Genoptix, a California laboratory-science firm specialising in blood-cancer diagnostics, has seen its share price fall by 50% since May. But despite two-profit warnings in as many months – largely down to customer budget constraints and price competition – the sell-off looks over-cooked.
Firstly, the numbers are not that bad. At last count, the board still expects 2010 revenues and underlying earnings per share (EPS) of $210m and $1.20 respectively. That’s 14% top-line growth on 2009, with the firm ending March with net cash of $132m (worth $7.20 a share). Secondly, Genoptix’s long-term prospects remain bright. The CEO expects the firm to organically double in size over the next five years. It operates at the forefront of personalised medicine, offering sufferers of haematological malignancies (850,000 people in the US) – such as cancers of the blood and bone marrow – tailored treatment plans.
Its services are typically provided to family doctors and community-based clinics in the US (1,300 in total), who do not have the scale to employ a crack team of specialist haematopathologists to test patients for tumours. Since being founded in 1999, Genoptix has amassed an 8% stake of the $2.5bn US market, and is on track to grow this share to 15%-20% by 2015.
Genoptix (Nasdaq: GXDX)
So, how much is the business worth? On a standalone basis, I would rate the group on a ten-times Ebita multiple. After adding back the cash, that generates an intrinsic value of around $27.5 per share. In the event of a takeover, the price could exceed $35. And the potential problems? As with any small company, it may be squeezed by larger players, and it could also be impacted by further pressure on reimbursement rates from its Medi-caid/Medicare customers after the passage of the healthcare reform bill. But with a rock-solid balance sheet and excellent science behind it, the shares are a ‘buy’ for the adventurous investor. Second-quarter results are out on Thursday 29 July.
Recommendation: speculative BUY at $17.70 (market cap $310m)