New Emerging Diagnostics Index

by: Mike Havrilla

The accompanying table (click to enlarge) includes 39 companies in the ETF Innovators (ETFI) Emerging Diagnostics Index of U.S.-listed stocks with market caps of $10-$200M. The index includes diabetes care device makers such as DexCom (NASDAQ:DXCM), personalized medicine lab service providers such as Clarient (CLRT), clinical diagnostic test developers such as OraSure (NASDAQ:OSUR), diagnostic imaging service providers such as Virtual Radiologic (VRAD), diagnostic equipment makers such as Vision Sciences (NASDAQ:VSCI), and genetic analysis + molecular diagnostic companies such as Affymetrix (NASDAQ:AFFX).

AFFX is a stock I wrote about in late July, as a value trap to avoid at over 7 bucks due to a string of poor results and lowered guidance. While the results are still poor and Illumina (NASDAQ:ILMN) continues to dominate its now much smaller rival, the price for AFFX is now under 3 bucks and is getting so low that it could be acquired or will rebound sharply at any sign of improved results. However, with the current bear market for research spending by academic institutions + big pharma, a lack of near-term catalysts, and a $73M cash-funded acquisition of Panomics to expand its cellular + genetic analysis capabilities, I plan to keep AFFX on my watch list for a possible buy as a turnaround play.

Since I first wrote about Home Diagnostics (HDIX) 10 days ago as a value, turnaround play in the Healthcare Cost Containment Index, the shares have increased about 10%, but are still trading well below the 52-week high of just under 11 bucks reached in early September. HDIX makes blood glucose monitoring systems and testing supplies under the TRUE and Prestige brands, in addition to partnering with major drug chains and wholesalers for private label and store brand alternatives to more expensive name brands such as Abbott Lab's (NYSE:ABT) Freestyle or Johnson & Johnson's (NYSE:JNJ) One Touch.

Key factors to watch will be a return to sales growth in the low teens (13%-15%) and gross profit margins improving into the low sixties (62%-63%) as the company ramps up its manufacturing capacity for the two new products and phases out the promotional activities. Once these favorable trends become apparent in the quarterly results, HDIX should find its way back to double digits around consensus analyst price targets of 10 bucks per share.

Earlier this month, AspenBio Pharma (NASDAQ:APPY) completed enrollment in its pivotal Phase 3 clinical trial for AppyScore, which represents the first blood-based diagnostic screening test for appendicitis. On December 10, APPY guided for a time frame of 4-6 weeks for announcing the trial results with plans for an early 2009 submission for FDA approval in the form of a 510(k), which means results could be released within the next 2-4 weeks and provide an upside catalyst if the results support approval by the agency – with the added bonus of no safety concerns since the test is non-invasive.

EXACT Sciences (NASDAQ:EXAS) has experienced a string of good news in the past 10 days, indicating wider acceptance of its non-invasive stool-based DNA (sDNA) colorectal cancer screening test by a trio of states and a major insurance company. While EXAS is up nearly 50% in the past month, the company has lost over three-quarters of its market value in the past year. New Jersey and Maryland added sDNA testing to their colorectal cancer screening mandates while Cigna (NYSE:CI) included the sDNA test as a covered benefit on a national basis.

Also, Massachusetts added the screening test to its Care Coordination Program for low-income individuals over age 40. Finally, University Hospitals Case Medical Center of Cleveland recently announced a pilot program for sDNA screening at two sites which will feature the test as the preferred option for those who are unwilling or unable to obtain a colonoscopy.

While EXAS represents my biggest loss for the year and has been a train wreck since I first wrote about the company in October 2007, recently appointed Board member and healthcare dealmaker, Michael Singer, summarizes the remaining value drivers as follows:

1.) a portfolio of intellectual property in non-invasive prenatal diagnostics, non-invasive colorectal, and aero-digestive cancer screening

2.) the recent American Cancer Society endorsement of sDNA testing

3.) the commercial launch of ColoSure by LabCorp (NYSE:LH)

4.) EXACT's long-standing relationships with scientific pioneers at Johns Hopkins University, Case Western Reserve University, and other leading medical institutions