By Brian Marckx, CFA
On September 6th DiagnoCure Inc. (Toronto:CUR.TO)
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.
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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