November 2, 2007, 10:53 am

GXDX - Genoptix

pre-ipo analysis on every deal at

disclosure: does have a position in GXDX at anaverage of 24 1/4.

GXDX - Genoptix

GXDX - Genoptix plans on offering 5 million shares at a range of $14 - $16. Insiders will be selling 700k shares in the deal. Lehman is leading the deal, BofA and Cowen co-managing. Post-ipo GXDX will have 15.6 million shares outstanding for a market cap of $234 million on a pricing of $15. IPO proceeds will be used to 1) increase personnel, (2) establish a second laboratory facility and expand backup systems, (3) repay all outstanding indebtedness and (4) pursue new collaborations or acquisitions.

Enterprise Partners will own 20% of GXDX post-ipo.

From the prospectus:

'We are a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists, or hem/oncs. Our highly trained group of hematopathologists, or hempaths, utilizes sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patients condition, aiding physicians in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, and other forms of cancer.'

Cancer laboratory diagnostic operation focusing on malignancies of blood and bone marrow. There are approximately 800,000 patients in the United States living with malignancies or pre-malignant diseases of the blood and bone marrow, with more than 140,000 new cases being diagnosed each year. 60% of GXDX diagnostic cases are bone marrow, 40% blood-based.

In order for hematologists and oncologists to make the correct diagnosis, develop therapies and monitor therapy effectiveness, they require highly specialized diagnostic services. That is where GXDX comes in. 2007 Medicare reimbursement rates average $3,000 for typical bone marrow diagnostic cases and range from $100-$3000 for blood based cases. GXDX estimates there are 350,000 bone marrow procedures performed in the US annually and each one requires at least one bone marrow diagnostic test. GXDX believes the bone marrow diagnostic test market is approximately a $1 billion market in the US; 350,000 procedures with at least one diagnostic battery done on each averaged $3,000 a pop. In addition to the bone marrow diagnostic tests, GXDX believes there are 200,000 blood-based diagnostic tests for liquid and solid tumors performed annually in the United States.

Traditionally these tests have been performed by hospital pathologists, esoteric testing laboratories, national reference laboratories and academic laboratories. GXDX believes historically none of these testing entities effectively served the needs of community based hematologists and oncologists. GXDX states their diagnostic testing services as follows:

'We believe our differentiated services offer the technical expertise of an esoteric testing laboratory, the customer intimacy of a hospital pathologist and the state-of-the-art technology of an academic laboratory, while maintaining a specialized service focus that is not typically available from national reference laboratories that cover a broad range of medical specialties.'

The key differences appear to be:

1) Personalized and comprehensive approach - GXDX assigns a single hempath to guide the diagnostic process for each patient file. This hempath is the person that is responsible for guiding the sample through all diagnostic services and for communication with the hem/oncs. Hematologists and oncologists speak directly to the hempath if and when needed and desired. This appears to be a key differentiator with GXDX and the testing labs that have traditionally provided bone marrow cancer and blood cancer testing.

2) More than just test results - GXDX hempaths provide hem/oncs with a clear, concise and actionable diagnosis rather than just providing individual test results. GXDX is sort of a full service diagnostic shop, not just a testing company.

GXDX two service offerings are COMPASS and CHART. With the COMPASS service offering, the hem/onc authorizes the hempath at GXDX to determine the appropriate diagnostic tests to be performed, and the hempath then integrates patient history and all previous and current test results into a comprehensive diagnostic report. As part of their CHART service offering, the hem/onc also receives a detailed assessment of a patient’s disease progression over time. Approximately 50% of test requisitions in 2007 have been for both the COMPASS and CHART services.

Cartesian Medical Group - GXDX contracts with Cartesian Medical Group to provide all hempaths and an internal medicine specialist. All GXDX hempath physicians are employees of Cartesian, contracted to work for GXDX in GXDX labs. There are approximately 1,500 hempaths licensed in the US with just 75 newly receiving board certification annually.

GXDX estimates their current bone marrow testing market share is 3%.

54% of revenues come from private insurance, including managed care organizations and other healthcare insurance providers, 43% from Medicare and Medicaid and 3% from other sources.


$5 per share in cash post-ipo, no debt. Note that GXDX will be using $2-$3 per share in cash of ipo monies to construct a second lab testing facility and to hire personnel.

Often these small medical ipos come public way too early in their revenue profit curves. The reason is simple: They need the ipo cash to fund growth attempts. I like here that GXDX did not come public before generating significant revenues and turning a nice operating profit. Personally I'd like to see much more of this as it really gives us far more information to make a good buying decision. I am thrilled that GXDX did not attempt to come public in 2005 when revenues were still in development stage and there was doubt as to whether GXDX would be successful in grabbing bone marrow cancer and blood cancer diagnostic services from the traditional sources. Here in the fall of 2007, we can clearly see GXDX has been wildly successful, very quickly grabbing market share in this niche.

Revenue growth has been nothing short of phenomenal. Start-up stage in 2004 (GXDX did not begin offering their services until 3rd quarter of 2004), revenues in 2005 were $5 million, in 2006 $24 million and on pace in 2007 for $55-$60 million. 10+ straight quarter of sequential revenue growth. *At just a $234 million market cap this revenue growth rate in a very specialized niche is reason enough to recommend this ipo very strongly.*

It gets better too. GXDX moved into operational profitability in the first quarter of 2007 and in the 6/30/07 quarter booked operating margins of 28%. For a company attempting to grab a foothold in a highly specialized niche, you nearly always see them spending massively on sales & marketing to grow revenues as fast as GXDX. Hasn't been the case here, there appears to be extremely strong organic demand for GXDX services. Sales and marketing expenses were just 20% of revenues in the 3/07 quarter and dipped to only 17% of revenues in the 6/30/07 quarter. In hard dollars, GXDX doubled revenues in the 6/07 quarter when compared to the 12/06 quarter yet spent just the same each quarter on sales and marketing expenses. This is perfect in what you want to see with small fast growing ipos.

The three paragraphs above are reasons to get very excited about this GXDX ipo as you rarely see all these highly positive combinations in one ipo, let alone an ipo that was in start up stage just 3-4 years prior. This is just outstanding stuff here, this GXDX ipo in range is a 'goose bump' ipo.

Provisions for doubtful accounts has run around 4% in 2007.

GXDX has sufficient tax loss carryovers to cover the bulk of 2007's earnings. We'll take a look at earnings untaxed and also plugging in normalized taxes as GXDX should begin normal tax rates by mid 2008.

2007 - Revenues are on track here for $55-$60 million. Gross margins are increasing quarterly and full year should be 61% for the full year. Operating expense ratio is dropping quarterly as well. Increasing revenues, coupled with increasing gross margins and lowering operating expense ratios is a recipe for fast bottom line growth. Full year operating expense ratio should come in at 34%. Operating margins should be 27%. Untaxed net earnings will be around $1 per share. Plugging in full taxes GXDX should earn $0.65 in 2007.

Pricing range of $14-$16 is much too low here for all the positives. GXDX has plenty of room to continue growing as they're going to make $0.65 in only their third full year of operations and garnering just 3% of the bone marrow cancer testing segment. Strong recommend in range, this is the one to pay up significantly for as well. Fantastic ipo.