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By Akwasi Asabere, Ph.D., Wenyi Chen, Ph.D., Kunal Mehta, M.Sc., and Suraj Pradhan, M.Sc.

Overview

diaDexus (OTCQB:DDXS) is an early-stage biotech company that develops and commercializes diagnostic products to assess the risk of coronary artery disease and stroke associated with atherosclerosis, which remain asymptomatic until a clinical event occurs. diaDexus' PLAC Test is the only FDA-cleared blood test to predict both coronary heart disease and atherosclerosis-related ischemic stroke. Since 2010, diaDexus' revenue has steadily increased around 28% every year and net loss per share has decreased from $0.25 in 2010 to $0.14 in 2011 to $0.05 in 2012. If the trend continues, 2013 may be the first year that diaDexus starts to make a profit. Given that in the U.S. alone, over 80 million people have moderate or elevated risk of cardiovascular disease and diaDexus only sold ~1 million of its PLAC tests in 2011, it is fair to say that there is a lot of growth potential for diaDexus in this market. diaDexus faces several major challenges in this regard: increase product adoption rates by primary care physicians, address the upcoming patent cliff, and face emerging challenges from new biomarkers. We believe that diaDexus will become a decently profitable business within the next 2 years and will be well-positioned to become an independent sustainable company or an attractive acquisition target.

Technology

diaDexus' flagship product in the United States is the PLAC ELISA Test, which quantifies the mass of the Lp-PLA2 (lipoprotein-associated phospholipase A2) enzyme in blood. Lp-PLA2 is a lipase that is produced by macrophages and found to be active around rupture-prone atherosclerotic plaques. These plaques build up in arteries and then rupture, releasing fragments that can block blood flow in downstream arteries leading to a stroke or heart attack. The level of Lp-PLA2 in blood has been extensively demonstrated to improve prediction of the risk of coronary heart disease or stroke compared to current cholesterol and C-reactive protein measurements. Patients with two or more cardiovascular risk factors may be candidates for comprehensive lipid testing involving the PLAC test.

The PLAC ELISA Test was initially cleared by the (FDA) in 2003 as the only blood test for assessing an individual's risk for coronary heart disease, the leading cause of death in the U.S. The FDA cleared the test two years later for additional use in assessing the risk of ischemic stroke associated with atherosclerosis, the number three cause of death in the U.S. Currently the test has a Category I CPT Code (83698) by the American Medical Association and only a small percent of the users of the test pay out of pocket with the rest covered by reimbursements from the Centers for Medicare and Medicaid Services (CMS) at a level of $46.66 per test. diaDexus management states that since the PLAC ELISA Test was launched in the U.S. market in 2004, it has gained more traction and use among primary care physicians than cardiologists due to its efficacy as an early diagnostic tool.

In March 2012, diaDexus introduced the PLAC Activity Test in Europe in addition to the PLAC ELISA Test. The PLAC Activity Test assays the activity of the Lp-PLA2 enzyme in human plasma and serum samples using automated chemical clinical analyzers. The PLAC Activity test is considered a slight improvement over the PLAC ELISA test because the chemical analyzers required to run the PLAC Activity test are more readily available at laboratories than the instruments required to run ELISA test and the measured activity of the Lp-PLA2 enzyme is an equally good predictor of heart disease risk as the mass test. diaDexus is intensely pursuing the approval of the PLAC Activity test with the FDA and is in the process of identifying clinical trials.

Growth strategy and competitive landscape analysis

Most of the existing diagnostic tests focus on the detection of heart attack after patients feel chest pain and are admitted into the hospital. As of now, diaDexus' PLAC ELISA test remains the only FDA-cleared blood test to predict the risk of both coronary heart disease and atherosclerosis-related ischemic stroke (other diagnostic tests including LDL cholesterol and C-reactive protein measurements are more general indicators for cardiovascular disease). Under their current business model, primary care physicians order the test from cardiovascular specialty labs (CSL), which purchase the kits from diaDexus and perform the test. To grow its user base over the past year, diaDexus has increased its marketing force to educate primary care physicians, collaborated with more CSLs, broadened reimbursement coverage nationally and internationally, and is working on getting FDA approval for the PLAC Activity test, which is easier to implement by CSLs. To expand the utility of the PLAC ELISA test, diaDexus is running a clinical trial with researchers at Stanford University to see if the test can be used as a diagnostic tool to triage and diagnose transient ischemic attack (TIA) and stroke risk. diaDexus is also partnering with GlaxoSmithKline (NYSE:GSK) for personalized medicine (see strategic direction).

diaDexus is aggressively creating a strong IP portfolio with 27 PLAC-specific patents issued and 18 patents pending around its proprietary kits. Nevertheless, the company may face generic competition after its mass test patent expires in 2016. On top of potential generic competition, more clinical trials are looking for new biomarkers to predict the risk of coronary heart diseases. One potential biomarker, Galectin-3 binding protein, underwent clinical trial, but no results have been published. Other companies are attempting to determine the presence of target biomarkers by DNA and RNA analysis. For example, CardioDx, a private cardiovascular diagnostics company located in Palo Alto, CA, is looking for new biomarkers for atherosclerotic coronary artery disease, and has at least four clinical trials currently in progress. Scripps Translational Science Institute is currently running a clinical trial to identify biomarkers for heart disease in circulating endothelial cells from high-risk patients.

Financial Position

The company's current financial position is more than sufficient to allow it to continue its steady growth and explore new markets over the next several years. In its 2012 10-K filing, diaDexus reported $13.6 million in cash, cash equivalents, and short-term investment on hand at the beginning of 2013, which should last it for just over three years at the current burn rate of $3.9 million/year. Two facts that strengthen diaDexus' financial position are firstly that debt is manageable, with current liabilities of $4.1 million against current assets of $18.6 million as of June 2013, and moreover that net loss has been steadily decreasing, from $(0.25)/share in 2010 to $(0.14)/share in 2011 to $(0.05)/share in 2012. Notably its Q2 2013 earnings report showed a net loss of $(0.01)/share, suggesting a swing to profitability may be around the corner. Expansion of existing products into new markets - primarily the PLAC ELISA test in Europe and U.S. - should further improve this picture and virtually ensure profitability in 2013 or 2014. Given current trends, the company should comfortably be able to meet, if not exceed, its 2013 revenue guidance of $24-25 million.

The company has penetrated a very small fraction of its current market of patients at risk for cardiovascular disease. Based on discussions with diaDexus management, we estimate it sold approx. 1 million PLAC kits in 2011, for which the company reported revenues of $16.38 million. If we assume a test frequency of once per year, it reached 1 million patients in 2011 against its "addressable market" of 36 million insured patients that have elevated risk of heart disease. If all of these patients can benefit from the test, the potential market is well over $500 million at current margins. Considering diaDexus's current market cap of $79 million, there is significant potential even in its current market alone.

Strategic direction

diaDexus announced Q2 2013 results on August 8th, where it reported its 12th consecutive quarter of year-over-year revenue growth. Currently, diaDexus does not have a diverse product pipeline, with its increase in revenue projections for 2013 based primarily on better penetration of the existing cardiovascular market. It is exploring other indications for use of the PLAC test or derivatives of the PLAC test as a diagnostic. However, its financial statements show a decrease in R&D spending of 18% from 2011 to 2012 and an increase in spending on sales and marketing of 32%. diaDexus is shifting focus away from internal R&D to improving market penetration by increasing its sales force that deals with CSLs, which partner with primary care physicians prescribing the PLAC test. diaDexus currently has a customer base of 30 CSLs and additional international CSL partnerships in 26 countries, a market segment that is rapidly growing. On the reimbursement front, more than 50% of the U.S. population is now covered for the PLAC test, accounting for 163 million people in the U.S. alone. There was 25% growth in covered lives in 2012 with initiatives underway to further expand this coverage. Thus we believe diaDexus management's short-term strategy over the next 1-2 years is to build a stable revenue generating company based on growth in its PLAC test product line. diaDexus is in a unique position right now, which gives it the option to pursue several different strategies for the long-term.

Revenue growth data look especially strong with a 28% year to year growth on average for the past 3 years. One strategy for diaDexus is to continue expanding its PLAC test market penetration, become a profit making business, and reinvest its PLAC test based revenue into diversifying its internal R&D portfolio. The advantage of such a strategy is that it minimizes current risk while allowing diaDexus to shore up its cash balance, providing a generous safety cushion. This cash on hand can then be used to expand its product pipeline through R&D or in-licensing, which will enable it to become a sustainable biotech company in the long term. A possible roadblock for diaDexus is the slew of patent expirations coming up from 2013-2016 that will have a big impact on its PLAC test product line. To this end, diaDexus is pursuing additional patents that cover the use of its test along with an inhibitor of Lp-PLA2.

Another natural strategic direction for diaDexus is acquisition by its longtime partner GlaxoSmithKline, which originally (as SmithKline Beecham) launched diaDexus in 1997 and granted it an exclusive license to intellectual property on Lp-PLA2. diaDexus is currently partnered with GSK in two Phase III clinical trials (STABILITY for treating atherosclerosis and SOLID-TIMI 52 for treating acute coronary syndrome) comprising around 28,800 patients combined, for testing its Lp-PLA2 inhibitor drug Darapladib. GSK is using the PLAC test to measure Lp-PLA2 levels in patients enrolled in the trials, for which the first results are expected to come in October of 2013. GSK is currently actively pursuing Darapladib as its next blockbuster drug and has made it a prominent part of its growth strategy going forward as it too faces upcoming patent cliffs that will negatively impact its revenue stream. If the Phase III trials go well and Darapladib gains FDA approval for treating atherosclerosis or acute coronary syndrome, the PLAC test could potentially serve as a companion diagnostic, to screen as well as monitor the progress of patients receiving Darapladib. Importantly, a pending patent for measurement of Lp-PLA2 in the presence of Darapladib would provide protection till 2024. Furthermore, the direct sales force set up by diaDexus targeting CSLs could be a very useful asset for GSK as it tries to penetrate the cardiovascular market. On the other hand, GSK's access to the global atherosclerosis market will allow it to extract a greater value out of the PLAC test than diaDexus could on its own. Thus, the technological expertise and commercial capabilities developed by diaDexus fit well with GSK's vision for Darapladib and may make it a very attractive acquisition target within the next few years if the initial Darapladib results look promising.

Conclusion

diaDexus has shown consistently strong revenue growth over the last 3 years and has a solid strategy in place to continue this trend over the next 2-3 years. Being first to market and with growing brand awareness, the PLAC test is increasingly trusted by primary care physicians as a reliable marker for elevated risk of heart disease or stroke and is now recommended by 4 major clinical practice guidelines. A large portion of the cardiovascular market still remains untapped and diaDexus is on track to capture a bigger share and post sizable profits over the upcoming years. diaDexus is pursuing a very low-risk, focused short-term strategy of increasing sales of its PLAC test products, which will put it in a great position for expansion as an independent company or as an acquisition target by a larger pharmaceutical company such as its longtime partner GSK a few years down the road.

Disclosure: We are long OTCQB:DDXS. 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.

Source: DiaDexus: A Hearty Choice