Cancer Genetics (OTCQB: CGIX) is one of the most compelling opportunities we've seen in 2013. The developer of DNA-based cancer diagnostics is emerging as a leader in what looks to reshape the future of oncology care globally. With collaborations and partnerships in place with the most prestigious organizations in cancer care and the endorsement of brokerage firm Feltl & Company, who recently initiated research coverage on CGIX with a Strong Buy rating and a $17.50 price target, 2013 is setting up to be a great year for CGIX shareholders.
CGIX is an emerging leader in a field that's transforming the way cancer is diagnosed and treated. CGIX's tests can determine the specific genetic mutation that's causing the cancer, enabling doctors to make more informed treatment decisions. The Company primarily focuses on hematological, urogenital, and gynecological cancers. According to the Feltl & Company report, CGIX has "an unrivaled position" in these categories.
While the Company's target markets represent a third of all newly diagnosed cancers in the U.S., only a handful of companies are developing diagnostic tests for these cancers.
Genomic-based cancer diagnostics made major headlines recently with Angelina Jolie's admission that she underwent a preventative double mastectomy after a genetic test revealed she had an 87% chance of developing breast cancer. The actress also considered having her ovaries removed, as the same genetic mutation that sharply increased her breast cancer risk can also cause ovarian cancer.
Ms. Jolie's announcement has brought widespread attention to the possibilities of DNA-based testing. A recent development that could accelerate the mainstream adoption of DNA-based testing is CGIX's new joint venture with the Mayo Clinic, the world-renowned healthcare organization. A newly created company, OncoSpire Genomics, equally owned by CGIX and Mayo, will seek to discover and commercialize diagnostic tests that leverage next-generation genomic sequencing technologies. With the combined expertise and resources of both the Mayo Clinic and CGIX, OncoSpire is positioned to create a major impact in the development of advanced genomic-based cancer diagnostics.
Genetic testing is changing physicians' understanding of cancer, while providing new tools to diagnose and treat cancer patients. Current cancer diagnosis methods are costly and time-consuming, and only 25% of initial cancer treatments are successful. Two patients with the same type of cancer may respond to the same treatment in completely different ways. By uncovering the mechanism behind each cancer case, genetic testing helps physicians create a personalized treatment plan for each cancer patient, increasing the prospects for survival and reducing medical costs.
Genetic testing also ensures a patient receives the care needed. With the wide variety of non-genetic-based testing, it's not uncommon for a patient to receive inconclusive results from multiple tests. In these cases, insurance providers will often refuse to pay for treatment. This could prove disastrous if that patient in fact needs treatment. With DNA-based diagnostics, physicians can produce conclusive results in every case - making sure their patients get the care that is needed.
Over $6 billion in the U.S. and approximately $15 billion worldwide is spent annually on cancer diagnostics. CGIX is gaining market share in this sizable market, and its technology in its focus franchises is unrivaled today.
There is increasing interest in molecular diagnostics throughout the healthcare ecosystem among four major groups: testing labs, large diversified diagnostic and med-tech companies, biotech and pharma companies, and genomic test and equipment providers.
Community hospitals and laboratories, where 85% of all U.S. cancer patients are initially diagnosed, represent a significant market opportunity for CGIX. Improving patient care and quality is critical for these organizations to stay competitive, and CGIX's state-of-the-art tests allow these smaller hospitals to provide world-class cancer care to their local communities. By leveraging CGIX testing capabilities, these facilities can expand their level of service and begin to capture major revenue increases through in-house treatment of cancer patients.
Cancer Genetics' SelectOne program offers testing services to support clinical trials for biopharmas and clinical research organizations, another high-growth area for genetic testing. CGIX has grown the program's contract backlog from $300,000 to $7.2 million over the past year, and counts top biotechs Roche and Gilead among its customer base.
Top cancer centers such as Memorial Sloan-Kettering and the National Cancer Institute also see the value of CGIX's technology. CGIX is engaged in research collaboration with these and other leading health institutions on a variety of cancers. Additionally, and further validating the strength of the Company's technology, many of these organizations are using CGIX for clinical services.
On the payor side of the healthcare equation, CGIX recently signed an agreement with Multiplan, the industry's most comprehensive provider of healthcare cost management solutions. Under the agreement, the Company's portfolio of genomic products and services will be available to 900,000 healthcare providers covering an estimated 57 million consumers.
As we recently discussed, billionaire investor John Pappajohn has invested $12 million in CGIX and sits on the Company's board of directors. Mr. Pappajohn made hundreds of millions investing in early-stage biotechnology companies that are at the front edge of new technologies. The fact that this highly successful investor holds a stake in CGIX speaks volumes about the Company's long-term potential. Other notable board members include Dr. Andrew Pecora, one of the world's foremost experts in blood and marrow transplantation, and Tommy Thompson, the former U.S. Secretary of Health and Human Services.
CGIX has achieved strong historical growth, growing revenue at a 26% compounded annual rate and clinical test volume at 30% since 2009. For the most recent quarter, revenue increased 46% and clinical volume increased 19% year-over-year. The Company has also reported annual and quarterly gross profit improvements. Gross profit increased 114% between Q1 2012 and Q1 2013, with gross margin improving from 1.4% to 12.2%.
So what is Cancer Genetics worth today? Let's look at some recent transactions and other comparables to get an idea. Decode Genetics, in the same business as CGIX, with less than $5 million in revenue, was bought out by Amgen (NASDAQ: AMGN) for $415 million; Exact Sciences (NASDAQ: EXAS), with less than $5 million in revenue, is trading at a $677 million market cap, over 160x sales. CGIX, with $4.7 million in trailing 12-month revenue, is trading at only 10x sales with a $50 million market cap.
CGIX is at the forefront of a paradigm shift in cancer diagnostics. The Company completed an initial public offering in April and converted $9.6 million of debt into common equity, strengthening the Company's post-IPO balance sheet. The stock has since been trading for a nearly 20% premium to its offering price and investors are starting to take notice, with a major surge in volume over the past several days.
To learn more about CGIX, watch an archived presentation the Company's president and CEO, Panna Sharma, gave at the UBS Global Healthcare Conference in NYC:
Additionally, you can watch our recent interview with Panna.
Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.