CardioGenics Holdings Inc. (CGNH) Q4 2010 Update - Analyst Blog

Brian Marckx, CFA

Q4 2010 Update
           
10-K Filed
CardioGenics Holdings Inc. (CGNH) filed their 10-K for the year ending October 31, 2010 on January 31, 2011.  Financial results were generally in-line with our expectations.  Fourth quarter operating loss of $520k was better than our $619k forecast mostly as a result of lower spend on R&D, partially offset by a $105k charge for write-off of patent application costs.  R&D was below our estimate due to delays to trials for the QL Care Analyzer and Troponin I test.  EPS for the quarter (10/31/2010) came in at ($0.01), in-line with our estimate.  For the full fiscal year operating loss and EPS were $2,493k and ($0.04).

Cash used in operations was $617k and $2,163k for Q4 and the full year, respectively – this is slightly less than we had anticipated but also a result of the trial delays.  We continue to expect the rate of cash burn to increase up at least until the magnetic beads launch and for the company to remain cash flow negative throughout 2011.  CardioGenics exited the fiscal year with $1,844k in cash and equivalents.  


Beads Update

The 10-K contained little in the way of a business update other than noting that CardioGenics signed “Material Transfer Agreements” (MTA) with “two other international beads distributors” related to commercialization of its magnetic beads.  

As a reminder, CardioGenics already has a commercialization and distribution deal in place with Merck Chimie S.A.S. for the magnetic beads.  Under that agreement, CardioGenics will supply Chimie with the silver-coated beads and Chimie is responsible for the polymer encapsulation process.  Chimie will then handle distribution.  

Under the first of the recent MTAs, CardioGenics will supply the distributor with their silver-coated beads and the distributor is responsible for the encapsulation process.  This distributor will also provide CardioGenics with their own bead prototypes, to which CardioGenics will apply their silver coating.  Under the second MTA, CardioGenics will supply the distributor with silver-coated beads and the distributor is responsible for the encapsulation process.  Following the encapsulation processes and testing of the encapsulated beads, CardioGenics and the distributors will determine whether to pursue commercialization of the finished beads.  The expectation is that it would be approximately six months before we know much more about the status of development under these two new MTA's.     

CardioGenics, in a February 1, 2011 press release, notes that they continue to work with Chimie in development of the beads and that Chimie is still working on refining its encapsulation process.  It also indicates that these two new MTAs were pursued in an effort to accelerate commercialization (perhaps implying Chimie has not been moving as quickly as CardioGenics would like and they hope these two new deals may light a fire).  

CardioGenics has not provided regular progress updates on the bead development but it is clear that commercialization of the beads is now behind where they had initially hoped it would be.  Prior to this most recent news, the last we heard was that Chimie had finalized an encapsulation process around the July/August 2010 timeframe that met commercial specifications.  Beads from the lot were to be sent (~September) to Chimie who would then pass them on to their customers and solicit their feedback.  Assuming the feedback was positive, the expectation was that customers would begin placing orders.  

Based on the current news, it is clear that customer orders have not been flowing.  While the press release did not provide an update to a potential launch date, it did mention that Chimie will test a batch of CardioGenics' beads that CardioGenics has encapsulated using its own processes.  The press release implies that CardioGenics hopes to get these beads, which have been dubbed the “CardioGenics Encapsulated Beads”, launched as they wait for the Chimie-encapsulated beads to be commercialized.

We had been expecting the beads to launch by year-end 2010, which we now model during fiscal Q3 2011 (ending July 31, 2011).  We note, however, that since management has not provided an update to a potential launch date or more specifics on development, that we have no reliable information to indicate when the beads could begin generating revenue.  



QL Analyzer Update

Days after the 10-K filing, CardioGenics issued a press release with an update to the status of development of the QL Care Analyzer and their Troponin I test (the first test expected to gain FDA clearance).  As a reminder, the prior expectation had been that Institutional Review Board (IRB) approval of proposed head-to-head clinical trials would have been received and testing started by (calendar) Q4 2010.  Assuming trials took approximately 45 days to complete, FDA trials could have started in late-2010 and a 510(k) application might have happened in early 2011.  This potentially put launch of the QLCA and Troponin test somewhere around (calendar) mid-2011.

The February 3, 2011 press release states that the head-to-head trials have been delayed and CardioGenics now expects to (receive IRB approval and) begin head-to-head testing in May 2011.  Assuming the company can hit these timelines and head-to-head trials take 45 days, they hope to start FDA testing in Q3 2011.  FDA testing is expected to take about two months which means a 510(k) could possibly be filed in Q4 2011.  Launch might then happen in the first half of 2012 – which is about a nine month delay from where we had it initially modeled.   

CardioGenics indicates in the recent press release that the delays in getting the head-to-head trials started were due to the test/device that they planned to test the QLCA against, was not available due to being hung up in the FDA regulatory process.  As a result CardioGenics will use a device already on the market (from Siemens) as the comparator instrument.  

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