ben c. haynor, cfa cancer genetics, inc. · 2013. 5. 21. · marked fish dna probes to india. one...

Healthcare- Molecular Diagnostics May 21, 2013

Please see important disclosures on pages 18 to 20.

Rev(mil) 2012A 2013E 2014E

Mar $0.8A $1.2A $3.5EJune $1.1A $1.5E $4.7ESept $1.2A $2.0E $5.7EDec $1.2A $2.5E $6.6E

FY $4.3A $7.3E $20.6E

P/Sales 11.6x 6.8x 2.4x

EPS 2012A 2013E 2014E

Mar ($0.81)A ($2.18)A ($0.46)EJune ($1.38)A ($0.53)E ($0.44)ESept $0.23A ($0.39)E ($0.39)EDec ($3.02)A ($0.42)E ($0.37)E

FY ($4.97)A ($2.21)E ($1.66)EP/E NM NM NM

Price: $11.6052-Week Range: $17.00-$10.00Target: $17.50Rating: STRONG BUY

Shares Outstanding: 4.3 milMkt. Capitalization: $50 milAve. Volume: 3,000Instit. Ownership: N/ABV / Share: -$1.17Debt / Tot. Cap.: 176%Est. LT EPS Growth: 40%

Feltl and Company Research Department 2100 LaSalle Plaza

800 LaSalle Avenue Minneapolis, MN 55402

1.866.655.3431 Ben C. Haynor, CFA

[email protected] | 612.492.8872

Company Description: Cancer Genertics is an early-stage diagnostics company targeting hematological, urogenital, gynecological and HPV-related cancers. The company provides both proprietary and non-proprietary laboratory services, largely to oncologists, pathologists and community hospitals on the East Coast and Midwest. The company was founded in 1999 and is based in Rutherford, New Jersey.

Cancer Genetics, Inc.

CGIX’s CTaaS brings unique model to cancer Dx – initiate w/ STRONG BUY, $17.50PT (CGIX - $11.60) STRONG BUY

Key Points

Financial Summary

Cancer Genetics’ model virtually defines CTaaS (cancer-testing-as-a-service).

CGI has unrivaled positioning within hematological, urogenital and gynecological cancers.

Deep pipeline and execution thus far provides confidence in the company’s platform.

Their FISH probe business looks to be the first to offer low-cost, high-quality probes outside the US.

Proprietary HPV-associated cancer test, FHACT, has the potential to be a blockbuster.

Initiating with STRONG BUY rating and $17.50 (3.5x 2015 EV/sales) price target.

Cancer Genetics’ model virtually defines CTaaS (cancer-testing-as-a-service). CGI’s focus on hematological, urogenital and gynecological cancers and focus on the entire continuum – diagnostic, prognostic, and therapeutic – offers a new paradigm in cancer molecular diagnostics. Cancer Genetics’ proprietary microarrays are able to offer patients and clinicians improved, genomic-based prognostic and treatment decisions, while at the same time being ideal for patient monitoring on a yearly basis (potentially more often), resulting in a recurring revenue model in cancer testing, which we have christened “CTaaS”. This is in contrast to other oncology molecular diagnostic models that test for hereditary risk or risk of recurrence following surgery which are usually one-time in nature. Investors have shown willingness to assign premium multiples to such recurring revenue models and we think CGIX will ultimately be the recipient of a premium as a result.

Deep pipeline and execution thus far provides confidence in the company’s platform. CGI has unrivaled positioning within hematological, urogenital and gynecological cancers; they are the only company that has launched microarrays in all of the following areas - CLL (chronic lymphocytic leukemia), SLL (small lymphocytic lymphoma), DLBCL (diffuse large B-cell) and kidney cancer. In addition, their pipeline features tests for additional hematological cancers as well as prostate, bladder, cervical, ovarian and endometrial cancers, in total representing over 600,000 US diagnoses, or roughly a third of all new cancer diagnoses.

CGI’s FISH probe business looks to be the first to offer low-cost, high-quality probes outside the US. The company has moved manufacturing of their 32 CE Marked FISH DNA probes to India. One of these probes, their proprietary HPV-associated cancer test, called FHACT, has the potential to be a blockbuster; cervical cancer is the second most common cancer amongst women in the developing world and approximately 2 million abnormal PAP smears are conducted in the US each year.

Initiating with STRONG BUY rating and $17.50 (3.5x 2015 EV/sales, discounted to 2014 by 25%) price target.

May 21, 2013 rops Strong, Pricing Weak, Farm Profits Could Suffer

Feltl and Company Research Department Cancer Genetics, Inc. (CGIX)

INVESTMENT THESIS We believe Cancer Genetics' business model and target markets are among the best in the molecular diagnostics space. The company has an unrivaled position within hematological, urogenital and gynecological cancers in that it has the most advanced microarrays with both CLIA and New York State approvals in CLL (chronic lymphocytic leukemia), SLL (small lymphocytic lymphoma), DLBCL (diffuse large B-cell) and renal (kidney) cancer and is the only firm that offers proprietary tests in all three. CGI's focus on providing diagnostic, prognostic and therapeutic information makes its arrays ideal for clinical management of these difficult to prognose cancers. As such, it is likely that its tests will be utilized on a recurring basis (likely once a year or more) for surviving patients to manage the disease, giving rise to what we're coining CTaaS, or “cancer testing as a service” due to the recurring revenue model. Investors have shown a willingness to assign premium multiples to similar “as-a-service” recurring business models, and believe CGIX will ultimately receive a premium multiple. However, given the fact that is early in the business' development, we have chosen to take a conservative approach. Our valuation methodology leads us to a $17.50 price target (3.5x 2015 EV/sales discounted back at 25%) using a multiple inline with its publicly-traded comps as well as the low-end valuation of other molecular diagnostic firms at this point in their growth trajectory. As our price target is more than 20% above the current share price, we rate CGIX shares a STRONG BUY. . Opportunities Cancer Genetics' model virtually defines CTaaS (cancer-testing-as-a-service). The larger pure-play genomics firms' proprietary tests, notably Genomic Health (GHDX – not rated) and Myriad Genetics (MYGN – not rated), are generally ones that would be run once in a patient's life, either to determine the hereditary cancer risk posed to a patient or to provide a likelihood of recurrence. CGI's proprietary tests are somewhat unique within the molecular cancer diagnostics space in that they are likely to be performed every year (potentially more often) on a patient for the remainder of the patient's life in order to clinically manage the disease. This gives CGI's model a measure of recurring, high-margin revenue, similar to a SaaS (software-as-a-service) model which investors have shown the willingness to place a premium multiple upon. We believe investors will ultimately assign CGIX a premium multiple once it demonstrates the power of this business model. Multiple tests already developed with a robust pipeline yet to come. CGI has launched four proprietary microarrays targeting under-served and difficult to prognose cancers types. Its pipeline may be one of the broadest molecular diagnostic pipelines in oncology with numerous proprietary microarrays and probes targeting hematological, urogenital and gynecological cancers. We believe at least two of these tests will launch before year-end 2013. Massive potential markets with little competition at present. The tests CGI has launched and has in its development pipeline represent theoretical addressable markets of $6 billion in the US and $15 billion globally. CGI's focus on the hematological, urogenital and gynecological cancer categories sums to approximately 600,000 new cancer diagnoses in the US alone, or roughly a third of all new cancer diagnoses. Most other firms have focused on the large solid tumor cancer categories such as breast and prostate cancer; as a result, CGI is the only firm to have commercialized microarrays in the CLL/SLL, DLBCL, and renal (kidney) cancer spaces. Validating partnerships and customers. Cancer Genetics has established research collaborations with some of the largest and respected cancer centers within the US – they count Memorial Sloan-Kettering Cancer Center, Mayo Clinic, Cleveland Clinic and Stanford, amongst others as collaboration partners. On the client side, they have secured Gilead Sciences (GILD – not rated) as a clinical services client and won a global RFP with Roche (RHHBY – not rated) to provide testing services for 18 countries in the Caribbean and Central America. Plans are in place to expand the Roche relationship, and Gilead has increased their reliance on CGI; we view this as an affirmation of CGI's testing capabilities, which should bode well for securing additional clients, high-profile or otherwise. Geographic expansion. CGI currently has clients regularly submitting tests in 10 states as they have been largely focused on the East Coast and Midwest given the capital constrained environment they were operating in prior to the IPO. They expect to hire 2-3 salespeople per quarter to continue targeting the East Coast and Midwest for the remainder of this year. In 2014, they will likely begin targeting the Western US as well, which will nearly double their addressable market domestically. Potential acquisition candidate. We believe CGIX is an attractive acquisition candidate for the aforementioned reasons as well as the recent spate of acquisitions that give the impression of a “land grab” occurring within the space. Given that



CGI has developed a nice portfolio and pipeline of proprietary tests, we would expect CGIX to generate interest from potential suitors as adoption of their proprietary tests accelerates. Risks Additional funding needed. Cancer Genetics raised $5.0 million in the recent IPO. The company will need to raise additional capital to execute on its plan and fulfill other obligations. Most pressingly, the company has indebtedness of $3.5 million that will need to be repaid on August 15, 2013. If the company chooses to raise funds via an equity offering, which we would consider the most likely option, the raise has the potential to put pressure on the share price. Competition. While CGI does not face much competition on the proprietary testing front at present, a number of other firms are attempting to develop tests targeting the same cancers as CGI. We appreciate CGI's commitment to improving their existing tests (now on the fourth generation version of MatBA-CLL) and soon to be launched partnership with Mayo Clinic in next-generation sequencing (NGS), that hopefully will allow them to stay ahead of the curve. That said, these are large markets characterized by rapid innovation, and the risk remains that another firm may be able to leap-frog CGI in certain areas. Reimbursement and mix. Much has been written recently about the difficulties surrounding molecular diagnostics reimbursement, particularly by CMS (Centers for Medicare and Medicaid Services), which did not reimburse for tests in Q1 2013. CGI also has a vast range of reimbursement levels for their MatBA arrays - $1,000-$5,000 – depending on the payor, so mix shifting negatively, could have a disproportionate impact on the company. We believe that CGI will be able to prove to payors that its tests reduce medical expenditures by lessening the need for exploratory surgeries and by getting the treatment correct the first time. That said, building this clinical evidence will take time and money to accomplish. Customer concentration. Currently, Cancer Genetics has a great deal of customer concentration, with its top ten ordering sites in 2012 accounting for 58% of their clinical testing volume. Three clients each accounted for more than 10% of the company’s revenue. Loss of any of these clients would obviously hurt CGI’s performance. Single supplier risk. Agilent Technologies (A – not rated) produces all of CGI’s microarrays and CGI has optimized its tests for use on the Agilent Microarray Platform. The companies do not have a long-term contract in place. Should Agilent experience production difficulties or increase prices substantially, CGI could be harmed. We believe that Cancer Genetics has taken steps to ensure that their business is not disrupted by maintaining a certain level of inventory and may have engaged in discussions with other microarray producers to secure another supplier, but the risk does remain. Thoughts on Valuation Valuation of molecular diagnostics companies early on in their revenue ramp is somewhat challenging. Both presently and historically, there are examples of companies in the space being assigned huge multiples based upon the potential of their tests. For some, such as Myriad Genetics (MYGN – not rated) and Genomic Health (GHDX), these multiples turned out to be completely justified, as both firms were able to grow into their initially large EV/sales multiples. The table below details the handful of companies we see as reasonable historical comps to CGIX at the point in their respective histories where they exceeded $40 million in annual sales. One can readily see how volatile the valuations can be, notably Myriad Genetics’ $1.9 billion EV at its peak and negative EV at trough, although this did take place in 2000.

Source: Company filings and Feltl and Company estimates.

While $40 million revenue run rate may seem an arbitrary figure to choose as a threshold, we believe this represents “escape velocity” for molecular diagnostics firms – the point at which continued success is much more likely. The chart



below illustrates this historically; the chart picks “Year 1” as the company’s last year in it’s history where revenue was below $10 million and “Year 2” as the first year it exceeded $10 million as well as the several years that follow. We believe CGIX will clear the $40 million “escape velocity” revenue hurdle in 2015. Consequently, we feel it appropriate to utilize a sales multiple based upon those achieved by the above firms discounted back to 2014 to set our price target. We shall be conservative and apply a multiple between the average low valuation on an EV/sales basis, 3.2x, and the average low valuation excluding Myriad Genetics’ negative EV/sales multiple in 2000, or 4.1x, and discount it back to a twelve month price target by 25%.

Source: Company filings and Feltl and Company estimates.

The table below features current publicly-traded comps for CGIX. One can clearly see the huge premiums that get assigned to firms like Exact Sciences (EXAS – not rated) and TrovaGene (TROV – not rated), whose tests hold great promise, but the revenue is still on the come. On the other hand, one can clearly see the much lower multiples assigned to firms that have not yet cleared the $40 million “escape velocity” threshold discussed previously. The median 2014 EV/sales multiple of 3.5x, and the average 2014 EV/sales multiple of 4.1x both fall within the 3.2x-4.1x average low EV/sales past firms have achieved the year they reached the “success threshold”. As such, we feel a 3.5x EV/sales multiple on our 2015 sales estimate for CGIX is appropriately conservative, and we have discounted it back to 2014 (for our twelve-month target) at a 25% rate as previously discussed. We are also taking into account the fact that CGIX will need to raise additional funding and using 7.3 million shares as the share count (assuming they offer an additional 3 million shares before August). Based upon our 2015 revenue estimate of $47.9 million and anticipated share count of 7.3 million, we arrive at a $17.50 price target utilizing this methodology.

Company Ticker EV 2013 sales 2014 sales 2013 EV/sales 2014 EV/sales NotesMyriad Genetics, Inc. MYGN 2,290$ 595$ 655$ 3.9 3.5 Proprietary breast, colorectal, ovarian, and uterine cancer testingGenomic Health, Inc. GHDX 1,030$ 262$ 297$ 3.9 3.5 Proprietary breast and colon cancer testingMeridian Bioscience, Inc. VIVO 874$ 189$ 205$ 4.6 4.3 Proprietary tests in infectious diseasesQuidel Corp. QDEL 739$ 184$ 205$ 4.0 3.6 Proprietary tests in infectious diseases, reproductive and cancerExact Sciences Corp. EXAS 583$ 4$ 37$ 142.2 15.7 Colorectal proprietary screening testSequenom, Inc. SQNM 474$ 190$ 262$ 2.5 1.8 Mainly prenatal proprietary testsNeogenomics, Inc. NEO 182$ 68$ 84$ 2.7 2.2 Non-proprietary & proprietary cancer testingOraSure Technologies, Inc. OSUR 166$ 96$ 113$ 1.7 1.5 Proprietary tests in infectious diseases, substance abuse, etc.TrovaGene, Inc. TROV 95$ 2$ 9$ 48.6 10.2 Urine-based assays, mostly in development, HPV test launchedAtossa Genetics, Inc. ATOS 74$ 6$ 19$ 13.4 3.8 Proprietary breast cancer testsBG Medicine, Inc. BGMD 35$ 7$ 23$ 4.7 1.5 Proprietary cardiac testsVermillion, Inc. VRML 35$ 2$ 29$ 15.2 1.2 OVA1 ovarian cancer test, proprietaryRosetta Genomics, Ltd. ROSG 0$ 5$ 16$ 0.0 0.0 Proprietary mRNA cancer tests

Average 19.0 4.1 Median 4.0 3.5

Cancer Genetics, Inc. CGIX 50 7$ 21$ 6.8 2.4 Proprietary testing in hematological and urogenital cancers Source: First Call, Feltl and Company estimates.



Key Model Assumptions As Cancer Genetics is early-on in its growth as a firm, we have endeavored to be conservative in our estimates. The company recently reported Q1 results, posting 46% year-over-year revenue growth, despite operating in a capital-constrained environment prior to their April IPO. We believe they will be able to accelerate this growth as new salespeople are added and have some confidence that this will occur given management’s statements on the conference call that April was the busiest month in CGI’s history and May is continuing to build upon April. The company has also recently launched new microarrays for DLBCL (diffuse large B-cell) and kidney cancer that together comprise potential markets of over $1 billion. Given the expanded proprietary test menu and additional salespeople, we believe the company will be able to grow revenue 70% to $7.3 million in 2013. In 2014, we estimate growth will continue to accelerate as the company adds additional proprietary tests in at least MCL (mantle cell lymphoma) and FHACT for the HPV-associated cancers as well as further expands its reach by hiring additional sales assets and expands its presence on the West Coast. Our 2014 revenue estimate calls for sales of $20.6 million. We have assumed non-proprietary revenue-per-test remains constant at ~$550/test for the entire forecast period; consistent with the range estimated for the past four quarters of $532-$568. Similarly, we have estimated average MatBA, UroGenRA and UGenRA tests average out to an ASP of $3,100/test. Our model has proprietary microarray tests (MatBA, UroGenRA and UGenRA) of 523 in 2013, 2,225 in 2014, and 6,200 in 2015. In our view, this is conservative given that the 2015 level of testing in our estimates would equate to the company capturing ~1% of the theoretical addressable market of their pipeline tests by that point, which could likely be accomplished through securing a mere handful of the big cancer centers. For the probe business, we estimate that it can grow to $11.9 million by 2015. Based upon management commentary on the Q1 2013 call, it appears CGI will have at least two large life sciences tools and distribution partners in place to distribute the company’s probes in the next couple quarters. We believe their probes will be well received given they are high quality yet low cost, thanks to CGI’s decision to move manufacturing to India. The probe line in our model also includes FHACT testing conducted in the US as a lab-developed test (LDT) initially. We think the FHACT probe has the potential to be a blockbuster both in the US and worldwide, with 2 million abnormal PAP smears occurring in the US annually where the sample could be sent to CGI instead of requiring the patient to undergo colposcopy/biopsy at a cost of ~$500-$700. Should Cancer charge only $100 to conduct FHACT in the US, this would represent a $200 million market. In terms of gross margin, we anticipate CGI will post gross margin of 17.5% in 2013, 32.4$ in 2014, and 49.1% in 2015. As we previously mentioned, we expect the company to generate $47.9 million in revenue in 2015, and the table below contains the gross margin experienced by a number of molecular diagnostic firms as they reached the $40+ million “success threshold” in bold. These range from 37.7% to 72.4% and average 56.1%, well above our 2015 gross margin estimate of 49.1%.



Neogenomics 2005 2006 2007 2008 2009 2010 2011Revenue 1,885 6,476 11,504 20,015 29,469 34,371 43,484

COGS 1,133 2,759 5,523 9,354 14,254 18,588 24,056 Gross margin 39.9% 57.4% 52.0% 53.3% 51.6% 45.9% 44.7%

Monogram Biosciences 2000 2001 2002 2003 2004 2005 2006Revenue 7,466 17,815 24,530 31,911 34,811 43,468 45,150


Genomic Health 2005 2006 2007 2008 2009 2010 2011Revenue 4,823 27,006 62,745 108,658 146,581 174,870 204,766

COGS 6,249 9,908 17,331 27,185 32,562 34,634 33,832 Gross margin -29.6% 63.3% 72.4% 75.0% 77.8% 80.2% 83.5%

Myriad Genetics (personalized medicine) 1999 2000 2001 2002 2003 2004 2005Revenue 5,220 8,793 17,091 26,821 34,683 43,294 71,325


Clarient 2004 2005 2006 2007 2008 2009 2010ERevenue 2,238 11,439 27,723 42,995 73,736 91,599 116,500

COGS 3,813 10,948 19,777 26,807 32,936 39,107 Gross margin -70.4% 4.3% 28.7% 37.7% 55.3% 57.3%

Genoptix 2005 2006 2007 2008 2009 2010E 2011ERevenue 5,193 24,018 59,332 116,170 184,378 200,000 225,300

COGS 5,189 13,131 24,106 45,931 69,200 Gross margin 0.1% 45.3% 59.4% 60.5% 62.5%

Our operating expense estimates grow by $3.5 million in 2013 and roughly $7 million in both 2014 and 2015 as the company adds additional salespeople and increases G&A expense to support these assets as well as opening a West Coast lab which we think could take place in 2014. All told, we estimate CGI will reach breakeven mid-2015. Company Brief Cancer Genetics is an early-stage diagnostics company targeting hematological, urogenital, gynecological and HPV-related cancers. The company provides both proprietary and non-proprietary laboratory services, largely to oncologists, pathologists and community hospitals on the East Coast and Midwest. CGI has focused its proprietary test development on cancers that are difficult to prognose and determine treatment outcomes. The company was founded in 1999 and is based in Rutherford, New Jersey. Their laboratory has secured College of American Pathologists (CAP) accreditation and is CLIA certified. Its tests have received approvals from Florida, Maryland, New York and New Jersey. Company Strategy Presently, CGI markets all their proprietary and non-proprietary testing services as lab-developed tests (LDTs) in the US market, and we would expect this to continue for the next couple or several years. In the near-term, we believe the company will focus on several strategic actions, mainly related to building their customer base, improving both launched and pipeline tests (for launch) to stay ahead of the curve, and building clinical evidence for their portfolio. On the customer acquisition front, management is focused on hiring experienced salespeople to build up their customer base. CGI currently has six salespeople and anticipates adding two or three salespeople per quarter to finish the year with a sales force of roughly a dozen individuals. This will help expand their geographic coverage; however, even with the expanded sales force, management will focus on hiring for the East Coast and Midwest markets for the remainder of this year. The company may need to open a West Coast laboratory (or acquire one) prior to hiring sales personnel to target accounts much beyond the Eastern and Central time zones, in our view.



Cancer Genetics has two main customer groups they plan on targeting – facilities diagnosing and treating cancer and the clinical research market. We believe CGI will emulate the successful Clarient (acquired by GE in fall 2010 for $580 million) model, targeting community hospitals and pathologists. There are over 4,000 community hospitals in the US, which in many cases lose patients to large cancers following a patient's cancer diagnosis. We estimate that losing such patients results in a revenue loss of $25,000-$50,000 for the community hospital. CGI estimates that the average community hospital testing opportunity falls in the $600,000-$800,000 range with their current testing capabilities. Even for large hospitals this can be an issue, we recently spoke with hospital board members at a local hospital fitting that description who mentioned the hospital was developing programs to retain more cancer patients. In our view, CGI's microarrays are a great fit for community hospitals seeking to retain new diagnoses as they are able to provide diagnostic, prognostic and therapeutic information for the clinician in an accessible manner. At the same time, they are also the most advanced tests on the market and are suitable for large cancer centers as well. The other customer group would be the clinical research market, particularly biopharma companies and clinical research organizations (CROs). To this end, Cancer Genetics has established their SelectOne program (see the “SelectOne” subsection that follows for additional discussion). They have done a remarkable job since launching this program – a year ago CGI's booked clinical trial contracts represented only $300,000, today they represent a backlog of over $9 million. This is likely to be a large opportunity as oncology drugs associated with a biomarker (or biomarkers) make up about 25% of such drugs. In several years’ time, it is estimated that over half of oncology drugs will be associated with biomarkers. CGI has already signed key clients, such as Gilead (GILD – not rated), which also serves to validate their capabilities. When it comes to building clinical evidence for their tests and capabilities, CGI has begun engaging in dialogue with payors, cost management organizations and insurance providers to demonstrate their approach. On their Q1 2013 call, management stated that they expect to make multiple announcements in this area over the next several months. We believe these announcements will increase the number of lives covered by their testing. The company also plans on launching several health economic studies to demonstrate the impact their tests can have. To a certain degree, it seems self-evident that their tests would reduce healthcare costs in that they help get the treatment right the first time (versus a ~25% success rate on initial cancer treatments overall) and can eliminate the need for invasive procedures which risk additional complications, amongst other positive economic impacts of their platform. CGI has also shown that they have a strong commitment to improving their technology and keeping up with the latest in genomic technology. This is evident in several areas. First, we believe the company has one of the deepest pipelines in the cancer testing space, with numerous proprietary tests expected to launch over the coming quarters in the hematological, urogenital and gynecological spaces. As an aside, we believe it is important to point out that these areas comprise a full third of all newly diagnosed cancers in the US, whereas other industry participants have tended to focus on solid tumor cancers such as breast and prostate, that see a large number of new diagnoses individually. In addition, there are less than a handful of companies which are developing proprietary tests for cancers whose new US diagnoses sum to the ~600,000 new cancer diagnoses that CGI is targeting. Second, they have rolled out four generations of their CLL microarray and are already publicly discussing rolling out a second generation of their newly launched UroGenRA-Kidney microarray adding sunitinib (Sutent) response testing. Lastly, they are forming a company (which will be split 50-50) in collaboration with the Mayo Clinic focused on applying next-generation sequencing (NGS) to complex disease states. While NGS is at least several years away from clinical adoption, it is important to be ahead of the curve, and with Mayo's patient sample database and stable of NGS equipment, it is hard to imagine a better partner for a small firm with big aspirations like Cancer Genetics. On the company's Q1 2013 earnings call last week, management spoke of their view of the three attributes required to build a successful molecular diagnostics firm. Obviously, the first would be great technology. The second would be building the clinical evidence necessary for clinician adoption. Lastly, the technology needs to keep up with new discoveries, whether proprietary or not, to keep pace with the rapid innovation taking place in the market. We would wholeheartedly agree with this assessment, but would add an additional attribute – solid management – which we believe CGI has in spades. Generally speaking, when we meet the management team of a company, someone will stand out as a potential weak link. Having met with the entire C-suite of Cancer Genetics, as well as key Directors and Vice Presidents, over several days spent at their facilities, we came away favorably disposed to the entire team, a rarity in our experience. ExpandDx ExpandDx is CGI's program to reach out to community hospitals offering them comprehensive clinical oncology services, both non-proprietary and CGI's proprietary tests. Approximately 85% of initial US cancer diagnoses occur in community hospitals, of which there are over 4,000. Newly diagnosed patients often seek treatment at large cancer centers upon



learning they have cancer. We believe this costs community hospitals $25,000-$50,000 per patient in revenue for those who seek treatment elsewhere. CGI believes the average community hospital could generate $600,000-$800,000 in testing revenue for the company annually. The ExpandDx program should allow community hospitals to treat patients locally given CGI's state-of-the-art testing capabilities. The sales cycle is likely three to six months for such accounts, and it may take a bit of time for customers to fully ramp up; many times, new clients initially send CGI some of their volume to test CGI's turnaround time and service before sending all, or nearly all, of their volume to the company. Surveys have shown that C-suite executives at hospitals view expanding and developing their cancer car programs is a top three priority, and we would expect CGI's platform to be attractive to such accounts as the company is able to build their sales force to a level that enables them to get their message out. Select One Select One is Cancer Genetics' clinical trial services offering. The company has secured at least a half dozen biopharmaceutical and clinical research organization (CRO) customers for this business, including Gilead Sciences, Inc. (GILD – not rated). This business aids customers in increasing the efficiency (both time and economic) of clinical trials. In several years’ time, it is estimated that over half of oncology drugs will be associated with biomarkers. Additionally, this program has the potential to lead to companion diagnostic offerings, whereby the prescription of a drug is tied to a companion diagnostic test which determines whether or not the drug is suitable for a patient. We believe CGI's current Select One clients are utilizing proprietary CGI offerings; should any of the biopharma clients gain approval for their drugs, it is likely that CGI's tests would become the companion diagnostic associated with the drug, giving CGI a monopoly on such testing. Cancer Genetics Proprietary Tests CGI’s portfolio of microarrays both launched and in development is unrivaled in the hematological, urogenital and gynecological space. The table below details the main cancers targeted by the company’s current and future tests. For reference sake, approximately 1.7-1.8 million new cancer diagnoses take place in the US annually. Thus, CGI’s tests will likely target around one-third of the newly diagnosed cancers, a massive market estimated to be ~$6 billion in the US and ~$15 billion worldwide.

Cancer Type New US Cases per Year Deaths per Year in USBladder 72,570 15,210 Cervical 12,340 4,030 Endometrial 49,560 8,190 Kidney 65,150 13,680 Leukemia 43,360 16,990 Non-Hodgkin's lymphoma 69,740 19,020 Ovarian 22,240 14,230 Prostate 238,590 29,720

Total CGI Addressable 573,550 121,070 Source: American Cancer Society 2013 estimates.

The table below covers the attributes of CGI’s MatBA arrays. Both MatBA-CLL/SLL and MatBA-DLBCL have launched. It is expected that MatBA-MCL (mantle cell lymphoma), which will target the ~15,000 MCL sufferers in the US, will be the next MatBA array to launch, which could take place within the next several months. We would expect that the company will launch both MatBA-FL (follicular lymphoma) and MatBA-MM (multiple myeloma) by summer of 2014, if not sooner.



Source: Company presentation.

MatBA-CLL/SLL CGI received CLIA approval for their MatBA-CLL microarray test in March 2011 and the SLL microarray in January 2012. Approximately 15,000 cases of CLL (chronic lymphocytic leukemia, a hematological, or blood, cancer) are diagnosed annually in the US, with ~100,000-120,000 patients that need ongoing assessment on an annual basis. SLL (small lymphocytic lymphoma) is a subset of CLL that presents as a mass. When initially launched, the MatBA-CLL array looked at eight genomic aberrations, but now looks at 14 genomic aberrations as a result of improvements made by the company. The graphic below details the implications of utilizing the MatBA-CLL/SLL microarray to assess CLL/SLL as opposed to a FISH probe. FISH probes will provide an unfavorable prognosis in ~15% of cases, but will miss a full 8% of patients who would have an unfavorable prognosis. FISH probes also do not provide any distinction between intermediate and favorable prognoses, whereas MatBA provides this information and can give oncologists confidence to take a “watch and wait” approach in 38% of cases, improving both therapy selection and clinical management. MatBA-CLL/SLL reports only genomic alterations that are clinically relevant, as opposed to whole genome aCGH (array comparative genomic hybridization), which can overwhelm many oncologists and pathologists and take significantly more time to process and analyze.


CLL typically afflicts older adults and often presents few symptoms; most patients are diagnosed following a routine complete blood count (CBC) test indicating a high white blood cell (lymphocyte) count. SLL presents without a high white blood cell count but with enlarged lymph nodes. Leukemia and Lymphoma are very complex cancers, with 89 subtypes



currently identified; only 12 subtypes had been identified as recently as 30 years ago (see chart below). For comparison's sake, breast cancer has only four major molecular subtypes. Staging of the cancer is generally done with the Rai staging system (created by Dr. Kanti Rai, a CGI collaborator) or the Binet classification. Unfortunately, these staging systems do not allow the identification of patients with early stage disease that unexpectedly becomes active and refractory (non-responsive) to treatment or differentiate between stable and aggressive late-stage disease. The incidence of non-Hodgkin’s lymphomas has been increasing in the US, and while the survival rate has improved since the mid-1990s, it has not changed significantly.

MatBA-DLBCL CGI received CLIA and New York State approval for their MatBA-DLBCL microarray test in February 2013. This proprietary array allows for the diagnosis, prognosis, and patient monitoring of diffuse large B cell lymphoma (DLBCL, the most common form of non-Hodgkin lymphoma) patients. Approximately 200,000 people in the US suffer from DLBCL with roughly 25,000 new diagnoses annually. DLBCL patients could benefit from assessment twice per year. Assuming a $2,000 ASP for this test, we estimate the total addressable market to be ~$425-$850 million in the US, depending on whether patient assessment is carried out once or twice per year. We are not aware of any competitor who has a DLBCL microarray which is approved by both CLIA and New York State. In addition to MatBA-DLBCL, Cancer Genetics has licensed a six-gene DLCBL predictive model and algorithm from Dr. Ron Levy’s Stanford Medical School laboratory. CGI was the first lab to bring this test to market. UroGenRA On May 2, 2013, CGI announced the launch of UroGenRA-Kidney for the diagnosis and sub-typing of kidney cancer. We understand the launch of this test makes CGI the only lab in the US with the ability to genomically profile kidney tumors from fine-needle aspirate samples. This is important as up to 30% of renal masses removed using laparoscopic partial nephrectomy turn out to be benign, potentially indicating the procedures were unnecessary. In addition, more than 15% of needle biopsies yield insufficient tissue to be considered histologically reliable. There are approximately 225,000 people in the US living with kidney cancer and ~65,000 new cases are diagnosed each year. At a $2,000 ASP, this would indicate a potential $580 million market. CGI also has UroGenRA microarrays in development for prostate and bladder cancers.




UGenRA CGI is designing the UGenRA microarray for gynecological cancers - endometrial (uterine lining), ovarian and cervical. The array looks at genomic changes in 83 regions of the human genome and is focused on addressing specific needs associated with the management of urogenital cancers. For example, the ovarian test addresses chemotherapeutic resistance while the endometrial version is designed to distinguish hyperplastic lesions that have a high risk of progression. UgenRA requires only small amounts of genetic material and can be performed on FFPE specimens. Approximately 85,000 gynecological cancers of these types are diagnosed annually. FHACT FHACT is a proprietary 4-color FISH probe targeting HPV-associated (human pappillomavirus) cancers - cervical, anal, and oropharyngeal. The probe is designed to identify the gain of the three most important chromosomal regions associated with these types of cancer. FHACT enables earlier detection of abnormal cells and allows for the prediction of cancer progression. The beauty of FHACT is that it is designed to leverage the same PAP smear sample taken during routine screening and provides the clinician greater genomic-based information. This represents a massive potential market – of the 55 million PAP smears conducted in the US annually, approximately 2 million come back as abnormal and are referred to biopsy/colposcopy, yet only ~12,000 of these patients will develop cervical cancer. A publication at the International Pappillomavirus Conference in 2011 showed FHACT having over 90.9% sensitivity in determining whether cervical intraepithelial neoplasia of second degree or higher (CIN2+), a critical milestone in the development of cervical cancer. CGI has launched this test outside the US in certain emerging countries, including India. The company is continuing to validate FHACT for anal and oropharyngeal cancers using specimens from the National Cancer Institute and seeking additional collaborations to validate the clinical utility for these cancers.



FISH-based DNA Probes Cancer Genetics has a portfolio of 32 FISH probes for hematopoietic neoplasms and solid tumors marketed outside the US. The company's strategy is to sell conventional probes into emerging markets through their Cancer Genetics Italia subsidiary and other partners. The company has enlisted Labomics S.A. to provide manufacturing support, storage facilities and fulfillment management for the products and recently signed a distribution partnership with Nikon Instruments to distribute 31 of these probes in the Italian market, where approximately 70,000 FISH tests are performed annually. Abbott (ABT – not rated) dominates the FISH probe market with 80%-90% market share. The probe market is highly concentrated in Western economies, with the US and Europe making up 80%-90% of all probe usage. A couple of other players, Kreatech (located in The Netherlands) and Cytocell (located in Cambridge, England) make up most of the balance of the market. However, they both manufacture in high-cost locales. CGI recently moved their probe manufacturing to India, which we believe will make them the low-cost producer of FISH probes worldwide. This gives CGI a huge advantage in the probe business, in that they produce a portfolio of high-quality, low-cost probes, in our view. As such, it is not particularly surprising that they are in discussion with several major players in life science tools and distribution to distribute CGI's probes in various geographies. By the end of the summer, we would expect CGI announcing agreements with two of these companies. While we don't expect material revenues from the probe business this year, we estimate the company will see a significant ramp in 2014 and beyond. Cancer Genetics’ Progress Developing a proprietary cancer test is a difficult process, as seen in the UroGenRA-Kidney flow chart above. While we do not have data on how many diagnostic test candidates progress from initial promising research to regulatory clearance, we would imagine that it is similar to that of pharmaceuticals, where it may take 1,000 initial drug candidates for a single one to reach Phase 3 trials. Even if test development is an order of magnitude easier than drug development, it is still a difficult proposition. We have been quite impressed with Cancer Genetics’ success in commercializing tests from the research and discovery phase to market entry. One year ago, CGIX filed an amended S-1 with the SEC detailing the progression of its pipeline towards commercialization (see below). Today, they have received both CLIA and New York State approvals and commercially launched their MatBA-DLBCL and UroGenRA-Kidney microarrays. In addition, they have added MatBA-MCL (mantle cell lymphoma) to the pipeline, which was not even discussed a year prior. Interestingly, it appears MatBA-MCL will be the next MatBA array launched. These clearances roughly triple CGI’s addressable market size versus one year ago. In our view, this is a stellar accomplishment, particularly while operating in a capital-constrained situation prior to their IPO.

May 16, 2012




May 21, 2013


Cancer Diagnostics Overview Cancer (malignant neoplasm) is characterized by unregulated cell growth resulting from a combination of environmental and hereditary factors (although only 5-10% are solely hereditary). There are a number of methods to diagnose cancer of varying complexity and accuracy. The simplest test would be a biopsy, whereby a small tissue sample is removed and viewed under a microscope (histology – the study of microscopic anatomy, or more specifically, histopathology – the microscopic study of diseased tissue), usually after sectioning and staining the sample. Often these samples are delivered to the laboratory in formaline-fixed paraffin embedded (FFPE) format. Fixation utilizing formalin leads to degradation of DNA in tissue. However, extraction and amplification for analysis is possible with appropriate protocols. If the tumor is filled with fluid, a fine needle aspiration biopsy can be done by inserting a long, thin needle to obtain a sample. Diagnostic imaging can also be used to detect tumors – X-rays, CAT scans, MRIs and ultrasounds are all used to find cancer. These imaging modalities have improved over the years, and as a result, less exploratory surgery is done today than in the past. For example, a few decades ago, before the improvement in CAT scans, a staging laparotomy was often done in the staging of Hodgkin’s lymphoma, where the surgeon would remove the spleen and take biopsies in multiple areas to determine the cancer’s staging. Naturally, blood tests often uncover cancer. As previously mentioned, CLL is many times initially diagnosed through a routine complete blood count (CBC) test indicating a high white blood cell (lymphocyte) count. Another common example would be using a prostate specific antigen (PSA) blood test to diagnose prostate cancer. An Imperfect, Unorthodox Analogy on Genomic Testing DNA detection methodologies have improved over the years, progressing from DNA FISH probes (first described in 1978) to DNA microarrays (first described in 1987, but feasibly implemented in the mid-to-late 1990s, and explained in the graphic below) to the present next-generation sequencing (NGS), which is the current state of the art.



Each of these technologies features a different level of resolution, as seen in the table below. For reference sake, the human genome has over 3 billion base pairs.

FISH Probe Microarray Next-Generation Sequencing

Resolution~1-2Mb ~1-2Kb 1-2 nucleotides

Market MaturityMid-High Low-Mid Emerging

As a means of comparison, we would like to present a somewhat unorthodox analogy comparing DNA detection technologies with the advancement of video game console technology and its subsequent emulation. The video game systems in the table below exhibit a roughly thousand-fold improvement in resolution (defined here as horizontal resolution * vertical resolution * color depth) sequentially, very similar to the resolution improvement the DNA detection technologies in the table above show from one to the next.



Just as the improvement in video game graphics has offered gamers a more realistic experience, improved DNA detection capabilities bring researchers a more complete picture as to how a cell’s genome affects diseases (and their treatment). However, to make the determination which genes may matter to certain disease states, researchers first must uncover them and their impact. These discoveries are akin to reverse engineering, or in the computer world, emulation. A Brief History of Video Game Console Emulation Early video game consoles, such as the Atari 2600, had very slow processors (1.19MHz in the 2600’s case, approximately 1,000x slower than today’s smartphones), but in order to successfully emulate (duplicate the behavior) these systems in software, much more processing power was required. In 1993, Intel introduced the Pentium processor (running at 66MHz), which gave programmers sufficient power to develop software emulators for early consoles. Activision (ATVI – not rated) was the first to develop an Atari 2600 emulator in 1995 (with their Activision Atari 2600 Action Pack) and a number of other early video game consoles saw emulators developed in the mid-1990s as well (including the Super Nintendo in 1996). Many, if not most, of these console emulators were developed by individuals or groups who were forced to reverse engineer each system through trial and error as only licensed developers had access to each system’s documentation and were under legal obligations to not disclose it. The most recent generation of consoles nearly all have ongoing efforts to emulate them, but improvements in processor and graphics card performance will likely be necessary before they can feasibly recreate the console experience. Analogue to Genomic Testing Our analogy (admittedly perhaps a bit strained) seeks to make the point that useful genomic testing is similar to emulation of video game consoles in several ways. If we imagine the human genetic code is akin to a video game console (and the software code which it runs) in the sense that we “know” what the code says but don't necessarily know what it means, it clearly is a nontrivial problem to decipher what matters. Even with the original developers' documentation furnished by the console's creator, emulator authors still struggle with undocumented features of certain chips or have to deal with edge cases, such as the game cartridge itself containing a specialized chip (such as the Mode 7 chip in the SNES Super Mario Kart game cartridge). While we'll never have the developers' documentation for the human genome, we will hopefully be able to reverse engineer its meaning given enough time and samples. Simple games, not using the full capabilities of early video game consoles are relatively easy to emulate – somewhat similar to how FISH probes are generally targeted at the “basics” - well known biomarkers with clinical relevance already established. Emulating more sophisticated features of consoles generally requires a lot more computing horsepower and a great deal more trial and error, which is similar to microarrays – a great deal more development is necessary to establish clinical significance. Next-generation sequencing (NGS) represents a greater jump still as it looks at the genome at an individual nucleotide level and would be akin to emulating every signal emanating from every pin on every chip contained within both the console and game cartridge, which obviously requires massive effort. Such an endeavor would allow for perfect emulation, but, even for simple consoles, has not yet been accomplished. NGS holds incredible promise for the treatment of disease, but reverse engineering the meaning of the genome at the nucleotide level will require incredible dedication. Management Panna Sharma - CEO Mr. Sharma became a member of CGI’s board of directors and Chief Executive Officer in May of 2010. Mr. Sharma was at TSG Partners, a specialty life sciences consultancy and advisory company, from 2001 to 2010, where he was the Managing Partner and founder. At TSG he led the development of strategic initiatives, corporate growth strategy and corporate



turnarounds for both public and private companies. He also led over 70 buy and sell-side transactions for life sciences, healthcare and biopharma companies. At TSG, he established the Global Diagnostics Index, the Global Biotools Index and several other life science capital markets indices that are still used in the life science industry. Prior to founding TSG, Mr. Sharma was the Chief Strategy Officer for iXL Enterprises, Inc., a public e-business consultancy where he led strategy development and acquisitions activity and was part of the management team that aided in taking the company public in June 1999. At iXL, he also managed the specialty e-business strategy practices group that grew from under $4 million in revenue in 1998 to over $75 million in 2000. From 1996 to 1998, Mr. Sharma was a partner at Interactive Solutions, Inc., a marketing and strategy consultancy focused on health care and financial services in Cambridge, Massachusetts, that was sold to Omnicom, Inc., one of the largest global market analysis and marketing companies. Prior to that time, Mr. Sharma served as a consultant to Putnam Investment Management, LLC and Bank of America Corporation. Mr. Sharma has also served on the board of directors of EpicEdge, a health care and government focused IT services firm, from 2001 to 2003 and as chairman of the Advisory Board for EndoChoice, a global leader for the gastrointestinal treatment market from 2008 to 2010. Elizabeth Czerepak – CFO Elizabeth A. Czerepak joined CGI as Chief Financial Officer in 2011. She has 18 years of pharmaceutical industry experience and nine years of venture capital experience in the biosciences industry. From 2009 to 2011, Ms. Czerepak founded and led BIOptima Advisors LLC, a consulting firm that provides business development, strategic planning and clinical advisory services to biotechnology and pharmaceutical companies. From 2000 to 2011, she was founding general partner of Bear Stearns Health Innoventures (“BSHI”), a $212 million venture capital fund that led investments in 13 biotechnology companies, seven of which she served as a board member. From 2000 - 2009, she also served as managing director of Bear, Stearns & Co., and later, J.P. Morgan, Inc. From 1982 to 2000, Ms. Czerepak held senior positions in licensing, business development and finance at BASF Pharma, Hoffmann-La Roche, Inc. and Merck & Co., Inc., where she led or supported over 30 licensing and M&A transactions. Jane Houldsworth, Ph.D. - VP of Research and Development Dr. Houldsworth came to CGI in 2007. She has a long standing interest in the biology and genetics of lymphoma and male germ cell tumors, with over 20 years’ experience in translational research. Dr. Houldsworth has published more than 50 peer-reviewed papers, 15 chapters, and continues to consult on academic research projects. She is a reviewer for multiple scientific journals. She is an active member of the American Society of Hematology (ASH) and American Association for Cancer Research (AACR). Dr. Houldsworth was awarded several grants from the National Institutes of Health, Lance Armstrong Foundation and other private foundations. In 2005, Dr. Houldsworth attained her New York State certificate of qualification as a laboratory director for oncology, molecular and cellular tumor markers. Before coming to CGI, Dr. Houldsworth was an Associate Attending Geneticist and an Associate Laboratory Member within the Memorial Sloan-Kettering Cancer Center in Dr. R.S.K. Chaganti’s laboratory. As Vice President of the Research and Development, she leads several ongoing research projects including the establishment of proprietary FISH-based testing and the development of CGH microarrays, such as the Mature B-cell Array (MatBA™), which was licensed by Clinical Laboratory Improvement Amendment (CLIA) in November 2010 and New-York State licensed in March 2011. Cory Hickmon – Director of National Clinical Sales Cory Hickmon has over twenty three years of oncology sales and sales leadership experience. His focus for the past 21 years has been the esoteric oncology testing market, with much of his career devoted to building and leading successful sales teams in the rapidly growing genetic and genomic space. Cory began his career with Impath, a recognized leader in the area of oncology and pathology esoteric testing. After several promotions, he became the Midwest Regional Manager in 1998, where he was in charge of all sales activities in one third of the US market. In this role, Cory was involved in one the earliest targeted therapy marketing campaigns in the country, the launch of Her-2/neu which qualified patients for Herceptin therapy. In 2004, Impath was acquired by Genzyme Genetics, and Cory was promoted to Southwest Regional Director based on his success at Impath. In this role, he oversaw two unique sales forces; one which was focused on oncology, the other was in the growing area of reproductive genetic and molecular testing. Again, his skills in building out sales teams were used as Genzyme went through rapid expansion during this time.

May 21, 2013


May 21, 2013


Analyst Certification

I, Ben Haynor, CFA, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report.

Important Disclosures: The analyst or a member of his/her household does not hold a long or short position, options, warrants, rights or futures of this security in their personal account(s). As of the end of the month preceding the date of publication of this report, Feltl and Company did not beneficially own 1% or more of any class of common equity securities of the subject company. There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of. The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months. Feltl and Company has been engaged for investment banking services with the subject company during the past twelve months and does anticipate receiving compensation for such services in the next three months. Feltl and Company has not served as a broker, either as agent or principal, buying back stock for the subject company’s account as part of the company’s authorized stock buy-back program in the last twelve months. No director, officer or employee of Feltl and Company serves as a director, officer or advisory board member to the subject company. Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months.

Strong Buy: The stock is expected to have total return potential of at least 20%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 10%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential between positive 10% and negative 10%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return of at least 10%. Current positions may be used as a source of funds.

5/21/2013Ratings Distribution for Feltl and Company

------ Investment Banking ------ Number of Percent Number of Percent of

Rating Stocks of Total Stocks Rating categorySB/Buy 44 67% 4 9%Hold 21 32% 0 0%Sell 1 2% 0 0%

66 100% 4 6%

The above represents our ratings distribution on the stocks in the Feltl and Company research universe, together with the number in (and percentage of) each category for which Feltl and Company provided investment-banking services in the previous twelve months.

May 21, 2013


Date Nature of Report Rating Price Target

05/21/13 [email protected] StrongBuy $17.50

Feltl and Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl and Company could act as principal or agent with respect to the purchase or sale of those securities. Valuation and Price Target Methodology:

Our valuation is based upon an EV/sales methodology. We have chosen 3.5x 2015 EV/sales as the multiple on which to value Cancer Genetics based upon comparable companies at this point in the company's development. Based on our 2015 estimates, discounted back to 2014 at a rate of 25%, this results in a market value of ~$17.50 per share based upon 7.3 million shares expected to be outstanding at this point next year.

Risks to Achievement of Estimates and Price Target:

Additional funding needed. Cancer Genetics raised $5.0 million in the recent IPO. The company will need to raise additional capital to execute on its plan and fulfill other obligations. Most pressingly, the company has indebtedness of $3.5 million that will need to be repaid on August 15, 2013. If the company chooses to raise funds via an equity offering, which we would consider the most likely option, the raise has the potential to put pressure on the share price.

Competition. While CGI does not face much competition on the proprietary testing front at present, a number of other firms are attempting to develop tests targeting the same cancers as CGI. We appreciate CGI's commitment to improving their existing tests (now on the fourth generation version of MatBA-CLL) and the soon-to-be-launched partnership with Mayo Clinic in next-generation sequencing (NGS), that hopefully will allow them to stay ahead of the curve. That said, the molecular diagnostic market is large and characterized by rapid innovation, and the risk remains that another firm may be able to leap-frog CGI or out-compete them in the marketplace.

Reimbursement and mix. Much has been written recently about the difficulties surrounding molecular diagnostics reimbursement, particularly by CMS (Centers for Medicare and Medicaid Services), which did not reimburse for tests in Q1 2013. CGI also has a vast range of

05/21/13 SB Target: $17.50

May 21, 2013


reimbursement levels for their MatBA arrays - $1,000-$5,000 – depending on the payor, so mix shifting negatively, could have a disproportionate impact on the company. We believe that CGI will be able to prove to payors that its tests reduce medical expenditures by lessening the need for exploratory surgeries and by getting the treatment correct the first time. That said, building this clinical evidence will take time and money to accomplish.

Customer concentration. Currently, Cancer Genetics has a great deal of customer concentration, with its top ten ordering sites in 2012 accounting for 58% of their clinical testing volume. Three clients each accounted for more than 10% of the company’s revenue. Loss of any of these clients would obviously hurt CGI’s performance.

Single supplier risk. Agilent Technologies (A – not rated) produces all of CGI’s microarrays and CGI has optimized its tests for use on the Agilent Microarray Platform. The companies do not have a long-term contract in place. Should Agilent experience production difficulties or increase prices substantially, CGI could be harmed. We believe that Cancer Genetics has taken steps to ensure that their business is not disrupted by maintaining a certain level of inventory and may have engaged in discussions with other microarray producers to secure another supplier, but the risk does remain.

Other Disclosures:

The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results. Additional information is available upon request.

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ben c. haynor, cfa cancer genetics, inc. · 2013. 5. 21. · marked fish dna probes to india. one...

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