Cytyc Corp. Raising $48 Million To Fund ThinPrep Sales Effort

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CEO SUMMARY: Armed with FDA premarket approval, Cytyc must now overcome significant obstacles to introduce its ThinPrep Pap smear system into widespread clinical usage.

ANOTHER WELL-FINANCED competitor will soon enter the Pap smear marketplace. Cytyc Corporation is offering 3,000,000 shares to the public with the goal of raising $48.2 million.

Cytyc will use $25 million of the proceeds to initiate a nationwide sales blitz of its ThinPrep® Sample Preparation System. Another $10 million will fund an international sales effort. Cytyc’s domestic sales program will kick into gear by the second quarter of 1997. The balance of the $48 million will be retained as working capital.

Founded in 1987, the company labored for nine years to achieve pre-market approval by the Food and Drug Administration. That approval was granted on May 20, 1996, permitting Cytyc to market the ThinPrep system for use in Pap smear specimen preparation. This was followed on November 6, 1996 by the FDA’s clearance of an expanded product label which, among other things, allows Cytyc to claim that “specimen quality using the ThinPrep System is significantly improved over that of the conventional Pap smear method.”

During the past nine years, Cytyc generated an accumulated deficit of $43.2 million. It raised capital twice. The first was a private placement for $43.3 million. An initial public offering last year generated $50 million in net proceeds. Most of these funds came from venture capital sources.

Within the clinical laboratory industry, there is widespread difference of opinion about both the clinical effectiveness and economic viability of various new Pap smear technologies. Controversy over such issues means that Cytyc must introduce ThinPrep into a relatively hostile marketplace.

Within the clinical laboratory industry, there is widespread difference of opinion about both the clinical effectiveness and economic viability of various new Pap smear technologies.

Cytyc faces three major hurdles to successfully introduce the ThinPrep System. The first hurdle is acceptance by laboratories and physicians of the technology. The second hurdle is whether the marketplace will pay for the added cost of the ThinPrep procedure. Finally, the third hurdle is how third party payers will decide to reimburse for the procedure.

“From my perspective, the biggest challenge for Cytyc is the economics of Pap smear testing,” stated one analyst who is familiar with Cytyc and competing firms. “At a time when managed care is driving costs out of the healthcare system, Cytyc wants to introduce a technology which is more expensive.”

List price for ThinPrep Pap Tests will be $9.75 per test. This includes reagents, filters and other supplies. The ThinPrep 2000 Processor will list at $39,000 per processor. It is expected that these prices will be discounted significantly for high-volume users.

Commercial Lab Pricing

Major commercial labs commonly offer pricing of around $7 per Pap smear for high volume contracts. The three national laboratories, Laboratory Corp. of America, SmithKline Beecham Clinical Laboratories and Quest Diagnostics, each do about 5 million Pap smears annually. They act as price leaders in the specific regions where they have dominant market share.

Pap smears priced at $7 barely cover marginal costs. As reported earlier in THE DARK REPORT, all three major laboratories consider cytology to be a loss leader that is uneconomical. (See TDR, April 8, 1996.) They calculate that a price per Pap smear of around $15 is closer to the full cost of providing the test.

If $15 is the true cost to perform a Pap Smear test, then Cytyc’s ThinPrep System would add at least $5 to the cost of the procedure, assuming a 50% discount to high-volume users. This means that major laboratories would need a reimbursement of at least $20 to recover full costs and utilize the ThinPrep technology.

“In my opinion,” stated the analyst, “the critical success factor for Cytyc will be whether they can get third party payers to reimburse for ThinPrep at a level that allows laboratories to provide the service and recover their costs.”

All companies offering automated cytology technology share the common problem of convincing third party payers that they should reimburse for Pap smear tests utilizing such technology. That is probably one of the reasons that Cytyc and Neopath announced a joint study in November 1996. The study will evaluate how effectively each company’s technology complements the other in improving the diagnostic accuracy of Pap smears prepared by ThinPrep, then evaluated by the AutoPap 300.

ThinPrep System Uses Monolayer Technology

Cytyc’s ThinPrep® System is actually a new process for preparing a Pap smear specimen. The device used to collect cervical cells is rinsed in a vial instead of being smeared on a microscope slide.

The solution, which Cytyc calls PreservCyt, preserves virtually all of the patient’s cell sample. The vial is shipped to a laboratory where Cytyc’s ThinPrep 2000 Processor is used to prepare the actual specimen.

The processor begins by gently dispersing blood, mucus, non- diagnostic debris and large sheets of cells. As the specimen becomes homogenized, cells are caught against Cytyc’s proprietary cell filter. It is an eight micron membrane which is specially designed to collect abnormal and cancerous cells. Cells collected by the filter are then transferred to a glass slide where they are deposited in a thin, uniform layer, stained and preserved.

Slides prepared this way are remarkably uniform. They consistently present 70,000 to 75,000 readable cells. This compares to a traditional Pap smear, where the number of readable cells can vary from 4,000 to 300,000. The ThinPrep 200 Processor can complete between 20 and 25 samples per hour.

Like traditional Pap smears, a Pap smear slide processed under the ThinPrep System is then read by a cytotechnologist or pathologist. Also, ThinPrep slides can be read by the automated systems offered by NeoPath (AutoPap 300) and Neuromedical Systems (PapNet).

Timing Of Public Offering

Cytyc is making this public offering now for two reasons. First, its stock price is close to $25, which permits it to raise considerable funds without a major dilution of existing stockholders. These funds will be used to finance sales activities and for working capital.

Second, of the three million shares to be offered, one million shares are currently owned by venture capitalists. They expect to net about $25 million from their stock. This is their “reward” for early investments in the company. Of interest, however, is the fact that none of Cytyc’s senior executives are selling stock in this offering.

Number Of Challenges

Cytyc faces a number of challenges to successfully introduce its ThinPrep System into clinical usage. It also has a direct competitor waiting in the wings. Autocyte, Inc. has been spun off from Roche and is moving forward with their version of monolayer technology.

With NeoPath and Neuromedical’s extensive sales and marketing efforts already under way, Cytyc’s sales team becomes one more group of sales reps who will be calling upon clinical laboratory executives to convince them of the benefits of automated Pap smear technology. Expect fierce competition as the marketing wars
intensify throughout 1997.

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