We are raising our rating on shares of GENE from Neutral to Buy...

We are raising our rating on shares of GENE from Neutral to Buy and introducing a $2.50 price
target based on increased visibility for launch of a second generation BREVAGen test with broader
ethnic coverage, greater visibility on the IP landscape and implementation of steps to trim operating
expenses. Specifically, we expect GENE to complete validation of its second generation BREVAGen
test in calendar 2Q14 for commercial introduction in 3Q14. The new test will provide coverage for
substantially all ethnic groups vs current coverage limited to Caucasian women. We expect the
introduction to result in a near term uptick in BREVAGen test volumes as clinicians currently using
BREVAGen offer the test to both Caucasian and non-Caucasian women. Additionally, we believe a
test with broad ethnic coverage will be better positioned to support reimbursement discussions with
managed care organizations. We expect list price of the next-generation test to be comparable to the
existing BREVAGen product. Separately, on 2/10/14 the United States Patent and Trademark Office
(USPTO) reaffirmed claims 1-15, 17,18, 26-29 and 32 of the company’s ‘179 patent. This was the
fourth request for re-examination of the issued ‘179 patent, which is the cornerstone patent in
GENE’s intellectual property licensing portfolio. We are cautiously optimistic the USPTO decision
may lead to more constructive settlement discussions with several large counterparties and the
potential for one or more material settlements before the cases go to trial in 2H14. Lastly, we expect
recent steps to simplify GENE’s operating structure to result in modest but meaningful reduction in
cash burn. As part of this process to divest non-core assets, GENE expects to extinguish common
stock equivalent to 13% of shares outstanding. Our U.S. $2.50 PT is based on a 3x multiple to
expected fiscal 2015 revenues of $14.9M divided by ADR share count of 18.0 million.
• BREVAGen Test Volumes Continue Strong Growth: BREVAGen test volumes for 3
months ending December increased 23% sequential and 206% y-o-y to 1,125 as the
company continues to hire additional sales reps. GENE has also refined its sales message
to focus on both BRCA-negative women and women with one risk factor for developing
invasive breast cancer (previous focus on BRCA-negative women). GENE has found that
many clinicians are using the BREVAGen result to help guide whether to order an MRI.
GENE expects to increase its sales force from 15 to 21 in calendar 2014 to support
introduction of the second-generation test. The new sales reps will be concentrated in
regions with substantial non-Caucasian populations (New York and California, among
other states). We expect this additional geographic coverage combined with the potential
for existing BREVAGen prescribers to recommend the test to a broader segment of their
patients to result in a sustainable uptick in BREVAGen growth in 2014.
• 2nd Generation BREVAGen Launch On Track for 3Q14: GENE is in the process of
evaluating a cohort of several thousand samples from Caucasian women on a secondgeneration
BREVAGen test with a broader panel of gene variants. Once that analysis is
complete (expected in March), the company will analyze cohorts of African and Hispanic
ethnicity to support potential introduction in July. While management declined to provide
details of the second generation test design, the new test will be run on an Illuminia (ILMN,
$158.94, Not Rated) platform vs ABI platform for the first generation product and includes
a panel of several dozen genetic variants. We expect the launch to expand the
addressable market in the U.S. and support more productive reimbursement discussions
with managed care organizations. As such, our forecast calls for BREVAGen test volumes
to more than double in fiscal 2015 to nearly 14,000.
• Increasing Visibility on IP Licensing: GENE recently disclosed that a court for District of
Delaware lifted the stay on litigation against several parties including Bristol Myers (BMY,
$52.85, Not Rated), Pfizer (PFE, $31.61, Not Rated) and Merial. A trial date is set for later
in 2014. We are cautiously optimistic GENE will reach material license agreements with
one or more of the companies in 2014.