CUR.TO: DiagnoCure's Q2 2012 Financial Results

Zacks Small Cap Research

By Brian Marckx, CFA

On June 6th DiagnoCure Inc. (CUR.TO) reported results for the fiscal second quarter ending April 30, 2012.  Revenue of $1.1 million was well ahead of our $328k estimate as a result of ~$820k more than anticipated Other Revenue, partially offset by lower than modeled Progensa PCA3 royalties. 

Other Revenue ($890k A vs. $70k E) benefitted from $503k received under the agreement with Gen-Probe whereby Gen-Probe pays DiagnoCure $503k annually on January 31 until Progensa PCA received FDA approval.  As Progensa received FDA approval in February 2012, DiagnoCure was able to book the full $503k in Q2 2012 (which we did not model).  Also running through Other Revenue was $387k (vs. our $70k estimate) under the R&D contract with Signal Genetics.  As a reminder, the mid-2011 transaction in which Signal acquired CUR's clinical lab and exclusive rights to Previstage GCC also calls for DiagnoCure to be paid $2.5 million related to funding of R&D projects, including for studies related to the Previstage test (including phase 2 of the VITAR study) as well as for continued development of a lung cancer test.  Payments under this R&D agreement may be somewhat irregular quarter-to-quarter.

Meanwhile, royalties from Gen-Probe related to Progensa PCA3 came in lower than our estimate ($169k A vs. $228k E) for the second consecutive quarter.  We have since made some slight downward revisions to this line item in our model to account for a later ramp in sales.  However, as we noted in our note on May 1st, Hologic's (HOLX) impending acquisition of Gen-Probe (GPRO) could be a positive development for DiagnoCure and help spark a greater rate of sales growth of Progensa PCA3.  Progensa PCA3 could be a natural fit with Hologic's major presence in cancer diagnostics and treatment.  Hologic's sales force will also have a substantially larger presence than did Gen-Probe's.  The other major potential catalyst to growth of Progensa is the recommendation by the U.S. Preventative Services Task Force (USPSTF) against the use of PSA testing.  The USPSTF issued a draft recommendation in late 2010 and its final recommendation statement against the use of PSA testing on May 21, 2012. 

Q2 net income and EPS were ($270k) and ($0.01), slightly better than our ($961k) and ($0.02) estimates as a result of the beat in Other Revenue as detailed above.  Cash balance (including investments) stood at $7.4 million at 4/30/12, compared to $7.8 million at 1/31/12.  We continue to expect cash burn to be between $2 million and $3 million for the full fiscal year 2012. 

We have made some very moderate adjustments to our model, mostly reflecting an assumed slightly flatter ramp in Progensa PCA3 royalties.  This has resulted in relatively minor changes to our EPS estimates, especially over the longer term.  We are maintaining our Outperform rating and $2.25/share price target.           

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