Have you ever been near the point of giving up on a stock but then found a reason for optimism? This story has repeated itself through the years -- sometimes with stocks that went on to become huge winners, such as Amazon and Apple.
Investors already have a new example of this phenomenon in the new year. By the end of 2022, DermTech's (DMTK 8.97%) shares were down more than 90% below the previous high. Many investors who hadn't already thrown in the towel were probably at least thinking about doing so.
But this under-the-radar healthcare stock has more than tripled so far in 2023. And it could have more room to run.
Behind the big bounce
DermTech markets genomic tests that are used to diagnose melanoma. The company has already secured Medicare reimbursement coverage for its product and made some inroads into winning private-payer coverage.
However, DermTech's management blamed the dismal stock performances in both 2021 and 2022 on limited commercial payer coverage for the company's skin genomics tests. The company hasn't reported its full-year 2022 revenue yet, but CEO John Dobak warned in November that it's likely to come in below the previous guidance range. Dobak said that "growth in utilization with certain customers is tempered because of typical payor tactics to impede our adoption momentum."
The company started off the new year with some great news, though. On Jan. 5, 2023, DermTech announced positive coverage decisions from Blue Cross Blue Shield of North Carolina, Blue Cross Blue Shield of South Carolina, Blue Cross Blue Shield of Louisiana, and Blue Cross Blue Shield of Kansas City. These four Blues plans added roughly 13 million covered lives for DermTech's melanoma test.
More good news was on the way. Five days later, DermTech announced that its melanoma test had been recommended for coverage by Tricare. The federal healthcare program for armed services members, retirees, and their families covers around 9 million people.
At the end of 2022, DermTech's total covered lives stood at close to 91 million -- 68 million of which were Medicare and Medicare Advantage members. In less than two weeks at the beginning of this year, the total had jumped 24% to 113 million. Non-Medicare covered lives nearly doubled.
Bigger opportunities ahead
Dobak said in DermTech's Q3 update that the company could add between 30 million and 40 million covered lives by the end of 2023 Q1. Investors who doubted him then now have reason to believe he could be right.
DermTech is targeting a melanoma testing market of around $2.5 billion per year. It should be in a good position to capture a significant share of this market. The company's melanoma tests are 17 times less likely to miss a melanoma diagnosis. They don't require incisions. And they're more cost-effective than surgical biopsies.
But the melanoma market is just the tip of the iceberg. DermTech thinks that there's a $10 billion annual opportunity in screening and assessing risk for more types of skin cancer. The company is testing a product called Luminate that evaluates damage from ultraviolet rays and assesses skin care risk. If this genomics test is successful in testing, it could significantly expand DermTech's addressable market.
A long way to go
To be sure, DermTech has a long way to go to achieve impressive commercial success. The company will likely report more than $13 million in assay revenue for full-year 2022 plus some additional contract revenue. That's not anywhere near where the company needs to be.
Gaining government and private-payer coverage is a good start. Now, though, DermTech must convince more doctors to use its skin genomics tests. It also must help patients and providers navigate the hurdles that insurers sometimes put in place.
The good news is that these aren't impossible tasks. Exact Sciences faced the same issues with its Cologuard colorectal cancer test several years ago. However, Exact Sciences continues to burn through cash despite its success. Investors should recognize that DermTech, too, could be years away from profitability.
