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Big Opportunity With Cancer Genetics (CGIX)

|Includes: Cancer Genetics, Inc. (CGIX)

Cancer Genetics, Inc. (NASDAQ: CGIX) had a big run in September; at one point, shares were up more than 130% over their IPO and secondary offering price of $10.

As recently as October 2, CGIX ranked as the 8th best-performing biotech IPO and the 19th best-performing IPO overall for the year. Also on October 2, Feltl & Co., who began covering the stock shortly after its IPO, raised their price target for CGIX to $30.50, nearly 100% higher than recent trading.

CGIX is in the right space at the right time, providing DNA-based diagnostics for cancer.

It was only 13 years ago that the human genome was first mapped out, a process that took many years and billions of dollars. Today, this can be done in days and for a few thousand dollars. This dramatic shift in economics has resulted in a relatively new arena where DNA-based diagnostics are becoming available to the average person.

According to Walter Isaacson's biography, Steve Jobs paid a reported $100,000 to learn the DNA sequence of his cancer. This work, completed at MIT and Harvard, led to the launch of Foundation Medicine (NASDAQ: FMI). Foundation Medicine has grabbed headlines over the past couple of weeks as it entered the capital markets with a high-profile IPO led by Goldman Sachs.

Flush with cash, Foundation Medicine is currently branching off from its broader FoundationOne DNA-testing platform to develop diagnostics for specific cancers, including blood-borne cancers such as leukemia and lymphoma.

It's estimated that hematological and urogenital cancers account for annual testing of approximately $6 billion in the U.S. and $15 billion globally.

CGIX already has five proprietary products in the market in these historically difficult-to-diagnose cancer categories, beating FMI to market. The Company's unique microarrays diagnose the specific subtype of a patient's cancer, provide important prognostic information, and inform physicians of likely treatment outcomes. This is a great example of the goal of personalized medicine. By analyzing the specific genetic information of a patient, doctors can generate the necessary insight to get the right treatment to the right person at the right time.

Like Foundation Medicine, CGIX is building its war chest too. It's already successfully closed on $23 million in gross proceeds this year and just filed to raise an additional $46 million. We view this raise as a major positive for CGIX. We expect after a quick closing, CGIX will up their projections significantly - likely bringing their longer-term plans forward by as much as 18-months and giving the company a national sales footprint as early as 2014.

This accelerated growth comes from a strong foundation. CGIX has already demonstrated that they can grow their business. The benefit of established reimbursements, combined with growing test revenue from recent and ongoing launches of proprietary tests puts CGIX in a great position. A position that strengthens dramatically with a major influx of new cash.

CGIX is already receiving reimbursements for its proven, proprietary tests, and additional cash will allow the Company to expand and deepen relationships with third-party insurers. Additionally, CGIX can take advantage of expected volume increases due to the Patient Protection and Affordable Care Act, which is extending coverage to approximately 32 million previously uninsured people. Higher capacity utilization will yield increases in gross margins.

Another big positive that will come from this raise is the ability to fully fund the Company's OncoSpire joint venture with Mayo Clinic. This JV has the potential to provide cutting-edge IP through the development of next-generation sequencing technologies in oncology.

While this latest funding is a major long-term positive for CGIX, the news of the raise had an initial negative impact on the shares. For investors who missed the first big run-up in CGIX, this pullback provides a solid opportunity to accumulate shares at low valuations.

The market appears to have simply had a reflex reaction to its fear of the unknown - the unknown of how much dilution this offering may bring. But for those reading our reports, they already knew our original target of $26.75 per share, issued in August, factored in additional dilution. Even taking into account a very conservative capital raise priced at $17.00 per share (the volume-weighted average trading price over last 30 days) would only result in a maximum increase in the shares outstanding of 2.7 million, giving the Company total shares outstanding of 8.7 million.

If the past is any predictor, this pullback will be brief. This also happened back in June when CGIX announced its previous round of funding. While the stock quickly dropped to around $7 in June, it rebounded quickly and spent the majority of the next eight weeks at the high end of its trading range, near $12 per share.

It's also worth looking at some other numbers. CGIX's average volume-weighted price for the past 14 days is $19.50, and its average volume for the same period is more than 400,000 shares per day. That puts the recent sell-off in perspective, especially considering it happened on relatively light volume. This pullback also coincided with a big sell-off in the broader biotech market.

By doing this raise now, CGIX is able to put itself in a position of substantial financial strength, potentially reducing the time needed to reach profitability. A major raise, on top of a sizable cash position from prior rounds, will provide the fuel for the Company to truly capitalize on its emerging leadership position in this rapidly evolving and expanding market.

Read the latest RedChip research update on CGIX, or watch our interview with billionaire investor John Pappajohn at the NASDAQ MarketSite, and see why he invested $12 million in Cancer Genetics.

Disclosure: The subject securities are clients 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.