MADISON, Wis. (TheStreet) -- After years of stumbles, Exact Sciences (EXAS) looks to be on the right path towards developing a commercially successful, stool-based genetic screening test for colon cancer.

I spent some time with Exact's new CEO Kevin Conroy last week in San Francisco and walked away impressed. Exact was probably the best small-cap stock story I heard during four days of meetings and presentations tied to the J.P. Morgan Healthcare Conference.

Shares of Exact Sciences are up almost 70% since the middle of December, when analysts at Baird reinitiated research coverage with an outperform rating and a $5 price target. The stock closed Wednesday at $4.20.

Exact was limping along unnoticed for quite some time, but Conroy is putting the company back on the Wall Street's radar. Investors should have reason again to get excited about the company's commercial prospects for an easy-to-use, non-invasive molecular test that will help doctors screen more patients for early-stage colon cancer -- and perhaps save lives in the process.

Results from the first outside validation of Exact's new gene test for colon cancer are expected in the second half of the year. If this study confirms the accuracy of the test, Exact plans to start a pivotal clinical study in 2011.

Exact estimates that the commercial market opportunity for its new colon cancer test to be about $1.2 billion, based on a conservative 30% share of the overall colon cancer-screening market.

Colon cancer is the second-deadliest cancer in the U.S., causing almost 50,000 deaths annually. Yet it isn't particularly aggressive, and in fact, if diagnosed early, surgical removal of the tumor usually leads to very high long-term survival rates.

Unfortunately, colon cancer is all too often caught in its late stages, which dramatically limits treatment options and lowers survival rates. For years, doctors and colon cancer advocacy groups have tried to convince more people to be screened, mainly through regular colonoscopies.

The effort has worked to lower colon cancer deaths somewhat, but still, only 25% of patients comply with current screening guidelines. Colonoscopies are expensive, cause a lot of patient discomfort and can miss some pre-cancer lesions or early-stage tumors if the doctor performing the procedure isn't vigilant.

Gene-based tests are one solution to the low compliance issue because non-invasive tests like these can detect small changes to DNA found in stool samples. These genetic mutations can be an early warning sign of early-stage cancer, or even of pre-cancerous polyps, in the colon.

Exact developed its first stool-based genetic screening test for colon cancer in 2003, but despite years of effort, the PreGen-Plus test was never a commercial success. Pre-Gen was large, clunky and decidedly not fun for patients to use; the genetic biomarkers it measured were not validated with an approval from the Food and Drug Administration; and Exact's marketing partnership with LabCorp ( LH), the distributor of Pre-Gen, was less than ideal.

The American Cancer Society included stool-based gene tests in its colon cancer screening guidelines in 2008, but even this coup for Exact failed to ignite Pre-Gen sales. Exact never generated more than a few million dollars in annual revenue during the Pre-Gen years and was not profitable.

Exact needed to restart, and that began in early 2009 with the hiring of Conroy as chief executive and Maneesh Arora as CFO. Both executives previously served in the same posts at Third Wave Technologies, a successful developer of a diagnostic test for human papillomavirus (HPV). Conroy and Arora were at the helm of Third Wave when Hologic ( HOLX) acquired the company for $580 million in 2008.

Under Conroy's management, Exact went to work perfecting a revamped version of its stool-based gene test. The new test uses three well-defined biomarkers to detect genetic abnormalities in stool, which are warning signs for both pre-cancerous polyps and early-stage cancer in the colon.

Exact also reworked the physical design of the test, making it smaller and easier for patients to use. The new test is non-invasive, requires no special diet or pre-medication and can be performed at home and mailed to a lab for analysis.

Conroy thinks Exact's gene test will be sensitive enough to detect 85% of early cancers and 50% of pre-cancerous lesions, making it a very compelling screening tool for general practitioners and gastroenterologists to use.

The Exact screening test is not designed to replace colonoscopy, which is important from a commercial perspective because gastroenterologists make money performing colonoscopies. Instead, Conroy believes the Exact test will be used to boost the number of patients who get screened early and non-invasively for colon cancer. Those patients who are red-flagged by the screen will go on to get a colonoscopy where pre-cancerous polyps or early-stage cancer can be removed.

The accuracy of genetic tests for cancer have come under scrutiny lately, in part because of last year's debacle at Sequenom ( SQNM), which had to recant data on its prenatal Down's syndrome test due to what amounted to scientific fraud.

Conroy says Exact is making every effort to rigorously and independently confirm the accuracy of its colon cancer gene test. The first step will be to get results later this year from the large preclinical study that is being conducted by the Mayo Clinic.

Assuming positive results, Exact will run a large prospective clinical trial in patients, with that data forming the basis of an FDA-approval filing in 2012. Unlike Sequenom, which tried to market its Down's test without FDA approval, Conroy says Exact will take the more conservative route to get regulators on board before launching a test commercially.

Exact has a little less than $27 million in cash but will likely raise more, probably around the time that the preclinical data is released later this year.

Potential competition for Exact's stool-based colon cancer test could come from other companies developing an even more convenient, blood-based diagnostic. A group of Israeli researchers presented data this week on such a test, one that looks for a colon cancer biomarker in a blood sample. While interesting, the data came from patients with a very high prevalence for colon cancer, so it's not clear how well the test will work in normal patients.

Conroy says that Exact has looked into a blood-based genetic screen, but that it seems unlikely today for any such test to be sensitive enough to detect the presence of pre-cancerous lesions.

-- Reported by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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