A lot of people worried that demand wouldn't materialize for Cologuard, a colon cancer screening test developed by Exact Sciences (NASDAQ:EXAS) as an alternative to colonoscopy. They were wrong. Cologuard's sales have grown steadily since its launch in 2014, and in the third quarter its sales totaled $118 million, up 63% from one year ago. Can this company continue rewarding investors with growth? Read on to find out what management's saying about its future.
What's the story
Colonoscopy remains the gold standard for diagnosing colon cancer, but colonoscopies can be expensive and they require pretest preparation that's burdensome. Because of this, 2 out of every 5 people who should be tested for colon cancer are behind their doctor's recommended schedule for testing.
That's a big problem. Colon cancer is easily treated when it's diagnosed early, but many cases aren't diagnosed until the cancer has advanced and is tougher to treat. Nine out of 10 patients survive five years when colon cancer is diagnosed in stages 1 or 2, however, only 1 in 10 patients survives five years when it's diagnosed in stage IV. Every year, colon cancer claims the lives of 50,000 Americans.
Clearly, catching this cancer early is critical, and arguably, the best way to do that is to increase patient screening by reducing costs and increasing convenience. Cologuard delivers this convenience, as patients are able to collect a stool sample at home and ship it to an off-site lab for screening, and since 92% of patients have access to Cologuard through their insurance with no out-of-pocket cost, it delivers cost savings, too.
Reaching more patients
Instead of licensing Cologuard to a larger company with deeper pockets, Exact Sciences has funded Cologuard's development and marketing all by itself. The company has invested in facilities that can process increasingly more tests, negotiated with insurers on reimbursement, and spent hundreds of millions of dollars on marketing and sales to drive consumer awareness.
Unquestionably, the company's efforts have paid off. Increasingly, more tests are being ordered by physicians every quarter, and as a result, Exact Sciences has screened 1.6 million people to date, including 241,000 completed tests in the third quarter, up from 161,000 in Q3 2017.
Despite its success, though, the company believes it has a lot of work left to do. Its sales team has reached only one-third of the primary care doctors in the U.S., so two-thirds of primary care doctors may not fully understand the benefits of recommending Cologuard to their patients.
To fix that, Exact Sciences inked a marketing collaboration deal with Pfizer (NYSE:PFE) in August. Beginning in Q4 2018, Pfizer is leveraging its large, deeply embedded sales team to co-promote Cologuard, significantly increasing the number of doctors who can be called upon. Since the Cologuard reorder rate is highest for doctors who are called on regularly, turning Pfizer's sales force loose will result in more frequent contact that, in turn, could cause Cologuard volume to accelerate. Pfizer has agreed to conduct at least 625,000 sales calls per year and to spend $65 million on marketing over the next three years in exchange for sharing any profit above a baseline.
According to Exact Sciences, it "successfully trained Pfizer's primary care sales, marketing and health system teams" in October, so Pfizer's sales efforts probably won't add much revenue this quarter. However, they could contribute meaningfully in 2019, when Exact Sciences expects Cologuard sales could be $700 million or more, up from an expected $435 million this year.
Prepping for growth
Ramping up marketing and launching new products will only matter if Exact Sciences has the infrastructure in place to process more tests quickly and accurately. Fortunately, management says it's making big strides to that end. Currently, its annual Cologuard test capacity is 2.5 million tests per year, but the company's capacity will surge to 3 million tests by the end of 2018, and it will grow to 5 million tests in 2019.
Management says spending to increase capacity will create a headwind to gross margin because it's increasing the cost per test, but the headwind should be temporary and disappear as volume increases. Each test cost the company $125 in the third quarter, and in the fourth quarter the company expects costs to increase to $130 per test. Over time, however, it's targeting $100 per test and an expansion in gross margin, to 80% from its current 75%.
Expanding its product line
Exact Sciences management seems increasingly excited about the potential to expand beyond colon cancer screening.
The company's developing a blood test that can catch early stage liver cancer, and earlier this year, it reported about 90% sensitivity for its liquid biopsy approach. If it can deliver results of 90%-plus and secure an FDA OK, its liver cancer test could significantly increase its addressable market opportunity.
About 700,000 new liver cancer cases are diagnosed and roughly 600,000 patients die of liver cancer annually worldwide. Regular testing of those at risk for developing liver cancer has been shown to improve life expectancy, but less than 30% of those who should be screened are being screened. According to Exact Sciences, "There are more than 3 million patients in the U.S. who should be tested for liver cancer every six months to 12 months."
Worse, existing screening options, including alpha-fetoprotein and ultrasound, "are less than 65% sensitive for early stage cancer." Undeniably, there's an important need for a solution that can do better than that. There's no timeline for Exact Sciences' liver cancer test to become available, but if it can develop a test that passes muster with regulators, then the company estimates the addressable market opportunity to be $1.5 billion annually at $500 per test.
Is it a buy?
If you believe Cologuard will continue resonating with doctors and patients, then the answer to whether the stock is a buy is "yes." Pfizer is a Goliath with proven experience in successfully marketing products, so I suspect it's an ideal partner to accelerate Cologuard's penetration. Overall, Exact Sciences pegs Cologuard's market opportunity at $14 billion, so it's only scratching the surface.
The potential to expand its product lineup into new indications is also exciting because Exact Sciences thinks the market for liquid biopsy tests across all cancers could be as big as $13 billion by 2030. With sales of less than $500 million expected this year and the potential for tens of billions of dollars in market opportunity, it's hard for me to think this company isn't going to be much bigger in 10 years than it is today.