As with everything that I will post to the investing section of this blog, the following should not be construed as investment advice. It is simply meant to be the ramblings of a now-retired individual with some time on his hands. I am not affiliated with any organization and have no interest in publishing other than for the intellectual exercise. While I make an effort to be accurate with my facts, I do not assert that any of the following information is 100% reliable. If I own a stock upon which I comment, I will always say so. In this case, I own Exact Sciences (EXAS) in a personal account.
So, the background to my interest in Exact Sciences stems from having done research on colorectal cancer screening for a class on multicultural health communications. In doing so, I came to appreciate that efforts to improve screening adherence were significant, and that there were several populations that Exact could access with Cologuard. In aggregate, these opportunities should allow Exact to grow at substantial rates for the foreseeable future.
Quick Background:
Exact Sciences sells Cologuard, the stool-based test that is approved for colorectal cancer screening and included in guideline recommendations as one alternative. The company takes in about $480 per test and generates a mid-70s% gross margin. These are good numbers for a medical technology company, since the price is reasonable, and the margin is strong enough to support high FCF margins at scale. In the fourth quarter, Exact’s screening revenues grew 60% to $229.4mm (>$900mm annualized).
Colorectal cancer is one that, if caught early, can be treated relatively effectively. I won’t go into all the details, but local and regional CRC boast 5–year survival rates of 90% and 71%, respectively. Patients diagnosed with advanced CRC have a 14% chance of being alive 5 years post diagnosis.
For years, the U.S. Preventative Services Task Force and the American Cancer Society (ACS) recommended that persons begin screening for colorectal cancer at age 50. However, CRC impacts a lot of persons younger than 50, and they tend to be diagnosed with more advanced disease as a result. These are persons in their prime, so the impact on them and loved ones is outsized. The rate of CRC incidence in persons under the age of 50 is growing at an outsized clip, which is in part why the ACS recently changed their recommendation to persons aged 45 and above.
Given the weight of the ACS recommendation, a lot of other entities have begun to follow suit. In Colorado, for example, legislators should eventually hear a Bill that would mandate that all insurance companies regulated by the DOI cover screening beginning at age 45.
Racial/ethnic disparities exist when it comes to colorectal cancer screening. I’ll skip the detailed data here, but there are several reasons for this. African Americans, Latinxs and Asian Americans do not trust the medical establishment as much, they tend not to have access to colonoscopy facilities to as great a degree as whites, and there is a stigma associated with screening for some subpopulations. As the U.S. ages, the percent of persons of color reaching the age where screening ought to begin is growing. Today, 30% of candidates are non-white. Importantly for Exact Sciences, 1) there are significant efforts being made to close these racial disparities (in the form of PSAs, outreach, etc.), and 2) many of the barriers to screening lie with colonoscopy, not Cologuard.
Issues:
There are a few approved and recommended CRC screening technologies. Two of these, in theory, compete directly with Cologuard. These are FOBT (Fecal Occult Blood Tests) and FIT (Fecal Immunochemical Tests). However, FOBT and FIT are not as comprehensive as Cologuard, nor are they as easy to take. Most importantly, however, they are much less well known. I spoke with a friend recently who indicated she wasn’t even aware of the non-invasive alternatives until she saw the Cologuard commercials. The other primary competitor to Cologuard is colonoscopy. It is an entrenched way of screening for a couple of reasons. First, it allows doctors to remove polyps (cancerous or pre-cancerous) during the exam. If you get Cologuard and a positive result, you must schedule a colonoscopy as a reflex exam. Second, colonoscopies are big source of revenues for gastroenterologists and the facilities in which they work. Thus, I don’t think we’ll see colonoscopies go away entirely. However, I do think Cologuard will fit into the continuum as a complement to colonoscopies. For populations for which colonoscopies carry a big stigma (African American males for example) or for which colonoscopy represents a monetary and structural challenge (rural populations, those of low socioeconomic status), Cologuard is clearly the better first option.
Based on a review of Exact Sciences’ advertising and promotional activity, I think the company has some (productive) work to do. Thus far, I think the company has largely ignored the low hanging fruit from an adherence point of view. Advertisements target a white audience with white characters and messages. There no Spanish-language advertisements I’ve been able to identify and the Cologuard patient welcome guide was only recently made available in other languages using a literal English translation.
Governance (based on behaviors and documentation) and management appear to be pretty good. I know and like several members of the B.O.D., although I don’t know the executive team. Most of the executives from Genomic Health have left, so the transaction is clean. Still, it remains to be seen how the cultures mesh (or don’t).
Market Opportunity:
According to Exact, there are about 106mm persons aged 45-85 in the U.S. at average risk of developing CRC. We will never screen 100% of the recommended population. Based on data for the most adherent populations (high socio-economic status whites), it’s possible we’ll achieve screening rates between 70% and 80% with time. At 70% adherence and assuming persons get screened every three years (the current ACS recommendation and Medicare reimbursement schedule), the market opportunity in the U.S. alone is $12bn. (In its presentation, the company points to an $18bn market, using a slightly higher price per test and not haircutting for practicality.)
Today, the company has about 5% of the U.S. screening market. Whether Cologuard runs out of gas at 15%, 25% or 35%, there’s a long way to go in theory.
Other Assets:
Genomic Health. Exact is trying to build a diversified cancer testing company. In July 2019, Exact announced it was buying Genomic Health for $2.8bn. In November, the company closed the transaction. Genomic Health is a breast cancer testing company, not dissimilar in focus to Exact. The company sells a product called Oncotype Dx, which is used to grade breast cancer and determine what therapy to take, as well as a woman’s risk of experiencing recurrence. It is not growing nearly as fast as Cologuard, but it is a valuable, high-margin diagnostic, and the business model is more–or–less the same (in this case, the doctor obtains a specimen and sends it in). There are potential integration risks, but there shouldn’t be any funky revenue-recognition alignment issues, etc.
Liquid Biopsy. I’m not sure if what Exact Sciences has in liquid biopsy is any good or not. If it’s good, it’s very valuable. If not, I hope the company realizes as much and shuts things down. Liquid biopsy is probably the hottest area in cancer diagnostics right now. It involves screening and diagnosing cancer from a blood sample, which turns hard to access and early cancers into tractable problems. Guardant Health is probably the leading publicly-traded company pursuing liquid biopsy, and it has a near-$7bn market cap (on 2020 revenue guidance of $280mm at the mid-point).
Valuation:
In rough numbers, EXAS bought Genomic Health for $1.1bn in cash and 17mm shares. The company is now approaching 150mm shares outstanding, and the stock price is ~$60/sh. Based on the timing of the close and EXAS’s cash balance, it looks like the cash has transferred — ergo, the year-end balance sheet ($320mm cash/MS, $830mm debt) should represent the current state–of–affairs. On these numbers, Exact’s EV is roughly $9.5bn, against previously issued revenue guidance of $1.6bn for 2020 (~6x). Exact’s management recently withdrew 2020 guidance on COVID-19 disruption, so it’s unclear what the near-term run rate is going to look like. I think it’s safe to say, though, it’s going to look quite bad. Colorectal cancer screening is clearly not top-of-mind right now, and it probably won’t be for a quarter or two after COVID-19 fears subside. For this reason, I think it probably makes sense to be patient with EXAS. That said, when the dust settles, I think this is a very intriguing opportunity.