On June 29 OncoCyte (NASDAQ:OCX) reported the results of the clinical validation of the DetermaDx test with very bad news: The results obtained failed to reach the target set. It has really been a very hard hit for shareholders, who, like me, have been waiting for many months to see positive results from DetermaDx.
The price after the bad news has reacted with a 55% drop from the closing price on Monday.
It is disconcerting to see how the company has been praising the virtues of DetermaDx for months, reporting truly spectacular interim results, with very good sensitivity and specificity ratios. Practically it was said that it was going to be the best liquid biopsy test for the early detection of lung cancer on the market, with a potential income that was going to reach several billion dollars.
And surprisingly, last Monday, the Company reported that the test has not passed clinical validation and that, therefore, they stop developing it further.
Of the three tests that OCX had (DetermaRX, DetermaDX, and DetermaIO), after giving up on continuing to develop DetermaDx, it currently keeps two.
What is the prospect for the company?
Actually, even with the bad news of DetermaDx, I think it still has some upward potential. It is clear that the upside potential is now lower after the bad news of DetermaDX. But the company has other great asset: DetermaRX. The best thing about DetermaRX is that it is a test that has already been approved by CMS to receive medical coverage of up to 70% of it cost. And this is an important guarantee that the test works. There can be no unpleasant surprises here in terms of test effectiveness. DetermaRx is a test for diagnosing lung cancer using a simple blood sample. The company’s reported earning potential is around $500M per year. In my previous article: ” “OncoCyte: Already A Commercial Stage Company With Enormous Revenue Potential”
I analyzed the DetermaRx in depth and the estimated revenue for the first quarter of next year 2021 of approximately $10.88M. Therefore, it is reasonable to expect an income of between $ 30 million and $ 50 million for next year, depending on many factors (evolution of the Covid-19 health crisis, effectiveness of the company’s sales teams, etc.).
It also has DatermaIO, a test to select those cancer patients who may receive cancer immunotherapy. It should be remembered that only 30% of cancer patients are likely to be treated with immunotherapy, hence the importance of previously performing this test.
The test is now available for biopharma research use.
Here the revenue is currently difficult to estimate, although it will surely be lower than DetermaRx.
With a current market capitalization of approximately $100M, and with the revenue expectations of DetermaRx and DetermaIO, I believe that OCX presents, despite not having DetermaDx, a reasonable upside potential that can lead to a capitalization of up to $300M market in the coming months.
What can we expect from DetermaRX?
As I have already mentioned, after resigning from the company to continue developing DetermaDx, the great asset that the Company still have left is DetermaRX. This is a test indicated for those patients who have been diagnosed with lung cancer and have undergone surgery. After the surgery, the test helps determine which type of chemotherapy is best for the patient, or whether it is not even advisable to treat the patient with chemotherapy.
As I have already mentioned, DetermaRx recently received approval from Palmetto (CMS) for medical coverage of up to 70% of its total cost. This coverage, in principle, will guarantee good sales figures.
DetermaRx is classified as a stratification liquid biopsy test for the early stage (phase I and II) of lung cancer and works by studying the information of the patient’s genes to determine what type of treatment best suits.
In the market, there is currently no test of identical characteristics that those of DetermaRx because those that currently exist are indicated for late stages cancer (phase III and IV), so it is very difficult to estimate future revenues that will be generated.
The only data we have is the number of Non-Small Cell Lung Cancer (NSCLC) detected annually in the United States, about 191,000, of which approximately 35% (68,000) correspond to phase I and II which is the target population of DetermaRx.
Therefore, we can assume starting from a very prudent% of market penetration for Q3 of 1% and a test sale price of $4000:
DetermaRx % Market penetration
Nº test sold
Regarding the cash status, we can see that as of March 31 they had $ 16.9M. The treasury status has been reinforced thanks to a capital increase made on April 28 for a total amount of $10.7M. This gives us a cash balance at the end of April of approximately $27.6 million. Cash used in operations was $6.9 million for the first quarter of 2020. Therefore, assuming this cash burn rate, it is presumable that at the end of June they had around $ 20.7M, enough to support operations until early next 2021.
Like any company in the biotech and healthcare sector, there are several risks to consider when taking positions:
The main risk it presents is that sales are finally not as expected, due to multiple factors such as:
-The effect of the COVID-19 lengthens more than expected with the consequent damage for test sales.
-The company’s commercial teams are not efficient enough to attract customers.
-Increase in the number of tests available from the competition. Although both DetermaRx and DetermaIO have better sensitivity ratios than other tests, there is always a risk that new tests will appear to market that will improve the effectiveness of the current tests.
Another risk could be dilution due to the capital increase.
Any of these risks could damage the evolution of the share price because they would worsen the company’s prospects.
The bad data of the clinical validation of DetermaDx has been a real bad hit for the shareholders since there were many good expectations regarding the commercial possibilities of this test. The market has severely punished the price with a drop of approximately 55% as it really has been a totally unexpected news. It is difficult to explain how a test that had been developing for years with very good internal results, has finally been ruled out because it has been shown not to work properly. The company’s future revenue potential is therefore reduced after the DetermaDx disaster.
However, I think the company has some bullish potential. This is due to the current small market capitalization, around $100M, and to the good revenue expectations presented by DetermaRx.
As I have explained previously, with the revenue expectations of this test for the coming months and years, I believe that OCX could be seen around 300M$ market capitalization in the future, provided for the DetermaRx revenue expectations.
And all this without counting on the possible income from DetermaIO.
In conclusion, the unexpected and sad news of DetermaDx has greatly affected shareholders, but I am confident of a price recovery in the future.
Disclosure: I am/we are long OCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.