Exact Sciences (NASDAQ:EXAS) announced on Wednesday that it's using the recent increase in its stock price to raise additional money from investors. Specifically, the company is offering 7 million shares at a price of $35 per share, plus an overallotment option for another 1.05 million shares. If the entire offering goes off without a hitch, it should raise $281 million in cash for the company, gross of any underwriting fees.

The decision to tap markets for more money isn't too surprising given that Exact Sciences has been spending heavily on marketing for its colon cancer screening test, Cologuard.

Burning through cash, for a good reason

Exact Sciences is reporting massive growth in demand for Cologuard, yet the company's still losing a lot of money because of its spending on marketing.

A businessman points at dollars signs in the air.

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In the first quarter, the company says it completed 100,000 Cologuard tests, up 150% from a year ago, and management thinks it will complete 470,000 tests this year, up from prior estimates of 415,000 tests.

Although the increase in completed tests is translating into significantly higher revenue, the company still lost $35 million in the first quarter. Sales increased in the quarter to $48.4 million from $14.8 million last year, but the company's operating expenses were $67 million, up from $54 million in the first quarter of 2016.

The spending is undeniably frustrating to investors eager to see the company transition to profitability, but management has good reason to be pressing the gas pedal when it comes to spending this year.

Although guidelines call for everyone between age 50 to 74 be screened for colon cancer, millions of people underestimate their risk of colon cancer and avoid being tested for it. In addition to being unaware of their risk, many patients have shunned testing because it's expensive and it can be painful.

A colonoscopy, for example, can cost between $1,000 to $3,000, requires patient preparation, and is invasive. Alternatively, Cologuard uses a stool sample collected and shipped from the patient's home for testing, and in the first quarter, Exact Sciences' average revenue per test was $485. 

Since there are about 80 million Americans within the guidelines' age range for testing, and studies show fewer than half of men and women over age 50 are up to date on screening, spending now to boost awareness could be smart. Backing up that thinking is the fact that about 45% of the 450,000 tests that have been completed since Cologuard's launch have been for people who hadn't been previously screened.

Better balance sheet

Exact Sciences' annualized spending clocks in at $270 million exiting the first quarter, and while sales are growing, management estimates revenue will be about $195 million in 2017.

With expenses outstripping revenue, its cash balance has become incredibly important to investors. The company went through $37 million in cash in the first quarter, and while it still had a nice cash cushion at the end of the quarter, it will be in even better shape following this offering. Exact Sciences finished in the first quarter with cash, cash equivalents, and marketable securities of $274.7 million, down from $311.1 million at the end of 2016. 

The company hasn't said what it expects to net after fees from the offering, but the amount should substantially increase its financial flexibility. It plans to use the extra funds for general purposes, which is a boilerplate reason that's given by companies when they raise money, but it did indicate some of the money will go to expanding laboratory and manufacturing capacity.

Potentially, that's good news, because it means management is seeing positive sales trends as more insurers cover Cologuard. Recently, Exact Sciences inked a deal with UnitedHealth Group, one of the last private insurer holdouts. UnitedHealth Group is the nation's biggest insurer and getting it on board adds an estimated 30 million covered lives for Cologuard.

Where do we go from here?

Exact Sciences isn't going to turn a profit this year, but long-term investors are probably better off focusing on Cologuard's peak sales opportunity. Eventually, management should be able to reduce its spending once Cologuard's brand recognition reaches mainstream levels.

According to Exact Sciences' projections, it believes that a 30% market share and once-every-three-year screening with Cologuard translates into a $4 billion per year market opportunity. Of course, we're miles away from that point, but the estimate does provide a bit of context as to just how big this company's opportunity could be.

Since colon cancer is the third most common cancer in America and 49,000 Americans die from it every year, it's not a stretch to think that many more people will become screened now that Cologuard is available. According to the U.S. Preventative Services Task Force, up to 18,000 lives per year could be saved from increased screening, so let's hope Exact Sciences' spending helps more people get screened.

Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.