January 21, 2019 - 12:32pm EST by
2019 2020
Price: 2.79 EPS -0.45 2.36
Shares Out. (in M): 5 P/E n/a 1.18
Market Cap (in $M): 15 P/FCF n/a .83
Net Debt (in $M): -18 EBIT -2 18
TEV ($): -3 TEV/EBIT n/a n/a

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We believe that Check-Cap Ltd. (NASDAQ: CHEK) has more than a 20:1 upside/downside skew with a plethora of positive catalysts slated for 2019, including the long awaited commercialization of Check-Cap’s core colon cancer screening capsule endoscopy product called C-Scan in the second half of the year.  CHEK currently trades at a discount to net cash on the balance sheet (implying that the market is ascribing a negative enterprise value to the business) and has paradoxically declined 32% since reporting transformational results for C-Scan on September 4, 2018 and approval to initiate commercial sales of the system in Israel.  We believe that C-Scan’s upgraded sensitivity results make it commercially viable without any further improvements, as FOBT, the most widely used screening modality for colorectal cancer worldwide, is approximately one-third worse than C-Scan at identifying colon cancer and two-thirds worse than C-Scan at identifying adenomas that could become cancerous.  C-Scan fills a void in the $25 billion colon cancer screening market that cannot be filled by Exact Sciences’ (NASDAQ: EXAS) Cologuard, Medtronic plc.’s (NYSE: MDT) PillCam, colonoscopies, or any other product on the market today. Check-Cap’s primary analogue was a company called Given Imaging, which arguably had inferior technology to that of Check-Cap and was acquired by Covidien plc (now owned by Medtronic) in 2014 for $860 million (versus CHEK’s current market cap of $14.9 million), a price tag that would imply in excess of $95 per fully diluted share of CHEK.  We believe that in 2019, Check-Cap will either announce a licensing agreement with a major strategic partner or be acquired at a substantial premium.


Check-Cap’s C-Scan is the first preparation-free ingestible capsule for colon cancer screening.  It is a low cost option that uses ultra-low dose X-ray and wireless communication technologies to create a 3D map of the colon, allowing physicians to look for polyps, abnormal growths rising from the lining of the colon that protrude into the intestinal canal, and other abnormalities.  Colon cancer is the second leading cause of cancer deaths in the United States, yet the Journal of the National Cancer Institute characterizes colon cancer as “the most preventable, yet least prevented form of cancer”.


Colonoscopies are considered the gold standard for colon cancer detection and prevention with a sensitivity rate for detecting cancer of approximately 95%.  In spite of this, only ~60% of the U.S. target population and a much smaller portion of countries such as China and Germany adhere to colonoscopies. The reasons such low adoption rates of this invasive procedure include obstacles such as required dietary restrictions 1 – 3 days prior to a procedure, bowel preparation to clean out the colon, discomfort associated with insertion of an endoscope, embarrassment, and concerns over pain.  Such barriers have opened the door for an explosion of alternative screening procedures such as Exact Sciences’ Cologuard, a do-it-yourself stool based DNA test and Medtronic’s PillCam, an ingestible capsule that takes images of the colon to identify polyps.


To demonstrate the magnitude of the opportunity for alternative colon cancer screening tests, EXAS currently has a market cap of ~$10 billion despite its Cologuard product having just 4.1% market share in the U.S. screening market.  While Exact Sciences touts Cologuard’s 94% early stage cancer sensitivity, its primary deficiency is prevention. Cologuard has no visual component and tests DNA from stool samples for the presence of abnormal cancerous or precancerous cells. Its sensitivity in detecting high-risk precancerous polyps is disappointingly low at just 42%.  Adenomatous polyps of the colon and rectum are benign growths, but they may be precursor lesions to colon cancer.  If such polyps are not removed, they continue to grow and can become cancerous. Cologuard’s deficiencies in identifying adenomatous polyps creates an opportunity for other noninvasive screening procedures like C-Scan to garner market share.


Capsule Endoscopy & C-Scan


Capsule endoscopy, which is gaining a strong foothold in the smart pill market, involves a procedure that uses a tiny wireless camera to take pictures of patients’ digestive tract.  A capsule endoscopy camera sits inside a vitamin-size capsule that is swallowed by patients. As the capsule travels through the digestive tract, the camera takes thousands of pictures, which are transmitted to a recorder, to identify cancerous and adenomatous polyps.  We believe the smart pill market is about to attract a surge in investment interest, as a Silicon Valley smart cancer pill maker named Proteus was recently valued at $1.5 billion and raised $487 million with backing from big name investors like Novartis.

In February 2014, the FDA approved the use of the Medtronic’s PillCam COLON 2 as a minimally-invasive means of viewing the colon.  The FDA approval occurred in spite of PillCam’s sensitivity of just 69% for 6 mm or greater sized polyps.  The FDA’s lenient approach to PillCam’s approval confirms the importance ascribed by the agency in bolstering colon cancer screening rates, as up to 10% of individuals may not be able to achieve a complete colonoscopy. For such patients, PillCam COLON could be an effective option to allow their gastroenterologists to complete a colon examination.  PillCam, however, fails to address what is arguably the most significant impediment to colon cancer screening, the requirement for bowel preparation. A clean colon is necessary to accurately explore the patient’s colonic mucosa, and PillCam does not have the ability to suck or wash the mucosa. Just before PillCam COLON received FDA approval, Covidien plc acquired PillCam’s owner, Given Imaging, for $860 million.

Check-Cap was founded in 2005 and completed an IPO in the US in 2015.  The company has offices in Israel and Boston, and it employs an R&D team of world-class experts in a range of fields including physics, algorithms, software, hardware and clinical science.   The technologically sophisticated work environment and culture at Check-Cap’s headquarters in Isfiya, Israel is very impressive.

Check-Cap’s C-Scan capsule uses ultra-low dose X-ray and wireless communication technologies to generate information on the contours of the inside of the colon.  The information generated by the capsule is used to create a 3D map of the colon, allowing physicians to look for polyps and other abnormalities. Check-Cap has a partnership with GE Healthcare, which is currently completing its manufacturing line for C-Scan.

C-Scan’s uniqueness revolves around the removal of many frequently-cited barriers to screening, such as laxative bowel preparation, invasiveness and sedation.  We believe that C-Scan is the only noninvasive screening solution that can effectively detect precancerous polyps without bowel preparation.  Since Medtronic’s PillCam uses video camera technology that requires a clear image of the wall of the colon, patients are required to have standard bowel preparation. Unlike optical imaging, however, C-Scan’s capsule uses X-rays that penetrate the colon contents, enabling it to map the inner topography of the colon surface while seeing through stool in the colon.  This key differentiator of C-Scan could enable Check-Cap to significantly accelerate screening rates globally by appealing to a large portion of the population that is deterred by bowel preparation.

In September 2017, Check-Cap completed a multi-center study of the C-Scan system in support of CE Mark submission. The objective of the study was to assess safety and clinical performance of the system in detecting polyps. No bowel preparation, sedation, or change in diet was required.  The study demonstrated only a 44% sensitivity, but there were no notable safety issues.

In the fourth quarter of 2017, however, Check-Cap commenced a clinical study for its C-Scan system Version 3, which incorporates the latest algorithms and system optimization. On September 5, 2018, Check-Cap announced interim results of the trial.  C-Scan system Version 3 demonstrated a meaningfully improved sensitivity of 76% (P=0.0038), with specificity (ability to correctly identify lack of polyps) of 80% for polyp detection.

CHEK’s stock should have soared in this improved data, as the sensitivity of C-Scan exceeded that for detecting advanced precancerous polyps with DNA testing (42.4%) and Fecal Immunochemical Tests or FIT (23.8%), a common screening choice in many areas of the world.  C-Scan’s sensitivity also exceeded that of PillCam COLON when it received FDA approval and Given Imaging was acquired for $860 million. Further improvements for C-Scan are likely as a result of better scan imaging density, 2D/3D imaging and a more accurate motility analysis algorithms based on increased clinical study data.

Instead of rising as we expected, however, CHEK’s stock has paradoxically declined 32% since the date on which the trial results were reported.  One reason the market may have misconstrued C-Scan’s sensitivity results is that they were mistakenly contrasted with Cologuard’s touted sensitivity rate.  These sensitivities, however, do not provide an apples-to-apples comparison, as Cologuard’s 94% sensitivity is for colon cancer detection while C-Scan’s 76% sensitivity rate applies to the identification of polyps.  For high risk precancerous polyps, Cologuard’s sensitivity is only 42%. Hence for patients who are seeking to take preventive measures in detecting and removing high risk precancerous polyps, C-Scan seems to have much better efficacy than Cologuard.

We believe the key revelation being missed by the market is that Check-Cap already has a commercially viable product with extraordinary potential without any further improvements.  In early 2018, the company obtained the CE Mark approval of C-Scan in Europe and on September 4, 2018 it received approval to initiate commercial sales of the system in Israel.  The company expects to start generating revenue in the second half of 2019.  Check-Cap also received FDA conditional approval of its IDE application to commence a pilot study in the U.S.  C-Scan should have success in Europe and Asia, where colon cancer incidences are rising, screening rates remain abysmally low, and inferior FIT and FOBT tests remain popular.  In the U.S., Exact Sciences’ Cologuard has wrenched >4% market share of the colon cancer screening market, opening the door for gastroenterologists to consider other alternatives to colonoscopies.  C-Scan is a logical alternative for patients who have an aversion to colonoscopies and are seeking a test that is both diagnostic and preventive.

If Check-Cap’s management team were slightly more promotional, we believe that CHEK’s stock price would currently exceed $20 per share, which implies a market cap of just over $100 million (yielding an enterprise value of less than $90 million), an 88% discount to Given Imaging’s price tag five years ago.  Instead, the stock currently trades at a discount to net cash, which was $17.6 million, or $3.30 per share at September 30, 2018.

We believe that CHEK is one of the most inefficiently priced securities we have encountered in our two decades of investing.  With a plethora of catalysts over the course of 2019, however, we expect CHEK’s shares to soar.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


1) Strategic partnership / licensing agreement / acquisition: Check-Cap published a new presentation for the JP Morgan Healthcare Conference this month that included some subtle but potentially important new indications that the consummation of a strategic partnership may be approaching.  The timing makes sense given C-Scan’s vastly upgraded sensitivity results. On slide 17 of Check-Cap’s new presentation, it says “Continuous discussions with potential strategic partners”. The addition of the word “Continuous” relative to the company’s September 2018 presentation may indicate that strategic discussions have moved from preliminary to a more advanced stage since the upgraded C-Scan sensitivity data was revealed.  Of course, we may be reading too much into the new language, but slide 9 of the new presentation for the first time specifically breaks out the potential colon cancer screening market opportunity in China, which the company estimates to be >$20 billion. China is a logical market in which to pursue a strategic partnership, as colon cancer incidences are rising significantly, the screening market is barely penetrated, and FOBT is currently the most popular test.  Also, there is clearly interest in China in the emerging capsule endoscopy market. A company called Shanghai Ankon Technologies, for example, recently raised $100 million in venture capital to market NaviCam, a swallow-able device, for imaging the gastric track to diagnose stomach cancer and other gastric problems.

Other strategic partners or acquirers for Check-Cap could include Medtronic and Exact Sciences.  In fact, in its last 10K, Exact Sciences specifically mentions C-Scan: “Our Cologuard test faces competition from procedure-based detection technologies such as….and newer screening technologies such as pill-based imaging solutions like PillCam COLON, cleared by the FDA in February 2014, and C-Scan, which recently obtained a CE Mark.”  With a rapidly expanding salesforce to leverage, Exact Sciences could offer gastroenterologists C-Scan as a noninvasive alternative to Cologuard that effectively identifies precancerous polyps.

With respect to Medtronic, two members of Check-Cap’s Board likely have ties to the company.  Check-Cap’s Chairman, Steve Hanley, was the President of Covidien’s Imaging Solutions business unit (Covidien was acquired by Medtronic) and Yuval Yanai was the CFO of Given Imaging until it was acquired by Covidien in 2014.  It seems likely, therefore, that Medtronic is aware of Check-Cap’s superior capsule endoscopy technology.

An acquisition of or strategic partnership with Check-Cap by a large Chinese medical devices company, Medtronic or Exact Sciences would make a lot of sense.  With CHEK’s stock at a negative enterprise value, the company seems like a sitting duck for a takeout.

2)    FDA progress: In December 2018, Check-Cap announced that the FDA conditionally approved the Company's Investigational Device Exemption (IDE) application to initiate a U.S. pilot study of C-Scan.  Check-Cap may begin enrolling patients immediately upon approval by the study site's Institutional Review Board (IRB). We expect this approval to occur soon. In the interim, we expect GE to complete its manufacturing line for C-Scan, a catalyst that may remind investors of GE’s commitment to the product.

3) Commercial sales of C-Scan to commence: In the second half of 2019, Check-Cap expects to begin selling C-Scan in Israel and the EU.  Utilizing the sales trajectories of Given Imaging and Exact Sciences as a template, Check-Cap’s revenue could ramp quickly. In the latter half of 2001, for example, Given Imaging generated its first sales, and in 2002 the company grew revenues exponentially to $29 million.

Risk Factors & Disclaimer


While we believe CHEK’s risk/reward profile is compelling, it is a pre-revenue company and hence there are many risk factors to consider.  If, for example, the company fails to execute in commercializing C-Scan while burning through its cash balance, the stock could decline from current levels.  CHEK is an extremely volatile small cap stock, and we advise investors to conduct their own due diligence before investing. We have an ownership interest in CHEK at the time of this write-up that could change at any time without notice.  The information set forth in this analysis represents the opinion of the author as of the date of this report. This report contains certain forward-looking statements, which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “could,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms.  All are subject to various factors, any or all of which could cause actual events to differ materially from projected events.

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