CombiMatrix: 'Array' of Sunshine in '09?

The accompanying table [click to enlarge] includes statistics for all 40 companies included in the ETF Innovators Emerging Diagnostics Index of stocks with market caps of less than $150M and an average market value of $50M. The index has lost nearly 54% of its value in the past year, compared to declines of about 40% each for the S&P 500 SPDR ETF (SPY) + iShares Russell Micro-Cap ETF (IWC), 29% for the Healthcare Sector SPDR (XLV), and 15% for the SPDR S&P Biotech ETF (XBI).

The index includes diabetes care device makers such as Home Diagnostics (HDIX), personalized medicine lab service providers such as Clarient (CLRT), clinical diagnostic test developers such as OraSure (OSUR), diagnostic imaging service providers such as Nighthawk Radiology (NHWK), diagnostic equipment makers such as Vision Sciences (VSCI), and genetic analysis + molecular diagnostic companies such as Nanosphere (NSPH).

CombiMatrix (CBMX) is a spin-off company from Acacia Research (ACTG), which has operated independently since August 2007 as a developer of DNA MicroArrays for lab-based personalized medicine applications to improve treatement outcomes, which are exempt from the more time-consuming and costly route of FDA approval as in vitro diagnostic products. The tests are also affordable, with a target price of $250-$300 on average.

While CBMX is not yet profitable, the Company is set to receive a $36M cash windfall from a court judgment against National Union for a coverage claim (an AIG company) and has enough cash to fund operations until this money is received. Additionally, CBMX expects the $36M payment will allow the Company to reach positive cash flow from operations – meaning that the very low 6.3M shares of common stock outstanding and 5M share float (including about 30% insider ownership) will not be diluted through equity offerings or convertible debt financings in the future.

Late last year, CBMX launched the first array-based test for prostate cancer, ProScan, which brings the Company's total number of tests on the market to 12, which is more than all of its competitors combined (including the launch of 1-2 new products per quarter for the last two years). ProScan allows oncologists to more precisely categorize prostate cancer patients based on genetic tumor markers to better gauge their risk level and to guide in the treatment decision process.

Other related products already on the market include the HemeScan family (three tests for blood-based cancers), the Constitutional Family (five tests which screen for over 220 congenital abnormalities on a pre/post-natal basis), ATScan (autism), Zoom In Array (sequence analysis), and the HerScan (breast cancer).

In mid-December, CBMX reported positive results in an expanded HerScan study, but Genetech (DNA) filed a Citizen Petition last year asking the FDA to re-evaluate its regulation of homebrew, lab-based tests such as HerScan for more stringent regulation. However, CBMX is confident in the regulatory status for its lab-based tests based on FDA feedback and will continue to launch new molecular diagnostic products in the future, such as ProScan.

CBMX is also working on a comprehensive test which would simultaneously screen for early indicators of a broad range of cancers based on a new type of genetic material called microRNA (miRNA). A broad-based, early detection test for cancer would have tremendous market potential and fits well with the focus on preventive medicine by the new administration. This early warning system for cancer is designed to be a non-invasive, blood screening test which would require confirmation of results by a follow-up, invasive method such as a biopsy.

CBMX estimates the market potential for this comprehensive cancer array (CCA) at over $12B, based on $250 per test administered to 50M people each year over the age of 40 who are believed to have an annual physical exam and the Company hopes to launch the test in 18 months (around mid-2010). Given a market cap of $43M, trailing 12-month revenue of $7M, and trends in favor of preventive medicine + growth in the population over age 40 – CBMX would only need to capture one-half of 1% of this potential market ($60M) to have a significant positive impact on its current market value.