SpectraScience Inc. (OTCQB: SCIE), a developer of light-based diagnostic technology for cancer identification, similar to companies like Verisante Technology Inc. (CVE: VRS) and MELA Sciences Inc. (NASDAQ: MELA), recently announced a very significant agreement with PENTAX that the market seems to have largely dismissed. As a result, the stock appears to be trading at a steep discount to its future potential, giving investors a unique opportunity.

In this article, we’ll take a look at three things:

1. Why SpectraScience’s agreement with PENTAX could generate more near-term revenues than many expect.
2. How PENTAX is incentivized to aggressively sell SpectraScience’s products and fuel significant long-term revenue growth.
3. What all of this means to investors and the company’s share price.

PENTAX is the third largest competitor in the gastrointestinal endoscopic device market with a 17.4% market share*. After restructuring in 2009 and 2010, the company expanded its sales force at a time when its competitors did the opposite, creating a huge opportunity.

More Revenue than What Meets the Eye

After two years of hard work, SpectraScience entered into an exclusive five-year distribution agreement with PENTAX Europe GmbH on June 15, 2012. The 23-country agreement, covering many parts of Europe and the Middle East, resulted in the company’s first significant revenues of $310,125. But this figure represents only a fraction of its potential near-term revenues.

Under the agreement, PENTAX agreed to initially purchase both the WavSTAT4 consoles and associated boxes of optical biopsy forceps. The bulk of the contract was for WavSTAT4 machines, which are sold at cost to enhance market penetration, but the unrealized near-term opportunity lies in the high-margin disposable forceps that generate recurring revenues.

PENTAX’s Incentives Fuel Revenue Growth

The colonoscopy industry is led by Olympus, which controls about 70% of the gastrointestinal endoscope market, according to SpectraScience management. The remainder of the players, including PENTAX and a few others, are aggressively fighting for market share in this space, which has created enormous demand for new technologies to differentiate largely similar endoscopes.

SpectraScience, the first biophotonics company to commercialize this type of product, holds a robust portfolio of 66 patents on their technology and provides that differentiation with its unique light-based approach to cancer diagnosis. While traditional endoscopes enable doctors to look at tissue very closely, the WavSTAT4 works “hand in glove” to enhance diagnostic accuracy to greater than 80% reduce false negatives by 93% via an easy-to-use indicator.

In addition to product differentiation, the WavSTAT4 system also provides several other advantages to PENTAX, including:

• Recurring Revenue – SpectraScience’s WavSTAT4 utilizes disposable forceps that provide PENTAX with a predictable recurring revenue stream, in contrast to a lengthy and uncertain capital equipment sales cycle when selling entire endoscopes to doctors.
• Market Share Gains – Since the WavSTAT4 can be sold without replacing an entire endoscope; PENTAX can contact competing accounts offering a unique solution that gets them in the door, which leads to significant gains in market share.

Quantifying the Potential for Investors

The market for GI endoscopic devices in Europe is expected to grow from 800 million euros in 2008 to more than 1 billion euros by 2018*. And in 2011, there were approximately 29.4 million procedures performed in the gastrointestinal endoscopic device market, which represented a 3% increase over 2010 figures.

Our models estimate that under its agreement with PENTAX, SpectraScience generates approximately $125 in revenues per disposable optical biopsy forceps. Capturing just 1% of the 29.4 million European procedures done in 2011 would therefore result in revenues of $36.75 million per year. Considering that PENTAX already has a market share of approximately 17.4%, that figure could prove to be much larger than 1%.

So, what does this mean for investors? Assuming that the stock trades at very conservative 1.0x sales multiples, capturing just 1% of the European market would equate to a share price of $0.31, which represents a 300% premium to the current market price. If the company achieves 10% market penetration, its stock could reach as high as $3.00 per share assuming it meets the 1.0x sales multiple.

Great Investment Opportunity Now

SpectraScience Inc. (OTCBB: SCIE) stands at the very beginning of a potentially enormous commercialization phase. With a market capitalization of just $12 million, the company trades at a significant discount to its near-term sales potential. Over the longer-term, the company’s stock price could significantly appreciate with only modest market penetration rates.

Despite this enormous potential, the market appears unappreciative at the magnitude surrounding the PENTAX agreement. These facts have created a big opportunity for savvy investors to get involved in the company now during its very low valuation prior to the potential upside.

For more information, please see the following resources:

• Company Website
• Recent SEC Filings
• Investor Presentation

* According to I-Data Research