Friday, October 10, 1997

HumaScan, Inc.
(Nasdaq: HMSC)
Phone: 908-709-3434
Website: http://www.humascan.com
Price (10/9/97): $11 1/8

HOW DID IT DOUBLE?

HumaScan has enjoyed the wild ride typical of a development stage company with a compelling story but no sales. From its IPO in August 1996 at $6 a share, the stock rolled to a high of $16 3/4 last February, then fell to $5 1/2 by early September, and has since rallied again to $12 1/2.

The story is simple: HumaScan's patented, FDA-approved BreastAlert device promises to help in the early detection of breast cancers in women under age 50, who often have the fastest spreading and hardest to detect cancers. The test is inexpensive, costing physicians $25 and patients $45. Analyst Melissa Wilmoth, of HumaScan's underwriter Smith Barney, has suggested the market for BreastAlert could reach over $1 billion annually, with the test becoming a standard of care like the Pap smear is for cervical cancer.

The stock dropped earlier this year on suspicions the company wouldn't meet its June product rollout date, which proved true. It now expects to launch BreastAlert in December, adding key personnel to support the effort. The September rally, though, came on no news. Given that October is National Breast Cancer month, some investors might have been betting that increased publicity would push the stock higher.

BUSINESS DESCRIPTION

HumaScan is a development stage company. Its only product is the BreastAlert Differential Temperature Sensor, a device patented by Dr. Zsigmund Sagi of Scantek Medical. An October 1995 licensing agreement with Scantek gave HumaScan exclusive rights to manufacture and sell the device in the U.S. and Canada. In 1984, the FDA said the product could be marketed for use by physicians as an adjunct to routine breast examinations, including palpitation (manual examination), mammography, and other established procedures.

BreastAlert consists of two mirror-image, non-invasive, lightweight, disposable soft pads, each of which has three wafer-thin segments containing heat sensitive chemical sensors. The sensors change color from blue to pink, reflecting an 8.5 degree temperature range. A physician places the pads inside a woman's brassiere for 15 minutes, during which time they register skin temperature variations.

By comparing the mirror-image temperature differences between the two breasts, a doctor can determine if one breast is giving off an increased amount of heat, which is typical of cancer cells. While the BreastAlert does not diagnose cancer, a two-degree differential would suggest the possible presence of a tumor and the need to conduct further tests.

Mammograms are recommended for women over 50. The National Institutes of Health doubts they benefit younger women, but the American Cancer Society officially recommends that women between ages 40 and 50 receive annual mammograms. HumaScan claims BreastAlert is especially useful for women under 50 because mammograms often don't work well on their dense breast tissue. Also, breast cancers are often 15 millimeters and spreading to other parts of the body before they can be felt or seen. BreastAlert can detect tumors as small as 5 millimeters.

The chances of surviving breast cancer are much greater if detected early. Even with increased attention to the disease, the American Cancer Society estimates there will be 180,000 new cases reported this year, with 44,000 women expected to die from their illness.

With no sales force of its own, HumaScan has signed an exclusive distribution agreement with PHYSICIAN SALES AND SERVICE (Nasdaq: PSSI), a leading distributor of medical supplies and equipment serving 92,000 physician-based offices.

FINANCIAL FACTS

Income Statement
12-month sales: N/A*
12-month income: ($2.4 million)*
12-month EPS: ($0.40)
Profit margin: N/A
Market Cap: $85.7 million
(*No sales. Only income from interest on cash deposits).

Balance Sheet
Cash & Securities: $10.7 million
Current Assets: $10.7 million
Current Liabilities $1.2 million
Long-Term Debt: $0.03 million

Ratios
Price-to-earnings: N/A
Price-to-sales: N/A

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Since it's not clear why HumaScan doubled in the last month, it's hard to know how this Double could have been predicted. Yet surely the first step would have been to notice this company. Investor's Business Daily profiled HumaScan in March. As is often the case with highflying development stage firms, that IBD profile marked a high point. It also attracted short-sellers who found it unlikely the company would hit the EPS estimates of $0.41 for FY97 when its only product wouldn't be rolled out until at least October.

WHERE TO FROM HERE?

The lone Smith Barney earnings estimate hasn't been revised this year, suggesting uncertainty about HumaScan's prospects. The first question is whether there's enough clinical data to convince doctors and insurers that BreastAlert works and offers meaningful information.

HumaScan is now planning its own clinical trials. But its prospectus notes that in five clinical trials involving 3,262 women and conducted between 1980 and 1984, the test exhibited 87% sensitivity and specificity, or only a bit below the 90% mark for mammograms. That means the test produces relatively few false positives and, more importantly, misses relatively few cancers.

Still, in 1984, the Health Care Financing Administration withdrew Medicare coverage for thermographic screening of breast cancer. In 1991, the American Medical Association (AMA) concluded that thermographic devices had not been proven to have diagnostic value. HumaScan says these products involved imaging rather than simple temperature measurements like its BreastAlert. However, the company's management admits there's a risk the FDA could review the device and rescind HumaScan's marketing rights.

Even more important, BreastAlert is protected by two U.S. patents that expire May 22, 1998 and one Canadian patent that expires August 24, 1999. So even if there is a market for this test, HumaScan could soon find itself competing against companies that actually have manufacturing experience.

So despite the good story, Foolish short-sellers have taken the recent rally as a chance to get back on board. With actual revenues just around the corner, the shorts may be premature. Still, it's hard to see how even this cash-rich company can survive for long when it's doomed to lose its main competitive advantage just six months after its only product hits the market.

- Louis Corrigan, TMFSeymor@aol.com

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