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Exact Sciences Continues to Surprise to the Upside

By Todd Campbell - Jul 26, 2017 at 7:46PM

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Exact Sciences delivered yet another quarter of greater than 100% top-line growth.

Exact Sciences (EXAS -2.73%) reported second-quarter financial results today that exceeded industry-watchers' forecasts, continuing a string of successes that has frustrated short-sellers and caused shares to more than double in the past year. Can this company continue its winning ways?

The backstory

Tens of millions of Americans who should get tested for colon cancer simply aren't doing it. Despite the ability of a colonoscopy to catch colon cancer early, and a much-improved rate of survival when colon cancer is identified in its earliest stages, many patients consider colonoscopies to be too invasive, too costly, and too preparation-intensive.

A man points at a dollar sign in a lightbulb in front of him.


Those decisions to skip testing result in thousands of additional late-stage colon cancer diagnoses per year, and therefore too many unnecessary deaths.

The good news is that those numbers could improve thanks to Cologuard, a stool-sample testing kit that can be completed at home and then shipped to a lab for evaluation.

Digging into the numbers

Current guidelines recommend that everyone between 50 and 74 be screened regularly for colon cancer. Given that there are 76 million aging baby boomers, those guidelines translate into a massive addressable market opportunity for Exact Sciences.

To establish itself in the market, Exact Sciences has been spending money hand over fist on marketing. Those dollars mean the company has yet to report a profit, but have also meant that the number of Cologuard prescriptions has been growing quickly.

In 2016, the number of doctors who have prescribed Cologuard increased 123% to 60,000. As a result, the company completed 244,000 Cologuard tests in 2016, generating $99.4 million in sales, up from $39.4 million in 2015.

This year, sales are accelerating even more. In the first quarter, completed-test volume increased 150% year over year to 100,000 tests, generating $48.4 million in revenue, up 226% from the same quarter in 2016. And in the second quarter, completed-test volume increased 149% year over year to 135,000 tests, producing $57.6 million in sales, up 172% from the same quarter last year. For perspective, industry-watchers had expected $37.3 million in sales in Q1 and $47.7 million in sales in Q2.

Cologuard's inclusion in physician guidelines last year is a big reason more doctors are prescribing it, but demand has also benefited from having more insurers sign on to pay for it. For example, UnitedHealth Group, the nation's biggest insurer, added Cologuard to its formulary earlier this year, and today, the number of covered individuals with access to Cologuard eclipses 235 million, up from 171 million exiting 2016.

Given the company's strong performance in the first half of this year, management is increasingly confident that sales will outpace earlier forecasts. Exact Sciences' revenue is now expected to be between $230 million and $240 million in 2017, up substantially from a forecast of between $195 million and $205 million exiting Q1. Exiting 2016, management had expected sales of only $170 million to $180 million, so the low end of its revenue forecast has increased by $60 million, or 35%, in the past six months.

What happens next

Colonoscopy is still the gold standard in colon cancer testing, but increasingly, Cologuard is being positioned as a viable alternative, especially in patients who wouldn't otherwise be tested or are at a low risk of colon cancer.

The company still hasn't announced a timeline for making the jump to profitability. However, gross margin continues to climb, and losses continue to shrink as sales growth gets leveraged against fixed costs. In Q2, gross margin increased 4% quarter over quarter to 69%, and the company's loss of $30.8 million, or $0.27 per share, was a big improvement from the $44.8 million, or $0.46-per-share, loss reported in Q2 2016.

Over 81,000 doctors have now prescribed Cologuard, and if their experience causes average volume per physician to climb, then it's not hard to imagine that Exact Sciences will eventually get into the black. After all, Cologuard represents only about 2% of an addressable market that Exact Sciences pegs at $14 billion.

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

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