Skin cancer detection company Dermtech (DMTK -3.48%) has seen a spree of good news lately. The company is reimagining the way skin cancer is detected, using stickers rather than scalpels to remove cells for testing. With several factors pushing the stock to double so far this year, its ascent may be just beginning.
The clinical data for its melanoma detection sticker, which is called the Pigmented Lesion Assay (PLA), is promising, with the sticker demonstrating superiority to a traditional scalpel-wielding biopsy. Just how much better is it? Standard biopsies miss about 17% of melanoma cases; the PLA misses just 1%. It's also more efficient -- for every 25 biopsies performed, only one melanoma will be found, compared with one melanoma for every 2.7 PLA tests. All of this is a big win for patients -- but the positive news for this small cap doesn't stop there.
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Last year was a good one ...
The PLA test for melanoma has already found its way into National Comprehensive Cancer Network (NCCN) guidelines. NCCN is a nonprofit alliance of 30 premier cancer centers throughout the United States that develops clinical practice guidelines in oncology with a particular focus on complex, aggressive, or uncommon cancers. NCCN's guidelines suggest that non-invasive testing that evaluates a patient's DNA for damage and signs of cancer -- such as the PLA test -- can help guide a doctor's decision on whether to perform a biopsy.
Dermtech opened 2020 with a big win in February, when Medicare decided to cover PLA for melanoma. This was crucial, as Medicare insures about half of the biopsy market according to Dermtech's most recent investor presentation. Since then, insurance companies have taken notice, and Dermtech has racked up agreements with Blue Cross and Blue Shield of Texas (and its approximately 6 million covered members), Blue Cross and Blue Shield of Illinois (8.1 million members), and Blue Shield of California (3.7 million members).
Additionally, Geisinger Health Plans in Pennsylvania issued a statement acknowledging positive benefit for PLA, which suggests Geisinger would cover the test for its 580,000 members. Such commercial insurance carrier agreements are crucial because they tend to mean higher reimbursement rates for Dermtech and for clinicians performing the procedure -- meaning investors can likely expect increased future profit margins as commercial insurance pays for a higher percentage of tests performed.
... and this year looks even better
Dermtech is clearly growing; in Q4 2020, the number of tests it was able to bill for hit approximately 8,300, a 69% increase over the same period a year ago and a 24% sequential increase from Q3. Test revenue of $1.2 million marked a 220% increase over Q3 2019 and a 90% sequential increase over Q2 2020. In hopes of expanding the company's relatively small base quickly, management is exploring partnerships on a PLA home collection kit with various entities -- including telemedicine providers.
This may prove fruitful, as according to medical staffing and consulting firm Merritt Hawkins, the average wait time to see a dermatologist in a metro area has steadily increased since 2009 to an average of about 32 days. This number is likely even higher in more rural communities with fewer dermatology providers. The ease of a sticker-based process, which can be done at a primary care office or via telemedicine, may enhance access to care, increase early detection, and save lives.
In addition to PLA's growth potential, Dermtech has other shots on goal. When its Luminate sticker test is approved -- currently predicted for the first half of 2022 -- the company will seek to market it directly to consumers, avoiding the need for insurance reimbursement. Luminate is an at-home test that quantifies UV damage at the molecular level in skin that appears normal to the eye. Should the test be approved, its results could help patients become better informed about skin health and determine possible action plans. Lastly, Dermtech has nine partnerships and collaborations ongoing with big names including AbbVie, Johnson & Johnson, AstraZeneca, and L'Oreal. All of these are in phase 2 or phase 3 clinical trials, and eventual approval could provide further fuel for future growth.
Valuation concerns may be overblown
While Dermtech's current price-to-sales valuation of nearly 500 may cause some sticker shock, we can look to a similar company, Exact Sciences (Nasdaq: EXAS), for comparison. In 2016, the first full year of sales for Exact's Cologuard at-home colon cancer tests, that company was similarly priced; sales were in the seven-figure range, and its market cap was almost $3 billion. That's compared to a market cap today of less than $2 billion for Dermtech and its currently similar sales. True, Dermtech has a smaller total addressable market size than Exact Sciences -- about $2.5 billion versus about $8 billion. However, it also has more levers to pull than one-trick pony Exact Sciences did in 2016 -- and from 2016 through 2019, Exact's stock price went up fourfold. In this context, it looks reasonable that Dermtech could go up five times in value in five years; to know whether that's happening, investors will want to keep an eye on the growing rate of billable samples, the company's revenue growth, and continued increases in the number of doctors utilizing the PLA test.
Dermtech grew volume by 86% in the third quarter despite a pandemic, and management is looking to pull some additional levers, including telemedicine dermatology solutions to drive PLA testing, Luminate's potential approval in late 2022, and multiple late-stage partnerships. Given all these future growth drivers, it is possible that Dermtech could approach a similar growth rate to Exact Sciences at its outset -- roughly 120% year over year. A five-bagger from here is possible, and if you're a growth-oriented healthcare investor looking for a way to get into oncology without gambling on all-or-nothing clinical trials, Dermtech looks like an opportunity for you.
