Opinion & Analysis
OPINION: Let's play "would you rather". Would you rather pee in a cup or have a tube poked up your privates?
Easy. All else being equal, Chalkie is prepared to bet a large sum the latter option is a minority interest.
This, basically, is the unique selling proposition of Dunedin cancer diagnostics company Pacific Edge.
Having battled away on its pee-test technology for a decade, Pacific Edge appears on the brink of commercial success and its shares have rocketed accordingly. After bumping along at or below 20 cents all year, in late August the share price took off and last week hit 48c.
The gain was so steep it drew a "please explain" from the stock exchange on September 21, asking if there was any particular reason the shares had risen 105 per cent since the company's last material announcement - the full-year result - in late May.
Pacific Edge responded saying it was an open book and it was "not aware of any material information that needs to be disclosed pursuant to its continuous disclosure obligations in the Listing Rules".
Fair enough. Let's put the company's remarkable increase in market value down to sudden investor enthusiasm.
So what's causing all the excitement and is Pacific Edge equity really worth $126 million?
Based on its reported financials, $126m looks exuberant. The company had revenue of just $646,502 in the year to March, most of which was interest on a cash stash amassed in capital raisings last year.
In total it raised $20.13m in two chunks, first through a 22c-a-share private placement of 23 million shares and second though a 19c a share rights issue of 79.3 million shares.
The money provides fuel to finance the business until it starts to make money, which could take some time yet. So far, it has burned through $28.5m in accumulated losses.
Clearly, Pacific Edge is causing excitement not because of what it is, but because of what it could become. Chalkie can see why the story is appealing.
The company, which began in 2001 with the acquisition of technology licences from Otago University, has developed a product called Cxbladder, which can be used in the diagnosis of bladder cancer.
Bladder cancer has the unenviable distinction of being the most expensive form of cancer, even if it is not the most common.
By one estimate there are 360,000 new cases each year worldwide.
In North America, it is said to be the fifth most common cancer, with about 75,000 people diagnosed and about 16,000 deaths annually.
However, it is not the number of people afflicted that makes it costly, it is the diagnosis and treatment.
Generally, the first sign of bladder cancer is peeing blood. Unfortunately, from a diagnostic point of view, it can also signify other things. In the United States, about 1 million people a year will go to their doctor after peeing blood, but only about 69,000 will have bladder cancer. So doctors need tests to identify which people have the disease.
Another characteristic of bladder cancer is its persistence - two-thirds of tumours recur at some stage - requiring regular further tests after treatment. Urologists, who specialise in treating this area, will retest every three months for a year after surgery and at less frequent intervals after that.
The amount of testing required before and after treatment is thus one of the main reasons for the high cost of bladder cancer.
There are two basic test methods. One is called cytoscopy and involves sticking a tube up the urethra to have a look inside the bladder. The other involves testing urine samples.
Cytoscopy is the preferred tool of urologists because it gives them quick, accurate insights into what they are dealing with - a cytoscopy can often be done in minutes in their own offices.
However, it's not much fun for the patient - urologists use the euphemism "uncomfortable" - and, because it requires a specialist the cost is high.
Trouble is, the pee-in-a-cup alternatives haven't been as reliable.
Several are in use. Cytology, which involves examining the urine for cancer cells, is a common technique, but is not reliable enough on its own.
Others include ImmunoCyt, NMP22 Bladderchek - marketed by Canadian giant Stellar Pharmaceuticals - and UroVysion, presumably named after a song contest.
These tests use various techniques. Bladderchek, for example, aims to spot high levels of a protein called NMP22, which is released from cancer cells into the urine. Used alongside cytoscopy, Bladderchek provides up to 99 per cent sensitivity, its makers claim.
Cxbladder tests for high levels in the urine of messenger ribonucleic acid, or mRNA, biomarkers.
A clinical trial published in September's issue of The Journal of Urology compared Cxbladder with several alternative urine tests and found it superior. The trial involved 485 people with blood in the urine, of whom 66 had bladder cancer.
The results can really be interpreted only by scientists, but to give a flavour, the Cxbladder test detected 62 per cent of the cancer cases, while cytology managed 56 per cent, and Bladderchek found 38 per cent.
The conclusion said Cxbladder "has sufficient performance to challenge urine cytology as the routine adjunct to cytoscopy".
Hats off to Pacific Edge. The company's scientific innovation looks world class.
But Chalkie reckons investors should be careful not to expect too much, too soon.
Urologists are a careful bunch and they are unlikely to switch holus bolus to a new product. Kiwi urologists Chalkie spoke to were aware of Cxbladder though not familiar with it.
One said he wasn't sure whether it was available in New Zealand (it is) but he would certainly consider using it, depending on price, particularly if it was accurate enough to replace all those post-treatment cystoscopies.
The company itself says it wants Cxbladder to replace cytology in diagnosis and to be used alongside cytoscopy in post-treatment testing.
A single test will retail at $320 in New Zealand, € 200 in Spain - the global hotspot for bladder cancer - and US$500 to US$800 in the US.
At that level it's pitched cheaper than a flexible cystoscopy, which in the US costs US$600 to US$1000, according to Pacific Edge's prospectus.
Rigid cystoscopy, also referred to in the prospectus, is more surgery than diagnostic and involves a tool the width of a pencil. Chalkie reckons it doesn't bear thinking about.
Anyway, the key for Pacific Edge will be encouraging take-up of Cxbladder among urologists. Its strategy is two-fold.
In New Zealand and the US, it has built its own testing labs while, in Australia and Spain, it has licensed its technology to existing diagnostics companies, Healthscope and Oryzon respectively.
In New Zealand and Australia, Pacific Edge reckons there is potential demand for at least 55,000 tests a year, which would represent gross revenue of about $17m, although the licensing deal would presumably reduce the net.
The US opportunity is hard to judge, but its prospectus estimated a total market of 1.8 million tests a year, representing revenue of US$50m (NZ$61m) at 5 per cent market penetration.
Scope, then, for a sizable business. But chairman Chris Swann told Chalkie the company's internal projections were "all based on a lot of what-ifs" and no public financial projections are likely any time soon.
"Before we release anything we'd want some actual data," he said.
Chalkie reckons all this adds up to a premature run-up in the share price. Still, it's better to have overpriced shares in a promising hi-tech company than a poke in the eye with a sharp stick.
Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.