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In Summer Doldrums, Dx Shops Lose 13.4 Percent in Market Cap Since May

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It’s been a cruel summer for publicly traded molecular diagnostic companies.

The sector of 111 companies lost 12.5 percent of its combined average market capitalization in July, and 13.4 percent of its market cap during the three months ended July 31, according to a market report issued by Pacific Growth Equities. By comparison, the space fell 9.5 percent for the first seven months of the year.

But the fall-off is not likely the result of recent terror alerts or weak recent jobs data. “It’s the summer doldrums,” said Adam Chazan, an analyst with Pacific Growth Securities. “This is an environment [in which investors] … take catalysts, regardless of whether they’re positive or negative, and use them as an excuse to sell.”

And though market cap valuations among diagnostic companies declined less severely than their drug-discovery counterparts, tool- and services-oriented companies such as Sequenom and Illumina that have been taking aim at the molecular diagnostic marketplace should make note of the seasonal decline.

“It’s hard to make a case to own health care in general through the summer,” Chazan said.

Indeed, the 414 diagnostic and pharma shops tracked by the report were hit significantly harder than the broader market indices many of them occupy: The combined market-cap average for the 153 companies residing on the Nasdaq Biotech Index fell around 9.5 percent in July, 12.1 percent for the three months ended July 31, and 5.1 percent since January, according to the report.

Meantime, the 17 companies on the Amex Biotech Index shed 7.6 percent of their combined average market cap in July, 7.8 percent between May and July, and just 1.6 percent since January.

The report, which Pacific Growth produces monthly, chronicles the market caps of 111 publicly traded molecular diagnostics companies and 303 publicly traded drug-discovery firms. (The report also tracks the market caps of 209 medical devices companies, services shops, and “ancillary” companies).

Diagnostics on balance performed better than therapeutic companies since January, but the sectors were equal during July, each contracting on average 12.5 percent, the report said. Chazan and others in the industry said this is likely because diagnostic companies are “generally lower-risk propositions” than pharmas: Investors understand there are fewer companies in the space, and it’s relatively easier, less expensive, and less time-consuming to market a molecular diagnostic than it is to launch a therapeutic.

Pacific Growth covers nine of the 111 diagnostic companies and 18 of the 303 drug makers listed in the report. The combined average market cap for the nine molecular diagnostic companies fell 15.6 percent in July to $1.5 billion [see table, previous page]. The combined average market cap of the 18 drug-discovery companies fell by around 20 percent to $1.3 billion.

“The businesses are fundamentally different, which is why [diagnostic] stocks don’t behave as badly [as drug makers] going into the summer,” Chazan said.

Year-over-year data were not immediately made available.

Separate But Unequal

To be sure, not all diagnostics companies are created equal. The market cap for only one of the nine shops that Pacific Growth covers — the micro-cap Third Wave Technologies — grew in July by more than 16 percent to $206 million.

“So far for the first two quarters of the year, [Third Wave] has exceeded expectations significantly,” Chazan told Pharmacogenomics Reporter this week. “The business that had the least visibility has been coming through above expectations, and they’ve effectively transformed that business from a … SNP-based life-sciences tools business into one that is really firmly focused on the clinical diagnostics arena.

“They’re showing they’re getting traction,” he added. “The numbers bear that out, and they had a good showing at [the American Association for Clinical Chemistry], where there was a lot of buzz about what the company is doing, about its products, and we expect to see continued good things from them for the balance of the year.”

Third Wave in late July said second-quarter revenues swelled to $12.6 million from $8.8 million in the year-ago period. Sales of the company’s flagship Invader systems represented the bulk of the revenue growth, contributing $12.5 million to the top line. By contrast, $8.5 million worth of Invader units were sold during the second quarter of 2003, the company said.

Revenue from licenses and royalties, and grants, for the three months ended June 30 were $40,000 and $48,000, respectively, compared with $28 million and $24 million, year over year, respectively.

R&D spending increased to $3.4 million from $2.9 million in the second quarter last year, while net loss shrank to $10,000, or $0.0 per share, from $2.2 million, or $.05 per share, one year ago.

Third Wave, based in Madison, Wis., said it had around $69 million in cash, equivalents, and short-term investments as of June 30, and raised its year-end revenue guidance to $42 million from $39 million.

On the opposite end of the spectrum is Ciphergen, which lost 44 percent of its market cap in July. Investors punished the Fremont, Calif., company during the month after it reported a $4 million year-over-year decline in second-quarter revenues. In addition, Merriman Curhan Ford last week downgraded Ciphergen stock to ‘sell’ from ‘neutral,’ one month after Piper Jaffray downgraded the shares to ‘underperform’ from ‘outperform.’

“The deal is, the old rules of the game still apply,” said Chazan, who covers Ciphergen. “If you do not deliver on your numbers, people are going to take their pound of flesh, like they did with Ciphergen.

“When your core business doesn’t look like it’s healthy, it doesn’t give people the confidence to hold the shares,” he added. Chazan said he believes “management [at Ciphergen] understands that, and needs to right the ship before the stock will do the same.”

Pacific Growth has rated the stock as ‘hold’ since the investment bank began covering it in January, Chazan said.

—KL

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