Cancer diagnostic specialist Exact Sciences (EXAS 0.66%) has lagged the market over the past three years. The pandemic and the economic troubles that followed disrupted the company's operations, and the healthcare leader remains unprofitable. However, one famous name on Wall Street continues to have faith in Exact Sciences.
That person is Cathie Wood, CEO of Ark Invest, an investment management firm that still owns Exact Sciences' shares. There are great reasons to follow Wood's lead; Exact Sciences could deliver excellent results over the long run. Let's find out why.
The core franchise is strong
Exact Sciences is best known for marketing Cologuard, an at-home, noninvasive test for colorectal cancer. It's not difficult to see the need for this product. Colorectal cancer is the second-leading cause of cancer death in the U.S. But being diagnosed with this disease isn't a death sentence -- far from it, especially when it is caught in the early stages before it has metastasized. That means a substantial percentage of cases are diagnosed too late, hence the need for diagnostic options to change that.
Cologuard's increased adoption has been one of Exact Sciences' brightest spots for years. Revenue has generally moved in the right direction for the company, primarily driven by the company's key product.
EXAS Revenue (Quarterly) data by YCharts
Last year, Exact Sciences' revenue increased by 20% to about $2.5 billion. The company's screening revenue, which records sales associated with Cologuard, came in at $1.9 billion (about 75% of total revenue), up 31% compared to the previous fiscal year. Is there more room to run for Cologuard? The answer is yes. Patients at average risk for colorectal cancer are supposed to start regular screenings at 45.
However, Exact Sciences estimates that 60 million people in the U.S. between 45 and 85 aren't up to date with their recommended screening schedules. The company has screened more than 10 million people with Cologuard, which was first approved in 2014. So there remains a massive addressable market ahead for Exact Sciences' crown jewel.
Important clinical progress
Exact Sciences has several other products in its portfolio and is developing newer ones. Or, in some cases, newer versions of existing ones. The company is working on a next-gen Cologuard, which has shown 30% fewer false positives in clinical trials. That's an important selling point for patients and the physicians who prescribe Cologuard. No diagnostic test is perfect, but Cologuard 2.0's greater reliability should allow it to attract more business than its predecessor.
Exact Sciences hopes to launch the new Cologuard in 2025, pending approval from regulatory authorities. Exact Sciences has more exciting products in its pipeline. The company recently reported results for a noninvasive test for esophageal cancer. Here, too, there is a significant unmet need. The disease is highly treatable when caught early enough, but testing options tend to be invasive and expensive.
Most cases of esophageal adenocarcinoma (EAC, the most common type of esophageal cancer) are caught in the advanced stages. More than 80% of EAC patients die within five years of diagnosis. Exact Sciences' Oncoguard Esophagus test produced encouraging results in a study, including 100% sensitivity in EAC patients -- that is, it did not have a single false negative. There is still a long way to go before this product earns approval, but it helps highlight Exact Sciences' innovative potential.
A bright future ahead
Exact Sciences' Cologuard should maintain the momentum it has had for nearly a decade, especially once the newer version hits the market. Cologuard 2.0 is also 5% cheaper to manufacture compared to its predecessor, so it should help Exact Sciences decrease its expenses and get closer to profitability.
What's more, the company's marketing and advertising sales as a percentage of revenue have dropped substantially over the years, something that should continue as Exact Sciences becomes a more established healthcare company. Lastly, the company's newer innovations will eventually make meaningful contributions.
In short, investors shouldn't give up on Exact Sciences. Those who hold onto its shares for a while could see outsized returns.
