A Near Cure for Cancer Is Not Enough

“Finding a cure for cancer” is synonymous in our society with the ultimate in success. And yet Digene (DIGE $37), which sells a test that could eradicate cervical cancer, meets with tepid enthusiasm from numerous analysts and from doctors, who are critical to the company’s success. How can this be?Digene is a specialty diagnostics outfit that makes and markets a test that detects with a high degree of accuracy the presence of the human papillomavirus. For about 15 years it has been known that HPV causes cervical cancer, which kills more than 250,000 women worldwide each year. HPV is a rapidly spreading sexually transmitted virus that shows up in about 20% of the American population. Astonishingly, it is estimated that 80% of Americans will be infected with HPV at some point in their lifetimes.Though Digene does not cure cervical cancer, early and accurate detection of the virus prompts medical treatment that is almost always successful in blocking the progression of the disease.One would think that Digene’s prospects are pretty terrific. The market is sizable and currently the company has the only FDA-approved HPV test on the market.In part because the stock is up 47% over the past year, many analysts are cautious. Ed Shenkan of Needham & Company notes that the valuation is rich and that results have sometimes been disappointing in the past, as the company’s test has not been adopted as quickly as projected by management. Notwithstanding the evidence, doctors have been slow to recommend the HPV test to their patients. A survey conducted last year indicated that 89% of women depend on their doctor for information about gynecological issues. Only 19% of the women said their doctor told them about HPV and cervical cancer.Why would doctors not spread the word? The company’s chief executive, Evan Jones, said, “There has always been resistance to giving women more information. Remember the furor over the home pregnancy test? A perfect example.”There may be a more disturbing reason. At present, most doctors recommend that women older than 30 get an annual checkup that includes the traditional Pap smear test for cervical cancer. Studies have shown that administering the Digene test in conjunction with Pap every three years may suffice; an annual check is not necessary since the test is significantly more reliable than the Pap smear. Though this may be too cynical a view, the loss of the almost guaranteed annual visit appears to be one factor contributing to the sluggish response from the gynecological community.This unexpected inertia also may simply reflect an unwillingness to flirt with novelty in a litigious society. Whatever the reason, it has acted as a headwind, delaying Digene’s penetration of the market and consequently ceding inevitable competition a more open field. Swiss pharmaceutical giant Roche is developing a similar test that Mr. Shenkan expects will win approval as early as next year.In frustration, Digene is ramping up awareness and revenues by running ads on local television stations. The spots educate women about HPV and prompt them to discuss the test with their doctors.Does the advertising work? According to Mr. Jones, most definitely. The company targeted five cities in America in 2005 and experienced a revenue boost of 60% to 90% in those markets. The direct to consumer marketing effort was buttressed by an increased sales effort to physicians; the results exceeded expectations. The company’s penetration in the American market place jumped to 15% in the most recent fiscal quarter, up two percentage points from the preceding quarter. In the target markets, the company’s share increased to almost 20%.Because of the momentum, management was able to report a gain in HPV revenues of 56% and earnings per share of $0.14 in America in the most recent quarter compared to $0.01 a year earlier, somewhat ahead of expectations. There are a number of uncertainties going forward, including the high level of sales and marketing expense stemming from the ad blitz. Nonetheless, management has raised expectations for current fiscal (June) year earnings per share, to $0.57.The long-term outlook for Digene will depend heavily on its success in becoming the accepted standard for HPV testing in America. However, the company also is active overseas. A German public-health insurer, Deutsche BKK, recently approved the use of the Digene test as the standard, which may encourage companies elsewhere in Europe to do the same. Digene at the same time is working on a test specifically targeting developing countries, where grants by the Bill and Melinda Gates Foundation will likely lead to a rampup of testing. Digene has an active R&D effort, and thanks to a recent financing, also has the ability to purchase other new products though licenses or acquisition.There are numerous challenges ahead. Promising vaccines are being developed by GlaxoSmithKline (GSK $52) and Merck (MRK $34) that might prevent infection by HPV. Currently, the medical community is suggesting that the vaccine might be administered to teens before they are sexually active, which would then render that emerging part of the population immune.The prospect of this vaccine being approved and marketed is viewed as a positive by the Digene crowd, since the advertising clout of the rival giants would far outweigh whatever campaigns they can mount on their own.There are other HPV products in the pipeline as well. So, it is a bit of a horse race. Digene’s stock is not cheap, selling at 36 times fiscal 2007 consensus earnings per share of $1.02. Still, if Digene is successful in rolling out its product and establishing itself as the standard of care, it has a shot at maintaining its revenue and earnings growth. The testing market in America is estimated at anywhere from $370 million to $750 million. For a company expected to have revenues of about $147 million this fiscal year, this is an exciting opportunity. And … it has almost found a cure for cancer.

A Near Cure for Cancer Is Not Enough

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