Clarient, Inc.: Clarifying the Complexities of Cancer

Clarient (CLRT) provides value-added, lab-based diagnostic services in the detection, monitoring, and treatment of cancer by performing highly specialized oncology molecular testing to improve upon and individualize the treatment outcomes of this complex disease. The future of Clarient lies in its unique ability to monitor circulating cells in the blood for molecular changes that indicate the source of cancer and whether the disease is recurring after treatment. In addition, with the advent of targeted, individualized therapies for cancer, Clarient is poised to benefit by both directing and monitoring these new treatment approaches based on the cellular profiles of each patient's disease.

The Company has reported 13 consecutive quarters of sequential revenue growth and serves over 550 pathology and oncology clients with a goal of achieving cash flow break-even by the end of 2007. The Company's future growth strategy includes increased market penetration, expansion of oncology services, and differentiation of its services through the discovery of novel molecular markers in order to achieve commercial success in the form of sustainable operating profits and revenue growth. Key upcoming milestones for 2008 include achieving profitability, delivering on 50% revenue growth for the next two years, commercializing four new molecular markers, initiating clinical validation for its prostate and CTC programs, and engaging in one pharmaceutical trial. Clarient's controlling shareholder with a 60% stake is incubator firm Safeguard Scientific (SFE), resulting in careful cash management and cost controls to avoid dilution of the latter's stake. The sale of Clarient's instrument system business in March to Carl Zeiss MicroImaging for net proceeds of $10.3 million (representing a gain of $6.1 million) in order to focus on molecular diagnostics illustrates this fiscal discipline, allowing the Company to focus on its future growth initiatives in a shareholder friendly manner. The sale also includes the likelihood of future business collaborations between the two companies in the area of rare event detection.

With shares closing Friday at $1.97 per share and a market cap of $102 million, Clareint is trading at the lower end of the range where insiders purchased over 50,000 shares back in May. Shares of the Company are currently trading just above the mid-point of their 52-week range of $1.20 to $2.65 per share. Clarient has about 52 million shares outstanding with a float of just 27.5 million due to Safeguard's controlling stake. Revenue for the trailing 12 months is $45 million, resulting in a net loss for that period of $15.5 million. At the end of 3Q07, Clarient had cash/equivalents and existing debt lines of $8 million available, with $2 million of that total in cash/equivalents. In the next year, the Company's two existing debt agreements will expire, and Clarient expects to negotiate for the renewal, extension, or refinancing of these debt obligations. Also, the Company may be required to seek additional debt and/or equity financing. Management has guided for adequate liquidity to fund operations through at least 3Q08, assuming successful negotiations on the two existing debt obligations and additional financing activities, if necessary. For the nine months ended in 2007, Clarient used $9.6 million in cash for operations, which consisted largely of a $9.8 million loss from continuing operations. While Clarient faces competition from the likes of diagnostic industry giants such as LabCorp (LH) and Quest Diagnostics (DGX), the shift toward personalized medicine and the Company's niche focus on the molecular testing and characterization of cancer cells should fuel continued top line growth and lead to profitability. Clarient estimates a $900 million pathology testing market opportunity with a 10% annual growth rate. Favorable market trends in the Company's favor include an aging US population that results in a higher incidence of cancer, a paradigm shift toward personalized treatments for cancer, a focus on molecular testing & characterization of cancer at the cellular level, and novel diagnostic tests in development to direct & monitor individualized therapies. The controlling stake by Safeguard mitigates the chances for unfavorable equity financings that would dilute the ownership of existing shareholders while increasing the chances for an eventual sale of Clarient to a larger diagnostic company looking to expand its services to include individualized cancer therapies.

Disclosure: none

Comments

[bsrichard]

Is Clarient (CLRT) a value at 1.75?

[ggrail]

A screaming buy under 2