e believe the QL Care Analyzer, which incorporates the sensitivity of lab analyzers with the speed and ease of use of POC (“point of contact”) machines, will be well received in the professional POC IVD testing market. Led by an acclaimed cardiologist with two decades of experience in developing and gaining FDA approval of several cardiac marker tests, CardioGenics Holdings’ (CGNH) initial tests will target their area of expertise — cardiac markers.
Cardiac markers are also the fastest growing segment in POC IVD testing due to the need for quicker tests in order for emergency physicians and cardiologists to make informed decisions within one hour of the onset of a cardiac event. We believe the QLCA will close the sensitivity gap between POC and lab analyzers and offer healthcare providers faster results (15 minutes versus 3 – 4 hours) without sacrificing sensitivity, the latter which has been a significant impediment in the further adoption of POC testing.
Unlike many development-stage companies with a better mousetrap but unrealistic strategies to realize outsized growth and market share expectations, CardioGenics’ initial plan is to just gain entry into the market as a niche player. We believe CardioGenics is uniquely positioned to gain a foothold in the rapidly growing professional POC IVD testing arena. The company’s initial game plan is not to hit a walk-off home run against the handful of large companies that currently dominate the space, but instead to just get on base.
Entry into the market will be gained by claiming a niche position within cardiac marker testing through offering next-generation technology at a significant discount to competitors’ products, most of which use legacy technology. The company’s first products, the QL Care Analyzer and Troponin I test should launch towards the middle of 2011 and provide the company with a respectable entry into the market.
We expect CardioGenics to fully exploit the razor/razor-blade business model by offering the QLCA for free through a minimum test purchase agreement. Despite under-pricing the competition, sales of the test cartridges and relatively low production costs should afford CardioGenics gross margins around 90%+ (including the cost of the analyzer). By outsourcing the majority of functions other than research and development, the company carries little overhead and has minimum capex requirements. This low cost business model, along with huge margins, can result in positive net income and free cash flow in relatively short order.
Following the launch of the QLCA and Troponin I test (~ mid-2011) in the U.S., CardioGenics expect to seek a CE Marking for sale of the products in Europe. We also believe the company has ample opportunity to make further market share gains as it rolls out other cardiovascular tests, including the PAI-1 test (expected launch 2012) and HFRS test (expected launch 2013), the latter of which we believe could have multi-million dollar potential and would open up the QLCA to the general physician and specialist segments.
In the meantime, we look for CardioGenics’ silver-coated paramagnetic beads to commence a full commercial launch towards the end of the current year. With a significantly lower cost of production and higher sensitivity compared to competitors’ beads, CardioGenics has enormous opportunity to take meaningful share of the ~ $1B market.
We expect the beads to account for the majority of CardioGenics’ revenue through 2013 and estimate gross margins also to be around 90%. We expect bead sales to ramp very quickly after the launch and be the bulk of the impetus in pushing the company to positive net income and free cash flow by early 2012.
We believe longer-term growth can accelerate beginning around 2014 as CardioGenics exploits its business model over a larger installed base and the fourth cardiovascular test product launches. Expanding the test menu into other disease areas offers another opportunity for growth, although we do not expect this to materialize until possibly towards the end of the decade.
We are initiating coverage of CardioGenics with an Outperform rating. Our 23 page report on the company can be accessed at Zacks.com. We feel the current market value of CardioGenics under-represents the significant and numerous competitive advantages of the company’s products and business model.
While various lingering questions remain, based on extensive due diligence and numerous conversations with management, we expect satisfactory answers to the bulk of these questions to come within the next 12 months. And from an investment (i.e. – risk/return) standpoint, we feel these questions are more than mitigated by the tremendous potential of the company’s products to rapidly ramp revenue and earnings and achieve positive cash flow in relatively short order.
Median valuation of peers in the professional POC IVD testing space is 13.6x 2012 earnings. We look for CardioGenics to post EPS of $0.09 in 2012. Using the peer averages our near-term target price for CardioGenics is $1.22 per share.
CARDIOGENICS HL (CGNH): Free Stock Analysis Report
Zacks Investment Research
