2023-06-22 08:00:00 ET
Summary
- Exact Sciences' next-generation Cologuard test shows improved specificity, cancer sensitivity, and precancer sensitivity, which could lead to better insurance coverage and increased reimbursements.
- The successful BLUE-C study and potential FDA approval for the upgraded test may drive revenues higher than previously forecasted.
- Despite the promising results, the company's current valuation holds significant risks.
The announced results from the BLUE-C study signify a positive development for Exact Sciences ( EXAS ) and its non-invasive colorectal cancer screening product, Cologuard. The study's successful conclusion signifies that the next-generation Cologuard has improved specificity, cancer sensitivity, and precancer sensitivity.
Diving into the specifics, the main changes in the next-generation Cologuard compared to the current version are its improved specificity (including non-advanced findings increased from 87 to 91, including no findings increased from 90 to 93), improved cancer sensitivity (increased from 92 to 94), and slightly improved high-grade dysplasia sensitivity (increased from 69 to 75). The advanced precancer sensitivity remains almost the same (42 to 43). The false positive rate also decreased by 30%, which means it is less likely to indicate cancer when none is present.
Implications
In terms of insurance coverage and reimbursements, these improvements could have significant implications. There is the potential for better coverage since improved performance could encourage more insurance companies to cover the test, seeing it as a cost-effective method for early detection of colorectal cancer, ultimately, resulting in better market penetration for Exact and Cologuard.
Furthermore, these improvements could ripple into the realm of insurance coverage and reimbursements, presenting significant ramifications. A superior test might persuade more insurers to cover the cost, viewing it as an economical means for early colorectal cancer detection. This would translate into wider market penetration for Exact and Cologuard.
Additionally, the enhanced precision could justify increased reimbursement rates from insurance providers, giving a direct boost to Exact Sciences' revenue. With a reduced false positive rate, insurance companies and healthcare systems could reap cost savings due to fewer follow-up tests and procedures, providing an additional incentive for insurers to advocate the use of this test.
If the new Cologuard iteration gains more traction and insurance coverage, it could be employed more frequently for colorectal cancer screening, leading to a higher volume of tests and consequently, increased revenue for Exact Sciences.
Ultimately, the reimbursement will depend on a variety of factors, including the decision-making processes of individual insurance companies, possible changes to healthcare policies, the test's market acceptance, and its final FDA approval. It's also important to consider that insurers will weigh the cost of the test against the cost of treating advanced colorectal cancer cases that might be avoided through early detection.
It is important to note that, previously, I considered multiple timelines for growth vectors for this company. Notably, the now successful BLUE-C study was perceived as a potential catalyst for medium-term revenue acceleration. With the study's results exceeding expectations, this projection holds even more weight:
“To that end, Exact Sciences has completed enrollment of the multi-center BLUE-C study, which is expected to support FDA approval of the enhanced Cologuard test. This presents a short-term opportunity, and it seems the best case for small accelerations in revenue in the middle term.”
Impact on our investment thesis
Exact Sciences is now outpacing our expectations as we had analyzed in an earlier article . The company's administration has set a path to extinguish its cash-burn, pledging to achieve a positive adjusted EBITDA in 2023. In actuality, the company's financial guidance includes a goal of generating $25 million in adjusted EBITDA.
This goal is paramount in ensuring the company's financial stability and sustaining its autonomy, especially in an era where tech firms with tight finances are not finding the market too welcoming.
Despite this, I had some reservations about the company's ability to meet this target, given it was starting from a negative EBITDA of $143 million in 2022. The noticeable reduction in liquid assets on the balance sheet compounded these concerns, hinting at even more challenging times ahead in bridging the cash-burn gap. However, a different picture emerged with the release of the first quarter results. When adjustments are made for Depreciation and Stock-Based Compensation, the company was able to break even in terms of adjusted cash flow.
Thus, the BLUE-C study emerges at a juncture when Exact Sciences is looking more fiscally appealing, making significant strides in curbing the cash-burn.
Investment Catalyst
Now I find myself in a position to significantly revise my bull and bear prognoses for Exact Sciences. In our preceding analysis, we put forth both an optimistic and a pessimistic outlook to serve as benchmarks for our valuation. The latest quarterly results and the BLUE-C study have offered us a tighter grasp on the assumptions we make for each scenario.
The bull case for Exact Sciences could be substantially bolstered by the successful study results and the potential FDA green light for the upgraded Cologuard test. Should this enhanced test see widespread adoption, it may drive revenues higher than previously forecasted. An upswing in the adoption rate could potentially surpass the anticipated annual revenue growth of 20% through 2025. Furthermore, the encouraging results may inspire investor trust and potentially escalate the revenue multiple, let's suggest, to 10.
Conversely, while the bear case remains relevant due to potential roadblocks, regulatory hurdles, or amplified competition, the successful study results could alleviate some of these concerns. Alongside the promising first-quarter results, this could potentially diminish the chances of a harsh liquidity squeeze. Hence, even though there exists a risk of Exact Sciences underperforming close to my previous bear, this risk seems less likely. For the bear case, I am now assigning a growth rate of 10%. The results are the following:
Results have seen a considerable improvement since our last dissection. Unfortunately, while we held a pessimistic view, the company's value has ascended. While the prospective upside for Exact Sciences is undoubtedly compelling, it is overshadowed by the fact that it showcases a symmetrical risk-reward profile, which isn't sufficient to persuade a shift in our company perspective.
The current valuation holds significant risks, and a reevaluation of the company's share price, akin to what other genomics firms have experienced, could be rather severe. In my assessment, the likelihood of the bull scenario unfolding is higher than that of the bear scenario. Still, determining whether it is sizable enough to justify a bigger wager on the stock is a tough call.
Additional regulatory challenges or setbacks in other product development could cap Exact Sciences' potential. The competitive landscape is not stagnant either, with several firms such as Grail and Guardant striving to make breakthroughs in the field. Therefore, I aim to avoid the mistake of chasing after the company after a substantial rise in value. It's a challenging stance to maintain as it can lead to a feeling of lagging behind, but given that I already have a position in the company, I am inclined to lean towards caution nonetheless.
For further details see:
Exact Sciences: The Future Of Colorectal Cancer Screening And The Impact Of BLUE-C Study Results