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| | Company Focus
2 breakthrough biotech stocks
Two companies emerge from nowhere with screeners to help battle two of the most common -- and deadly -- forms of cancer. If insurers cooperate, the companies that developed them could be good investments as well.
By Michael Brush
Thanks to big breakthroughs in genetic research, highly accurate tests for two of the most common forms of cancer will be appearing at a doctors office near you soon.
Assuming that tightfisted insurers get with the program on reimbursement, these tests could save hundreds of thousands of lives from two of the biggest killers -- colon cancer and cervical cancer -- over the next decade.
The tests, which scan for genetic signals that these cancers are developing in the body, are likely to become widespread because they are less invasive than other tests available today. Theyre also much better at detecting cancer in the crucial early stages.
Clearly, these are technologies worth exploring for the long-term health of you and your family. And, if all goes according to plan, the companies involved -- Exact Sciences (EXAS, news, msgs) and Digene (DIGE, news, msgs) -- should merit consideration by investors. Shares in both companies have risen substantially in the last year, but, given the potential of their products, there should be plenty of value left to tap.
Tests can offer much earlier detection
The colon cancer test, launched in early August, can catch about two-thirds of cases in the early stages, when it is still curable. This is no small feat; colon cancer is the second biggest cancer killer for both men and women worldwide.
Exact Sciences, headquartered in Marlborough, Mass., developed the colon-cancer test, known as PreGen-Plus. Colon cancer is one of those cancers that you dont have to have, says Don Hardison, the companys president and chief executive officer. If you catch it early, there is a really good chance you are going to survive.
The test for cervical cancer, meanwhile, looks for genetic markers indicating a woman has a strain of a sexually transmitted virus that causes the cancer. Known as DNA Pap, the test was developed by Digene, based in Gaithersburg, Md. Actually, the test has been on the market for several years now, but only for use in detecting a narrow type of cervical cancer. However, the company recently won approval to market the test as a tool to screen more broadly for cervical cancers. Cervical cancer is the second most common cancer among women worldwide (after breast cancer). Like colon cancer, it can be cured easily if detected early enough.
Heres a closer look at these how these two cancer tests work, and the companies bringing them to the market.
EXACT Sciences looks for genetic defects
Unfortunately, most victims of colon cancer discover the illness far too late and succumb. There are two reasons this cancer goes unnoticed:
- Patients dont feel symptoms in the early stages.
- The best ways of discovering the disease early -- colonoscopy and sigmoidoscopy -- are unpleasant. They require the insertion of a flexible, lighted tube into the backside and a lot of uncomfortable poking and probing, something most people would rather postpone again and again. So thats exactly what they do.
There's a pain-free alternative, the fecal occult blood test, but its not good at picking up early signs. In fact, 67% to 85% of the patients whose cancers are detected with the test still die.
Exact Sciences PreGen-Plus test promises to change all this. Simply put, the new test works by scanning stool samples to look for genetic defects in cells shed from polyps. The presence of these defects implies that cancer is developing. Polyps, like the rest of the lining of the colon, constantly shed cells. Thanks to research by scientists at the Johns Hopkins University, we now know that genetic mutations in those cells signal that polyps are turning cancerous.
Exact Sciences, picking up on that academic research, discovered a way to scan accurately for those mutations in the real world. Aside from being easy for patients to deal with, the test is relatively accurate. It works about 70% of the time.
"Think of us as being in the detection of cancer business, Hardison says. Indeed, the potential market for PreGen-Plus is quite large. The American Cancer Society recommends that anyone over 50 be checked regularly for colon cancer. That translates into a potential market of about 80 million. Because colon cancer takes about three years to develop into the fatal stages, it would make sense to run a test like PreGen-Plus every three years, suggesting as many as 26.7 million people a year could be tested.
The PreGen-Plus test costs around $600-$800, and Exact Sciences receives about $120 per test from its partner, Laboratory Corporation of America (LH, news, msgs), the giant testing company that runs the tests for doctors. A little math shows Exact Sciences is on to a potential multibillion dollar market. To be sure, no one thinks the company will be pulling in that kind of money for the test anytime soon.
But if we just get 1% to 5% of that, you are still talking about a huge business, especially given the high gross margins, Hardison says. Because research and development costs are in the past, gross profit margins on the test are around 80%. Analysts expect use of the test to start ramping up next year, when about 250,000 of them will be performed, and in 2005, when close to a million of the tests are expected to be carried out. The big hurdle will be inducing insurance companies to agree to reimburse patients for the test. More on this in a moment.
Meanwhile, these developments over the next year could spark more investor interest in the company.
- Studies under way at institutions such as the Mayo Clinic and the National Cancer Institute should confirm accuracy -- and raise the profile of the test in medical circles.
- The PreGen-Plus test may become even more accurate once a sample preparation technology called Effipure is added to the process. The new technology could increase the sensitivity of the test by 10%.
- At some point in the next year, medical boards will issue doctors formal screening guidelines for PreGen-Plus.
Digene looks to improve the Pap test
Like colon cancer, cervical cancer is fairly easy to cure if detected early enough. So it makes sense to try to encourage more women to get regular checkups with Digenes DNA Pap test -- a highly accurate way of knowing if a woman is likely to develop cervical cancer.
How the DNA Pap test identifies the potential for cervical cancer is fairly simple. Research has shown that cervical cancer is caused by any of 13 strains of the human papilloma virus (HPV), a common sexually transmitted virus with about 100 strains overall. HPV can cause warts and lesions, but the majority of infections produce no symptoms at all. As a result, people can transmit it easily without even knowing. Thats one reason why genital HPV is now the most common sexually transmitted disease; an estimated 20 million people have it, including more than a third of college students.
If a woman has any of the 13 cancer-causing strains of HPV, she wont necessarily develop cervical cancer. But its a good clue she may develop lesions that may turn cancerous, and she needs to be tested more often. There is no known cure for HPV. Sometimes, however, it naturally clears out of the system, putting women back in the low-risk category.
Digenes DNA Pap test is more accurate than the standard Pap test, which looks for atypical cells that suggest cancer may be developing. The standard Pap test produces too many false positives, and it catches only 50% to 80% of problem situations. Our test is in the 90% range, says Al Fleury, who handles investor relations for Digene. The companys test is also less painful than a colposcopy, one of the most accurate cervical cancer tests in use today. The DNA Pap uses a sample of cells taken from the cervix, just like a regular Pap test.
To date, the DNA Pap test has only been used widely on women with inconclusive results on the regular Pap tests. But Digene won Food and Drug Administration approval in March to turn its DNA Pap test into a regular screening tool.
Digene got another huge breakthrough at the end of July when the American College of Obstetricians and Gynecologists (ACOG) issued formal guidelines on using the DNA Pap test, notes John LaForge, a money manager with Phoenix-Hollister funds. (The Sarasota money manager owns Digene shares.) ACOG suggests the use of the DNA Pap along with the regular Pap test once every three years as an option for women over 30.
Again, the potential market is very large. If ACOG recommendations were followed to the letter, Digene would have a $300 million market in the United States alone. The DNA Pap likely will cost $50, of which Digene will get about $20. (The company reported a 1 cent a share profit for its fiscal fourth quarter on revenue of $19.1 million.)
Digene will probably get a very large percentage of the market eventually, because it is a better test and doctors tend to be risk averse when it comes to litigation, says Steve Laveson, an analyst with Becker Capital Management in Portland, Ore., which holds shares of the company. If doctors have a better test that is not very expensive, they will use it. Especially if it is reimbursed.
Will the health insurers reimburse?
As good as these tests sound, it's surprisingly tough to predict how far insurance companies will go in reimbursing the costs. Both Exact Sciences and Digene, of course, have lobbying teams pitching clinical data and cost effectiveness studies to earn support. The reimbursement issue is big, Hardison says. Every insurer is going to be different, and it is going to be a slug-it-out kind of thing.
Its no sure thing the two companies will succeed. It is always an uphill battle, agrees Digenes Fluery. But we believe the clinical data supports the use of our test, and the ACOG guidelines will support acceptance. You can imagine that, if a large body like ACOG says you should consider the test, it makes it an easier battle.
Both tests will also face some natural resistance in the medical world. Many doctors, especially older ones, are slow to change. And unfortunately, practical considerations like profits may play a role in how fast doctors start using the tests. A recent survey found that some gynecologists worry if they tell patients they only have to get a DNA Pap test once every three years, patients will be more likely to skip annual visits, cutting into revenue. Likewise, advocates of competing colon cancer testing methods will likely wage a quiet campaign against PreGen-Plus.
Because of risks such as these, some money managers are wary of buying into Digene and Exact Sciences. And, indeed, the stocks already have risen substantially in recent months. Digene is up 338% over the last year. Exact Sciences is up 33% in the last year but 129% since early February, following a dip under $7.
The easy money has been made, says Laveson, who has been trimming Becker Capitals stake in Digene as the stock has pushed into the 30s. But given the potential for this new type of genetic cancer testing, long-term shareholders who buy now may yet find themselves on the ground floor of an important medical movement.
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