What happened

Shares of OncoCyte (NYSEMKT:OCX), a company developing noninvasive cancer tests, are giving back some of yesterday's gains. Successful validation of OncoCyte's liquid biopsy sent shares soaring 208% yesterday. The stock has tumbled 15.6% during early-morning trading and was down by 10.5% as of 11:45 a.m. Wednesday.

So what 

OncoCyte is a modestly funded operation with explosive sales potential. Its DetermaVu liquid biopsy test for lung cancer recently demonstrated results that suggest it might work. The company used 250 blood samples from patients who had also undergone biopsies, and DetermaVu correctly identified malignancies 90% of the time.

Chart on a chalkboard that's reversing course.

Image source: Getty Images.

OncoCyte's test also correctly identified benign growths 75% of the time. At the moment, the only way to know if tiny spots that show up on a CT scan are malignant is to reach inside and pull out a chunk of the lung. Around one in five lung cancer biopsies result in potentially serious complications, which makes screening for lung cancer a tough decision for patients and their physicians. DetermaVu isn't meant to replace the use of biopsies, but it could be extremely useful for determining whether performing one is worth the risk.

Now what

The company thinks annual DetermaVu revenue can reach $2.1 billion as a test for patients with large nodules that show up on CT scans, and $4.7 billion if expanded to include medium-size growths as well. The company has another validation study to complete later this year and expects to launch DetermaVu in the second half if all goes according to plan. In recent years, the FDA has threatened to crack down on new lab tests that heavily influence treatment decisions, and the agency could decide DetermaVu needs to jump through a lot more regulatory hoops than expected.

Full-scale clinical trials to please the FDA would cause expenses to explode for OncoCyte, but investors need to brace for a secondary share offering even if all goes according to plan. OncoCyte finished September with just $11.8 million in cash after losing $11.2 million during the first nine months of 2018.

Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.