Interpace Biosciences ISIN: US46062X3035 Forum: Aktien Thema: Hauptdiskussion

Summary Imminent positive catalyst in 1Q20 with local coverage decision to nearly double Medicare reimbursement on largest franchise accounting for ~65% of legacy sales - not in estimates. Trading at currently a mere 1x '20 EV/sales versus 5-10x for cancer diagnostics comps, there is a lot of room for multiple expansion. Annual growth rates of 30%+ justify higher multiples. BarreGEN's $1-1.5 billion market opportunity represents a substantial upside into the $60+ range longer term. More data, reimbursement, commercialization, and partnership are potentially coming this year. Building presence in artificial intelligence and data driven analytics creates open-ended blue-sky opportunity. AI is likely the future direction of healthcare among other sectors. 66% now owned by two healthcare PE firms at a cost basis of $6.00 who are motivated to actively realize a return. Dilution incurred but, importantly, no more financing overhang. The opportunity in Interpace (IDXG) represents highly compelling upside at a very favorable entry. At about $70 million market cap (fully diluted pro forma for the recent financing), just a move to lower end peer multiples can almost triple the value of the company to be conservative even accounting for the preferred shares and warrants in the capital structure. In my view, investors may be overly fearing the reverse split (effective today) and have grown weary of the continued capital raises, dilution and cash constraints. I believe these concerns can now fade away as I will discuss. Cancer molecular diagnostics for screening and treatment planning using genetics has generated considerable industry and investor interest as we have seen acquisitions of Foundation Medicines (FMI) and Genomic Health (GHDX) go for up to 10x revenue. Companies like Natera (NTRA), Exact Sciences (EXAS) and Invitae (NVTA) have all returned over 100% in the past year or two. The involvement of now two dedicated healthcare private equity (PE) firms brings in highly motivated shareholders that want a target return and exit, a much better situation now than the previous 80%-plus retail holder composition prior to Ampersand's involvement last year. They likely see an apparent path for value creation in Interpace. Post-reverse split, institutions restricted from <$5 penny stocks may quickly acquire the outstanding public float of 3.8 million shares when they see two thirds of shares owned by motivated activist (who own 7.9 million equivalent preferred shares convertible to common equity or 66% ownership). Add to this the catalysts of a big increase in reimbursement for lead product ThyGeNEXT and substantial opportunity in BarreGEN and predictive analytics/artificial intelligence and we reach $60+ potential. I'll keep this brief and hit on the points that make me interested in this potential highly lucrative investment. (for simplicity in calculations preferred shares are equivalent to common)

Interpace Biosciences specializes in cancer diagnostics tests using next-generation sequencing and micro-RNA to rule out cancers, to perform early detection, or to aid in treatment course planning. 65% of the legacy IDXG revenue is from thyroid tests and the other 35% is from lung, pancreatic and esophageal tests (see Figures 1 and 2) with ample reimbursement. Cancer diagnostics overall is a very attractive space as it is a direct application of the latest in genetic analysis/sequencing to find cancers early to both prolong life and save dollars in avoiding incorrect treatment. The company has solid coding and reimbursement for its current diagnostic tests from Medicare and large insurers including United Health, Blue Cross Blue Shield, Aetna (AET), Kaiser, Cigna (CI), etc. (Figure 1) Generally reimbursement has not been a problem and is in fact limited to only a 15% cut per year in Medicare (10-K page 28) which is relatively small compared to the roughly 210% increase its largest test just had proposed. Figure 2Source: Interpace November Presentation In July 2019, Interpace acquired the Biopharma services unit of Cancer Genetics (CGI) for $23.5m. CGI generates about $16m in revenue a year (2020 projection). The combination allows them to offer their expertise to assist biopharma in developing tests, particularly cancer, for personalized medicine. The revenue comes at a lower margin but is fairly visible with bookings set for next year. The company believes it will reach cash break even faster with this deal. CGI also gave them Response Genetics and solid tumor data to augment their push into data analytics, libraries and artificial intelligence. Importantly, this deal brought in the involvement of the first PE firm Ampersand Capital at an initial cost basis of $0.80 ($8.00 post split).

BarreGEN's Underappreciated Potential Here's a little more on the molecular esophageal assay that excites me. I believe it is just starting to get noticed as the already FDA approved test has only generated nominal sales thus far as data to support reimbursement just started trickling in last year and we have more studies ahead. BarreGen for stratifying risk and determining the course of Barrett's esophageal cancer intervention is a potentially transformative product soft launched in 2018 (i.e. some coverage for investigational use) that addresses a large $1-1.5 billion market (see Figure 2) and is now collecting supporting clinical data to report in 2020 to support commercial launch and reimbursement. BarreGen alone could make IDXG an investment that could realize multiples of share appreciation as its market size is larger than all 3 other indications combined (Figure 3) and has no marketed competition from genetic tests for risk stratification. Currently, there is no test to risk stratify what patients need surveillance after a Barrett's diagnosis or not. Per the company, 3.3 million patients per year with Barrett's Esophagus are test candidates as this condition increases the risk of fatal esophageal cancer (only 19.9% survival rate over 5 years) by 30x, so the urgency is there. The realization of this upside can start with data this year- a significant catalyst which is partially why the stock moved up almost 15% on the UNC collaboration announced this month with data later in 2020. There are no marketed genetic mutational load tests for Barrett's esophagus risk for cancer, only home-brew type tests, so this would be a first in class test in a large market. Early data in recent publications look quite promising at 100% sensitivity and 85% specificity for progression to more severe high grade dysplasia at certain mutational load levels, albeit small sample sizes. Just a 10% penetration at the low end of the $1-1.5B market opportunity could equate to $100 million of sales in 5 years, not unreasonable with no competition. Just using Thyroid testing as an example, competitor Veracyte reached 25,000 tests in 5 years post 2011 launch (even with ThyroSeq on the market) before ThyGenX launched in 2015 (Veracyte release). At $2,500 net revenue per test 25,000 tests translates to $63 million in a market one third ($350 million) the size of BarreGen's $1 billion market. This not so unlikely scenario of $100m sales could even take us as high as $80 per share just on low end market multiples of 5x in 5 years. Using the following calculation: ($100m of sales + existing revenues of $50m growing 15% a year for five years X 5 multiple / 11.7m shares+1.1m warrants)=($100m+($50m(1.15)^5) x 5)/ 12.8 million= $79 per share. If the test gains traction, the company would get much more than a 5x multiple at that point in my view. The announcement of a commercial partnership that could happen sometime this year would be positive news as well.

ThyGeNEXT Reimbursement to Possibly Double or More On December 17, 2019, the company announced that reimbursement (press release) for its biggest selling test ThyGeNEXT received a draft local coverage decision (LCD) to increase reimbursement by $2,400 over previous coverage. This decision by Medicare contractor Novitas could be *** final sometime in 1Q per press release and covers all Medicare. For further background, the thyroid franchise of ThyGeNEXT/ThyraMIR makes up 65% of the legacy Interpace revenue (from quarterly conference call). This reimbursement was cut July 2018 and is now proposed to be bumped back up again. As shown in Figure 1, the increase brings ThyGeNEXT to the reimbursement levels of Interpaces' other tests. Importantly, it seems likely to become final since it makes sense to increase reimbursement as the higher level brings ThyGeNEXT more inline with leading competitor Afirma which is ~$5,000 for a comparable panel if not more. Both inline reimbursement and a much higher positive predictive value (recent study) should set Interpace up for share gains as well. I believe some investors may be waiting on this reimbursement to finalize before getting too excited. The chances are high in my view. The impact to numbers could look like this: The average net price per ThyGeNEXT test is $1,100 (Figure 1) and Medicare is roughly 40% of thyroid tests as noted by the company (company press release). If we take Interpace's $34m 2020 estimate for the legacy (ex-CGI) and apply 65% to get the Thyroid franchise contribution and multiply by 40% Medicare percent we get about $8.8m revenue as Medicare. If we assume Medicare is paying the net (Figure 1) for simplicity we get Thyroid combo test of ThyGeNEXT and ThyRaMIR at $3100. If we increase this amount by $2400 we get $5500 per test. We can multiply $8.8m by the ratio of prices or $5500/$3100 and we get ($8.8m x $5500/$3100) =$15.7m for new reimbursed Medicare contribution. This is an incremental $7m to annual estimates just on Medicare. Commercial payors often follow Medicare reimbursements and in many cases exceed them if coverage is granted. I do not see why this can't happen here. While an increase in reimbursement will take a year or two to flow through to most payors, it would be highly additive to company forecasts/street numbers. If commercial insurers (the other 60% of payors) also adopted the change at just Medicare rates today ex share gains we could get about $7m x (60%/40%)= $11.4m of total revenue from the reimbursement bump which is meaningful as it is not in numbers and high margin revenue (an incremental 30% over 2020 legacy revenue estimates). Net realized reimbursement can be complex to calculate exactly with payor mix, gross-net, particularly in this case considering the use of ThyRaMIR in combination after ThyGeNEXT in ~80% of cases, for illustrative purposes, the order of magnitude of reimbursement should result in a significant bump in revenue and importantly reduce cash burn.

Building Artificial Intelligence and Data Driven Analytics for the Long Term There is another under-the-radar benefit from CGI that may have escaped investors focusing on the biopharma service. CGI may augment a potential green field opportunity in data collection and artificial intelligence (AI) as the Response Genetics component of CGI with solid tumors adds to data on thyroid and pancreatic cancer. There is a long term vision (CEO Jack Stover mentioned five years in last call) of the company becoming more of an AI or data driven company particularly with the collaboration last July with Helomics to build AI-driven thyroid cancer models, announced just 2 weeks after the CGI deal, very interesting timing. "All that being said, and I've said this before, and I firmly believe it, that as we move forward and you look at us in five years, we may be more of an AI driven or data driven company than we are an assay driven company that part of the business is changing quickly." --CEO Jack Stover on 3Q19 conference call Undoubtedly, AI could dominate treatment paradigms and whoever has the data and algorithms will become increasingly valuable. Here's some more AI info in an article on a recent fund launch. I would note upstart Tempus has already succeeded in raising a whopping $560 million in 4 years and recently partnered with CVS/Aetna in a cancer venture. As of May 2019, Tempus had a valuation of $3 billion, just incredible, after raising another $200 million and at last check only $7.5 million in annual revenue. Tempus focuses on creating a library of clinical and molecular data to drive cancer treatment and research--something Interpace would be in the sweet spot to do for its oncology focuses. There is literally nothing in Interpace's valuation for this despite its substantial amounts of data in thyroid, pancreatic, lung cancers and now solid tumors. Even a fraction of Tempus' valuation would vault Interpace into the stratosphere in stock price. The combination of Helomics/Interpace sounds a lot like Tempus (Artificial intelligence combined with data libraries in oncology). I wouldn't be surprised if Tempus IPO'd for a unicorn-type valuation and then immediately healthcare AI in cancer becomes a hot area and so would companies like Interpace with mountains of data from years of clinical experience. In fact, it might be the only pure play public comp at that point along with virtually unknown Predictive Oncology (POAI) which owns Helomics. It is hard to put a price or valuation on this seeing Tempus is $3 billion with $7.5 million in revenue but it would be massive upside obviously for IDXG. Interpace would also be able to cross sell its data for drug development on the Biopharm side. For now, I think there are plenty of catalysts near term and immediate concerns like streamlining and integrating CGI will take a precedent. I am highly encouraged Ampersand and 1315 Capital are involved near term to get through that before the AI aspirations can take off. I consider this AI/data driven concept to be a thick layer of icing on the cake that takes us into high IRR territory.