July 23, 2012
SpectraScience (SCIE) Targets Colorectal Cancer
SpectraScience Inc. (OTCBB: SCIE) is 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. The company has developed a promising technology that delivers clear cancer biopsy results in real-time, initially targeting the colorectal cancer industry, alongside companies like Regeneron Pharmaceuticals (NASDAQ: REGN) and Myriad Genetics Inc. (NASDAQ: MYGN).
Colorectal Cancer: A Leading Cause of Cancer Death
Colorectal cancer – also known as colon cancer or bowel cancer – affects the colon, rectum or appendix. With symptoms ranging from bleeding to anemia, the condition is both painful and difficult to treat. Cancer confined to the colon wall can be treated with surgery, but cancer that has spread is usually not curable, leaving only life extension options open.
The colorectal cancer treatment market was $6 billion in 2009 and is expected to hit $11.6 billion by 2016, according to recent research. The 9.8% compounded annual growth rate is primarily driven by targeted therapies in adjuvant treatments, with over 150 molecules in various stages of clinical development around the world, as well as by demographic trends.
Cancer treatments as a whole are expected to rise 27% between 2010 and 2020, according to the National Institute of Health (NIH). Meanwhile, colorectal cancer is expected to be the second largest cost driver, at $14 billion in 2020.
Despite its size and importance, physicians have not been able to cost-effectively detect colorectal cancer at an early stage. Close to 70% of physical biopsies remove normal tissue, while only 39% of colorectal cancers are detected at any early stage. The results are that some 50,000 annual deaths each year from the condition could be prevented.
SpectraScience Makes Screening Easier
SpectraScience develops and manufactures innovative Laser Induced Fluorescence (LIF) spectrophotometry systems that are capable of determining if tissue is normal, precancerous or cancerous without removing tissue from the body. Moreover, the technology removes any guesswork, by eliminating the need for a physical sample, and provides real-time results for doctors and patients. The result is a diagnostic that could revolutionize the way biopsies are conducted to save both time and money.
By using a low-power laser to stimulate natural fluorescence in tissue, the technology uses proprietary algorithms to differentiate between healthy and cancerous tissue. The system itself consists of a mobile console and an attached, single-use, disposable forceps. As a result, the company has an attractive razor-razorblade business model with recurring revenues.
The use of spectrophotometry systems is also well documented in clinical research. For instance, a 2000 study called Early Detection of Lung Cancer with Laser-Induced Fluorescence Endoscopy and Spectrofluorometry found that the technique improved accuracy by nearly 50% compared to the standard of care options consisting mostly of a physician’s eye to spot cancer.
In Europe, the company estimates there are 10.3 million cases of colorectal cancer each year, with some 4.1 million procedures being performed. Given the average costs of such procedures, this translates to a $826.6 million direct market for the company’s innovative technology in Europe where it is already being sold by PENTAX Europe.
Commercialization Already Underway
SpectraScience has already begun to commercialize this technology through an agreement with PENTAX in Europe. The distributor will likely sell in four initial markets, including Germany, France, the U.K. and the Netherlands, where it has extensive experience and expertise.
While $310,000 in equipment was sold to the distributor in the second quarter, the amount is likely just a fraction of the company’s potential sales over the near-term. The disposable forceps are the cornerstone of the company’s revenue model and are only sold when the units are placed with end users rather than the distributor. The company’s forceps should have initial margins of around 50-60%, which could be expanded to 80%+ when economies of scale are reached.
Notably, many European countries are also becoming more favorable operating environments for companies like SpectraScience and PENTAX. Multi-center evaluations are expected to begin soon in France, which will lead to a reimbursement determination; and the Netherlands is beginning a new colorectal screening program that could boost demand.
A Great Investment Opportunity
SpectraScience represents a great investment opportunity at its current levels, with an approved product that is already on the market in Europe with initial sales. The company’s $20.5 million market capitalization could therefore be significantly undervaluing, especially relative to other players in the space with market caps in excess of $100 million.
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