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About the Author IPOdesktop

During the IPO season Francis Gaskins, editor of IPOdesktop.com & director of research for Equities.com, regularly appears on CNBC TV, Bloomberg, thestreet.com & other financial cable channels. On the day of the Visa IPO he appeared on four cable TV financial shows including Bloomberg & CNBC. Over the past five years he has been quoted over 500 times by such financial media as the Wall Street Journal, Bloomberg, Reuters, Associated Press, USA Today among others. Those quotes are available at IPOdesktop.com. His varied personal interests include violin playing. For example, he is concertmaster of the Palisades Symphony. He also holds an MBA from Harvard Business School (finance) and an AB from Princeton University (economics).

IPO Preview: AltheaDx


Based in San Diego, CA, AltheaDx (Pending:IDGX) has scheduled a $60 million IPO on Nasdaq with a market capitalization of $161 million, at a price range midpoint of $13, for Wednesday, February 4, 2015.

The full IPO calendar is available at IPOpremium.

SEC Documents

Manager, Joint-managers: Citigroup, Jefferies
Co-managers: William Blair, Cantor Fitzgerald

End of lockup (180 days): Monday, August 3, 2015
End of 25-day quiet period: Monday, March 2, 2015

Summary
IDGX is a IDGX is a commercial-stage molecular diagnostics company specializing in the field of personalized medicine.

IDgenetix, IDGX’s pharmacogenetic (PGx) testing portfolio, enables personalized therapeutic decisions for patients suffering from some of the most prevalent clinical conditions in the United States, including cardiovascular disease, neuropsychiatric disorders and pain.

IDgenetix may reduce healthcare costs. IDGX believes IDgenetix can improve clinical outcomes and reduce the overall cost of prescription drugs by enabling better drug selection, earlier favorable results and lower occurrence of adverse events.

Valuation
Glossary
Pre-IPO grade-score summary

Accumulated deficit ($mm)..-$19
Per share dilution..-$8.96
——————————————–
Valuation RatiosMrkt. Cap ($mm)Price /SlsPrice /ErngsPrice /BkVluePrice /TanBV% offered in IPO
Annualizing Sept. 9 mos
AltheaDx$1618.9-20.53.23.237%

Conclusion
Neutral

Commercial-stage molecular diagnostics

May reduce healthcare costs

Total rev. +221%

Diagnostic testing % of rev. 67%, up from 3%

Diagnostic testing gross margin 81%

Operating expenses +241%

Loss -43% of rev.

P/E -20.5, indicating moderate cash burn relative to market cap

Price-to-book of 2.3

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business
IDGX is a commercial-stage molecular diagnostics company specializing in the field of personalized medicine.

IDgenetix, IDGX’s pharmacogenetic (PGx) testing portfolio, enables personalized therapeutic decisions for patients suffering from some of the most prevalent clinical conditions in the United States, including cardiovascular disease, neuropsychiatric disorders and pain.

IDgenetix may reduce healthcare costs
IDgenetix is designed to enable healthcare providers to make timely and evidence-based decisions, which IDGX believes can reduce the overall cost of patient care by reducing adverse events, optimizing patients’ overall therapeutic regimen and helping to achieve a faster therapeutic response.

Target customers
IDGX designed IDgenetix to provide a comprehensive PGx test offering to best meet the needs of target customers, such as long-term and post-acute care facilities, government facilities, integrated delivery networks, or IDNs, and managed care organizations.

These institutional healthcare providers require broad PGx testing capabilities to manage a large and diverse patient population, with patients often suffering from multiple clinical conditions.

These customers often operate under fixed-fee-per-patient or fixed-fee-per-procedure arrangements, and are searching for ways to improve clinical outcomes at the lowest possible cost.

In addition, IDgenetix addresses the needs of physicians across multiple specialties, such as cardiologists, general practitioners, obstetricians and neurologists.

Reimbursement
Reimbursement for IDgenetix testing services comes from third-party payors, such as Medicare, Medicaid and other governmental payor programs, hospitals, private insurance plans, managed care organizations and individual patients.

Tests performed on patients covered by Medicare represented 59% of all IDgenetix tests for the nine months ended September 30, 2014.

Continued Adoption of and Reimbursement for IDgenetix
As a Medicare-participating laboratory based in California, IDGX bills Noridian Healthcare Solutions, or Noridian, the Medicare Administrative Contractor, or MAC, for California, and is subject to Noridian’s local coverage and reimbursement policies.

Effective July 2014, Noridian no longer covers and reimburses IDGX for CYP1A2 testing, which negatively affects future revenue and gross margin. This change in coverage decreased average Medicare reimbursement rate per sample from approximately $1,000 to $1,100 to approximately $720 to $780.

In addition, in August 2014, Noridian issued a draft local coverage determination, or LCD, that proposes to revise coverage and impose policy limits related to genetic testing, including testing for the CYP2D6 and CYP2C19 enzymes, which are part of IDgenetix tests.

The draft LCD would impact all three therapeutic areas in which IDGX currently offers testing (cardiovascular disease, neuropsychiatric disorders and pain), as well as those therapeutic areas IDGX intends to expand into (neurology and rheumatology).

The draft LCD is similar to the LCDs of two other MACs (Palmetto GBA and CGS Administrators) that already restrict coverage of the CYP2D6 and CPY2C19 enzymes to only certain patients with depression, who are initiating therapy with one of three specified medications (for CYP2D6) and patients with acute coronary syndrome (ACS) undergoing percutaneous coronary interventions (PCI) who are initiating or reinitiating Plavix therapy (for CPY2C19).

Palmetto and CGS currently consider all other clinical indications as investigational at this time.

Noridian’s draft LCD, if finalized, would adopt the same coverage criteria.

The draft LCD was subject to a 60-day comment period beginning on September 3, 2014 and ending on November 3, 2014.

If the proposed LCD as currently drafted is finalized, it would limit coverage of CPY2D6 and CYP2C19 testing, which would impact all three therapeutic areas in which IDgenetix tests are offered, and adversely affect the business.

IDGX currently has plans in place that it expects may mitigate some of the expected impacts of this proposed LCD on the business, primarily through re-configuring IDgenetix tests to harmonize with the LCD in a manner consistent with approaches by other industry providers.

With the projected implementation of these plans, and based upon the historical ordering patterns of customers, IDGX expects that its average Medicare reimbursement per sample will decrease to approximately $600-620 if the LCD is implemented as drafted.

Molecular Diagnostic Services Program
Palmetto GBA, the current MAC for North Carolina, South Carolina, Virginia and West Virginia, and the former MAC for California, developed the Molecular Diagnostic Services Program, or MolDX, in 2011.

As part of this program, Palmetto issued a Molecular Test Panel Edit Alert in November 2014, which announced that laboratories performing test panels in affected jurisdictions should start to register each panel, obtain a unique MolDX identifier for each panel and bill such panels using a single current procedural terminology, or CPT, code and the unique MolDX identifier.

Laboratories that perform molecular diagnostic testing and submit claims to Palmetto GBA or Noridian may be affected by the MolDX program, as Noridian is responsible for administering the MolDX program and implementing the MolDX guidelines developed by Palmetto in California.

Effective July 1, 2015, Palmetto has announced that it will begin rejecting claims for tests performed as panels and not billed in accordance with the MolDX program.

IDGX intends to register each of its IDgenetix test panels and obtain a unique MolDX identifier for test panels if this is required of the company by Palmetto or Noridian before July 1, 2015.

Although not part of the announcement, it is possible that payments under the test panels may lead to a reduction in payments for IDGXr tests, which could have a material adverse financial impact on IDGX.

Even with these current and potential developments in Medicare reimbursement, IDGX believes that it has developed a business model to withstand these and future impacts of decreases in reimbursement, primarily based upon the following factors:

  • IDGX designed its cost structure to maintain positive gross margins, even with the risk of decreases in reimbursement, supporting a belief that cost of sales differentiation is a competitive advantage.
  • For the nine months ended September 30, 2014, IDGX generated gross margin of approximately 81% from diagnostic testing revenues.

Even with future expected and potential changes in reimbursement in the near and long term, IDGX believes that it will be able to maintain gross margins for diagnostic testing revenue in the 65-70% range.

Platform
IDGX’s proprietary algorithm-based bioinformatic platform and PGx testing portfolio are intended to serve as a tool to assist healthcare providers in identifying optimal drugs for their patients, as well as dosing guidelines based on a patient’s genetic make-up, current prescription regimen and other key factors.

Market
In 2013, the U.S. healthcare system spent in excess of $260 billion on prescription drugs, and that amount is expected to exceed $450 billion in 2022.

Nearly 50% of the U.S. population, and almost 90% of people 65 years and over (or approximately 36 million patients) take at least one prescription drug, and more than 10% of the U.S. population, and almost 40% of people 65 years and over (or approximately 16 million patients) take five or more prescription drugs, which IDGX refers to as polypharmacy.

IDGX estimates that the overall potential market opportunity for IDgenetix is greater than 150 million patients in the United States, representing the number of people that take at least one prescription drug, which includes the more than 30 million people who are into polypharmacy.

IDGX believes there are significant health concerns and unnecessary costs associated with the trial-and-error manner in which physicians prescribe drugs, without prior knowledge of an individual patient’s genetic profile.

There are an estimated approximately 120,000 deaths and more than two million serious adverse reactions attributable to prescription drug use in the United States each year, at a cost to the healthcare industry that exceeds $136 billion annually.

It has been estimated that genetics can account for up to 95% of variability in drug disposition and effects, and as much as 40-60% of adverse drug reactions.

IDGX believes IDgenetix can improve clinical outcomes and reduce the overall cost of prescription drugs by enabling better drug selection, earlier favorable results and lower occurrence of adverse events.

Intellectual property
IDGX protects its proprietary rights through a variety of methods, including confidentiality agreements and proprietary information agreements with suppliers, employees, consultants, collaborators, researchers and others who may have access to proprietary information.

IDGX’s success will depend significantly on its ability to obtain and maintain proprietary protection for the technologies, inventions, know-how and products the company considers important to its business, preserve the confidentiality of its trade secrets and operate its business without infringing on the proprietary rights of third-parties.

Competition
IDGX faces competition from CLIA-certified laboratories offering PGx testing services, companies developing and commercializing PGx assays, and from various companies researching and developing PGx technology, in each case in the United States.

IDGX’s competition arises from other parties using the same or similar methods, as well as alternative methods of PGx testing.

Competitors and potential competitors include, among others, American International Biotechnology LLC, AssureRx Health, Inc., Iverson Genetic Diagnostics, Inc., Millennium Laboratories, LLC and PGXL Laboratories.

National reference laboratories typically offer a full suite of tests for a variety of medical professionals, including general practitioners, hospitals and specialists.

This emphasis on providing a broad product portfolio of commoditized tests at the lowest possible price tends to limit these laboratories’ ability to provide specific, comprehensive and actionable results to healthcare providers.

For example, the IDgenetix pain test screens for nine metabolizer, transporter or receptor genes applicable to pain drugs.

To obtain the same results from a national reference laboratory, an ordering physician would need to know which nine specific genes to test, and order nine separate tests.

In addition, IDGX believes national reference laboratories tend not to provide comprehensive interpretation of test results or a specialized focus on the needs of the ordering physicians.

However, it is possible that these national reference laboratories may become more competitive with IDGX in the future.

Examples of IDGX’s competitors include Quest Diagnostics Incorporated, Laboratory Corporation of America and Bio-Reference Laboratories, Inc.

5% shareholders pre-IPO
Entities affiliated with Telegraph Hill Partners 43.9%

Entities affiliated with Alma Life Sciences LLC 24.5%

Jorge A. Garces, Ph.D. 10.8%

Greg Hamilton 10.8%

Shannon Blalock, Pharm.D. 9.3%

Dividends
No dividends are planned.

Use of proceeds
IDGX expects to receive $52 million from its IPO and use it for the following:

$15.0 million for research and development, including clinical studies to demonstrate the utility of its products and support reimbursement efforts, as well as for the expansion of its IDgenetix testing portfolio;

$15.0 million to expand its commercial capabilities in selling and marketing related to its IDgenetix tests;

$10.0 million for the expansion of its facilities and laboratory operations; and

the remaining proceeds for working capital and other general corporate purposes.