Those who have undergone surgery understand the hardships that come along with it – the lengthy hospital visits, the meticulous recovery processes, and the debilitating side effects that can significantly interfere with a patient’s daily activities. Not to mention, it’s no secret that these procedures are extremely costly even with insurance, and can be financially devastating to a patient who requires these services. Unfortunately, the medical industry is just that, an industry, and making a profit is just as much of a goal as providing care to patients. Additionally, many diseases can be difficult to diagnose, yet wreak havoc if left untreated. Take all of this into consideration, and one can see why it’s not uncommon for a patient to undergo a long, expensive, and potentially unnecessary process at the quick recommendation of their doctor, when a simpler solution could have been discovered before treatment even began. Enter Interpace Diagnostics (NASDAQ: IDXG), a company that has set out to provide personalized medicine that helps patients receive the right treatment, and at the right time.
The Importance of the IDXG Platform
Rather than providing the treatment itself, Interpace Diagnostics is a company focused on the diagnostics. In the medical world, there is often little time for patients to wait around while a condition continues to worsen, and doctors, needing to assist these patients as soon as possible, often greenlight inappropriate and expensive procedures despite having inconclusive data on the patient’s potential diagnosis. Moving forward with these indeterminate results can lead to unneeded or even wrong practices including unnecessary surgeries, which can result in taking money and resources from both the patient and the care provider as well as misdirecting therapies by the physician. Sensing a need to remedy this issue for the benefit of patient and industry alike, Interpace Diagnostics provides molecular diagnostic tests and pathology services at a time when current first line assessments of cancer are simply not able to determine the nature and extent of cancer. The Interpace Diagnostic assays for both thyroid and pancreatic cancer can paint a much more accurate picture not only of the patient’s current condition but also of the patient’s prognosis to deadly metastatic cancer, thus in turn assisting doctors to recommend the most beneficial treatment at the right time and delivered to the right patient. Not only does this allow the patient to receive only the necessary treatment for their condition, but it can also potentially prevents them from spending thousands more on a follow-up procedure due to a misdiagnosed ailment. These ideas are reflected in numerous statements from industry associations, with groups such as the American Thyroid Association and the American Society for Gastrointestinal Endoscopy recommending the use of molecular diagnosis in cases of indeterminate results. In addition to the health and financial advantages, IDXG faces much less risk than companies focused on drug development, enjoying lower developmental costs and a quicker path to the market. IDXG’s emphasis on discovering a precise diagnosis is something that can be appreciated by all parties involved, and investors should respect the robust portfolio the company continues to build.
IDXG Product Portfolio Serves Billion Dollar Potential
With three products on the market and a potentially lucrative fourth being prepared for a 2017 roll-out, IDXG has already built a powerful portfolio of molecular diagnostic products. The first of the three is PancraGEN®, a fully-integrated molecular pathology test designed to identify the risk of pancreatic cancer progression. Pancreatic cancer is the third most deadly cancer in the United States, with a five-year survival rate of only 7.2%, meaning a quick and accurate diagnosis is absolutely essential. In fact, clinical trials have shown PancraGEN to be significantly effective at identifying potential progressors to metastatic cancer in cases where biopsy results are indeterminate; meaning at a very early stage. While the 2012 Sendai guidelines are quick to recommend surgery due to the disease’s aggressive tendency, PancraGEN allows pathologists to have a better understanding of the risks at hand. With over 30,000 tests already performed in over 250 hospitals around the world, IDXG is enjoying continuous adoption and growth of their product. Most importantly PancraGEN is virtually the only product in this market currently and today that market is estimated to be in excess of $300 million. Along with PancraGEN, IDXG also has two products on the market designed to diagnose thyroid modules by identifying the possible signs of thyroid cancer: ThyGenX® and ThyraMIR®. An estimated 726,646 people in the US were living with thyroid cancer in 2014, and according to the American Cancer Society, an estimated 56,870 new cases of thyroid cancer have been diagnosed in 2017. Additionally, up to 18 million US adults have been plagued with thyroid nodules, which can carry the potential to lead to thyroid cancer if left untreated. Similar to PancraGEN, ThyGenX and ThyraMIR aim to eliminate the risk for unnecessary procedures stemming from indeterminate biopsy results. When used together, ThyGenX and ThyraMIR have been clinically shown to provide more accurate and detailed results of both ruling in and ruling out cancer, than the current market leader, Afirma, allowing doctors to prescribe the necessary treatment with confidence. Like PancraGEN, IDXG’s thyroid-focused products have also seen strong support from medical leaders, boasting a partnership with LabCorp and use by over 400 hospitals and physicians. The market for ThyGenX and ThyraMIR is also estimated to be in excess of $300 million with only a small number of competitors.
Finally, there is one more product in the pipeline at IDXG that deserves serious attention: BarreGEN®. BarreGEN is a molecular diagnostic test developed using the same platform as PancraGEN, to analyze the risk of esophageal cancer in patients with Barrett’s Esophagus. Investors should take note because there is massive potential in the market waiting to be realized by a product that may preemptively and accurately assess this risk. Barrett’s Esophagus is a condition in which the original tissue lining one’s esophagus is replaced with a tissue similar to that of the intestine. There is a small risk of Barrett’s Esophagus leading to esophageal cancer, which, like pancreatic cancer, is known to be one of the most lethal cancers in the world. Currently, no tests can predict whether a patient’s condition will lead to this disease, and IDXG is in the enviable position to fill that need. With over 3.3 million adults undergoing endoscopic screens annually, there is an estimated $1.5 to $2 billion market for a product like BarreGEN. BarreGEN began its Clinical Experience Program in September of 2016, and like IDXG’s other tests is designed to reduce the overall cost of care by providing an accurate diagnosis that quickly allows for the necessary and correct treatment. As stated earlier, the market is begging for a product that could help doctors accurately identify the risk of progression of Barrett’s Esophagus patients progressing to esophageal cancer, and since IDXG is already begin to prepare for its roll-out BarreGEN this year, IDXG’s current share price is in no way reflective of the substantial potential it could bring to the table. Clinical trials have demonstrated strong reliability in the test, and a successful launch of the BarreGEN product would almost certainly give this undervalued stock the attention it rightfully deserves.
A Company Transformed
From a financial perspective, IDXG has never looked better. The company has transformed itself mightily during the previous 18-months, boosting its balance sheet strength and increasing shareholder equity to roughly $24.5 million in the first quarter of 2017, a near 276% increase.
Revenue growth has been spurred by the recent reimbursement agreements from major insurance carriers, contributing to year-over-year revenue growth of 39% during the 2015-2016 fiscal accounting periods. Not only has revenue increased substantially, but IDXG also eliminated all outstanding debt, royalty, and milestone obligations from a 2014 asset purchase, and has raised approximately $26 million since the third quarter of 2016. Although growth is apparent and appears to be gaining momentum, investors were not treated to formal revenue guidance during the most recent conference calls, likely due to the complex accounting and receivables recognition associated with healthcare reimbursement. However, investors should not assume that the team lacks visibility or robust opportunity in the near term, especially when taking into account the company’s emerging financial strength and product adoption rates.
At the end of June, the company reported a cash balance of approximately $13 million, which is significant in that IDXG had slashed its operating overhead by approximately $30 million a year since 2016. Thus, with a cash burn rate churning at just $500K per month, IDXG is well positioned financially to proceed aggressively in driving revenue-generating opportunities for its broadening diagnostic platform. Now trading at less than a dollar per share, the company appears to be significantly undervalued, especially when investors consider that the business has no debt, at least two years of operating capital without including new cash flow, and has non-trading warrants that can bring an additional $21 million of cash to the company. Assuming all the warrants get exercised, IDXG will have an outstanding share count of approximately 36 million shares. What investors should find attractive about the warrants outstanding is that they have no cash value and do not trade on the open market, which dramatically reduces the financial overhang often associated to open warrants, as investors hedge stock positions utilizing arbitrage trading strategies.
As of now, however, IDXG has just 18.68 million shares outstanding, and the company is well placed to take advantage of the opportunities recognized from the adoption of the diagnostic portfolio. The IDXG product line address a combined market potential of more than $3 billion when accounting for successful market penetration of its PancraGEN, BarreGEN, ThyGenX and ThyraMIR diagnostic solutions.
At current prices, the case for investment is compelling.
IDXG Makes A Case For Itself
There are times when investors need to be told the story of a compelling stock, and then there are the cases where a stock can provide its own measure. IDXG is one of those companies that can let its accomplishments speak for themselves.
Too many investors make the mistake of lumping all sub-dollar stocks together, passing over the potentially lucrative opportunities that may be at hand. IDXG is far from typical, and for that matter, is differentiating itself from those that rightfully trade at sub-dollar levels. So, to not acknowledge that IDXG is far different from the others at its current price level may prove to be a terrible mistake – and, here’s why.
While a large number of companies trade at levels similar to IDXG, few can boast of having at least two years of operating capital in the bank, no debt, and a fully-diluted share count of less than forty million. Add to that a product portfolio that has already proven to be a necessary and much-needed addition to the healthcare industry, and the recipe at IDXG leads to success. The IDXG diagnostic products are not only necessary, but they should also be a requirement that the insurance industry puts in place to stop the unnecessary and often life altering events associated with surgical procedures that prove to be unwarranted. With IDXG products used as validating tools, not only can hundreds of millions of dollars of healthcare cost be saved, but countless numbers of lives may be spared the burden of surgical procedures that should never have been performed. But perhaps most importantly is that IDXG differentiates itself by not being just a sophisticated molecular diagnostics company. IDXG differentiates itself by being a provider of personalized medicine and IDXG is first and foremost a commercial company of over 20 sales reps that has sophisticated customers and provides sophisticated solutions. Once a company has the confidence of its customers at the highest levels the opportunity to commercialize other products may be significant.
And then there’s the fact that IDXG is addressing a multi-billion dollar industry, and is well positioned to capitalize from a partnership, licensing, and merger opportunity. Obviously, there is interest in what the company is doing, proven by successfully raising over $14 million in just the last six months. Insurance companies also realize the benefit, and the momentum of reimbursement inclusion is gaining momentum.
At roughly 90 cents a share, with sufficient cash in the bank and a diagnostic product line that can save both lives and money, IDXG becomes a compelling case for investor consideration. Markets often play catch-up and remain inefficient when pricing emerging companies. Retail investors are typically the last to know of businesses that bring transformational products to market. It’s true again, in this case, demonstrated by the fact that IDXG has raised substantial capital, eliminated all debt, and is positioned to generate exponential revenue increases in the coming quarters. Obviously, big money is already onto the story.
In this case, however, retail investors don’t need to be the last to know, as long as they pay attention to what IDXG is revealing to the market and respect the progress made on multiple fronts. IDXG may very well be a break-out winner in 2017. The next few quarters may spur a new chapter in the evolution of this promising company, but it may be just a small addition to the IDXG story that is only beginning to unfold.
Disclaimer – The author has no positions in any stock mentioned herein.
This article was originally featured on CNA Finance