written by reader LexaGene (LXXGF) – Molecular diagnostics company with great upside due to high margin “razor blade” business model

By OSUfball, January 14, 2021

This is a molecular diagnostics company that has been mentioned here a few times, as it has been teased in a few newsletters. I have been invested in this company since 2019. I increased my position greatly after I saw a free youtube interview where Dr. KSS was interviewing the CEO. (I did not know Dr. KSS had invested in this company before I saw the video). I came away very impressed by the CEO, Jack Regan. He had previously worked at Lawrence Livermore National Labs where he helped invent and patent the technology that is being used in the MiQLab. LexaGene has an exclusive license with Livermore for use of these patents. This company makes a device called the MiQLab which performs quantitative PCR that can test for 27 pathogens, all in one hour. Originally, the company had planned to focus on the veterinary diagnostics market but once Covid-19 appeared they decided to also go for FDA EUA to test for Covid-19. They are conducting a trial at Dartmouth Hitchcock Medical Center right now and anticipate submitting the results to the FDA sometime in February. The FDA usually takes about 2 weeks to get back with its decision. The stock has been steadily rising the past 2 weeks and today made an all time high. I think this is only the beginning as the anticipated FDA EUA for Covid-19 will really boost the share price. I have written an extensive blog post on this and published it on Seeking Alpha but I will cut and paste it here (I am allowed to do that as I did not grant Seeking Alpha exclusive access).

Summary
LexaGene’s MiQLab provides gold-standard, quantitative PCR results at the point of care, while testing for 27 pathogens, all in 1 hour vs. 1-3 days for PCR at a lab. Set to be a market leader in veterinary diagnostics. 1 hour PCR test results for the LexaGene MiQLab vs. 4-5 business days for sending to outside lab. Recent purchase order from a large multinational biotechnology company illustrates the vast potential in the open access market.

COMPANY PROFILE

LexaGene Holdings Inc. engages in the research, development, and commercialization of an automated genetic analyzer called the MiQLab for pathogen detection in veterinary diagnostics, human clinical diagnostics, food safety testing, and other life sciences markets (open access). Its automated pathogen detection platform is used at the site of sample collection (point of care), which offers unprecedented ease-of-use, sensitivity, and breadth of pathogen detection. The company is headquartered in Beverly, Massachusetts, USA.

BUSINESS DESCRIPTION

LexaGene (OTCQB:OTCQB:LXXGF) (TSXV:LXG) (FRA:5XS2) was founded in 2016 by its CEO Dr. Jack Regan, who also invented the technology that is being advanced by LexaGene when he worked at Lawrence Livermore National Laboratory. The technology is suited for rapid pathogen detection and can be used across a variety of markets, including the detection of the 2019-Novel Coronavirus and its variants.

TECHNOLOGY

MiQLab is a system that has the ability to screen for 27 pathogens at once while also providing higher confidence in results. Polymerase Chain Reaction (PCR), is considered to be the gold standard in pathogen detection and pathogen diagnostics. LexaGene automated the PCR process and moved it to the point of care (POC) while providing quicker results. The automation of PCR could increase the effectiveness and speed of the detection of new pathogens like COVID-19. Also, as PCR is currently done manually, the automation process would erase the need for highly trained personnel to perform tests and would steer clear of any inefficiencies due to human error. The company has claimed that unskilled workers can be trained in as little as one hour to operate the MiQLab, and that there is no complex work involved like pipetting of fluids.

What MiQLab technology does:

Extracts and purifies genetic material
Assembles tests
Performs PCR
The innovative technology brings reference laboratory quality to the point of care: border crossings, stadiums, cruise ships, airports, hospital emergency rooms, schools, etc.

Advantages of MiQLab:

1 hour test results (vs 1-3 days)
Replaces complex workflows
Non-technical workers can operate. No pipetting required
Quantitative – exact amount of virus, bacteria, or fungus known

MiQLab vs Traditional PCR:
MiQLab: Automated, small footprint device, run by unskilled labor.
Traditional PCR: Manual, fully equipped lab needed, run by skilled labor.

Intellectual property:

4 patents granted. Exclusive license to market its microfluidic technology from Lawrence Livermore National Laboratory. US Government spent over $20M on predecessor instruments.

CURRENT COVID-19 TESTING

Most tests are singleplex (only testing for COVID-19) and only give a simple yes/no answer whether the virus is present or not, so one can never know if someone has something else such as the common cold or influenza virus. Also, the severity of the viral load cannot be determined.
MiQLab tests are multiplex and quantitative – the sample is tested for 27 different pathogens. Ex: Person comes in feeling sick with cold and flu symptoms. One can know whether the person has an active COVID-19 infection, the new UK strain of the COVID-19 virus, rhinovirus, influenza, or RSV, and the precise viral load present, all in 1 hour.

ADDRESSABLE MARKETS

MiQLab has the potential to penetrate the following markets. Having a current market cap around $80M, we consider LexaGene to be significantly undervalued.

a. Veterinary ($2.2B by 2024)
25,000 pet hospitals in the US
90M dogs and 95M cats in the US
No in-hospital infectious disease testing instruments
Improve use of antibiotics by knowing antibiotic resistance
Improve wait times and better decision making

b. Food Safety ($23.4B by 2025)
48M illnesses due to contaminated food every year in US
1.1B tests are run each year
New FDA Food Safety Modernization Act requirements: focus on preventing foodborne illness, thus more testing will be needed
Avoid costly recalls and brand damage such as what happened to Chipotle with E.coli in 2015. The incident resulted in a ~$6B loss in market cap

c. Clinical Diagnostics ($12.9B by 2025)
18.3k reference labs in the US
Prevent future outbreaks – well prepared for the next pandemic
LexaGene was able to make its COVID-19 test panel in 1 week after the CDC issued guidelines
COVID-19 ($5.2B in 2020)

d. Open access markets (>$20B)
Open access allows assays to be customized for the latest variants of a pathogen within days after sequencing. Other automated RT-PCR solutions on the market use custom manufactured cartridges which take 2-3 months to produce.
-Pharmaceuticals, academic labs, biodefense, water safety testing, cannabis, agricultural pathogen testing, genotyping markets
Ex: Recent purchase of a MiQLab system by a multinational pharma to test for pathogen contamination in bioreactors making biologics

STUDIES
Beta testing results:
98.2% concordant with reference labs
Detected multiple pathogens at once and antibiotic resistance factors

COVID-19 study at Dartmouth-Hitchcock Medical Center in New Hampshire:
Announced start date of December 30, 2020. The results of which will be submitted to FDA for Emergency Use Authorization (EUA) in a point-of-care (POC) environment between February and March 2021. The FDA typically gives its decision in approximately two weeks on these EUA applications.
Dr. Jack Regan, LexaGene CEO states, “Our open-access technology is unlike any other on the market today, as it could be configured quickly to detect new variants, such as the recent UK variant (aka SARS-CoV-2 VUI 202012/01). Since our system is capable of high multiplexing and is microfluidic in nature, it is easy to add newly developed PCR tests to detect variants that are either poor matches to the vaccines or are resistant to any developed therapies, which is critical to help get this pandemic under control”

RISK MANAGEMENT
1. Operating History
LexaGene is in the development stage and will be subject to risks associated with early stage companies, such as uncertainty of market penetration, uncertainty of revenues, uncertainty of profitability, continuing need to raise additional capital
2. Failure to manage growth
The company’s ability to manage growth will depend on a number of factors such as, but not limited to:
Expanding internal financial controls so that it can maintain control over operations
Building a sales team to keep costumers informed regarding the technical features
Attracting and retaining qualified technical personnel in order to continue to develop reliable and flexible products to meet customer needs

BUSINESS MODEL
Recurring revenue stream (“razor blade” business model):

MiQLab draws from a reagent panel using microfluids to perform tests:

Disposable sample preparation cartridge
High gross margin per sample tested
Single-use cartridge used every time a sample is processed to purify genetic material from the sample:

Each panel allows for each sample to be screened for 27 targets plus controls
Open-access feature allows for customized testing
The consumables will be manufactured at extremely low cost and would furnish high gross margins (estimated to be 80-90%) from a recurring revenue stream.

BUSINESS OUTLOOK

The company is aiming to work with the FDA for an Emergency Use Authorization (EUA) to proceed with COVID-19 testing. To provide an appropriate example of what an FDA approval could mean for a small developing company such as LexaGene, we can look at Co-Diagnostics (Nasdaq: CODX), that went up from just under $1.00 per share to around $3.50 upon an expected FDA approval, and later skyrocketed to $17.60 upon the actual FDA approval, and even reached irrational record highs of $30.

Just like any biotech company in the development stage, any good news could see the per share price rapidly increase, just like what we saw happened with CODX. LexaGene’s share price is a bargain at this level (~$0.70), and has the potential to become a $4B-$5B market cap company if growth is managed well.

As we saw from the technology section, LexaGene’s innovative technology provides significant value for potential buyers at competitive prices. This is a notable advantage for the company as it could limit the need for advertising and marketing expense, while the product will sell itself, especially in the veterinary diagnostics market. The company will have a significant advantage in veterinary diagnostics, where current lab samples must be sent to an outside lab where it takes 3-5 days for results, while the MiQLab can provide results at the vet’s office in 1 hour. The cost per test is also expected to be much less for the MiQLab compared to sending the test to the outside lab. In July 2019 LexaGene ran a beta trial of its LX2 device (predecessor to the MiQLab) at Massachusetts Veterinary Referral Hospital in Woburn, MA. Mass Vet is one of 24 hospitals owned and operated by Ethos Veterinary Health. The trial was an overwhelming success. Dr. Sam Stewart, Commercialization Scientist Fellow at Ethos Veterinary Health, stated, “LexaGene’s analyzer is really going to be a game changer. Our team’s enthusiasm for this technology has been so overwhelming, we’ve asked LexaGene to allow some of our other hospitals to beta test the technology.” Video testimonials from the veterinary team can be viewed on the LexaGene website. On December 15, 2020 Ethos placed a purchase order for a MiQLab. Dr. Chand Khanna, DVM, PhD, the President of Ethos Discovery, comments, “We are very excited to purchase a MiQLab system and look forward to using the validated test panel to quickly diagnose infections. In veterinary health, there are many unmet clinical diagnostic needs where LexaGene’s technology can be of great value.” He continues, “In 2021, we will collaborate with LexaGene on expanding the MiQLab’s capabilities to pursue additional diagnostic innovation in areas that are important for Ethos.” We anticipate Ethos will purchase many more MiQLabs in 2021 and create its own test panels to take full advantage of the open access capabilities of the machine.

On November 18, 2020 the company announced it placed a MiQLab system at the University of Pennsylvania’s School of Veterinary Medicine as part of its Early Access Program in order to obtain real world feedback on the device. A peer-reviewed paper analyzing the results produced by the MiQLab is expected to be published in a veterinary journal. The company anticipates using these results, in effect a stamp of approval from one of the leading vet schools in the country, to help its sales team sell the MiQLab to vets.

The open access market is the most intriguing one, as the use cases are vast. The MiQLab is capable of accepting the user’s own PCR assays for improved workflow and cost savings. Recently, a multinational pharmaceutical company came to LexaGene to see if the MiQLab could help detect pathogen contamination in its large bioreactors used in producing biologics. After several months of due diligence, which included multiple visits to LexaGene’s headquarters, this pharma company purchased a MiQLab system for a trial run. If the company is satisfied, LexaGene anticipates several more MiQLab purchases. LexaGene has now decided to pursue this market of providing MiQLabs to pharma companies in order to detect contamination in bioreactors. This was a market that the company hadn’t really anticipated, but the market came to the company seeking answers to problems.

The price per unit for MiQLab will be around $25,000 while the initial cost of manufacturing per unit is estimated to be ~ $20,000. However, the manufacturing cost could easily be lowered to $17,000 as volume increases and eventually $12,000-$15,000 from value engineering down the road.

Initial manufacturing capacity is ~ 20-30 units/week that could be scaled up to 50-100 units per week (from only one manufacturer) for the technology and 2500 units/week of consumables (reagent panel) that could later be scaled up to 25 to 50k per week. The company has contracted with LaunchWorks to manufacture the reagent panel for the MiQLab.

One thing we need to emphasize is the fact that the company has been reliant on equity financing in the past. However, the company recently stated that it does not anticipate any financing will be needed over the next 12 months, as it raised approximately $10M on a bought deal basis with Canaccord Genuity Corp and Industrial Alliance Securities to add to its existing $3M cash balance. The offering closed on September 9, 2020. The company has US $9M in its treasury as of December 2020. The current burn rate is between $450k-$500k per month.

The company has also stated that it anticipates uplisting to NASDAQ in the future once listing requirements are met.

FORWARD LOOKING REVENUE MODEL (Can’t paste it here due to formatting of tables not possible here)

For our forward looking revenue model, we used the following assumptions:

Cost per unit for the machine is $20,000 and would be brought down to $15,000 as volume increases
Price per unit for the machine would be around $25,000
Manufacturing capacity for the machine first quarter of sales is 120u/month and later on 500-800u/month as manufacturing process will be outsourced
Consumables are sold at around 85% gross margin
Manufacturing capacity for the consumables is 10k units/month and later on 250k units/month as manufacturing process will be further outsourced
First Q of sales would see around 150 machines manufactured and sold
As manufacturing capacity takes a big jump, it will be able to meet demand and therefore the rapid growth of sales in the early stages of commercial sales
Using an extremely conservative assumption that the demand will flatten by 2022 as most potential buyers already bought the technology, the revenue will be driven by the consumables, which are extremely high margin as we can see from the gross margin% and EBITDA% in any Q in 2022
We assumed that SG&A expenses will increase slightly as direct sales expenses will increase as revenue increases

LexaGene’s business model allows itself to bring recurring revenues in at a high margin, which also allows it to have a big competitive advantage in terms of pricing the technology.

We believe the company has the potential to easily become a $1.05B market cap company in the near term (next 18 months), and a $5B+ company eventually. Using comparable company analysis, without taking into account further dilution, we are estimating a price range between $5.44 and $9.52, with room for far more upside. We are of the opinion that an FDA EUA for COVID-19 would drive the share price to the high end of this range, and therefore we believe that $9.52 is a fair price for the shares. With such an advantage in terms of its technology and pricing, we anticipate large suitors to notice LexaGene. In the current laboratory diagnostics space, the large companies tend to acquire smaller ones (Ex: Danaher acquired Cepheid for $4B in 2016) rather than focus on internal R&D.

SNAPSHOT ANALYSIS

Fair value estimate: $9.52
Uncertainty: High
Value: Significantly undervalued. Long-term growth stock
Disclosure: I am/we are long LXXGF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not registered as an investment advisor in the United States or in any other jurisdiction. Information in this article is presented “as is,” without warranty of any kind – whether express or implied. I make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and I do not undertake to update or supplement this article or any of the information contained herein. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. I have not received any form of compensation from the companies that I have written about in this article, nor have I received any form of compensation from company affiliates or other company shareholders.

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.

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Adam Reynard
Member
Adam Reynard
January 15, 2021 8:20 am

Thanks for posting. Excellent !!

Interview Dr Jack Regan
1/13/21

https://www.youtube.com/watch?v=Vg696sPc9RI&feature=youtu.be

Another interview

https://www.youtube.com/watch?v=enO_8PB5EV8&feature=emb_logo

Cleveland
Irregular
January 17, 2021 4:50 pm
Reply to  Adam Reynard
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Cleveland
Irregular
January 15, 2021 2:50 pm

Lexagene’s machine cost for the MiQLab is approximately $17,000. Cost: parts + labor = cost of MiQLab. Total of 296 parts in the MiQLab. Labor estimates are 15% – 20% of the total cost

Lexagene’s selling price for the MiQLab is approximately $20,000. With 1800 samples processed a year one machine will generate $ 180,000 revenues at $ 100 a test. The average pathogen machine is $70-80 thousand in the industry. Thus Lexagene has a huge advantage in price.

Highly profitable (over 90%) projected retail price by category -Human diagnostics $100+ Veterinarian $ 75 Food Safety $ 27 Water $ 27 Open Access $ 50 – $150

Razor Blade Profit Model: each test cartridge costs a few dollars to produce as the technology is in the machine, each test requires a new barcoded cartridge, patented. Selling price per test will be circa $ 27-150 dependent on volume and market. Each machine sold should do around 1800 tests per annum. Massive profit opportunity per machine sold.

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Last edited 1 month ago by Cleveland
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t34classic
Irregular
January 24, 2021 6:31 pm

These are my thoughts I have some knowledge with analytical instrumentation. Reading through their last filing with a management discussions they mentioned a couple of areas that caused me some concern: They seemed to be uncertain about cleaning procedures between runs and how to deal with carry over. They did not seem to have a good handle on running samples in different matrices. The matrix would be the solution the pathogen is embedded in. As in they have not had any experience running fatty solution IE milk. Technical difficulties that they should be able to find solutions for but at what cost to efficiency.

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