Response Genetics: A Growth Story Trading At A Significant Discount
Each week I will seek to identify an undervalued name or significant opportunity In the biotechnology sector. This sector can be perilous, but can also be among the highest returning sector in the stock market. True growth can be tough to come by here and when it can be identified, one should investigate the name thoroughly. Why is this sector so competitive and tough for companies to thrive in? Well, companies often have to design, test and then receive approval for new diagnostics, and this process can take many years from development to actual sales. Many new companies go bankrupt. Further, even if a company gets approvals, selling such products requires contracts, and they can be tough to negotiate and finalize.
However, once in a while, opportunities can arise. There is one severely undervalued company that my monthly review of the small cap biotech space has identified. This company is Response Genetics (NYSE: RGDX). The company is worth just $26 million at its current share price of $0.69. The first thing I looked at was the company's most recent quarterly performance. I then examined their product pipeline, its financial status and looked at the potential for a takeover.
For the first quarter of 2014, Response Genetic's adjusted operating income from continuing operations was $236 million, or 13.5% of revenues, compared to $272 million, or 15.2% of revenues, for 2013. For the first quarter of 2014, reported operating income from continuing operations was $208 million, or 11.9% of revenues, compared to $227 million, or 12.7% of revenues, in 2013. at first glance I was unimpressed. Then I saw that Cash provided by operations during the first quarter of 2014 was $84 million, compared to $47 million in the first quarter of 2013. It is also important to note that in a sector like this, the whims of the market can cause quarterly sales and earnings to fluctuate wildly. On the whole, the company is growing long-term, but the short term can be painful.
So what can Response Genetics do? The answer is the company needs growth to resume its share price appreciation and reverse the nearly 50 percent haircut the stock has taken in just over a month, sending its market cap to absurd levels for the amount of cash the company generates and moves around. The company is undervalued in my estimation and is likely a takeover target, but before making any decisions regarding a company you have to understand the fundamentals.
Just what does the company do? Response Genetics is focused on the development and sale of molecular diagnostic tests that help guide cancer therapy selection, a field of intense interest and growth in the medical industry. The company continues to innovate. Response Genetics recently announced the availability of new testing capabilities to advance cancer immunotherapy clinical development. The Immuno-Oncology assay, which runs on HTG Molecular's Edge System, is designed to measure the RNA expression of 26 commonly investigated immunotherapy related genes enabling screening for response to immunoregulatory pathways. The Immuno-Oncology test will be made available to all of Response Genetics' existing biopharmaceutical partners, and new potential partners, to aid in development of biomarker driven cancer immunotherapy clinical trials.
As the field of cancer immunotherapy continues to expand with potential immunotherapeutic targets in a broad range of malignancies this test will help grow sales at Response Genetics. Regulation of the immune system is the key to several therapeutic approaches for cancer treatment. A number of clinical development programs being pioneered by large pharma are focused on signaling pathways with the goal of enabling the immune system to attack cancer cells. The new assay covers these pathways as well as numerous other targets.
What is even more striking is that the company is also expanding internationally. The company recently announced a commercial agreement with DxM Diagnostico Molecular, a leading distributor for cancer testing in Mexico. Under this agreement Response Genetics will provider its ResponseDX testing services to patients throughout Mexico. The agreement specifically covers the ResponseDX: Tissue of Origin test which is an FDA approved test that uses gene expression analysis to provide a definitive diagnosis for poorly-differentiated or metastatic cancers without a clear primary origin. Also included in this agreement are the provision of an array of other targeted molecular tests in the Response Genetics portfolio. Further, Response Genetics has recently signed a major deal with major provider networks.
Response Genetics signed agreements with six health plans across 10 states bringing Response Genetics' total national contracted membership to more than 174 million lives. The number of patients being reached and the sales potential simply cannot be understated. The new agreements include additional Blue Cross Blue Shield contracts in Arizona, Iowa, South Dakota, Pennsylvania, Delaware, and West Virginia. The Company also signed new agreements with an Independent Physician Association (covering two states) in the North West region and a Commercial Health Plan (covering two states) in the North East region of the United States.
Response Genetics is now in-network with a total of thirteen Blue Cross Blue Shield health plans, which brings the total number of "Blues" subscribers with direct access to Response Genetics to approximately 23 million. Among Response Genetics' other Blue Cross Blue Shield contracts are Blue Cross and Blue Shield of Illinois, Blue Shield of California and CareFirst BlueCross BlueShield.
What about the company's financial future. This was what put this stock as one of my top recommendations. The company is still growing and made acquisitions. It is burning a lot of cash to grow. A terrible choice would have been a dilutive secondary offering, like the one conducted in December 2013. It was announced that Response Genetics has just secured a revolving $12 million credit facility. This is huge. This is approximately 50 percent of its current market cap as an available loan. Further, it does not dilute shareholders. The creditor SWK Holdings has given $8.5 million, and the remainder can be drawn when Response hits predetermined revenue milestones. What is more, SWK Holdings received warrants to purchase over 600,000 shares at $0.93, a 25 percent premium to the current price.
As Response Genetics has now secured funding, has expanded to 13 hospital/physician/insurance networks, is selling products internationally and has multiple contracts in negotiations (see recent conference calls), I think the stock is a potential hidden gem opportunity in the biotech sector.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.