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Shares of Diagnostic Firms, Led by Exact Sciences, Outperform Broader Stock Market in 2017

NEW YORK (360Dx) – Investors in many diagnostics firms saw a healthy return in 2017 as the share prices of several companies in the 360Dx Index more than doubled year over year, resulting in an overall increase of 30 percent.

For the year, 18 of the firms in the index saw their share values grow from 2016, while seven firms saw their stock prices contract. While the broader markets helped lift the share values of diagnostic firms, the index also surpassed the performance of the Dow Jones Industrial Average, which was up 25 percent year over year; the Nasdaq Composite, which grew 21 percent; and the Nasdaq Biotech, which closed up 28 percent for the year.

Several firms saw big gains in their stock prices, including Exact Sciences (+293 percent), Foundation Medicine (+285 percent), Myriad Genetics (+106 percent), and Quidel (+ 102 percent).

Conversely, a handful of firms' stock prices retreated significantly: NantHealth was down 69 percent year over year, GenMark Diagnostics slipped 66 percent, and Opko Health contracted 47 percent.

In a research note last week, Wells Fargo analyst Tim Evans wrote that one trend jumped out in his review of share-price trends among tools and diagnostic companies. Market cap, he said, was a "reasonably good predictor of stock price returns," with small cap firms experiencing a rougher go of it.

While the 2017 trend continued a similar motif from the past several years, "2017 seems to be particularly notable for the divergence among large and small caps," Evans said.

One reason for the difference may be that the strongest mid- and small-sized players have been acquired by larger firms, a phenomenon he called "survivorship bias." Evans also noted that large companies have greater market power than smaller players through large direct sales forces or strong distribution channels. They also have larger R&D resources, allowing them to stay ahead of smaller and newer competitors, while existing technologies and methods "can be very sticky, particularly in the world of diagnostics."  

While December turned out to be a down month for Exact, it was one of the few negatives for a company that started 2017 as the index's largest gainer last January. Subsequently, the company reported a sharp year-over-year increase in its first quarter 2017 revenues, followed by sharp revenue increases in the second and third quarters.

In November, Exact announced it would build an additional lab to meet increasing demand for its Cologuard colorectal cancer screening test.

In June, the company's stock took a hit after a new lab fee schedule from the US Centers for Medicare & Medicaid Services lowered the reimbursement rate for Cologuard. CMS then said that it had made an error in the fee schedule, prompting a recovery in the stock price.

The firm also weathered a report from short-seller Citron Research that called Cologuard "inferior" and claimed that it had proof that Exact's stock "will soon be cut in half." Wall Street largely ignored the Citron report, and one analyst, Doug Schenkel at Cowen wrote in a research note that Cologuard's momentum was just starting to ramp up.

Foundation Medicine, meanwhile, found itself the target of at least one lawsuit alleging its management made false statements about the reimbursement process for its cancer genomic tests. By the end of the year, though, it received approval from the US Food and Drug Administration for its Foundation One CDX test, as well as preliminary national coverage determination from CMS for the test.

Additionally, in September, the firm said it was advancing a blood-based version of its tumor mutational burden test as a companion diagnostic to Roche/Genentech's immunotherapy drug Tecentriq (atezolizumab) in first-line treatment of non-small cell lung cancer patients. And a few weeks later, it received approval from New York State for its FoundationACT blood-based circulating tumor DNA assay.

During 2017, Myriad's share price improvement was pushed along by an expanding list of insurers covering its tests. In the spring it inked a long-term pricing deal with UnitedHealthcare for several of its diagnostic tests.

Lastly, Quidel's stock received a boost in September when it announced an amendment to an earlier agreement to buy Alere's MeterPro cardiovascular and toxicology assets and BNP assays. At the end of 2017, investors also welcomed what the firm had to say in an update on the acquisition.

In connection with that business, Danaher's Beckman Coulter business sued to affirm its rights to sell the BNP assays directly, prompting Quidel to disclose that Danaher had made offers to acquire the BNP assay business.

Along the way, Quidel also received regulatory OK for its immunoassay platform and assay for respiratory syncytial virus, an influenza A and B immunoassay, a molecular assay for the qualitative detection of Clostridium difficile, and assays for Group B Strep and Group A Strep.

Among the decliners, NantHealth's problems started in March when Stat wrote that a contract tied to a $12 million donation to the University of Utah by NantHealth Chairman and CEO Patrick Soon-Shiong effectively forced the university to spend $10 million of the gift on NantHealth services. The story led to several lawsuits filed against the company alleging the firm made misleading statements about its initial public offering.

Though Soon-Shiong and the company denied Stat's story, the fallout continued to drag on NantHealth's stock through the rest of the year.

On the other hand, no single event could be blamed for GenMark's share-price drop in 2017. On the contrary, the firm received clearance from the US Food and Drug Administration for its ePlex instrument and Respiratory Pathogen Panel.

In a note in November, however, Raymond James' Nicholas Jansen downgraded GenMark's shares, citing slower traction in Europe for the company's products, as well as a shift toward more rentals, rather than sales, of its instruments, and a delay in US menu expansion by one to two quarters.

"We still remain firm believers in the technology and believe the ePlex system will be a share gainer over time, but realization of this now appears to be more of a 2019 event, which pushes us to the sidelines for now even amidst low sentiment," Jansen wrote.

Moving forward, though, Schenkel of Cowen said the news for GenMark isn't all bad. The firm is back "'in the penalty box' for at least a couple [of] quarters," he wrote in a note last month, but heading into 2018, the bar for commercial success has been lowered "(albeit painfully). If GenMark can execute relative to sales and menu expansion initiatives, the stock should move significantly higher."

Opko's stock, meantime, steadily declined throughout 2017, as it continued to wait for a positive local coverage decision (LCD) from Medicare contractor Novitas for the firm's 4Kscore test for prostate cancer. Novitas issued a positive LCD for the test in May of 2016 but withdrew the determination when another Medicare contractor Palmetto issued a conflicting LCD that refused coverage of the test. Opko still has not announced a positive LCD by Novitas.

In November, the company's shares dropped 22 percent month over month on its announcement that its third quarter revenues dipped 12 percent year over year.

The same month, however, Opko also provided some positive news to its investors when it announced it had filed a premarket approval application with the FDA for a total prostate-specific antigen test with its Claros 1 immunoassay analyzer.