IPO Preview: Cancer Genetics

| About: Cancer Genetics, (CGIX)
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Based in Rutherford, NJ, Cancer Genetics (NASDAQ:CGIX) scheduled a $35 million IPO with a market capitalization of $80 million at a price range mid-point of $7, for Wednesday, February 13, 2013.

Five IPOs are scheduled for the week of February 11. The full IPO calendar is available here.

S-1 filed January 22, 2013.

Manager, Joint Managers: Aegis Capital/ Feltl.

CBIX develops genomic tests for cancer. CBIX lost $9 million for the nine months ended September 2012, excluding warrant value changes, which will disappear post-IPO.

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CBIX is too risky right now for most investors. Pass on the IPO.

CBIX is an early-stage diagnostics company focused on developing and commercializing proprietary genomic tests and services to improve and personalize the diagnosis, prognosis and response to treatment (theranosis) of cancer.

The proprietary tests CGIX is developing target cancers that are difficult to diagnose and predict treatment outcomes by using currently available mainstream techniques. These cancers include hematological, urogenital and HPV-associated cancers.

CGIX recently began to provide proprietary tests and services along with a comprehensive range of non-proprietary oncology-focused tests and laboratory services that CGIX has provided historically to oncologists and pathologists at hospitals, cancer centers and physician offices.

CGIX agreed to form a joint venture in March 2013 with Mayo Foundation for Medical Education and Research focused on developing oncology diagnostic services and tests utilizing next-generation sequencing. Additionally, CGIX agreed to a research collaboration with the Cleveland Clinic to validate CGIX's renal-cancer microarray UroGenRA.

CGIX also has collaborative relationships with Memorial Sloan-Kettering Cancer Center, Mayo, North Shore - Long Island Jewish Health System, the National Cancer Institute and other institutions that provide CGIX with tissue samples and other biological materials that CGIX uses in developing and validating tests.

CGIX historically derived a significant portion of revenue from a limited number of test ordering sites.

The test ordering sites that generate a significant portion of revenue changed from period to period.

For example, there was one site which represented more than 10% of revenue for the year ended December 31, 2010 that generated less than 10% of revenue for the year ended December 31, 2011.

Test ordering sites are largely hospitals, cancer centers, reference laboratories and physician offices. Oncologists and pathologists at these sites order the tests on behalf of the needs of their oncology patients.

For the nine months ended September 30, 2012, the top five test ordering sites accounted for 61% of clinical testing volume with 47% of the volume coming from community hospitals.

For the year ended December 31, 2011, the top five test ordering sites represented 63% of clinical testing volume, with 29% of the volume coming from community hospitals.

The top five test ordering sites for the year ended December 31, 2010, accounted for 60% of \clinical testing volumes, with 15% of the volume coming from community hospitals.

In particular, during the year ended December 31, 2010, there were three sites which each accounted for 10% or more of revenue: one community hospital accounted for 12% of revenue, a regional reference laboratory accounted for 11% of revenue and a community oncology practice accounted for another approximately 11% of revenue.

For the year ended December 31, 2011, CGIX generated revenue from two test ordering sites that represented 10% or more of revenue: a community hospital accounted for 18% of revenue and a community oncology practice accounted for 11% of revenue.

For the nine months ended September 30, 2012, three test ordering sites accounted for 10% or more of revenue, a university teaching center accounted for 15%, a clinical trial client accounted for 12% and a community hospital network accounted for 11%.

Principal competition comes from the existing mainstream diagnostic methods that pathologists and oncologists use and have used for many years.

It may be difficult to change the methods or behavior of the referring pathologists and oncologists to incorporate molecular diagnostic testing in their practices.

CGIX also faces competition from companies that currently offer or are developing products to profile genes, gene expression or protein biomarkers in various cancers.

Competitors include public companies such as CombiMatrix Corporation, Quest Diagnostics, Abbott Laboratories, Inc., Johnson & Johnson, Roche Molecular Systems, Inc., bioTheranostics, Inc. (part of bioMérieux SA), Genomic Health, Inc., Myriad Genetics Inc., Qiagen N.V. and Response Genetics, Inc., and many private companies, including Agendia B.V., Pathwork Diagnostics, Inc. and Foundation Medicine, Inc.

CGIX expects that pharmaceutical and biopharmaceutical companies will increasingly focus attention and resources on the personalized diagnostic sector as the potential and prevalence increases for molecularly targeted oncology therapies approved by FDA along with companion diagnostics.

For example, FDA has recently approved two such agents-Xalkori crizotinib from Pfizer Inc. along with its companion anaplastic lymphoma kinase FISH test from Abbott Laboratories, Inc. and Zelboraf vemurafenib from Genentech USA Incorporated and Daiichi-Sankyo Inc. along with its companion B-RAF kinase V600 mutation test from Roche Molecular Systems, Inc.

These two recent FDA approvals are only the second and third instances of simultaneous approvals of a drug and companion diagnostic, the first being the 1998 approval of Genentech, Inc.'s Herceptin trastuzumab for HER2 positive breast cancer along with the HercepTest from partner Dako A/S.

With respect to the clinical laboratory sciences business CGIX faces competition from companies such as Genoptix, Inc. (a Novartis AG Company), Clarient, Inc. (a division of GE Healthcare, a unit of General Electric Company), Bio-Reference Laboratories, Inc., and Genzyme Genetics (a LabCorp Specialty Testing Group).

CGIX expects to net $29 million from its IPO. Proceeds are allocated as follows:

$5.0 million to repay debt;

$5.0 million to fund further research and development, potential regulatory submissions and potential commercial launch of CBIX's proprietary genomic-based diagnostic tests, and potential collaborations;

$7.0 million to hire additional sales and marketing personnel and support increased sales and marketing activities;

$2.0 million to fund initial contribution to the joint venture with Mayo; and

$10.0 million to fund working capital for ongoing operations and expansion of the business.

Disclaimer: This IPO report is based on a reading and analysis of CBIX's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.