The U.K.'s decision to leave the EU, or "Brexit," led to a more than 3% drop in the S&P 500 and a nearly 5% drop in biotechnology stocks, but Exact Sciences (NASDAQ:EXAS) shares are up 3.8% at 3:30 pm today. The tailwinds supporting Exact Sciences are so strong lately that not even the Brexit-inspired market tumble can derail the diagnostic company's share price. With its shares up 69% since March, can there still be room to run?
Almost all of the gain in Exact Sciences shares has happened since mid-month, when it was leaked that the U.S. Preventative Services Task Force (USPSTF) was finalizing its colorectal cancer screening guidelines in a way that puts Exact Sciences' Cologuard screening test on the same level playing field as other approaches.
Previously, the USPSTF had toyed with the idea of referring to Cologuard as an alternative to long-standing fecal blood tests, sigmoidoscopy, and colonoscopy. If the USPSTF had kept that language in its final guidelines, it could have given insurers the cover they needed to avoid reimbursing for Cologuard and created a disincentive to doctors to prescribe the test.
Because the USPSTF final guidelines ditched the "alternative" language for Cologuard, it's more likely that Exact Sciences' 270-person sales force can gain traction by arguing that Cologuard is better than fecal testing and more patient-friendly than invasive procedures like sigmoidoscopy.
Changing the standard
Cologuard sales are growing rapidly as more reimbursement deals with private insurers have been made, but even with the rising demand, Cologuard is only capturing a fraction of its addressable patient population.
The USPSTF guidelines call for regular screening of adults who are between 50 and 74 years old, a population that totals in the tens of millions of Americans. Yet last year, Exact Sciences completed only 104,000 tests, generating $39.4 million in sales; this year, the company estimates it will complete 240,000 tests and haul in at least $90 million in sales.
The increase in test volume shows that Cologuard has potential to be much more widely used, especially as people become more aware of its patient-friendly features, including the ability to submit a sample from the comfort of your own home.
If demand does accelerate for Cologuard now that the USPSTF guidelines have been released, it could mark a significant shift in the battle to defeat colon cancer. Despite colon cancer being more easily treated when caught early, many Americans forego testing, and as a result, a majority of colon cancer cases are diagnosed in the later stages of the disease, when it's much harder to cure. As a result, 50,000 Americans die every year from colon cancer.
The potential to see its testing volume in the U.S. climb is one reason why shares didn't pause during the post-Brexit sell-off, but it's probably not lost on investors that Exact Sciences remains a U.S.-centric company for now that's pretty insulated against risks across the pond.
Although Cologuard has a CE Marking that allows it to be marketed in Europe, the company's taken what it describes as a "limited and focused" approach to that market. Instead, it's spending the vast majority of its effort on winning market share in the U.S. That means it's not nearly as exposed to post-Brexit currency risk.
Furthermore, Exact Sciences is also insulated against Brexit-inspired economic uncertainty by the Affordable Care Act. Obamacare mandates U.S. health insurers cover 100% of preventative services graded "A" or "B" by the USPSTF. Since the USPSTF gives colon-cancer screening an "A" grade, there's little economic impact on patients associated with testing, even if the economy stutters because of the U.K. decision.
Exact Sciences entered June as one of healthcare's most heavily shorted companies. Prior to the USPSTF news, 22% of Exact Sciences shares available for trading were held short by investors. Since 20 million shares were short exiting May, a lot of Exact Sciences' rally likely comes from sellers scrambling to buy stock to cover their positions.
Although rising Cologuard volume could continue to pressure short sellers in the coming quarters, investors may still want to approach Exact Sciences cautiously. The market opportunity for this company is massive, but so is its spending. Despite expectations that sales will approach $100 million this year, management plans on spending twice that amount. As a result, it's still going to be a while before this company turns a profit.