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We are initiating coverage of AnPac Bio-Medical Science Co., Ltd. (NASDAQ: ANPC) with a target price of $7.00. AnPac is a China-focused cancer screening company that designs and manufactures devices that analyze the biophysical properties of blood to determine an individual’s risk of cancer. It is also building a presence using this same technology in the US. The company’s founders spent many years combining the disciplines of medicine, physics and weak signal detection to decipher the biophysical information contained in cells suspended in blood for the purposes of cancer detection. In contrast to the traditional tests that have been used for screening which differ by type of cancer, AnPac’s CDA technology uses a single test that can evaluate the risk of many cancers, including the most common ones such as breast, colorectal and lung. The approach provides earlier detection when compared to image-based screening and can be performed rapidly with a single sample of blood. For some cancers that can be addressed via CDA, such as esophageal and brain, no practical detection methods exist. The test is not only beneficial to patients, but is also valuable for the health management of large populations to help optimize costs and prompt early treatment. We see the target market for these services as managed care, large corporations, hospitals, single payer systems and other groups where it is critical to efficiently allocate scarce health resources where they will have the greatest impact.
Key reasons to own AnPac Bio shares:
‣ Swiftly growing demand for cancer screening
‣ Rapid, inexpensive screening process for the most common cancers using a single blood sample
‣ High incidence and prevalence of cancer in primary markets of China and US
‣ Effective screening approach using biophysical properties
◦ Substantial literature supportive of the approach
◦ Prospective studies presented at ASCO demonstrate high accuracy
‣ Physical labs in place in China and the US
‣ Extensive history of research associating biophysical properties of blood with cancer
‣ Opportunity to expand suite of products to provide additional services
◦ Therapy selection
◦ Treatment monitoring
◦ Genomic testing
‣ Development platform that can be applied to many genetic tests and cellular therapy applications
AnPac Bio is focused on two of the largest cancer markets in the world, China and the United States. The disease has been a leading cause of death in both these countries since 2011. There are 18 million new cases of cancer around the globe annually with about 4.3 million in China and 1.8 million in the US. The number of cases is expected to grow as the incidence of cancer increases with age, and both of these regions are experiencing faster growth in the older population as a result of demographic trends.
Despite the high prevalence of cancer, there are few screening tests available that are easy to use, highly accurate, inexpensive and simultaneously test for the most common cancers. While there are a great number of screening tests available for different types of cancer, some cancers do not have a single reliable detection method, such as esophageal or brain cancer and tests that do exist provide low accuracy. This unmet need highlights the opportunity for a new approach that is able to demonstrate high levels of sensitivity and specificity for the types of cancer most difficult to detect.
CDA: A Differentiated Approach
AnPac adopts a differentiated approach to screening and detecting cancer that we see as establishing a new paradigm in routine checkup screening and complementing both traditional and new cancer testing, including ctDNA and genetics. The use of biophysical properties to screen for cancer is not mainstream, yet there has been considerable research conducted in the field. Cancerous cells have distinct characteristics related to their structure and are larger, have greater density, lack surface adhesion molecules, and have greater stiffness among other attributes as compared to normal cells. These features allow for the use of acoustical, electrical, magnetic, nanomechanical and optical measurement devices to differentiate them from normal cells. These detection methods are simpler and cheaper to execute than current generation sequencing-based liquid-biopsies, making CDA more efficient for preliminary, routine screening. While there are many types of cancer originating from different sites, the various cancer cells share similar attributes that allow them to be distinguished from normal cells. Thus, biophysical screening enables not only the rapid and cost-effective screening for a cancer, but the simultaneous screening for multiple cancers.
AnPac developed its Cancer Differentiation Analysis (CDA) technology in the first years after its foundation and performed the first commercial CDA test in China in 2015. The unit consists of a blood sample unit, a sample transport unit, a sample mixing chamber, a testing unit and a data storage unit. The machine employs a microfluidic device consisting of micro channels, micro sensors and measurement instruments with automated data recording capabilities. It is connected to a fluid delivery line inside the testing unit. When the sample enters the micro-channels of the microfluidic device, it is probed and analyzed to measure the desired parameters.Results are measured over discrete units of time and further analyzed by Anpac’s proprietary algorithm.
After the test has run, the CDA value is generated along with the protein tumor factor (PTF) and the cell tumor factor (CTF). These two outputs measure changes in protein and cell properties in the blood, respectively.
AnPac’s studies have demonstrated high levels of accuracy in 26 common cancers, providing a comprehensive solution for a disease that in many instances is not detectable until an advanced stage. Numerous retrospective studies have been conducted in conjunction with Chinese hospitals and research institutions. 25 research studies have been conducted and 15 of them have been published at ASCO meetings, other medical conferences or in medical journal supplements. AnPac will continue its research efforts in both China and the United States and conduct prospective studies that are expected to provide additional evidence of the CDA test’s utility.
A Simpler Alternative
The use of biophysical properties for cancer screening is not a mainstream approach. Modern science has tilted toward highly sophisticated, challenging and expensive sequencing without realizing the utility of information that is available at the elegantly simple level of biophysics. One catalyst that could shift interest towards this approach may be the resurgence of interest in machine learning; even the most elementary of machine learning models can leverage large amounts of data and produce actionable insights. Combining sensor design and fabrication, a vast blood-based cancer dataset and a trained algorithm is what AnPac founders, Drs. Herbert and Chris Yu, achieved when developing CDA technology. Leveraging these characteristics will provide an alternate and complementary approach to traditional screening.
The Market is Large
The market for screening and checkup packages is large; however, there are additional opportunities for growth as well. This includes assisting in cancer diagnosis, monitoring recurrence of cancer after therapy and guiding therapy selection. The CDA test may prove a useful and effective tool to improve cancer treatment and optimize its timing, improving outcomes.
The world of diagnostic testing has exploded over the last decade. As more treatments have become available for a wide variety of diseases, testing has become more important to identify those who will benefit from available therapies. Precision medicine, which considers an individual’s genetics and physiology in the determination of treatment, has been enabled by the expansion in patient specific data, collected through a variety of methods including screening. When a person is diagnosed with cancer, the genetic signature of their disease is used to tailor the appropriate therapy. We anticipate that the signature of biophysical properties of cancer will also be able to efficiently and cost effectively monitor a patient’s treatment. With the advent of genetic sequencing and blood-based biopsies, the ability to narrow down stage and type of cancer has improved markedly, allowing for ever more accurate diagnosis and precision therapy. AnPac’s CDA technology is distinct from sequencing-based tests that generate large amounts of highly specific information but are costly and are challenged by signal to noise; instead, CDA is a tool that can effectively and quickly identify risk at a relatively low price.
Sources of Revenue
AnPac’s initial revenue generation has been in cancer screening and physical checkup packages conducted in China. As the company advances through the regulatory process we expect it to obtain several clearances and approvals to fully market CDA in its two primary geographies. After receiving regulatory approval in China, AnPac will have access to the hospital market which should catalyze a leap in testing and revenue growth for the company. About 100 million Chinese citizens visit hospitals to conduct annual physical checkups every year. CDA is a natural, inexpensive addition to physical checkups, especially for those age 45 and older. The company is also pursuing laboratory certifications, device clearance and additional studies in the United States that will allow for commercialization of the CDA test in this region when achieved.
AnPac offers two main services: cancer screening and detection tests and physical checkup packages. AnPac’s CDA technology is also capable of assisting diagnosis, monitoring recurrence and selection of therapy. We anticipate a broader penetration of the tests as the technology becomes more widely used and accepted. AnPac is in the early stages of growth and is generating minimal revenues in China. One of the primary hurdles to faster growth is clearance for a Class III medical device registration certificate from the Chinese National Medical Products Administration (NMPA). Securing this certificate will allow AnPac to place CDA diagnostic equipment in hospitals, the primary source of annual physical checkups for 100 million Chinese citizens every year. AnPac may obtain this authorization by late 2021. Recent successes, such as the new contract with Beijing Yuan Jian Health Management and the launch of new test products provide additional opportunities for revenue expansion.
While there are no revenues yet generated in the United States, AnPac plans to initiate a variety of studies that will validate the technology with leading academic centers. The company has active laboratories in California and Pennsylvania. These labs will initially be used to conduct further validation studies and later function as the bases for conducting CDA tests in the United States.
AnPac is approaching diagnostic cancer screening from a new direction that identifies the biophysical properties of blood to identify cancer risk. Not only is this approach uncorrelated with other testing approaches that use DNA sequencing but it is also much less costly with simpler detection mechanisms. The company is in an attractive market as there are an estimated 18 million cases of cancer a year, and as the likelihood of the disease increases with age, there is also a demographic tailwind. Research has shown that catching cancer early can have a dramatic impact on survival and on the total cost of treatment, which can make a strong economic case to employers and health plans who want to keep their people on the job and reduce spending on preventable disease. Current screening approaches are poor and present accuracy levels that create an undue burden on the health care system and on the patients who use them, either through unnecessary worry and procedures for a false positive, or failure to catch the disease for a false negative. We see a long runway of growth for this technology given its simplicity, low cost and high rate of accuracy. Following additional studies in the United States and diagnostic test and device clearance in the US and China, we anticipate high double digit growth and penetration into employer and health plan markets over the next several years. Based on our forecasts and valuation assumptions, we generate a target price of $7.00.
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1. Source: AnPac Corporate Presentation, November 2019
2. Source: AnPac corporate filings and author’s work.