| 2008 | 2009 | ||||||
| Price: | 12.63 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 76 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
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Combimatrix (CBMX $14.70), is the rare value play in the medical diagnostic space. Medical diagnostic stocks have flourished in this bear market. CBMX is no different having basically doubled over the past year. But, given it will be collecting approximately $36m from a recent court award (giving them ~$5 /sh in cash by yrs end), coupled with a myriad of diagnostic products not matched in the industry, we believe CBMX constitutes the most attractive play on the growing field of personalization of medicine.
Personalized medicine is defined as the use of information about a patient's genotype to customize medical care to an individual's needs. Such information is used to help stratify disease status, select between different medications, provide a specific therapy for an individual's disease, or initiate a preventative measure that is particularly suited to that patient at the time of administration. The efficacy of personalized medicine has now been established in medical practice. Currently with four tangible products in the marketplace, Combimatrix has distinguished itself as the genomic based diagnostic leader in the field, with more offerings than all of its competitors combined.
Combimatrix specifically focuses on developing and commercializing genetic diagnostic tests that leverage its customizable microarrays. Put simply, the arrays are collections of DNA strands arranged on a semiconductor chip, on which researchers perform experiments and monitor the reactions of genes. Such experiments are useful aids to the process of drug discovery and development, as well as in the areas of medical diagnostics. Combimatrix, has combined its expertise in microarrays with industry leading R&D capabilities to establish a lab that has thrust them into the forefront of the genomic based medical diagnostic industry.
Huge competitive advantage:
Given the plethora of genomic based medical companies trying to be first to market with tests in their respective areas, it can take as long as 3 to 5 yrs to get FDA approved and have a test on the market. Thus, CBMX’s real competitive advantage is its speed in bringing tests to market. CBMX’s CLIA certified lab allows them to manufacture their tests on-site exempting them from FDA approval. It’s important to note, at the moment, only one of CBMX’s competitors Sequenom (SQNM) has this valuable CLIA designation. CBMX introduced its first test in 2007 and has committed to bringing one new test to market every quarter.
CBMX’s Current diagnostic tests - $1Billion market potential :
Hemescan – Leukemia and related blood disorders detection
Market potential : $300m
HerScan – Breast cancer detection
Market potential : $100m $120m
AtScan – Detects and classifies Autism
Market potential : $200m - $400m
Constitutional Genetic Arrays – Detects more than 65 abnormalities
Market potential : $400m
New tests anticipated:
On the last conference call, the CEO stated, as per the company’s commitment, they were on track to announce two new revolutionary tests. Earlier in the year he prepped investors to expect a test in the urological / prostate cancer area. Additionally, he said the 2nd anticipated test should be out in early Q4.
Distribution:
In order to bring these tests to market, CBMX has increased its own internal salesforce to 4 individuals and expressed that this will most likely double to 8 by Q1 2009. But, in order to capitalize on its leading strategic position in the marketplace, CBMX looks to be increasingly seeking out partnerships.
Clarient Partnership:
In early 2008, CBMX announced it was partnering with Clarient (CLRT) on its Hemescan test that detects Leukemia and related blood disorders. Clarient’s hematopathic business is a good fit as a partner for CBMX as CLRT’s stated mission is to “help improve patient care through personalized medicine.” In Q2 2008 Clarient’s y/o/y revenues increased 71% to $17m. Clarient has stated publicly it believes that Hemescan will improve profit margins of its hematopathic business and they expect market adoption for Hemescan to begin to ramp now that the validation period has ended.
On the last few conference calls, CBMX’s CEO has stated that he is talking with a few large diagnostic companies for distribution footprints for their product lines. This will give CBMX another significant strategic advantage over its competitors. In other words, not only will competitors have a time disadvantage in bringing products to market by not being CLIA certified, but they may also be forced to build out an internal salesforce, which will take precious time. We believe that its likely CBMX’s technology will be well advanced toward becoming an industry standard by the time competitors emerge.
Competition / Industry landscape :
As stated, advancing science is rapidly discovering new genetic markers, which is having a profound impact on the medical diagnostic industry. There are many small companies in the R&D stage of development in the field of personalized medicine, though currently few companies overlap in the specific test areas which CBMX is engaged . The most notable industry player is Sequenom (SQNM, $1.6B in market cap). Its “blockbuster” genomic based test is for Down Syndrome, an estimated $3 - $4B+ potential market. Recently, on 09/24 SQNM announced that SEQureDx successfully tested fetuses for the gene Trisomy 21, which causes Down Syndrome. In 219 patients, it showed an accuracy rate of 100% (ie. no false positives or negatives). The current tests on the market for pregnant women have not proved to be as accurate as SEQureDx and can’t be administered in the first trimester. Sequenom doesn’t anticipate bringing the test to market until late 2009 at the earliest. Yet, it is interesting to note that the market rewarded SQNM handsomely for the announcement, as the stock is up ~30% (or $360m in additional market cap) since the announcement.
National Union Settlement:
CBMX has recently won a settlement against National Union (a subsidiary of AIG) for $36m plus interest. Given AIG’s problems, investors were rightfully concerned over the ability of CBMX to collect its judgement award. Last week, CBMX allayed all fears by announcing that National Union had posted a $36m bond with the court. Although the verdict is being appealed by National Union, we believe that CBMX will ultimately prevail. In the trial, the court found National Union negligent in paying a plaintiff’s claim against CBMX, which was stipulated under the insurance agreement. Therefore, the $36m sum will only reimburse CBMX its own capital, as there is no “blue sky” involved in the settlement award.
Equity stake in potentially promising drug :
Additionally, the company has a 33% equity stake in the private company Leuchemix, which is based outside of
http://bloodjournal.hematologylibrary.org/cgi/content/abstract/blood-2007-05-090621v1
Projections:
It is always difficult to forecast when a disruptive technology will be fully adopted into the marketplace. Admittedly these are early days, and diag sales figures are coming off a small base, but revenue for its tests were up 421% y/o/y for Q2 2008. As Combimatrix’s tests gain acceptance, we anticipate that sales will hit a tipping point, and begin to grow exponentially. We anticipate the break-even point to come in the first half of 2009. However, even before that occurs, there is the possibility that CBMX is acquired by a much larger life sciences / diagnostic company. Once sales really ramp, the buy-out potential (and the presumed multiple) only increases.
Potentially interested suitors:
Labs: Quest (DGX) or Genoptix (GXDX)
Diagnostic equipment makers: Illumina (ILMN), Affymetrix (AFFX) or Applied Biosystems (ABI)
Its interesting to note that take-outs in the advanced diagnostic space have carried large premiums. For example, in June, Hologix acquired Third Wave Technologies (TWTI) for $580m or 17x annualized Q1 2008 revenues.
Valuation : Adj. Potential
Price EV(1) fully diluted 2008 Est Rev’s EV / Rev’s size of mkt
CBMX 14.70 $80m 10.4m $9m 8x ~ $1B
SQNM 27.56 $1.2B 57.0m $51m 35x ~ $3B - $4B
Note (1) : CBMX Adjusted EV assumes the warrants / convertible debt are exercised ($40m) and National Union award is received ($36m).
Currently CBMX has $13m in cash, no debt. There are 10.4m fully diluted shares outstanding including options, warrants and convertible debt. CBMX would receive an additional $40m if all the shares were exercised. While you could argue that is not truly a “value” stock we believe it is due to the low EV/National Union Award, enormous market potential and most importantly rich portfolio of products.
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