Disclosure: None