Private Placement a Shot in Arm for Biotech Firm

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Money begets money for cancer diagnostic company Response Genetics Inc. in Lincoln Heights.

The company raised $7.8 million in a private-equity placement announced Feb. 2. Since then, news that investors paid $1.50 a share, a 27 percent premium to the stock’s trading price at the time, has inspired a further rise in stock price.

Last week, Response Genetics ranked as the top gainer on the LABJ Stock Index with an increase of 43 percent to close at $1.69. (See page 32.)

Response Genetics makes test kits that help doctors decide based on genetics which cancer treatment is best for an individual. Its products include tests for lung, colon and gastric cancer.

Since its founding in 1999, the company has never achieved profitability and accumulated operating losses of $43.8 million as of its 2010 annual report. In November, the company received a warning from Nasdaq for failing to maintain market capitalization above the $35 million minimum for 30 days.

Barely a month later, Thomas Bologna, a veteran executive who has run several public and private biotech firms, was named chief executive and given the charge to accelerate sales.

Bologna told the Business Journal last week that to accomplish that, he will use the fresh capital to expand the sales staff, hire a vice president of marketing and install a lab management software system.

“This company has solid technology but really needs to move into the commercialization phase,” he said. “I have turned around companies before, so my background fits this challenge to a T.”

Bologna previously served as an executive at Quorex Pharmaceuticals Inc. in Carlsbad and Scriptgen Pharmaceuticals in Medford, Mass., among others.

Rod Ryanovich, owner of Raygent Associates, a biotech management consulting firm in Manhattan Beach, said he was impressed by the way Bologna took control and quickly secured a capital infusion. But for the company to reach profitability, revenue must increase quarter over quarter.

“I consider this a value stock,” said Ryanovich, who owns shares in the company. “If they keep increasing revenue, the increase in value should be commensurate.”

Kevin DeGeeter, director of health care research at Ladenburg Thalmann & Co. in New York and the only analyst who follows the company, sees the private placement’s 27 percent premium as an endorsement of the company’s leadership team.

“The strong performance of Response Genetics’ stock price is a reflection of investor support for the company reinvesting in growth,” DeGeeter said. “The hiring of an experienced new CEO in December and the recent infusion of capital were collectively viewed as signs the board was serious about taking steps to reinvest.”

Ryanovich sees a major deadline for the company May 14. To retain its Nasdaq listing, the company must maintain a market capitalization of $35 million for 30 consecutive days by that date. That equates to a share price of $1.80. He noted that the recent price gains put the stock within striking range.

DeGeeter at Ladenburg Thalmann said that in the battle to grow revenue, Response Genetics has an advantage because personalized diagnostics is one of the fastest-growing sectors of health care.

“If management can successfully position new products in the market, the company should benefit from a pretty strong tailwind,” he said.

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