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Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank -- Ignore unavailable to you. Want to Upgrade?

To: Howard S. who wrote (9178)	5/7/1998 12:10:00 PM
From: Jenna	Read Replies (2) \| Respond to of 120523

CYTC with over 50 million Pap smears performed each year, Cytyc Corp.'s ThinPrep Pap Test has the makings of a blockbuster product. ThinPrep was labeled by the FDA as "significantly more effective than the conventional pap smear" in screening for cervical cancer, and initial marketing efforts proved very successful. But as Cytyc can attest, the road to success is often riddled with potholes. Having cleared the important hurdles of regulatory approval and market acceptance, Cytyc (Nasdaq:CYTC) is now facing problems with reimbursement by insurance organizations. The result was a significant disappointment in first quarter results, and the stock plunged 12 points (50%) last month after the company warned of the problems. But on Wednesday the stock bounced back 3-1/4 points on news of significant progress on the reimbursement front. Cytyc announced that five additional Blue Cross and Blue Shield (BC/BS) health plans established reimbursement for ThinPrep in the past two months. One of the five was Empire BC/BS, New York's largest health insurer with coverage of nearly 5 million people. That brought ThinPrep's Blue Cross Blue Shield total to 21 plans (out of 55) representing 20 million lives, to go along with reimbursement coverage by other plans accounting for another 30 million people. The progress with Blue Cross Blue Shield plans is significant because a few months ago the BC/BS Technical Evaluation Center issued a rather negative review of ThinPrep's cost benefits. The TEC report suggested funds would be better spent on educating women, especially poor women, to seek regular Pap smears rather than on higher-priced Pap technologies. But independent evaluations of ThinPrep's clinical data by individual BC/BS plans has led to 21 plans so far establishing reimbursement, suggesting they found ThinPrep's clinical effectiveness and cost benefits to be compelling. Clinical trials showed Cytyc's ThinPrep detected 65% more cancerous or precancerous samples when used in screening centers (where 95% of all Pap smears are processed) compared to the conventional Pap smear. A swab is still used to collect the cell sample, but instead of smearing it across a slide, the swab is rinsed in a vial of fluid which is then sent to the lab. ThinPrep's processing machine then filters out impurities such as blood and mucus and provides an even layer of pure cell sample that is easier to read. The conventional Pap smear has been a pillar of cancer prevention, reducing deaths from cervical cancer by over 70% in the fifty years since it was first adopted, but it is far from perfect. The promise of greater accuracy and earlier detection offered by ThinPrep is an important leap forward, so it only seems a matter of fighting through the bureaucratic entanglements of health insurance reimbursement before widespread adoption is achieved. Analysts had anticipated reimbursement would be an issue, but that it would gradually be overcome. That still looks to be the case. What they didn't anticipate was even with the health organizations that did establish reimbursement for ThinPrep, there were major problems with a transition to a new billing code. Many Cytyc customers and/or insurance companies weren't using the new code, resulting in reimbursement delays. This made some customers hesitant to reorder ThinPrep testing materials, causing a much larger net loss for the quarter than expected. Last week the company said it was making significant progress in getting the billing code issue resolved, and they expect that progress to continue in the second quarter (meaning it wasn't entirely fixed in the first). Analysts slashed earnings estimates after the warning last month, so now Cytyc is not expected to turn profitable until next year. The current consensus is for earnings per share of $0.66 in 1999, down from $1.24 prior to the mid-April warning. Nonetheless, Piper Jaffrey upgraded the stock to a Buy on Wednesday after the announcement about the additional health plans signing on. Analysts still figure ThinPrep could be worth $300-$500 million per year in revenues. The gross margins on Cytyc's disposable products are huge, too, in the neighborhood of 75%-80%. For a stock with a market cap of $350 million, that's a pretty attractive pot of gold if the company can successfully navigate the rainbow. *reprinted courtesy of the online investor. May 7, 1998