Exact Sciences’ Stock is Soaring – Here’s Why
In a recent article, we talked about how the mythical “cure for cancer” doesn’t actually exist. There is no one-size-fits-all cure for the over 100 types of cancer out there, not to mention the advances being made in cancer genomics that show just how many unique variations of cancer there are. Everyone’s cancer is unique, and the path we’re going down now is genomic profiling and personalized treatment. That’s for people who have mid to late-stage cancer, but for the earlier stages, we may be able to “cure cancer” through early detection.
While startups like Grail are ramping up to dominate early detection at a broader level, other companies are already making loads of money off of tests that can detect specific types of cancer before they become problematic. One such company is Exact Sciences (EXAS).
Founded in 1995, Exact Sciences became a publicly traded company in early 2001 after which time the stock stagnated for about fifteen years, eventually reaching an all-time low of less than $5 per share in March of 2016. If you were smart enough to back up the truck at that price, you’d be up +1,438% on your position as the company approaches a $10 billion market cap today. So, what exactly has happened in the past several years that merits this skyrocketing stock price? The answer can be found in the success EXAS has had in selling the first and only FDA-approved non-invasive stool DNA screening test for colorectal cancer.
Colorectal cancer is the second leading cause of cancer deaths in the U.S. and the leading cause of cancer deaths among non-smokers. Each year in the U.S., around 50,000 people die from this type of cancer and around 140,000 are newly diagnosed:
Colorectal cancer is among the most preventable cancers as it can take up to 10-15 years to progress from a pre-cancerous lesion to metastatic cancer and death. Out of the 85 million people who ought to get screened for this type of cancer, only 38% do so, resulting in two-thirds of colorectal cancer diagnoses being made in the disease’s late stages where life expectancy plummets. Clearly, people need to start getting tested more often.
When it comes to getting tested, there are a variety of different methods as seen in the below table:
Exact Sciences makes the Cologuard test seen in the above table which received FDA approval in August of 2014. The test is administered every three years in the comfort of your own home at a cost of $502, and 92% of the time the test will return a positive result if you have cancer. The cheaper alternative is the Faecal Immunochemical Test (FIT), but it’s less sensitive and requires a yearly test. (A less frequent test would certainly help with the adherence problem we mentioned earlier.) Surprisingly, almost half of the people who are tested with the Cologuard test have never been screened before:
The business model for Exact Sciences is best described by this statement made by the company in their latest 10-K:
If the test were used by 40-percent of the 85 million people that we estimate to be eligible for screening in the U.S. between the ages of 50-85, at a three-year interval, and if average revenue per test was $500, we estimate that our annual Cologuard revenue would be more than $5.5 billion.
With a potentially $5.5 billion in revenue to be realized, Exact Sciences now needs to educate both the patient and doctor about the importance of being screened and the need to use Cologuard instead of any other available screening methods. So far, that seems to be working well as the company has screened nearly 1 million patients and detected early-stage cancer in 4,300 cases. Just last month, the company announced a partnership with Pfizer (PFE) to co-promote Cologuard through 2021 using Pfizer’s massive marketing platform. Per the announcement:
Pfizer will join Exact Sciences’ sales representatives in reaching both physicians and health systems and will also actively participate in extending and deepening the Cologuard marketing campaign.
Following the announcement, shares of Exact Sciences soared over +50% showing that investors feel the Pfizer partnership will result in some serious growth. Even before the announcement, the number of Cologuard tests being sold was soaring, and consequently, revenues have been as well:
As mentioned earlier, EXAS estimates that they could capture $5.5 billion in testing revenues if 40% of eligible patients took their test every three years. That translates into $1.375 billion in revenues per quarter compared to their most recent quarter which brought in just over $100 million in revenues. While there is a lot of upside for the company in testing for colorectal cancer, they’re also working on the development of additional tests for other types of cancer. Through their collaboration with the MAYO Foundation, Exact Sciences has identified proprietary biomarkers for several major cancers, including liver cancer and lung cancer. Both of these are being developed as cancer blood tests for early detection.
Exact Sciences’ Financials
As with most companies that are aggressively trying to capture market share, EXAS is operating at a loss. Strong revenue growth is accompanied by a sharp increase in marketing costs as the company plans to increase the number of sales representatives on staff from 200 to 550.
While $36 million in losses for the last quarter might seem like a big number, Exact Sciences has accumulated a rather large war chest of marketable securities that total nearly $1 billion. That’s a lot of runway for the company to expand before having to look for more funding.
Stool tests that detect cancer aren’t exactly new, but Cologuard offers increased accuracy using DNA testing and an increased time between tests. Couple those advantages with a strong marketing team that can educate patients and the public about the need to get screened and Cologuard may just become a normal part of life for people between the ages of 45 – 80 who should be regularly tested for colorectal cancer. Of course, we’re just talking about one type of cancer here, so we’re more interested in a yearly test that can detect any type of cancer – or better yet – a smart toilet that automatically takes a look every time you use it. That’s a long way away, and until then Exact Sciences has a total addressable market of around $14 billion, little competition, and soon one of the world’s largest pharmaceutical companies helping them to market their Cologuard tests. It’s no surprise the share price is soaring as a result.
Are you paying too much in transaction fees to your broker? Check out a brokerage firm called Zacks Trade that's offering $1 trades for U.S. stocks and options until 2019. After that, you'll pay just $3 a trade or a penny a share, whichever is greater. It's one of the cheapest brokers out there and you can also trade stocks on foreign stock exchanges. Trade US stocks and options for as low as $1 per order until July 4, 2019.