Genoptix: Little-Known Biotech with Strong Focus and Growth

Genoptix, Inc. (GXDX) is a relatively small player in the laboratory diagnostic field, and yet it is one of the most well respected companies within its field. The firm focuses exclusively on serving hematologists and oncologists in diagnosing their patients’ illnesses. Most of the diagnostic tests are run on bone marrow samples which are very difficult and painful to extract from the patients. Because doctors consider these samples so precious, and the prospect of potentially drawing another sample is so unattractive, doctors typically are receptive to sending samples to this smaller more specialized lab rather than sending the bone marrow to a competitor.

While Quest Diagnostics Incorporated (DGX), and Genzyme Corporation (GENZ) may be able to perform the same tests, Genoptix is able to win some business from these firms because of its special focus, its customer service, and the willingness of its lab physicians to consult with the doctor to adequately diagnose the patients' conditions.

The focus is paying off as the company just reported its 15th consecutive quarter of significant sales growth along with growth in the number of cases handled. For the first quarter the company realized revenue of $22.3 million. A small portion of this was due to increases on estimates from 2007, but even without these adjustments, the growth was impressive. Not only have the number of cases increased (7,828 for the quarter which is up 78%), but at the same time the average revenue per case increased roughly 4% to $2,800. When asked about pricing power in the industry, management led analysts to expect future growth to come much more as a result of increased case numbers and not pricing, but it is still comforting for investors to know that revenue per case is steady to slowly rising.

The net result was EPS of 0.34 after non-cash items, and at the same time, management noted that it felt comfortable with its ability to hit the high end of its previous guidance of 85 to 95 cents for 2008. During the conference call, analysts pressed to get more clarity on this number and it appears that even the high end of the range is a very conservative forecast.

One of the largest questions relating to future earnings revolves around Medicare reimbursement. Since the company gets 38% of its revenue from Medicare and Medicaid, and the CMS program is likely to experience some changes in the next few months, this could be a significant issue. Management stated that no matter what happened with CMS, it was comfortable with its guidance. This implies that if there are positive surprises in the reimbursement program, the guidance will prove to be very low. In fact, Lehman Brothers is forecasting an additional 50% growth in 2009 which compares very favorably to consensus estimates.

In addition to a robust earnings picture, the company’s balance sheet is in good shape after its IPO. The capital raised in the transaction should allow Genoptix to continue with its aggressive growth plans while at the same time not taking on debt or difficult obligations. Currently, the company is sitting on cash reserves of $84.7 million with no long-term debt. With capital expenditures estimated at $6 million for 2008, and that number likely to be stable to up just a bit in 2009, there is ample room for flexibility.

Expansion plans include increasing the current lab space by 75%, which should be complete by Q4 2008. In addition, the firm is looking to open a new laboratory in the eastern part of the US in order to fulfill service more efficiently on that side of the country. Management commits to having this new location up and running by mid 2009.

Despite the strong growth story and robust financial position, the company has very little coverage on Wall Street. While this makes finding information a little more challenging, the lack of coverage actually works to the small investor's favor as the company is relatively undiscovered and the opportunity appears to be great.

The stock has ramped up significantly since the earnings announcement, but still appears to have a reasonable valuation - especially if Lehman’s growth projections are reasonable. The strong volume the last few days of trading point to institutions beginning to build positions which may help to support the stock even if the overall market weakens. Diagnostic services are less affected by the overall economic trends as they are essentially not an elective medical procedure. Genoptix appears to offer an attractive investment for those willing to do their homework.

GXDX Notes

Disclosure: Author does not have a position in GXDX.