2023-04-06 02:30:11 ET
Summary
- Population-based cancer screening is now closer than ever to becoming a reality.
- EXAS products have a leading market position in their respective markets, offering a solid foundation as the company expands into new market opportunities.
- Q4 delivered meaningful progress towards management profitability plans, but uncertainties remain regarding R&D and SG&A expenses as EXAS continues its expansion into new markets.
Investment Thesis
Population-based cancer screening is now closer than ever to becoming a reality, supported by a broad political determination to lower national healthcare spending and improve outcomes through a preventive, active approach to healthcare, cemented by the Affordable Care Act that marked a departure from a reactive care model focused on treating diseases only when they arise. Rapid advancements in gene sequencing and the decline in gene sequencing costs allowed more access, encouraging physician adoption of these molecular tests as a standard of care practice. We are still at the beginning of the road but headed in the right direction. Last year, US Preventive Services Task Force expanded coverage of Colorectal Cancer Screening to the 40 - 49 age group. Limited resources will always push decision-makers to prioritize patients with higher cancer risk. Still, as costs go down, insurance coverage for cancer screening will expand into more age groups. Population-based early cancer detection through a simple blood test will become a reality.
These dynamics opened the door for Exact Sciences ( EXAS ) to serve a rapidly expanding subsector of the healthcare industry by developing and commercializing novel molecular diagnostic tests for early cancer detection and monitoring. The company's acquisition of Genomic Health in 2019, along with the Oncotype product suit, has expanded its market opportunity to blood testing (namely gene expression profiling), building on a solid base it enjoys in stool-based Colorectal Cancer "CRC" molecular diagnostics test marketed under the Cologuard brand.
As an alternative to invasive procedures such as MRI scans, which can cause cancer, EXAS is developing a Multi-Cancer Early Detection "MCED" blood test to detect various malignancies with one blood test. Preliminary results are encouraging, with an average sensitivity of 61% and a specificity of 98.2%. During last week's Q4 earnings call, management discussed plans for its SOARs clinical trial to validate its MCED test. This trial is expected to be the largest, with 26,000 patient participants, marking a critical milestone in bringing population-based early cancer detection screening a reality.
In the previous article , we highlighted that EXAS is well-positioned to pivot into profitability compared to its peers, thanks to its mature portfolio and integration into Medical Standards of Care Guidelines. This advantage allows EXAS to invest less in validation studies and awareness campaigns that push its peers' margins deep into the red.
My bullish rating on EXAS stock in the past few quarters reflects its core business sales growth, relatively clear profitability path, and leading market position. Although competition is high in the field, and EXAS might be overvalued according to the same metrics, I believe that the company's innovative approach to cancer detection holds immense promise for the future of patients and shareholders.
Revenue Trends
A key factor that determines the success and revenue of companies like EXAS is physicians' adoption of their diagnostic tests. Medical practice guidelines are the cornerstone of evidence-based medicine, providing physicians with a reliable framework for making informed clinical decisions. The guidelines are formulated by a small group of key opinion leaders responsible for setting standards of care. These experts review and analyze clinical data, research, and emerging technologies to develop recommendations that shape the practice of medicine. For diagnostic companies like EXAS, having their tests included in the guidelines is crucial for driving adoption by physicians, as such endorsement gives credibility to the test.
An insurance company's willingness to cover a test depends on the quality and quantity of research and literature supporting the tests' clinical validity. A streamlined reimbursement and healthcare coverage are often conditional to having a CPT code, which in turn is influenced by the pace of adoption, which circles back to insurance availability, echoing a chicken and egg dilemma. In a fragmented healthcare system such as the US, changing the standards of care is challenging and expensive.
Fortunately, unlike many of its peers, EXAS derives approximately two-thirds of its revenue from Cologuard, which is widely accepted by payors, physicians, and key opinion leaders. The company's straightforward pitch for Cologuard emphasizes early detection, as it takes about 15 years for a polyp to develop into cancer. Early detection boasts a nearly 100% survival rate, costing only $200 annually for detection and $2,000 for treatment. These costs pale compared to the $23 billion the CMS spent on CRC in 2019 and the 50,000 deaths in the same year.
FY 2022 results released last month show an exponential growth in Cologuard revenue, driven by the United States Preventive Services Taskforce's decision to expand guideline coverage recommendations to patients aged 45 - 49. Sales also benefited from the newly-implemented digital ordering systems and the company's partnership with EPIC, the leading Medical Record Management services company.
The market for the company's flagship product is still in the early stages of penetration. For example, US residents aged 45 to 80 are $127 million, and only 10 million used Cologuard (according to data from EXAS annual report), representing approximately 8% penetration. Below is a table showing Screening Services revenue by payor group—figures in thousands except for YoY percentage change.
Screening Sales | 2019 | 2020 | 2021 | 2022 |
Medicare Part B & C | $ 404,331 | $ 365,471 | $ 438,646 | $ 545,458 |
YoY % change | -9.61% | 20.02% | 24.35% | |
Commercial | $ 368,006 | $ 409,671 | $ 569,944 | $ 743,238 |
YoY % change | 11.32% | 39.12% | 30.41% | |
Other | $ 37,783 | $ 39,925 | $ 53,718 | $ 136,007 |
YoY % change | 5.67% | 34.55% | 153.19% | |
Total Screening | $ 810,120 | $ 815,067 | $ 1,062,308 | $ 1,424,703 |
YoY % change | 0.61% | 30.33% | 34.11% |
EXAS precision oncology "PO" segment represents about a third of its revenue and consists of tests designed to help guide treatment decisions of patients already diagnosed with cancer. Although the PO segment has a smaller addressable market than the Screening segment, the Oncotype brand is well recognized, with a market share of about 70%. Revenue from the PO segment saw a modest 8% increase in 2022, driven by international expansion and partially offset by a sales decline in the US, primarily due to the spinoff of the Oncotype prostate business.
Precision Oncology | 2019 | 2020 | 2021 | 2022 |
Medicare Part B & C | $ 24,325 | $ 165,799 | $ 197,394 | $ 197,327 |
% change | 581.60% | 19.06% | -0.03% | |
Commercial | 29,976 | $ 153,410 | $ 180,177 | $ 177,518 |
% change | 411.78% | 17.45% | -1.48% | |
International | $ 11,444 | $ 77,484 | $ 109,913 | $ 117,738 |
% change | 577.07% | 41.85% | 7.12% | |
Other | $ 428 | $ 43,800 | $ 74,192 | $ 108,905 |
% change | 10133.64% | 69.39% | 46.79% | |
Total Precision Oncology | $ 66,173 | $ 440,493 | $ 561,676 | $ 601,488 |
% change | 565.67% | 27.51% | 7.09% |
Future Plans
EXAS is preparing to begin recruiting patients for the FDA registrational Study of All comeRs ("SOAR") trial, aimed at verifying the efficacy of its Multi-Cancer Early Detection Screening Test. Management believes it to be one of the largest Multi-Cancer Early Detection Screening Test clinical trials in the US.
EXAS is also responding to competitive dynamics (discussed in previous articles ) by enhancing its Cologuard market position and is currently progressing in BLUE-C clinical trial, which will bring about Next Generation Cologuard, or Cologuard 2.0. The company hasn't provided details on packaging, and some details still need to be discussed. The way I imagine Cologuard 2.0 is as a combination of a stool-based and blood-based test, with regulatory clearance to market the two tests together or individually, to help bring adherence to periodic testing up for those who find it inconvenient to hand stool samples.
Profitability and Valuation Model
I expect the revenue momentum in Screening to continue in 2023 and beyond, driven by higher sales team efficiency in a low-penetrated market. My DCF model is predicated on about 19% annual growth in Screening revenue, incorporating a lower growth rate on a higher revenue base compared to previous periods. Below is a chart showing Screening Segment revenue projections.
Author's estimates based on company filings
My five-year estimates for Precision Oncology's revenue are roughly half those of the Screening segment due to the more mature nature of the company's PO product offering. Given the anticipated long sales lead times for introducing new molecular diagnostic products, we put conservative weight on expected new product launches.
There are still questions and uncertainties around GAAP profitability. Namely, we see a need to cut R&D and SG&A expenses as a percentage of revenue in the next five years for EXAS to deliver GAAP value to its shareholders. Nonetheless, we see a clear path to cash flow profitability in 2023 and beyond. A significant portion of EXAS expenses is non-cash items related to previous acquisitions that only serve to track the value creation of past company events. Stock-based compensation "SBC" is a recurring issue, given the need to retain talent in a tight job market. Most SBC expenses go to R&D, Sales, and Marketing personnel, including scientists and sales professionals, rather than C-Suit executives.
In Q4, EXAS succeeded in pivoting its scale into profitability on a cash-flow basis to reduce reliance on capital raising to fund its growth initiatives, reducing one element of concern to long-term shareholders worried about dilution in a high Cost of Capital environment.
Summary
Preventive care is now the focus of policymakers as a means to lower national healthcare spending, and early cancer detection has undisputable benefits for patients and payors. EXAS offers an attractive investment, having the growth element due to expanding market, a defensive element due to the inelastic demand of the Precision Oncology segment, and significant exposure to the politically popular Medicare program through its Screening segment.
As lower gene sequencing prices usher in nationwide population screening, heralding the industry's transition to a volume-based economic model, I see a bright future for the sector as a whole. EXAS' current products have a leading market position in their respective markets, providing a solid foundation to expand into new markets, including Multi Cancer Screening Tests.
A catalyst for the stock price could come from the results of the BLUE-C clinical trial this year as the firm works to solidify its position as the market leader in colorectal cancer screening before launching its next-generation product, Cologuard 2.0.
Our DCF model is based on conservative revenue growth assumptions yet shows great potential. There are risks, especially around the company's ability to leverage operating expenses to achieve GAAP profitability. Nonetheless, the company's progress in achieving cash-flow profitability assuages concerns over reliance on external capital, especially given high-interest rates.
For further details see:
Exact Sciences Leads The Way In Low-Cost Cancer Screening