SpectraScience Inc. (OTCBB: SCIE), a designer, developer and manufacturer of light-based analysis systems capable of determining whether tissue is normal, precancerous or cancerous without removing physical tissue from the body, similar to companies like IsoRay Inc. (AMEX: ISR) and MELA Sciences Inc. (NASDAQ: MELA), recently held an insightful business update call that expanded upon its second quarter projections and distribution agreement with PENTAX.

Revenues are Tip of the Iceberg

SpectraScience reported second quarter revenue estimated at $310,000 in a recent press release, which are double analyst expectations of $155,000. Driven by its distribution agreement with its European partner PENTAX, the company sold a number of its WavSTAT4 Optical Biopsy Systems, according to management comments on the business update call.

But the $310,000 hardly represents the real potential from PENTAX, given that most of the profits are realized from sales of the disposable forceps. These forceps should have initial margins of around 50-60% that could be expanded to 80%+ when scale is reached, which means the razor-razorblade business model could dramatically improve both top and bottom lines.

The systems were initially sold to four major European markets, including Germany, France, the United Kingdom and the Netherlands. With extensive experience and expertise targeting these markets, the distributor is well positioned to ramp up sales and has the critical mass necessary, while its distribution agreement also provides for expansion into 19 additional countries.

PENTAX is Incentivized to Sell

PENTAX has been working diligently to expand its revenues in a relatively slow growth market for endoscopes. With SpectraScience’s innovative technology, the distributor will be able to not only portray itself as a technology leader, but also sell to its competitors’ customers. And, of course, the razor-razorblade model builds a significant long-term revenue stream.

Minimum annual purchase levels for both Europe and each of the individual 23 countries named in the agreement should also help drive sales forward. While these amounts were not yet disclosed, the obligation to sell should keep PENTAX focused on pushing the company’s products throughout the vast geographical region covered under the agreement.

PENTAX has therefore begun to prominently display the company’s products at tradeshows and other events throughout Europe. With a potential market for these products estimated at $1.44 billion for colon cancer and $1.17 billion for esophageal cancer indications, according to a recent presentation, this sales push could result in significant shareholder value being unlocked.

Potential Near-term U.S. Approval

FDA regulated clinical studies performed at the Mayo Clinic, Mass General and others demonstrated significant improvements in diagnostic accuracy. For instance, sensitivity increased from 56.2% to 96.9% and false negatives decreased from 43.8% to 3.1% when a WavSTAT4 Optical Biopsy System was added to an endoscopist’s repertoire.

These positive results have led to optimism among the investment community for an eventual U.S. approval that could further unlock value for shareholders. With plans to market to U.S. managed care, the company hopes to have an approved product on the market for colon cancer indications by mid 2014 and a product for esophageal cancer by late 2014 or early 2015.

A Great Investment Opportunity

SpectraScience represents a great investment opportunity at its current levels. With a market capitalization of just $20.5 million, the company appears to be significantly undervalued with an approved product on the market, especially given that companies like MELA Sciences (NASDAQ: MELA) trade with a market capitalization of closer to $108.2 million. Finally, numerous near-term catalysts mentioned on its business update call make it a stock definitely worth watching.

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