FY16 Revenue Up 50% YoY; Strong Organic Growth, Decreases in Operating Expenses and Increased Contracts Drive Road to Profitability
Strong FY16 revenue growth of 50% YoY. Revenue increased to $27 million in FY16, up 50% from $18 million in FY15. Growth was primarily driven by revenue increases in biopharma and clinical services.
Biopharma services revenue increased 32% in FY16 and is expected to drive revenue growth in FY17. Biopharma services revenue increased to $15.3 million in FY16, up 32% from $11.6 million in FY15. Quarter-over-quarter, revenue was up 34% to $4.0 million in 4Q16. FY16 revenue from clinical services increased 88% YoY to $10.7 million; QoQ, clinical services revenue increased 25% $3.0 million in 4Q16. Clinical services test volumes increased 131% YoY to 28,658, driven by increases in immuno-oncology testing, companion diagnostic testing for PD-L1, and solid tumor profiling.
We expect Biopharma services revenue to show strong growth overall in 2017. This view is validated by the Company’s signed contracts for expected future revenue with pharmaceutical and biotech companies, which total approximately $40 million (the majority of this revenue should be generated during FY17-FY18).
As more immunotherapies and targeted therapies are approved, it is apparent that genomic information that can only be given by sophisticated, multi-gene panels will be required to effectively utilize these therapies.
Net loss in FY16 was $15.8 million or ($1.00) per diluted share, which represents an improvement over net loss of $20.5 million in FY15. We are projecting further improvement to net loss in 2017, as Biopharma services revenue increases and operational improvements and expense reductions are implemented. We are projecting CGIX to essentially reach breakeven in 4Q17 (with projected net income of $35,000 and revenue of $11.15 million). Our model assumes modest quarter-on-quarter growth through 2017, although our assumptions could change if we see meaningful volume increases in some of the Company’s proprietary tests. We believe that FHACT and the Tissue of Origin test are the most likely candidates to show volume increases over the near-term.
Key recent business highight
- Currently, CGIX has 14 commercially-available tests leveraging genomic and immune platforms
- Company provides testing services to 9 of the top 10 biopharma companies
- CGIX is powering over 125 active clinical trials and studies focused in immune-oncology
- Company has collaborations with leading cancer institutions including Mayo Clinic and has over 100 patents globally
- Received New York State approval for FOCUS: CLL™, a highly-targeted NGS panel for Chronic Lymphocytic Leukemia
Gross margin improvement and operating expense reduction moving CGIX toward profitability. CGIX continues to show consistent improvement in margins and operating expenses. In particular, we have been impressed by the Company’s ability to grow revenue and innovate with new tests and collaborations while reducing expenses. Operating expenses have fallen to $6.5 million in 4Q16, down from $7.9 million in 4Q15.
FY16 Gross profit margins were 37%, up from 22% in FY15. The YoY increase was driven by greater operating efficiencies and the successful integration of Response Genetics. We expect strong improvement in gross margins in 2017 as test volumes increase. Management estimates gross margins in the high 50% to low 60% range once it reaches approximately $10 million in quarterly revenue. Margin improvements should play a large role in moving the Company toward profitability.
Continuing to build test portfolio, infrastructure, and intellectual property/knowledge; we believe that this backbone will translate into near-term revenue opportunities in biopharma and set up longer-term opportunities in clinical services. CGIX has continued to build its intellectual property and test portfolio, with 14 genomic tests commercially launched, 18 research collaborations with leading institutions, and over 90 patents globally. Main highlights include the launch of the NGS panel for Hereditary Breast & Ovarian Cancer, FOCUS: RenalTM with CLIA validation, New York state approval for FOCUS: MyeloidTM, a partnership with ApoCell, Inc., that leverages ApoCell’s proprietary, high-performance liquid biopsy platform for rare cell capture and detection, and a collaboration with BARC Global Central Laboratory to offer comprehensive clinical trial and companion diagnostic solutions for oncology clients.
Further R&D development should lead to the launch of additional tests and improvements to current test offerings. This should lead to near-term growth in biopharma revenue and eventually longer-term in clinical services.
CGIX announced strategic agreements with Mendel AI and Lantern Pharma Inc. to jointly leverage genomics, biomarkers & artificial intelligence (AI) to rescue and repurpose drugs for cancer. A Mckinsey & Company report recently concluded that the big data revolution is in its early days in the biopharma industry and the potential value creation is still unclaimed. According to the report, big data strategies could generate up to $100 billion in value across the US healthcare system. Big data provides biopharma companies essential data points that can be effectively used to identify new potential drug candidates, improving efficiency of research and clinical trials. CGIX’s partnerships with Mendel AI and Lantern Pharma provides the company with vast amounts of data that combined with artificial intelligence (machine learning algorithms) will play a significant role for the company to discover new tests, patient trials and in drug development.
Current expected revenue from biopharma contracts is more than $40 million; forecasted to increase as the number of trials and trial complexity both increase. CGIX’s current expected revenue from biopharma contracts is more than $40 million (this revenue is expected to be realized between 2017-2018).
CGIX continues to aggressively expand its biopharma services. The Company saw a 35% increase in the number of biopharma projects over the past 12 months, reaching 125 clinical trials in 4Q16, up from 103 in 1Q16. In particular, the Company generated a 5-fold increase in its immuno-oncology projects over the past 12 months to 18 in 4Q16, up from 3 in 1Q16. The immuno-oncology market is expected to reach over $35 billion by 2024 (source: IMS Health), and impact up to 60%-70% of cancer patients.
Given the expected significant growth in immuno-oncology over the next decade, providing services for immuno-oncology clinical trials should drive consistent revenue growth for CGIX’s biopharma services, along with providing significant long-term revenue potential in clinical services. As more immunotherapies are approved for use in the clinic, we anticipate clinical demand for multi-gene NGS panels to increase. CGIX’s current focus on biopharma services should generate a positive impact both for current results with longer-term potential in clinical services and companion diagnostics.
We derived a target price of $6.15 by applying a 3.0x EV/S multiple to our FY17E revenue of $37.9 million. CGIX has built a significant backbone of intellectual property and proprietary genomic tests. This expertise has enabled the Company to consistently grow its Biopharma services business, which we believe will eventually lead to significant growth in clinical services revenue. The Company’s rapid increase in immuno-oncology trials is very promising, as many top analysts expect immuno-oncology to have a huge impact on future cancer treatment.
In particular, we believe that a strong economic case will be given for the use of NGS testing alongside immunotherapies, especially given the high cost of treatment of these therapies (typically $100k+), and the increasing evidence of the need for variable treatment regimens dependent on specific patient characteristics. CGIX’s strong, disease focused knowledge base should prove valuable as immunotherapies and targeted therapies are approved for indications where the Company has developed expertise. Any companion diagnostic approvals should greatly increase clinical services revenue. Ultimately, we believe that the clinical services opportunity is a matter of “when”, not “if.”
Given this backdrop, we view the Company’s focus on moving toward breakeven to be a strong strategic move. Strong improvements in operating expenses and margins were achieved in 2016. We are estimating CGIX reaches breakeven in 4Q17. We are not currently modeling any additional capital raises, given the fact that the company raised/gained money through a credit facility. Although a small capital raise could be needed depending on how long it takes CGIX to further reduce costs. Controlling costs ensures that the Company minimizes dilution while the clinical opportunity develops..
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Cancer Genetic, Inc
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