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CGI Maps Plan for Turnaround Amid Challenges

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NEW YORK (GenomeWeb) – A tumultuous April for Cancer Genetics brought a lawsuit from investors, the disclosure of accounts receivables problems in its clinical services business, and the US Food and Drug Administration clearance for a test that it expects to see broad adoption.

Most important, according to its interim CEO John Roberts, the company has embarked on a plan to transform the company to put it on a path to profitability.  

Early in April the firm said that it was evaluating strategic opportunities — including raising additional capital, acquiring other firms or complementary assets, or selling itself.

That came on the heels of the departure of its former CEO Panna Sharma in February and at least two class action lawsuits for allegedly making false and/or misleading statements and/or failing to disclose information pertinent to investors.

Around mid-April, the firm announced that the FDA had cleared its microarray gene expression Tissue of Origin (TOO) test following modifications it made to reagents and software. The firm expects to see broad adoption of its services based on this test and many others in a broad portfolio that straddles most segments of in vitro cancer diagnostics.

During the first three months of 2018, CGI's business leaders had begun developing and implementing what it calls a "transformative strategy" to improve revenues and cash collections, while reducing costs.

"As we think about the 2018 and 2019 business plan, we are highly focused on our cost structure and growing our top line," Roberts said in an interview. "We recognize that it is important to make the company profitable, and that is our primary focus."

Although the firm hasn't announced a timeline for profitability, Roberts said that he expects to provide additional details about it on upcoming earnings conference calls. The goal of the transformation program, he said, has to do with more than cutting costs. He noted that is also about "identifying our core strengths and investing in those areas that have the greatest potential to drive future growth and profitability."

The company expects to see "significant growth," for example, in its Biopharma and Discovery revenues in the US. Together, these business segments made up about 63 percent of its total revenues in 2017, and CGI has seen a significant uptake in projects related to providing diagnostic services for the discovery and development of immune-oncology drugs.

These business segments have also been bolstered by acquisitions that the firm completed and integrated within the past few years, Roberts said.

The acquisitions have built upon the firm's core competencies and expertise in providing testing services for hematological cancers from its CAP-accredited and CLIA-certified labs, enabling CGI's broad portfolio of testing, and a primary reason its partners choose to work with the company, Roberts said.

The firm provides testing on a range of platforms, including molecular diagnostic tests that use PCR, next generation sequencing, pyrosequencing, Sanger sequencing, and gene expression, Rita Shaknovich, chief medical officer of CGI, said in an interview. The firm also offers services that use flow cytometry, immunohistochemistry, and fluorescence in situ hybridization among others, she said.

"Today, we have a tremendous breadth, covering diagnostic testing across all tumor indications and not just serving community and academic center clinicians and physicians, but also working very closely with the pharmaceuticals industry," she said.

From its accredited labs, CGI provides information on diagnosis, prognosis, and predicting treatment outcomes of cancers to guide patient management. Its biopharma services customers consist of pharmaceutical and biotech companies performing clinical trials. In a second segment, clinical services, the firm provides diagnostic testing to customers in hospitals, cancer centers, and clinics. And in discovery services, its third business segment, the firm provides services to pharmaceutical and biotech companies, academic institutions, and government-sponsored research institutions.

Having competency to provide a broad range of testing has its benefits, but it also provides some challenges, such as the ability to tightly manage its businesses, Roberts said. "Because of this, we are carefully evaluating our portfolio to determine which of our commercial tests generates the most value for the company in terms of positive reimbursements, while assuring that we are continuing to work towards our primary mission of assisting the medical community in treating patients suffering from cancers."

Patient focus

The company was founded in 1999 when Raju Chaganti, now a faculty member of the department of medicine and cell biology at Memorial Sloan Kettering Cancer Center, launched CGI with a view to providing a focus on patient care. The firm initially provided diagnostic services to community-based hospitals and cancer centers in the mid-Atlantic and New England area within the US. Over time, leveraging its core competency in testing for hematological cancers, it expanded its services nationally.

Sharma joined the company in 2009 and was part of a team that brought the company public in 2013. At a price to the public of $14 per share, CGI raised $46 million from the offering. Roberts said that the company put the cash to work not only to operate the business, but also to support acquisitions.

However, one of those acquisitions, Response Genetics, has been a source of trouble recently. As part of the firm's recent transformation initiatives, it conducted an in-depth evaluation of incongruities with its accounts receivables that resulted from a disruption in collections from its clinical services business. The uncollected business was primarily related to its acquisition of the assets of Los Angeles, California-based Response Genetics, Roberts said recently on a conference call to discuss its Q4 and 2017 results.

CGI closed the acquisition in October 2015 and paid about $14 million, including $7 million in cash and 788,584 shares of CGI common stock.

Roberts said during the conference call that "claims has been denied for a variety of reasons dating back to 2016," and that led to the company to make adjustments, including writing off a bad-debt expense of $4.4 million, implementing a write-off against its accounts receivables of $1.8 million, and doing a revenue reversal of $1.6 million.

Although this was "a prudent decision that better positions the company moving forward," it had a significant impact on Q4 results, Roberts said.

However, it also triggered a default of its loan covenants with its senior lenders for which it is negotiating a waiver to amend the agreement, he said. Further, the firm's audited financial statements contained a going concern note, and the company also disclosed that it had a material weakness in its internal controls over financial reporting as of Dec. 31, 2017.

A class action lawsuit against the company filed on behalf of shareholders who purchased its shares from March 23, 2017 through April 2, 2018 seeks to recover damages and alleged that Cancer Genetics made false or misleading statements and/or failed to disclose that it had ineffective disclosure controls and internal controls over financial reporting.

The firm is continuing to collect on its claims, and it is undertaking additional measures to further streamline operations, reduce costs, and decrease its overall laboratory facility footprint, Roberts said.

The firm expects that its transformation plan and activities will have a meaningful and positive effect on its financial and operational performance in future periods, he added.

Roberts noted that the company also has a track record of implementing collaborations and acquisitions. In May 2013, for example, CGI launched a joint venture with Mayo-Clinic called Oncospire Genomics focused on developing and commercializing next-generation sequencing testing for high need oncology categories. In 2014, it acquired Raleigh, North Carolina-based Gentris, a provider of pharmacogenomics, genotyping, and biorepository services to the pharmaceutical and biotech industries, for $4.75 million of which $3.25 million was in cash and $1.5 million in stock. And in the same year, it acquired Hyderabad-based Bioserve Biotechnologies, a genomics services provider serving both the research and clinical markets in India, for about $1.9 million of mostly CGI stock and other deferred consideration.

In August 2017, the company acquired VivoPharm for around $12 million, with an eye on strengthening its position in oncology discovery, in vivo and in vitro drug development, and early-phase clinical trial testing for biotechnology and pharmaceutical companies. VivoPharm operates labs in Melbourne, Australia and Hershey, Pennsylvania, and maintains a presence in Munich that provides project management, client services, and clinical affairs.

Mapping future growth

Roberts said that in its quest for profitability, the firm expects broad adoption of services based on several tests, including its microarray-based gene expression Tissue of Origin (TOO) test. In mid-April, CGI announced that the FDA had granted a special 510(k) clearance for the test, which analyzes a tumor’s genomic information to help identify its origin, which is valuable in classifying metastatic, poorly differentiated, or undifferentiated cancers.

TOO provides extensive analytical and clinical validation for statistically significant improvement in accuracy over other methods, including immunohistochemistry (IHC), Shaknovich said.

TOO results lead to a change in patient treatment 65 percent of the time, the firm said, adding that in challenging cancers that require a second round of IHC, TOO increases diagnostic accuracy and confidence in site-specific treatment decisions.

Last year, the firm announced the validation and commercial launch of its next generation sequencing assay Liquid::Lung-cfDNA to detect lung tumor-derived cell-free DNA obtained from the plasma fraction of blood. Thermo Fisher's Oncomine Lung cfDNA assay is the backbone for the CGI assay, which runs on the Thermo Fisher Ion S5 XL sequencing system and uses Thermo Fisher's Ion AmpliSeq library preparation technology.

CGI has also launched its Complete::IO test, a 10-color flow cytometry panel to enable identifying rare and challenging subsets of immune cells within 24 hours. In January, the firm said that it had expanded the immuno-oncology test to include five new biomarkers, bringing the total number of markers it simultaneously detects to 27.

In December, the firm announced it received approval for use of Thermo Fisher Scientific’s Oncomine Dx Target Test from the New York State Department of Health. The FDA-cleared test is a next-generation sequencing-based companion diagnostic that simultaneously screens tumor samples for multiple biomarkers associated with three FDA-approved therapies for non-small cell lung cancer, including the combined therapy of dabrafenib and trametinib, crizotinib, or gefitinib.

"We now truly address and live up to our motto of being a diagnostic company that helps patients and services them from bench to bedside," Shaknovich said.

The company said earlier this month that it has engaged Raymond James & Associates as a financial advisor to assist with evaluating options for the company’s strategic direction, including a possible sale.

 

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