There's no doubt that Exact Sciences (EXAS +0.00%) is a battleground stock. Bulls have long believed that the company's innovative Cologuard colon cancer detection test would convince millions of patients to be step up and get screened. Bears have pointed out that Exact has burned through massive amounts of capital in its history, and note that its test wasn't compelling enough to convince providers and insurers to jump on board and cover it.
Based on the stock's performance over the last few years, the bulls have been fully vindicated thus far. Exact Sciences' share price has quadrupled over the last five years as demand for Cologuard has been off-the-charts strong. Does that mean that it is too late for new investors to get on board?
Image source: Getty Images.
An innovative solution to a deadly problem
Colon cancer is expected to cause more than 50,000 deaths in the U.S. in 2018, which makes it one of the most deadly varieties of the disease. That's particularly disturbing because colon cancer is highly treatable -- if it's detected early.
Unfortunately, patient compliance with the traditional recommendations on colon cancer screening is terrible. Estimates show that only 0.3% of patients adhered to standard-of-care testing guidelines over a 10-year period.
This is the problem that Exact Sciences was founded to solve. It created an easy-to-use, noninvasive screening product -- Cologuard -- that can be used right from the comfort of your home. Individuals simply deposit a stool sample in a kit that they get in the mail, then send the sample back to Exact Sciences for testing. The results will be sent off to their doctor within a few days.
Image source: Getty Images.
While Cologaurd sales got off to a bit of a slow start after the test hit the market in 2014, demand has grown rapidly in the ensuing years as insurers and health care providers have gotten on board:
| Metric | 2017 | 2016 | 2015 | 2014 |
| Cologuard Tests Sold | 571,000 | 244,000 | 104,000 | 4,000 |
| Annual Revenue | $266 million | $99.4 million | $39.4 million | $1.8 million |
Table source: Exact Sciences.
The exponential growth in testing volume has improved the company's gross margins dramatically, too. Exact Sciences sported a negative gross margin in 2014, but it had improved it to a positive 73% as of the most recently reported quarter. Those dramatic rises in revenue and gross profits have put the hurt on the company's short sellers.
EXAS Short Interest data by YCharts
Why the good times can continue
As exciting as this growth rate has been thus far, there are plenty of reasons to believe that the company's rise still in its early innings. There are millions of baby boomers who ought to be screened each year but who aren't being, which is one reason why management asserts that it has only captured about 2% of its current addressable market. The size of that opportunity explains why management projects that it will complete at least 900,000 Cologuard tests in 2018, and generate at least $420 million in revenue. That would give it year-over-year growth of 58%.
Looking a bit further down the road, management also believes that its technology could be used one day to detect several other types of cancer. Tools to detect lung, esophageal, and pancreatic cancer are all in the research-and-development stage right now. Success in any of them could magnify the company's growth opportunities dramatically.
Is Exact Sciences a buy?
While there's no doubt that Exact Sciences' growth potential is massive, it is a much harder call to determine whether or not shares are a buy at the moment. The company is still burning through capital like crazy, and is trading for about 18 times sales. If Cologuard doesn't deliver on its lofty growth expectations, shareholders could be in for a world of pain.
Despite that risk, I think that it is clear that Cologuard is a hit with patients, health care providers, and insurers alike. With plenty of white space left to conquer in the U.S. (not to mention internationally), I'm reasonably confident that this company's upward growth trajectory should continue for the foreseeable future. That's why I think that investors could do well by opening a new position in this stock, even at today's lofty valuation.
