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Keith Stokes
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Currently going for MBA in finance. Working in wealth management at Morgan Stanley. Personally invest mainly in biotechs and all opinions are my own. Follow me @KeithStokes14 on twitter (I discuss trades and companies, mainly small-cap biotechs).
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  • Discount After Earnings Creates An Attractive Entry For Combimatrix

    Last month we wrote an article discussing Combimatrix's (CBMX) turnaround story in the making (Combimatrix: A Turn Around Story for 2014). We mentioned many positive events for the company that occurred in 2013. Such events included positive scientific studies based on their product, new direction for the company, improved liquidity, increasing growth, and several different partnerships and contracts. We also mentioned many positive catalysts that we expected to occur throughout 2014, many of which have already started to occur. This article will discuss the positive events that occurred for Combimatrix over the last month, and why the sell on earnings created a very attractive entry price.

    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.

    Total operating expenses increased from 2012 to 2013, 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 support the company until profitability.

    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 forecasted that the large growth rate in microarray testing would continue through 2014 and beyond.

    · 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 market for 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) purchased by Great Point Partners, LLC. 13G filed on February 14, 2014.
    • 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 over 20% of Combimatrix's shares outstanding. This 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.

    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.
    • Potential for a future buy out of the company, if earnings growth rate and attention to microarray testing gains more traction, bigger biotechnology firms may see Combimatrix's low market valuation as an opportunity to enter this market.

    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 5-10 times current valuation.

    Combimatrix is a microcap biotech company, and as such is subject to high volatility. Always make sure to do your research before buying 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.

    Disclosure: I am long CBMX.

    Tags: CBMX
    Feb 24 9:03 AM | Link | 3 Comments
  • Combimatrix: A Turn Around Story For 2014

    As a small cap biotech investor it is difficult to locate under the radar companies that haven't exploded in recent months. 2013 was an incredible year for most biotech investors as the IBB and XBI finished the year up 60.33% and 42.7% respectively. As we going into 2014 it is becoming increasingly more difficult to find the next big run up play, but one company, CombiMatrix Corporation (NASDAQ:CBMX), has caught our eye and could provide significant returns in 2014.

    This past year, 2013, has been an incredible year for CombiMatrix. CombiMatrix(The company) is a molecular diagnostic company specializing in DNA-based testing services for developmental disorders and cancer diagnostics. The company specializes in Chromosomal Microarray Analysis (CMA), which is a technique used to identify chromosomal abnormalities, including submicroscopic abnormalities that are too small to be detected by conventional Karyotyping. Until recently, the broad application of this technology was limited by a lack of large population based studies.

    In December of 2012, two studies conducted by the National Institutes of Health (NIH) were published in the New England Journal of Medicine. These studies were the largest head-to-head studies comparing CMA to traditional Karyotyping for genetic prenatal diagnosis and genetic evaluation of stillbirth. Both studies favored CMA, stating that it identified additional, clinically significant genetic abnormalities not identified through traditional Karyotyping. (http://www.nejm.org/doi/full/10.1056/NEJMoa1203382 and http://www.nejm.org/doi/full/10.1056/NEJMoa1201569).

    This was just the spark that CombiMatrix needed as the company has experienced incredible growth since.

    2013 Growth Highlights

    In February of 2013 they introduced new CEO Mark McDonough. As a former VP of sales at LabCorp, McDonough brought with him a strong background in diagnostic sales and business development. Since McDonough took over office the company has signed numerous contracts and developed partnerships with premier healthcare providers.

    In June of 2013 the company announced that Pathology, Inc selected them as their exclusive provider of chromosomal microarray tests for the products of conception (POC) testing market throughout the United States. POC testing is also referred to as miscarriage diagnostic testing and is a subset of the overall prenatal testing market. Also in June of 2013, the company announced that they had received condition approval from the New York State Department of Health to market their prenatal miscarriage analysis tests in the New York metropolitan area. This was a major milestone for the company, as it will give approximately 20,000,000 people the access to the company's miscarriage diagnostic tests.

    In July of 2013, the company announced that they had signed a contract with Blue Cross Blue Shield of California, which will give its 3,000,000 members access to the company's suite of diagnostic tests. This adds to the existing multi-plan contract to increase access to 60,000,000 members who need the company's diagnostic testing services.

    In August of 2013, the company announced a collaboration with the Sequenom Center for Molecular Medicine, LLC. Under the terms of the deal, the Sequenom Center for Molecular Medicine will work with CombiMatrix to promote services, provide technical training to physicians, as well as counseling, education and support services to physicians and their patients. With this deal, Sequenom becomes the first major player in the next-generation sequencing-based, non-invasive prenatal testing market to offer chromosomal microarray analysis services to its customers. Non-invasive prenatal testing analyzes cell-free fetal DNA (cfDNA) circulating in the mother's blood. Sequenom's MaterniT21 PLUS test does just that. The American Colngress of Obstetricians and Gynecologists recommends cfDNA testing be done on for high-risk pregnancies, and abnormal results should be confirmed by invasive testing before any action is taken. Under the collaboration, Sequenom will be using Combimatrix to confirm the abnormal results given from their MaterniT21 PLUS test. (www.genomeweb.com/arrays/combimatrix-dea...)

    Also in August of 2013, the company entered into a strategic partnership with Manhattan Labs to service the New York City metro area. Under this agreement, Manhattan Labs will market and distribute Combimatrix's microarray tests for the miscarriage management testing market in the New York City metro area.

    In October of 2013, the company announced the signing of a contract with Three Rivers Provider Network. This contract will give approximately 15,000,000 members access to the company's suite of diagnostic testing services.

    In November of 2013, the company announced the signing of a contract with Blue Cross Blue Shield of Kansas City, which will give approximately 800,000 members access to the company's suite of diagnostic testing services. They also, announced signing a contract with America's Choice Providers Network, which will allow access to approximately 14,000,000 members.

    Finally, at the end of December 2013, the company announced that they signed a contract with FedMed National Provider Network, giving approximately 40,000,000 members access to the company's suite of diagnostic testing services. Also in December of 2013, the American Congress of Obstetricians and Gynecologists (ACOG) published a new research paper. In the paper, ACOG recommends that CMA be used as first line genetic testing in pregnancies that show fetal abnormalities on an ultrasound screening.

    Financial Situation and Earnings Growth

    As most small cap biotech investors know, a company's financial situation is an important factor to take into account before investing. The majority of small cap biotech companies incur high R&D costs to take their drugs through experimental phases, with the hopes that their drug will receive approval and bring in substantial profit in the future. Even after a biotech company's products are approved it may take a marketing team, sales force and time before the company reaches a positive profit margin. Combimatrix is such a company with marketable products incurring net losses and net operating cash flow deficits throughout its recent history. According to their 3rd quarter 2013 10Q, CombiMatrix had $4 million in cash and cash equivalents. However, last month CombiMatrix closed a $12 million dollar public offering. The net proceeds from this offering after expenses was $10.8 million cash. At current burn rate of about $1.35 million a quarter the company should have enough cash to sustain operation into mid 2016. Also, the company has issued warrants along with recent cash raise that will bring in an additional $18.6 million for the company if they are all exercised at the $3.12 per share exercise price. With only $2.6 million in total liabilities, this would give CombiMatrix enough funds to maintain operations well into 2019. As you can see, CombiMatrix now has a strong cash situation and substantial liquidity after the recent financing activities. We believe that since the company is growing at a rapid pace, these cash reserves will support the company until it becomes highly profitable. This greatly assuages the likelihood of future dilution.

    According to the most recent quarter, which ended September 30, 2013, the company showed that its microarray testing volumes increased by 34% and that diagnostic testing revenues increased by 39% when compared to the 3rd quarter of 2012. Prenatal microarray revenues increased by 128.91% in the 3rd quarter of 2013 when compared to same period of 2012. The increase in prenatal microarray revenue was primarily driven by a 140.44% increase in prenatal testing volume. (http://investor.combimatrix.com/releasedetail.cfm?ReleaseID=800665)

    Company growth and share price appreciation

    Over the past year, Combimatrix has expanded its partnerships to allow more than 72,800,000 people access to their suite of diagnostic testing services through the contracts it has signed with national payers. According to CEO Mark McDonough, the contracts are a "validation of our strategy to partner with nationally known and respected provider networks like FedMed, which connects us to a large group of physicians, hospitals and ancillary care providers. It also underscores the notion that physicians better understand the value of the services we offer their patients, particularly chromosomal microarray analysis or CMA. We expect the recent endorsement of CMA from the American College of Obstetricians and Gynecologists to continue to drive interest in our services."This endorsement of CMA from ACOG could prove to be a significant catalyst for the company in 2014. The recommendation from ACOG in 2012 to perform invasive prenatal diagnostics to confirm positive results from noninvasive prenatal testing helped to seal the partnership between Combimatrix and Sequenom back in August. (http://www.acog.org/Resources_And_Publications/Committee_Opinions/Committee_on_Genetics/Noninvasive_Prenatal_Testing_for_Fetal_Aneuploidy) This most recent endorsement could help Combimatrix to initiate additional partnerships as this technology gains mainstream acceptance.

    With plenty of cash on hand and essentially no debt, we believe that Combimatrix is positioned for success in 2014. Institutional investors are also taking note as seen by Longwood Capital Partners, LLC's 5.08% passive stake recently reported in an SEC 13G filing on January 03, 2014. As we enter into the year 2014, expect Combimatrix to continue their efforts to enable more people access to their technology. With greater numbers of people having access and greater adoption rates of this technology by Physicians, hospitals and ancillary care providers, I believe CombiMatrix's revenue will greatly increase. The next significant catalyst for the company will be its fourth quarter 2013 financial results which will be released sometime in February of 2014. These results could greatly appreciate Combimatrix's share price. Since the Sequenom and Manhattan Labs partnerships happened midway through the third quarter, the financial results from that quarter do not show the effect of these partnerships on the company's revenue. Fourth quarter results will show a full quarter of revenue resulting from these partnerships as well as partial revenue from contracts it signed with Three Rivers Providers Network, Blue Cross Blue Shield of Kansas City, and FedMed National Provider Network. With endorsements from ACOG, NIH, and respected institutional investors like Longwood Capital Partners, LLC we believe that 2014 can be an even better year for Combimatrix than 2013 was.

    Significant catalysts in 2014 are:

    · Revenue and profit margin growth, which we believe will be seen in future earnings releases, due to partnerships and growth throughout 2013.

    · Future partnerships throughout 2014.

    · Possible increases in institutional ownership as earnings numbers, partnerships, and contracts continue to show increased growth for Combimatrix.

    · Combimatrix will be airing on TV on RedChip microcap stock companies Thursday January 23rd. This could bring more exposure and insight to prospective investors.

    Through our analysis of Combimatrix we have come to the conclusion that the company is significantly undervalued with around a $23 million market cap. We believe that the February earnings release will show increased exposure and growth in sales of Combimatrix's products.

    We believe the 3 month price target will be $4-$5 a share due to the February earnings release, partnerships and other catalysts likely to occur in the short term for this underappreciated stock. We believe the company will continue to grow at a rapid pace and give the company a $8-$10 share price by year end as new exposure, partnerships and future earnings will validate our undervalued opinion on Combimatrix.

    Written in collaboration with Kenneth Mangano.

    Disclosure: I am long CBMX, .

    Tags: CBMX
    Jan 20 8:27 AM | Link | 11 Comments
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