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Exact Sciences' Earnings Hammer Short-Sellers (Again)

By Todd Campbell - Oct 31, 2017 at 10:19AM

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Demand for Exact Sciences' Cologuard tests continues to surprise to the upside.

Americans have historically done poorly when it comes to sticking to recommended guidelines for colon cancer screening, but a new test launched by Exact Sciences (EXAS 4.42%) may be changing that -- and frustrating short-sellers in the process.

Bears have been lining up against Exact Sciences since Cologuard's launch, arguing that the test isn't nearly as useful as a colonoscopy and that doctors and patients will shun it. So far, that hasn't been the case, and as a result, short-sellers have been forced to cover their position in Exact Sciences, pushing shares higher.

Exact Sciences Cologuard kit.

Image source: Getty Images.

Testing made simple

Colon cancer is easy to treat if it's caught early; however, many people are diagnosed in the late stages of this disease when it's far more difficult to overcome.

Everyone between ages 50 and 74 should be tested regularly for colon cancer, yet many fail to stick to a schedule. According to the American Cancer Society, there are over 20 million Americans who are behind on their colon cancer screening. 

Historically, a colonoscopy has been the gold standard for colon cancer testing because it can identify and remove polyps that can turn into cancer. However, many patients avoid a colonoscopy because preparation requires strong laxatives. A colonoscopy can also be costly.

Exact Sciences' Cologuard is an alternative colon screening option that's simpler and cheaper. A Cologuard kit can be completed at home and then sent to Exact Sciences' lab for evaluation. If the test comes back positive, then a colonoscopy is recommended.

In trials, Cologuard identified 92% of cancers that were found by a colonoscopy and 42% of potentially cancer-causing polyps that were caught by colonoscopy.

Sales surging higher

Last year, the U.S. Preventative Services Task Force included Cologuard every three years as a recommended screening option, and demand for it has increased substantially ever since.

Sales were $99.4 million in 2016, up from $39.4 million in 2015. Sales were $57.6 million in just -the second quarter of 2017, up 172% year over year. And during the third quarter of 2017, sales were $72.6 million, up 158% year over year. Overall, 91,000 doctors have ordered a Cologuard kit for a patient, up from 81,000 physicians in Q2 2017 and 60,000 physicians in Q4 2016. 

Making headway toward profitability

The big knock against Exact Sciences is that it's losing money, but a major reason for the losses is spending on marketing. As more commercial insurers have agreed to pay for Cologuard, average recognized revenue per test has increased 9% in the past year to $451.

At the same time that average test revenue is growing, average cost per test is down 28% to $129. As a result, Exact Sciences' gross margin improved 14.7 percentage points year over year to 71% in Q3.

The company also saw year-over-year improvements in operating expenses as a percentage of revenue in the past year.

 Metric Q3 2017   Q3 2016  
Laboratory service revenue $72,574   $28,115  
Operating expenses:    % of Revenue:    % of Revenue:
     Research and development $11,725 16.2% $7,625 27.1%
     General and administrative $30,763 42.4% $20,292 72.2%
     Sales and marketing $37,768 52% $26,308 93.6%
     Total operating expenses $80,256 110.6% $54,225 192.9%

Those profit-friendly trends should continue into year end because management now expects revenue for the full year to be between $254 million to $257 million on test volume of between 568,000 to 572,000. Previously, its expectations were for 2017 sales to be between $230 million to $240 million on 550,000 completed Cologuard tests.

Investor takeaway

Solid third-quarter results and a rosy outlook suggest the company will get closer to turning a profit in Q4, yet Exact Sciences may only be scratching the surface of its total addressable opportunity. According to management, 80 million Americans need regular colon cancer screening, and Cologuard's market share is only about 2%. 

Since nearly 17% of the company's shares available for trading were held short ahead of Exact Sciences' third-quarter earnings report, and Cologuard's market opportunity is $4 billion annually, short-sellers may continue being disappointed by this company's performance. 

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