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Could DermTech Be a Millionaire-Maker Stock?

By Jim Halley - Mar 18, 2021 at 6:13AM

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There are lots of reasons to be excited about DermTech's breakthrough diagnostic technology.

DermTech (DMTK -1.28%) has the potential to be a truly disruptive genomics company, one that could change dermatology entirely. And investors like the stock -- DermTech's shares are up more than 400% over the past year.

Skin cancers are the most prevalent form of cancer, affecting one in five Americans by the age of 70, according to the Skin Cancer Foundation. The most common forms of skin cancer are basil cell carcinoma and squamous cell carcinoma, but the most deadly is melanoma, according to a American Cancer Society report, which estimated that of the more than 100,000 people who were diagnosed with melanomas in the United States in 2020, 6,850 of them died from the disease. DermTech is looking to lower those numbers. If it's succesful, it might reward shareholders in the process.

Doctor talking to a senior male patient.

Image source: Getty Images.

What gives DermTech an edge

The problem with detecting skin cancers is that it is generally done by sight. Dermatologists look for telltale signs and pigmented spots on your skin, such as discoloring, bleeding, or an irregular shape. This is usually done with the naked eye or by using a dermascope, a type of magnifier with a light source. If your dermatologist sees something they don't like, the next step is numbing the skin, then cutting out a small sample of skin through a biopsy. That skin is then examined under a microscope.

DermTech's approach is less invasive. The company has developed quarter-sized adhesive patches that can be applied to an ominous skin lesion. Once they are peeled off, they contain skin layers with ribonucleic acid (RNA) that can be analyzed within 72 hours.

In addition to convenience, the company has produced studies showing that its genome-based test, called a pigmented lesion assay (PLA), is more accurate than typical biopsies, meaning fewer unnecessary surgeries, better early detection of skin cancer, and reduced costs to patients and doctors.

The company said its TRUST study, reported in December, showed that the company's PLA was 99% accurate in showing when lesions were not associated with melanoma, significantly reducing the need for surgeries.

Another study, reported in January in SKIN, the Journal of Cutaneous Medicine, found that the company's PLA, which tests for elevated expression levels of two genes shown to correlate with melanoma, LINC00518 and PRAME, was nearly five times more likely to detect melanoma than traditional visual methods alone.

DermTech's financials are improving

The company was founded just two years ago and isn't turning a profit yet, but it has been growing. DermTech said its billable sample volume was 24,000 in 2020, an increase of 75% over 2019. Its reported revenue for the year was $5.9 million, another increase of 75% year over year. That growth was even more impressive considering that visits to the dermatologist were frequently put off last year because of COVID-19 concerns.

And the company's fourth-quarter numbers show that that headwind may be abating: The company reported assay revenue of $1.6 million for the fourth quarter, a gain of 214% year-over-year and a 27% gain sequentially.

The company showed a net loss of $35.2 million in 2020, compared to a net loss of $19.7 million in 2019. It was also concerning that the company, citing COVID-19, declined to conduct many forecasts for 2021, though it has said it expects between $1.6 million and $1.9 million in assay revenue alone this year.

What's next for DermTech?

There are a couple of reasons to be enthusiastic about the company's prospects this year. Last January, Medicare agreed to cover the company's test, opening up a big avenue for billing. Other insurers soon followed, including Blue Cross and Blue Shield of Texas, Blue Cross and Blue Shield of Illinois, Blue Shield of California, and Geisinger Health System.

One study reported in Dermatologist Magazine said that DermTech's PLA patch was between 91% and 97% accurate in detecting melanomas, and 99% accurate in ruling out lesions that were not melanomas, adding that the test could reduce the need for surgical biopsies by dermatologists by 90%. This year, the company's test got another boost when the National Comprehensive Cancer Network, a not-for-profit alliance of 30 leading cancer centers, recommended DermTech's PLA.

The company is also working on a home-collection kit that would involve telemedicine companies. A clinician would order a test, and a doctor or nurse would provide guidance to make sure the appropriate skin lesion was checked. The patient would then return the sample to DermTech.

The company said it sees other applications for its PLA stickers, such as detecting cytokine (proteins that regulate cell function) levels associated with certain inflammatory conditions, such as psoriasis, atopic dermatitis, and lupus.

DMTK Revenue (TTM) Chart

DMTK Revenue (TTM) data by YCharts

Look for the tipping point

DermTech's PLA assay is still very new, but I can see its business building momentum as more insurance carriers approve the test and more dermatologists adopt it. The company's test is patented, and at this time faces no similar competition.

This process is already making millions for DermTech, and as the company grows, early investors could find the stock to be a millionaire-maker for them as well. As with any growth stock, there's risk to this pick, but I think DermTech has too much potential to ignore.

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