Editor's Note: Odette Galli's column runs exclusively on RealMoney.com; this is a special free look at her column. For a free trial subscription to RealMoney.com, click here. This article was published May 21 on RealMoney.
When I was a portfolio manager, I used to joke sometimes that it's better to be lucky than smart. After all, when it comes to stocks, no sure thing really exists.
, a small biotechnology stock that I
highlighted back in February, may prove that point. Since that column, its shares are up 63.5%, beating the overall market's 3.6% return as well as the Dow Jones Biotechnology index's loss of 14.8% over the same time frame.
Why do I partly attribute this stock's incredible performance to luck? Well, nothing has really happened at the company since February, except that the stock has obviously gained the investment community's attention. However, as biotechnology can be a very volatile sector, I'd wait for a pullback in the shares before leaping in now.
I still believe that Exact has a truly revolutionary new product that can detect signs of colorectal cancer in its very early stages. In terms of its share price, several recent appearances at biotechnology investor conferences have certainly helped. In fact, spokesperson Amy Hedison told me that the company has been doing the roadshow thing, holding one-on-one meetings with a lot of investors lately. Plus, in mid-April, the company reported results that were largely in line with the guidance it provided.
But something else here may be worth watching. Think of Exact as more of a medical diagnostics company than as a biotech, or drug, company. Exact has developed a patented technology that uses stool samples to extract and detect mutated DNA -- in other words, DNA that's shed from abnormal cells associated with cancer.
Exact's first product, PreGen, may provide early detection of colorectal cancer in what are called Duke's A and B stages. If treated then, the survival rate of patients jumps to 95% in the A stage and 80% in the B stage, compared with 55% in the C stage and 10% in D. Because current methods of detecting colorectal cancer, such as colonoscopies and fecal occult blood tests, are either invasive or inaccurate, only 37% of colorectal cancers are diagnosed in the early stages, and just one-third of the 80 million Americans over age 50 actually undergo the tests.
PreGen-26 is already in commercial use, thanks to an agreement with
signed last year. It's being used to detect cancer in the roughly 300,000 Americans who are at 80% risk or more of colorectal cancer because of a hereditary predisposition to the disease. The company plans to roll out the PreGen Plus test in early 2003. That version is designed to test the broader population, but it may have the most initial success with the 25 million people over 50 who are at "higher risk" or have had one first-degree relative, such as a parent, with colorectal cancer.
The beauty of a medical diagnostics company like Exact is in its business model. Exact is working closely with primary care physicians, health care reimbursers (HMOs, for example) and diagnostic laboratories across the country to gain acceptance for its test. For diagnostic labs in particular, Exact may offer an attractive business proposition in addition to an accurate test. According to Exact, its tests could provide labs with 40% to 60% gross margins for their services, such as collecting samples and billing, which are more profitable than the more typical 40% gross margin in the diagnostic world. Exact expects to earn an 80% gross margin on the recurring revenue it will get from licensing its technology to the labs.
A Worthy Predecessor
What gives Exact even more credibility than perhaps other biotech stories is its leadership. Exact's founder, Stanley Lapidus, started up another successful biotech company called
in 1987, setting an important precedent for the diagnostic-test business model that Exact now follows.
Cytyc developed a new, more automated type of Pap smear, a test for cervical cancer, which dramatically improved the test's accuracy. Fifty years ago, cervical cancer killed more women than any other cancer. In 1996, the Food and Drug Administration approved Cytec's ThinPrep Pap test as a replacement for the conventional Pap smear. It's now the standard test used in diagnostic labs across the country. According to Cytec, one in every three cervical screening tests in the U.S. uses its ThinPrep test. In addition, ThinPrep is now a covered benefit for more than 75% of all insured women in the U.S., with more than 290 insurance plans reimbursing for the test. I'm sure Exact is likely aiming for the same statistical success with its colorectal cancer test.
Although I wouldn't chase this stock (or any other stock that jumped so high so quickly), keep a close eye on Exact. The inherent volatility in speculative biotech investing could provide you with a better buying opportunity soon.
Odette Galli writes regularly for TheStreet.com. In keeping with TSC's editorial policy, she doesn't own or short individual stocks, although she owns stock in TheStreet.com. She also doesn't invest in hedge funds or other private investment partnerships. She invites you to send your feedback to