Q3 2012 Financial Results
Brian Marckx, CFA
On September 6th DiagnoCure Inc. (T.CUR) reported results for the fiscal third quarter
ending July 31, 2012. Revenue of $710k was more than double
our estimated $305k as a result of about $500k more than modeled
R&D services revenue booked related to the agreement with
Signal Genetics for further development of the Previstage GCC
test. Meanwhile royalties from Gen-Probe related to Progensa
PCA3 continue to disappoint and again came in lower than our
estimate ($137k A vs. $198k E).
Management attributed the continued softness in PCA3 revenue to
prolonged economic weakness in Europe. It's unclear what the
issue(s) are that have apparently stunted the roll-out in the U.S.
following FDA approval of the test which happened in February of
this year. As a reminder, DiagnoCure receives royalties from
Gen-Probe (GPRO), which sells the test in North America and
Europe. On August 1st Hologic (HOLX) closed on their
acquisition of Gen-Probe. As we noted in previous updates, we
think the acquisition could be a positive development for
DiagnoCure and help spark a greater rate of sales growth of
Progensa PCA3. Progensa PCA3 could be a natural fit with
Hologic's major presence in cancer diagnostics and treatment.
Hologic's sales force will also have a substantially larger
presence than did Gen-Probe's. However, given the recent
disappointing sales, we have made further downward revisions to
this line item in our model - mostly effecting the near-term.
The biggest surprise revealed in the earnings release is that
Signal Genetics apparently closed their Pennsylvania lab (as of
7/31/12) and discontinued selling and processing the Previstage GCC
test. Signal has also stopped paying DiagnoCure for sales
royalties owed as well as for the R&D services contract
(current Signal-related A/R balance is $707k). There were no
specifics offered relative to what the possible reasons are that
Signal took this action. DiagnoCure noted that they intend to
enforce the contract with Signal but didn't offer much in the way
of specifics relative to when they might know more or their plan
forward for marketing/processing Previstage. They did note on
the call that they will continue with R&D activities of
Previstage development, including the VITAR studies, despite the
current ambiguity with Signal (which was funding at least a portion
of the Previstage R&D).
While we have no idea what the outcome of DiagnoCure's enforcement
efforts will be, until there's more clarity on this situation we
think it's prudent to remove all Previstage royalties as well as
R&D revenue from Signal Genetics from our model. We will
again update our model, which could include re-establishing
Previstage revenue and R&D from Signal, if and when it may be
appropriate. As it is now, we have removed these from our
model.
Net Income, EPS
Net income and EPS came in slightly better than our numbers for
the second straight quarter. Q3 net income and EPS were
($606k) and ($0.01), compared to our ($834k) and ($0.01) estimates.
Cash balance (including investments) stood at $6.5 million at
7/31/2012, compared to $7.4 million at the end of Q2
(4/30/2012). Management indicated that full-year cash burn
could remain within their earlier guidance of $2MM - $3MM depending
on the outcome with Signal.
Updating Outlook
As noted, we have removed all revenue contributions from Signal
Genetics from our model until further notice. We have also
made some downward revisions to our ramp in PCA3 royalties due
mostly to the apparent delay in the U.S. roll-out. As (prior
to Q3 results) we had modeled Signal-related revenue to account for
40% and 23% of total revenue in 2012 and 2013, respectively
(falling to 15% and 14% of total revenue in 2014 and 2015),
removing this contribution from our model results in a significant
reduction in projected sales, especially in 2013 and 2014.
Downward revisions to the ramp in PCA3 also results in the $62.5
million royalty-rate hurdle (moving the royalty rate paid to CUR
from 8% to 16%) now being met in 2014, instead of 2013 where we had
it previously. This also significantly reduces our projected
revenue in 2014.
We now look for total revenue of $1.1 million in 2013 (almost all
of which is PCA3 royalties), growing to $6.8 million in 2015, this
is adjusted from $3.5 million in 2013 and $10.0 million in
2015. We note, however, that long-term our outlook has always
been mostly driven by an elongated ramp in PCA3 royalties. As
this assumption remains intact (although slightly delayed), our
longer-term outlook is much less effected by our current
updates.
The adjustments to our model have moved our DCF-generated
valuation from $2.25/share to approximately $1.80/share. As
such, we are moving our price target to $1.80/share but maintaining
our Outperform rating.
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