Today, the detection of cancer is time consuming and expensive. Tissue samples from molecular diagnostic tests must be mailed to a lab and sequenced or otherwise analyzed. In the United States, the process can take between seven and fourteen days, and costs $4,000 to $8,000. Test results from Foundation Medicine FMI, Myriad Genetics MYGN, and Genomic Health GHDX allow information on specific genetic mutations to direct oncologists toward treatments that will increase a patient’s survival odds. Because of the costs and significant turn-around time, both outsourced lab and on-site molecular tests are ripe for disruption . . . $168 billion worth of disruption. Leading the movement away from centralized labs, Cepheid CPHD is a leader in the hospital based clinical diagnostics space. Its distributed model offers a significant number of tests for serious infectious diseases and, soon, cancer. Test kits are sold in chemical cartridges that require Cepheid’s GeneXpert system.
Cepheid is collapsing the time to detect cancer, potentially providing test results within 90 minutes, instead of the days or weeks. The result is less anxiety for patients and quicker treatment decisions for doctors. GeneXpert systems are designed to allow future diagnostics to be added seamlessly. Because of their flexible modular structure, hospitals have embraced GeneXpert systems, now in 23% of American hospitals (as shown below1).
Though Cepheid is well known for its MRSA (staph infections), HIV, and tuberculosis tests, it intends to release a GeneXpert test for bladder cancer by the end of 2015. As is always the case, the new test will be compatible with existing systems, enabling easy adoption.
The upside to Cepheid’s economic model will become clear as it adds tests for cancer. If it were to offer its bladder cancer test for $200, as does Abbott ABT for its Urovysion test, Cepheid could generate $3.5 million in annual revenue from the roughly 74,0002 Americans diagnosed with bladder cancer each year, even if GeneXpert penetration were to stall at 23% of hospitals. Oncologists in hospitals that already have a GeneXpert system will be able to adopt it easily.
Its bladder cancer test could generate high margins for Cepheid at a $200 price point, or it could destroy the pricing structure of the molecular diagnostic space. Its current average cartridge price is roughly $20, with a 60% gross margin. Even at ten times the average price of its other tests, Cepheid’s bladder cancer test would be competitive with Abbott on price, but significantly margin accretive. If Cepheid were to price its bladder cancer test in line with its current cartridges, however, it would cause significant disruption in the molecular diagnostic space.
The information provided is for informational purposes only. It does not constitute any form of advice or recommendation to buy or sell any securities mentioned. It is intended only to provide observations and views of the author(s) at the time of writing, both of which are subject to change at any time without prior notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on ARK's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance is no guarantee of future results. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. For a list of all purchases and sales made by ARK for client accounts during the past year that could be considered by the SEC as recommendations, click here. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. For full disclosures, click here.