Three years ago, I alerted Seeking Alpha investors to the growing market for rapid Medical Testing and Diagnostic Kits - MTDK. I reviewed the market and recommended two companies, Trinity Biotech PLC (TRIB) and EXACT Sciences Corp. (EXAS). TRIB is languishing but EXAS shares jumped from the twenties to a current 52-week high of $97.27. EXAS shares and those of other producers are likely to go higher. Here is why.
A Booming Market
Public demand is great and growing for information about health status, propensities for illnesses, diseases, allergies, and ancestry. Our neighbor's mother and grandmother died from breast cancer. Our neighbor regularly began self-testing for markers after 40 years old and in her fifties chose to have a double mastectomy and reconstruction surgery. She remains cancer free twenties years on.
Some tests return results on the spot, while others require shipping samples to laboratories for analysis and feedback. Data results are portents leading users to doctors for early intervention, decisions about medications and treatment, or jail in cases of alcohol and drug test results.
Purchasing MTDKs is easy. Kits are sold in retail stores and online to consumers and physicians. The MTDK market is approaching $30B annually. Blood test kits used in-home, by labs and doctors and sent to out for medical processing and analyses will top $62B in the near future.
Demand took flight with the affiliated invention by graphic designer Margaret Crane of the home pregnancy test 50 years ago. Sales exploded amid America's cultural tsunami in the 1970s of free love, hippies, "make love not war," and the Woodstock generation. The home pregnancy test kit is credited with getting millions of women into the medical-care system early for prenatal care and giving women choices on courses of action regarding their pregnancies.
A half-century later, the World Health Organization and The Global Fund credit use of malaria and HIV testing kits, for example, with saving thousands of lives through quick diagnoses, millions of dollars by ruling out misdiagnoses, and curtailing its spread through Big Data analyses from MTDKs. There are diagnostic test kits for a plethora of problems, too many to mention here. One word of caution, however, to users and investors: it seems kits are allowed for sale whether or not endorsed by the U.S. FDA or have certification by science or medical organizations. Even toys require consumer protection quality testing. Some companies may be vulnerable to class action suits and government actions.
Start-Ups & Legacy Companies Are Prospering
Big pharma led by Roche Holding Ltd. ADR (OTCQX:RHHBY) dominates the testing market holding ~20% of the testing market share. Shares are touching their 52-week high. Abbott Laboratories (ABT) since its merger with Alere is challenging Roche's market share. Alere holds 12.5% of the point-of-care test market. The remainder of the blood and MTDK market is inundated with products from lesser known start-up companies and mature ones with a narrow focus. Few are public in comparison to the sea of privately-owned companies like BTNX of Ontario. BTNX is making its mark with low-priced disposable rapid response strips testing for fentanyl, one of the leading killers of drug users. Bio Group Medical System produces MTDKs testing for cocaine in the system, food, and lactose intolerance issues.
EXAS offers significant growth potential and sound management leadership. Share price is currently down ~13 percent in part caused by its issuance of $650M of convertible notes. In 2018, EXAS reports collecting $454M in revenues. The company's Cologuard MTDKs screened 934K people for colon cancer. Partnering with Pfizer (PFE), EXAS's Cologuard is expected to capture 40% of the market up from 4% today.
Moreover, EXAS is aggressively marketing its benefits to insurance companies. They estimate 94% of people will not pay out-of-pocket for using the $500 Cologuard kits. 85M Americans over 55 are able to use the $500 Cologuard screen free every three years under Obamacare.
Pfizer is target marketing Cologuard to women via its women's health team.
There are more than 30,000 in the U.S. and to date, only 4,000 OB/Gyns have ordered Cologuard. Approximately 25% of OB/Gyn patients are 50 years and older. And cancer screening is often discussed in this setting, making it an ideal area to grow Cologuard's use."
Another exciting opportunity for greater sales is:
Through our 10-year collaboration with Mayo Clinic, our pipeline is focused on developing a test for the early detection, accurate diagnosis, and recurrence of the top 15 cancers. The Mayo Clinic team has 50 experts working on nearly 70 protocols, helping form the foundation of our pipeline."
The biggest reward for EXAS investors may be in the partnership with PFE, and for investors, that hearkens to the merger between ABT and Alere.
Two notes of caution for investors. I am concerned that throughout 2018 and, currently, insiders are selling shares in large numbers during a period when the share price rose from the $50s to $96 but few purchased any new shares. Second, EXAS has to find a path to profitability after reporting an annual loss of ~$175M (12/31/18) despite ending the year with significantly higher revenues ($454.46M to $265.99M Y/Y) and tamp down its debt-to-equity ratio now over 100%.
Genetic Testing Forging Ahead
The detection of specific alleles, mutations, genotypes or karyotypes that are associated with heritable traits, diseases or predispositions to disease for the individual or their descendants. Genetic testing may also be used as a method for the determination of parentage or ancestry."
The site discusses research and reviews including ethical questions around the availability and uses of testing kits. In March, there was a front-page headline in the Jerusalem Post that the "Chief Rabbinate Admits Using DNA Tests To Help Determine Jewish Status."
A reasonably priced stock is Myriad Genetics (MYGN). The company was founded 25 years ago at the forefront of molecular diagnostic testing's halcyon era. MYGN products test for hereditary cancer, urological cancer, autoimmune disorders, depression, and more. Their goal is to assess an individual's risk for developing the disease and spur users to seek medical intervention.
In 1996, MYGN sold the first molecular diagnostic test kit for hereditary breast and ovarian cancer. Looking forward, there is a host of good news pointing to revenue and earnings growth. MYGN, for instance, is seeking FDA approval for the test that identifies patients with metastatic pancreatic cancer. 466K new cases of pancreatic cancer were diagnosed globally in 2018, so the early testing with these kits will potentially intervene in a substantial market leading to early treatment.
The myRisk Hereditary Cancer test identifies an elevated risk for 8 cancers. A new company strategy in the works for a year seeks to expand sales and increase penetration and market share of the myRisk test by satisfying the experience for physicians. Sales of the kits to prenatal users reportedly increased by 209%.
FQ2 '19 revenue was in line with expectations reported at almost $217M (+15% Y/Y) or 38 cents per share after adjustments. Shares are selling for below $30 after reaching a 52-week high topping $50 each. The lingering effects of a class action lawsuit and a subpoena issued by a government agency over MYGN's Medicare billing practices are still suppressing share price.
Overall, I believe MYGN is a safe BUY for the long-term rather than a strong buy at least until these two legal problems are resolved. Lawsuits don't necessarily shy me away from an investment opportunity. I learned from personal experience; if you're in business, there is always the potential for a lawsuit over one thing or another. If you do business with the government, there is always the potential for an investigation but settlements are the common way they are resolved. Rarely do either have a high negative impact on the targets.
TRIB One Last Time
In conclusion, let's take a passing glance at TRIB mentioned earlier. Here are highlights from the recent earnings report:
- Q4 GAAP EPS of $0.07 beats by $0.03.
- FY'18 revenue fell from $99M to $97M.
- Clinical lab revenues and the overall TRIB gross margin were flat to 2017.
- Operating profit jumped from $5.5M to $6.7M in 2018 helped by the decreased spending on R&D by $300K and SG&A cuts of 6%.
- Future growth is expected to come from sales of diabetes and autoimmunity product lines.
I cannot recommend a BUY of TRIB to Seeking Alpha investors. It is simply too risky. The company has a Gordian Knot: $30.3M in cash on hand but debt (185.3%) compared to net worth is unhealthy. Debt to net worth is up over the last five years. Its free cash flow is -$19.19M. I do not know from where TRIB will muster the money to robustly market new products management expects will turn things around.
TRIB cash is tight. The gross profit margin for EXAS is 74%, 77% for MYGN, and 42% for TRIB. Despite management's enthusiasm for new product launches in 2019, it does not seem like TRIB has pockets deep enough to launch a viable marketing program for current let alone new products. The market is coming under pressure from a furious slew of large and small companies cutting kit prices to capture market share. TRIB investors have not profited much of the last decade under Ronan O'Caoimh, Co-founder and CEO. His own compensation, however, appears higher than average for similar companies. In the interest of public investors, it is time for a change or sale of the company.
I remain enthusiastic about the medical testing kits market. It is booming and the public's growing self-awareness about their health and ancestry bode well for greater sales, higher revenues for clinical testing, and deeper penetration into global populations. There is a myriad of test kits for illnesses, diseases, allergies, and ancestry, with more on the way. Before investing, make sure the companies have a science officer, their kits are FDA approved or certified by a science/medical organization, the company has a viable marketing program and the cash to support it, that margins are not too high reflecting over-pricing of a company's kits in the retail market, and management has a business plan and sticking to it. More analyses of other companies will be coming in the near future to Seeking Alpha investors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.