Diagnostics and Tools Update:EXAS,GNMK,QGEN, RGDX

Busy Day Today -Overall a Lot of Green Screen

The diagnostics and tools sector has seen resilience over the past 30 days as the market corrected 7% or more.Bellwether large cap tools stocks with revenue growth such as ILMN,NEOG, TMO have held up well helped by M&A action and good fundamentals. Smaller cap “story” stocks with good technology such as EXAS  $7.66 up 3.65% today and SQNM $7.39 down 5.6% today are well off the March 2011 lows.

Last year we covered the AACC meeting and many diagnostic and tools companies were strong this period.We will look for new opportunities this year as the Meeting is coming up JY 24.

Within our portfolio we have one underachiever and that is Qiagen (QGEN $19.16). We added the stock to the portfolio on 3/15/10 at $21.50 based on its strong positioning in genomic tools as well as clinical diagnostics. But growth has stalled with revenue estimates at 6.5% for 2011 and EPS actually decreasing. The Company has been aggressive with acquisitions so we’ll need to see some synergy on these deals. Recently the Company announced that it made a proposal to acquire 47% of Ipsogen a molecular diagnostic Company in the area of hematologic(blood cancer), based in France with 2010 sales of $11M growing at 24%. Based on the proposal the market value would be $101M assuming a Eu at $1.44. That is nearly 10X revenue.Qiagen currently has shareholder equity of $2.5B but has $797M of long term debt and $1.3B of goodwill from previous acquisitions. Qiagen remains in the portfolio as a hold and we are looking for Q4 improvements.

The Qiagen/Iposgen deal brings to mind Response Genetics (RGDX $2.77) another small cap player in cancer and companion diagnostics. The market cap is $51M with a stock range of $1.77-2.77. Revenues were $5.9M for the last quarter with estimates of $22.5M for the year and $27.7M for 2012. Losses were reduced for the last quarter. The Company has had some issues with management turnover, low stock trading volume and balance sheet so we’ll see if that is behind them with a new President. The valuation on RGDX is $50M vs a deal valuation of Ipsogen at $101M with half the revenue level. Somebody needs to look at that in more detail.

Genmark ( GNMK $5.93) is up 37% today after announcing a public offering at $4.25 raising~ $30M. Revenues for the last quarter were $764k with a loss of 56 cents. Obviously with this offering some revenue growth is forecasted for this molecular diagnostic player.The market cap is $71M.

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