AutoCyte's PREP Gets Aetna OK (News) September 3, 1999

AutoCyte's PREP Gets Aetna OK

By Dave Marino-Nachison (TMF Braden)
September 3, 1999

Shares of cervical cancer screening technologies company AutoCyte (Nasdaq: ACYT) rose by nearly 40% today on news that leading health insurer Aetna (NYSE: AET) will cover its PREP System liquid-based Pap smear alternative.

Other companies' stocks moved on the news as well. AutoCyte competitor Cytyc (Nasdaq: CYTC), which has marketed its ThinPrep system for the last three years, has been busy the past two sessions on similar news from Aetna. The same goes for NeoPath Inc. (Nasdaq: NPTH), whose AutoPap computerized screening system will be covered by the insurer as well. (NeoPath is in a deal to merge with AutoCyte.)

Cervical cancer is lethal and, according to American Cancer Society data in AutoCyte's most-recent annual report, will affect nearly 13,000 more women this year. But it's commonly cured if detected early, lending credence to the development of new testing methods.

AutoCyte's future depends not only on its ability to convince its market that converting to the new technology is in its best interests, but that it is a distinct improvement on other options available. Cytyc's system, a year ago turned away by Aetna, has been on the market for years, and the company has allies in most of the nation's top health insurers. AutoCyte's just earned FDA approval this summer.

Although some insurers, Aetna among them, have historically resisted covering the new tests -- which cost several times more than Pap smears -- this news may be an indication that the advanced screening processes are becoming the standard.

With the backing of Aetna (which said it sent out 2.1 million Pap smear reminders to members in 1998) and others, AutoCyte's growing direct sales force now has extra force behind its pitch.

But will that be enough to make the company a blockbuster investment? Thanks in large part to the costs associated with getting FDA approval, Cytyc is only now beginning to push into profitability. It's expected to post its first-ever black numbers this year, while Wall Street expects to wait until 2001 for AutoCyte to join the profitability party. Margins are going to be perennially challenged by the need to maintain a busy sales staff and active research and development operations.

So how much does the Aetna announcement, in and of itself, change AutoCyte's viability as an investment? It's an improvement, but investors would probably do well to listen for more news of the same stripe, tracking carefully the integration of NeoPath and the finances of Cytyc, before taking the PREP plunge.

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