By Brian Marckx, CFA
Yesterday (8/28/2012) Transgenomic (OTC Markets:TBIO) announced an agreement to acquire ScoliScore, a saliva-based genetic test to determine the likelihood that a mild curvature in the spine of adolescents will progress to one which eventually requires surgery.
In return for global rights to the ScoliScore Adolescent Idiopathic Scoliosis (AIS) Prognosis Test, TBIO will pay Axial Biotech $4.4 million in cash. The deal, which still needs to be ratified by Axial shareholders, is expected to close by October 1st.
Scoliosis is a side-to-side curvature of the spine (an "S" or "C" shape). Approximately 65% of scoliosis cases are characterized as idiopathic (unknown cause), with genetics identified as having a clear link to the disease. Mild (10 - 25 degree curve of the spine) AIS afflicts approximately 100k adolescents in the U.S. Although typically less 5% of cases result in the curvature of the spine progressing to the point where surgery is required, most patients will undergo strict monitoring which often includes regularly x-rays of the lumbar region. Lumbar x-rays expose patients to potentially unhealthy doses of radiation (studies have shown that radiation from lumbar x-rays is about 30 times that of chest x-rays), which can be particularly problematic in children.
The ScoliScore assay is indicated for use with Caucasians ages 9 to 13 with a mild curve of the spine. The test uses a saliva sample and looks at 53 specific DNA markers. Results of the test classify a patient as either low risk (1-50), intermediate risk (51-180), or high risk (181-200). On average, approximately 75% of mild AIS patients are classified as low risk. The test has shown a very high level of accuracy (negative predictive value of 99%) in predicting which low-risk patients will not progress to where surgical intervention will be required. While the label suggests using it as an adjunct to current clinical information including x-rays, the high accuracy indicates it may offer ~75% of the ~100k adolescents diagnosed with mild AIS every year the potential to forego (or at least reduce) the stringent, potentially unhealthy and costly monitoring associated with AIS.
Development of ScoliScore included validation on over 10,000 patient samples. It is the most rigorously studied genetic test for scoliosis and the only one on the market with high predictive value and accuracy.
The test was co-developed and is currently marketed by DePuy Spine (part of Johnson and Johnson (JNJ)) and Smith and Nephew (SNN), both of which specialize in orthopedic and spine devices, not genetic tests. JNJ and SNN are also relative behemoths compared to TBIO, with potentially less incentive to dedicate efforts to market the test (i.e. - tough to move the needle with these large companies).
We think ScoliScore could be a very solid fit for TBIO, offering meaningful top-line and margin expansion. The company will leverage their sales force (although they may add a handful of sales people) with the test processed at their existing lab facilities with existing personnel. While there is only spotty (estimate ~30%) reimbursement, given the ability to leverage their infrastructure, we estimate the acquisition could be highly profitable for TBIO with just the existing already established base of physicians using the test. We also expect that TBIO will be aggressive in marketing the test, which could potentially significantly grow sales volumes of ScoliScore as well as potentially increasing the price point (which we estimate is already very high margin).
We will update our financial model following the closing of the deal, which is anticipated sometime in September.
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