Genomic testing has been a mixed blessing for investors thus far. While progress in the lab and clinic has been significant, the investment picture has followed a pretty familiar pattern - huge enthusiasm (and overvaluation) up front, crushing disappointment, and then general apathy and pessimism. If the pattern continues, a host of commercial successes should begin to appear over the next few years.
One of the more promising molecular diagnostics companies to watch at present is Exact Sciences (EXAS) - a small biotech company in pivotal studies for its non-invasive screening test for colon cancer.
Two Years To The Starting Line
If things go to plan, Exact Sciences should be launching the Cologuard test about two years from now. As of the company's last report, there are 59 sites enrolling patients for its pivotal study, and another 20 or so should come online in the first quarter of 2012.
Assuming that the numbers of cancer in the enrollment population stay consistent, enrollment should finish in about six months. The company will then hope to announce results in the fourth quarter of 2012, submit its final clinical module to the FDA a quarter later, and receive FDA approval in 2014.
A New Approach To An Old Problem
While it doesn't get quite the same attention as breast or prostate cancer, colon cancer is a relatively common cancer. More significantly, it's a cancer type with a very high percentage of long-term survival if caught and treated early.
Unfortunately, early detection has been a problem and only about one-quarter of eligible patients are in compliance with the recommended protocols. Current non-invasive tests are not especially sensitive (40% - 66%) and have less than a 50-50 chance of catching pre-cancerous lesions. Colonoscopies are far more sensitive (95%) and quite capable of detecting pre-cancer (90-95%), but they are uncomfortable and men (and women) simply don't want to get them.
This is where the Cologuard comes into the picture. The test is noninvasive and painless - the patient need only collect a stool sample. Early studies have shown that the Cologuard catches about 85% of cancers and almost two-thirds of pre-cancer. That's an excellent performance for a test that is likely to have minimal patient compliance issues vis a vis colonoscopy.
If the pivotal study backs up the earlier performance data (and generally speaking, that's a good bet in molecular diagnostics), Cologuard will represent a compelling product opportunity. Pricing will likely be somewhere in the vicinity of $250-$350, a level which would give good economics to both Exact Sciences and customers like LabCorp (NYSE: LH. What's more, that would be a fairly compelling price for payors as well, relative to the $1,000 to $1,500 cost for colonoscopy.
With over 26 million in potentially eligible patients, it's easy to generate eye-popping sales potential for this test. Keep in mind, though, that no test gets 100% of its potential market. Becton Dickinson (BDX) and Hologic (HOLX) have never been able to drive 100% compliance with Pap tests. Moreover, other genomic cancer testing companies like Myriad (MYGN) and Genomic Health (GHDX) have likewise been unable to get all of their potential market.
Remember, too, that there will be competition in this market. Qiagen (QGEN) is working in collaboration with Epigenomics (targeting the detection of methylation of a different gene), and Epigenomics has also licensed technology to Abbott Labs (ABT). OncoMethylome is working on its own dual-gene test, and Given Imaging (GIVN) offers a completely different option with its swallowed camera technology.
At this point, nobody really knows what the "magic formula" of genes is going to be in terms of maximizing sensitivity and specificity. So while Exact's current test seems compelling, there is a risk that future molecular diagnostics tests will be even more sensitive without any incremental difference in invasiveness.
Moreover, with the features offered by technologies developed by Affymetrics (AFFX) and Luminex (LMNX), it may only be a matter of time before a company partners with one of these companies and develops another option. Of course, Exact would have a multi-year headstart on any such test.
Still Plenty Of Risk, But Lots Of Opportunity
There is plenty left to go wrong for Exact Sciences. Although it would certainly be surprising, it is at least possible that pivotal study results of Cologuard will not be as good as earlier studies and perhaps not good enough for approval or commercial success.
There's also the issue of achieving commercial success itself. The company already has a relationship with LabCorp, and the economics of the Cologuard seem compelling, but no test sells itself and Exact Sciences could mess up the commercialization.
Honestly, I'm not particularly worried about either of those outcomes at present, but biotech investors can never sleep on risk.
If Exact Sciences can reap $500 million in revenue by 2018 (four years after expected launch), the stock is easily worth at least $12 today and perhaps as much as $20 (or more). That's a fairly compelling risk-reward trade-off for a company that should not need further financing before FDA submission, but investors should realize that this is still no sure thing.