Pap Smear Industry: Lots of Money, Lots of Deals
Executive Summary
Women's health has been a hot area for health care investors this year, and one of the most active segments of that field is automated Pap smear screening. In the past 12 months, four companies seeking to transform Pap smear screening have gone to public markets to raise money.
Women's health has been a hot area for health care investors this year, and one of the most active segments of that field is automated Pap smear screening. In the past 12 months, four companies seeking to transform Pap smear screening have gone to public markets to raise money, two in initial public offerings and two in follow-on offerings; several others are doing private deals of one kind or another. The total raised in the public markets is $215 million, not bad, considering that most of the companies raised the money before they got FDA approval for their technologies.
And that doesn't include Digene Corp., which went public in May, raising $31.3 million, and which has a DNA-based test for HPV, a strong risk factor for cervical cancer. Nor does it take into account private financings in the field, such as one completed last month by AutoCyte Inc., a new spin-off of Roche Image Analysis Systems. AutoCyte received an undisclosed amount of money from two venture capital firms, Ampersand and The Sprout Group, and several private investors in North Carolina.
What makes Pap smears such an attractive target is that they are screens, and screens, by their nature, can be applied to large populations. Pap smears have an additional appeal: their utility is proven, since it is a given that detecting cervical cancer early can impact survival. The new approaches seek to address the labor-intensive nature of the manual process and/or its weaknesses, including murky samples that make the slides difficult to read.
While NeuroMedical, which went public a year ago, has raised the most money to date, it is Cytyc that everyone is talking about. Last month, the FDA approved Cytyc's claim that the ThinPrepis significantly more effective than the 50-year-old Pap smear in screening women for cervical cancer.
While the companies are competing for laboratory attention and dollars, their technologies, in some cases, are complementary rather than competitive. Cytyc and Digene are combining their products in order to allow physicians to use Cytyc's ThinPrepsamples to test not only for cervical cancer but also for HPV; the association with Cytyc helped Digene's stock nearly double (it was at 11.875 as of Dec. 16). In addition, Cytyc has conducted feasibility studies with NeoPath, demonstrating that NeoPath's AutoPep instrument can effectively sort out abnormal ThinPrep slides. The study shows the feasibility of combining the two technologies, says Joe Kelly, Cytyc's CEO.
In recent weeks, the stock prices of all of these companies have fluctuated a bit and they are down from their highs. Even so, their valuations remain strong: Cytyc, which is trading in the low $20s, down from its high of 34.50, has a valuation of roughly $350 million—not bad for a company that hasn't yet fully launched its first product. Will this group maintain its momentum? That depends on whether it can continue to come out with positive developments. One thing is certain: a lot of people with a lot of money are looking for good deals.