Biomarker Products for Cardiovascular Disease and Cancer

This is the third article on Emerging Biomarker Companies. See 11/15/12 Update

The synergies between diagnostics and drugs are growing as more treatment options require better data for cost-effective, targeted therapeutics.The development of unique biomarkers has been considered  the “Holy Grail” of innovation in diagnostics but is slow to advance due to expensive clinical trials, a complex regulatory scheme, reimbursement and collaboration between drug and diagnostic companies. Companion diagnostics and genetic analysis of tumors will drive therapeutic trends in cancer. IP ownership can be an issue with companion diagnostics.

We have been following three early stage companies that have potential for product revenue ramp in the diagnostic market: BG Medicine (BGMD), Response Genetics (RGDX) and Vermillion (VRML). The $13.5M funding of  Vermillion (VRML) has reminded us of the potential for  micro-cap biomarker companies with products, unique IP or compelling data for personalized medicine. Private funding through angels and venture capital is drying up  for “start-ups” and flat in total ($4-5B/yr, since 2008), and the IPO market has not really recovered from 2006 except for larger companies. Thus public companies with clean SEC filings offer entrepreneurial and trading appeal because valuations under $50M are at the VC level.  As reported by In Vivo, the US JOBS Act of 2012 should kick in next quarter, offering emerging companies a new avenue for financing. Recently there has been an uptick in some successful reverse merger deals such as GALE Biopharma up 100% over one year.

A CEO must pursue all sources of financing and a public company offers more opportunities to bring in new investors in a biotech bull market.

Here is a brief  update on all three companies:

BG Medicine -Focus on Novel Cardiovascular Tests

BG Medicine (BGMD) completed its IPO in 2011 at $8/share (over $200M market cap) with a strong management team, high profile investors, unique biomarker technology for chronic health failure and a strong marketing partner in Abbott (ABT). Despite all the “right stuff” the Company found out it takes longer to ramp up revenues for an innovative product. Revenues were at the $1M level in Q4 with an analyst forecast for $8.13M in 2013. Product Revenues for Q1 2013 were $0.8M for the Galectin-3 test, compared to $0.4M for Q1 in 2012. Net loss was reduced to $5.4M or $(0.21) per share compared to $(0.38) in Q1 2012. The balance sheet has $21M in cash but shareholder equity was only about $8.4M due to a term loan. In January of 2013 the founder and former CEO, Noubar Afeyan purchased 2M shares of Company stock at $2/share. Other insiders purchased stock as well. Regulatory milestones were achieved with partners Abbott and bioMerieux in Europe. On May 9 a new CEO, Dr. Paul Sohmer was appointed replacing the second CEO Eric Bouvier. Dr. Sohmer has an impressive background as an entrepreneurial CEO of several diagnostic companies.

The Galectin-3 test has been cleared by the FDA as an aid for assessing chronic heart failure aiming to reduce hospital re-admissions. Heart failure patients with elevated Galectin-3 are 2-3x more likely to be re-admitted. The Company is also developing the CardioSCORE Test, a multivariate biomarker, blood based test for patients at risk for vulnerable plaque. A six person sales force has been brought on in the U.S..

Response Genetics-Molecular Tests to Guide Cancer Therapy 

Response Genetics (RGDX) went public in June 2007 at $7.10/ share and has struggled in the market ever since despite being early into pharmacogenomic molecular tests for targeted cancer treatment and building revenues to the $20M level. The Company has  a strong strategic partner in GlaxoSmithKline (GSK), a leading cancer therapy Company, and last September they bought 8.8M shares of common stock at $1.10  a share. Response Genetics sells predictive panels of biomarkers to analyze mutations and gene expression for lung, colon, stomach and melanoma cancer to help physicians make treatment decisions. The proprietary technology utilizes the following biomarkers: ROS-1 for lung, KRAS for colon, HER-2 for gastric,and BRAF for Melanoma. Very small tissue samples can be utilized in a paraffin embedded samples (FFPE) utilizing microdissection procedures. The Company hired a new CEO, Tom Bologna last year along with other management changes. Q4 2012 Revenues were $5.5M an 11% increase from the prior period with a loss of $0.50M down from $3.9M in the prior year Q4. There is $9M in cash prior to Q1 2013 reporting but the shareholder equity is less than $1M due to current liabilities.The Company recently added to their domestic sales force, now 16 with a goal of reaching 19 by the end of Q2.

RGDX  announced positive Q1 2013 results on May 14 with $5.6M in revenue a 40% increase relative to Q1 2012 with gross margin increases to 55%. Cash and cash equivalents were $8M. The net loss decreased to $0.8M from $3.1M in the 2012 Q1. The turnaround appears intact should these trends continue. The Company also announced a focus on new business development activities to grow sales and develop partnerships.

Vermillion-Novel Tests for Gynecological Cancer

Vermillion has a long, complex history (see Ciphergen BioSystems) going back to 2003 but on March 4, 2008 underwent a 1 for 10 reverse split with much volatility to follow based upon the promise of the OVA-1 diagnostic test for ovarian cancer.The OVA-1 test is a FDA cleared blood test that helps evaluate an ovarian mass for malignancy prior to planned surgery. The test uses 5 biomarkers and has 96% sensitivity. The CA-125 a monitoring test is also included in the OVA-1 panel but for early stage ovarian malignancies the sensitivity is brought up to 94% compared to CA-125 alone.In 2012 16,460 OVA-1 tests at for $1.64M in Revenue at a fixed $50/test, were sold by Vermilion’s partner Quest Diagnostics (DGX), an increase of 8% over 2011. Q1 2013 earnings will be reported at the end of the day on May 15. On May 9 Vermillion (VRML) announced that life science investors were making an initial investment in Vermillion (VRML) of $13.2M with potential including warrants totaling $31.5M before transaction costs. The stock took off immediately and is now up 60% from last Wednesday’s May 8 close of $1.50, so very difficult to trade at the current price.

Investment Thesis

Here is what to keep in mind when trading or investing in these and other micro-cap companies:

Balance sheet. Dilution is the major issue for micro-cap investing as fresh cash may be needed to fund R&D and Marketing.

  1. Revenue ramp. All three  companies have been around for several years so the major trigger for validation of the product and business model is sales growth.
  2. Stock volatility. Technicals may be hard to follow on their charts as the stock ranges can exceed 100% over a 12 month period. Momentum rules.
  3. Valuation and fundamentals. Metrics such as Price to Sales or PE are less important here.The story matters more. See 1 and 2 above.

The market capitalizations of the three companies are comparable at about $40M. Based on revenues only, Response Genetics (RGDX) has the edge assuming the product sales continue to ramp. Vermillion,Inc. (VRML) stock has taken off recently sparked by a $13.5M financing with an investment group that has a solid track record. Although the near term focus will be OVA-1 sales, we can expect new strategic initiatives for Vermillion in 2013. BG Medicine (BGMD) is clearly a laggard with a weak balance sheet and slow revenue growth. But the story is compelling and investors need to see traction in sales of the FDA cleared Galectin-1 .

We think all three companies will be successful long-term either through M&A or a successful product. BGMD and RGDX are at the low-end of  their 12 month valuation and VRML is about 6% below 52 week highs. All three companies now have institutional investors who have a long-term interest. However, recent volatility make it difficult to target a buy price for all three. We are currently long RGDX.

Comparison of Three Emerging Biomarker Diagnostic Companies

Note: Financials need to be updated by month-end 5/28

Company BGMedicine Response Genet Vermillion
Price 5/14/13 1.73 1.27 2.53
Price 11/14/12 1.25 1.15 1.35
Market Cap $M $43.80 $41.7 $38.50
Cash Bal.$M $13M 8 8++  $13.5M new
Stockholder Eq. $8.4M $-0.54M $5M
Retain.Earn$M -137M -57M -320M
Rev Est 2013$M $7.5M $21.3M $2.3M
Q1 Rev $M $0.8 $5.6 $0.30est
EPS Est 2013 ($0.81) ($0.16) ($0.57)
Lead Product(s) Galectin-3 ROS1,KRAS, BRAF, others OVA1
Disease focus Cardiovascular Cancer Ovarian cancer

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