The Wall Street Journal - August 11, 1999
Steven D. Jones

The biotech concern, which began as a private research firm in 1981, hasn't had much success creating a market for its system of using saliva to check for illegal drug use or such medical conditions as HIV. And it has failed at attempts to increase cash flow with what turned out to be money-losing ventures into genetically engineered crops, and even strawberry processing.

As a result, its stock has been under the weather -- at $4.937, off from its 52-week high of $8.375 in January. And its per-share loss has widened to five cents in its most recent quarter, compared with a 66.7% increase in earnings per share this year for the industry as a whole.

But Epitope has dropped those unprofitable ventures and has a new plan to win the saliva-testing market. Its strategy: It recently formed a partnership with two companies to enter the $1 billion annual market for pre-employment drug testing.

That move has convinced Bart Blout, a money manager with Sawtooth Capital Management in Century City, Calif., that Epitope has finally turned the corner in its long pursuit of a mass market for its technology. Over the past 10 months, Mr. Blout has bought 1.4 million Epitope shares, or 10.2% of stock outstanding -- and he's still buying.

"The perception on Wall Street is that Epitope is nothing, and I love it," says Mr. Blout, who adds that he intends to begin selling "when everybody starts to love it," which he expects to happen within 12 months.

What Mr. Blout figures investors will love is a replacement for something a lot of Americans hate: the urine test, which for pre-employment drug screening has become as much a part of business as voice mail. The American Medical Association estimates that 85% of businesses screen new hires for drugs. Nearly all of the 28 million annual tests are performed on urine samples collected at an occupational health clinic or in controlled settings on the job; technicians then measure the temperature of the sample before sealing it and sending it away for lab analysis.

Collecting urine samples is a graceless process at best, and doing it well requires medical technicians and time -- sometimes even hours when workers must travel to a distant clinic for testing. The tests cost between $40 and $55 per person; $10 to $18 of that comprises personnel and overhead costs necessary to collect the sample, according to Mr. Blout.

The saliva test Epitope is introducing will cost about $15 less because it can be done on site. The potential employee lays an absorbent swab between his gum and cheek below his molars and leaves it there for two minutes. It's then removed and sealed in a plastic vial for shipping to a lab. There is no embarrassing trip to the bathroom, and the results, the company says, are just as reliable.

Besides the obvious cost savings of the saliva test, Mr. Blout also is enamored of Epitope's partnership to market the test with LabOne of Lenexa, Kan., which offers laboratory testing services for the insurance and health-care industries, and STC Technologies, a private company in Bethlehem, Pa., that bundles kits for medical tests.

This is the plan: STC Technologies packages the Epitope saliva-collection device into a kit with its compounds to test the sample. The Federal Food and Drug Administration last year approved the kit for use in drug testing. LabOne delivers the kit to personnel managers and then tests the samples for drugs once they are collected. LabOne then notifies the employer of the results in three days or less.

Together, the partners have launched a $2 million marketing campaign to sign up personnel managers at Fortune 500 companies to test the system beginning in September. The system will be available nationwide in the first quarter of 2000. The partners expect that by 2002, they will have captured about 10% of the drug-testing market -- about four million tests a year, says Mike Gausling, president of STC Technologies.

Mr. Blout is more optimistic: "I think it will be triple their expectations," or some 12 million tests annually.

For Epitope, which reported a loss of five cents a share in the fiscal third quarter ended June 30 on sales of $2.6 million, such success with employment drug testing would make for a quick turnaround, says President and Chief Executive Officer John Morgan. Once sales of the tests climb over $13 million annually, he says, they will start to show profits that "will fall quickly to the bottom line."

The company currently sells about three million of its saliva-testing devices annually. Most are used by the insurance industry for testing potential life-insurance policyholders for HIV, cocaine use and smoking.

Still, there are reasons to be cautious. Matt Desmond, an analyst with the Portland-based Red Chip Review, a small-cap newsletter, says Mr. Morgan has brought focus and discipline back to Epitope in his nearly two years at the company. But investors "need to see" some earnings results from the new partnership "before jumping back on board."

And Mr. Morgan knows that competitors with a big stake in urine testing -- such as pharmaceutical firm Roche of Basel, Switzerland, and Quest Diagnostics of Teterboro, N.J., won't "roll over and play dead."

Meanwhile, other rivals also are vying to break the monopoly of urine testing for drug use. Psychemedics of Cambridge, Mass., is marketing a system that uses hair for testing. And Avitar of Canton, Mass., is promoting a test that gives a reading from a saliva sample in less than 15 minutes with no lab testing. (Epitope plans on challenging Avitar on that front with a similar test called OraQuick to be introduced next year.)

But Mr. Blout of Sawtooth Capital says neither company has the advantages of Epitope and its partners: lower price, convenience and reliability. The Psychemedics hair test, he says, is costly and detects drug use so far in the past that it is irrelevant to some employers. The Avitar test is quick, but must be confirmed by a separate lab test on either urine or saliva to stand up to scrutiny. "Every employer wants a lab between them and the employee on this issue," Mr. Blout says.

"I know there are guys out there who doubt Epitope can succeed in this market," adds Mr. Blout. "But the precision with which Epitope has realigned its business is impressive. I think this stock will take off sometime this year."
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