Over the past five years, Exact Sciences (EXAS 0.10%) hasn't delivered great returns. In fact, the diagnostic testing company has severely underperformed the S&P 500 over this period. Of course, that doesn't mean the company is condemned to do the same over the next half a decade.
But before investing in the stock, you'll want to get a sense of where it might be heading. So can Exact Sciences deliver better returns in the next five years?
Cologuard 2.0 should lead the way
Exact Sciences develops cancer diagnostic tests. It is best known for its at-home, noninvasive colorectal cancer screening option, Cologuard. Colorectal cancer is the second leading cause of cancer death in the U.S. despite being highly treatable in its early stages. This is a clear sign that not enough people are getting screened, and that's what Exact Sciences is looking to change.
Despite having screened millions of patients already, the company argues that 60 million eligible people (those above the age of 45 who are at average risk of contracting the disease) aren't up to date with their recommended screening schedule. Here's a critical development for Exact Sciences: It is currently developing a next-gen version of Cologuard. This could meaningfully move the needle for the company in the next five years for at least two reasons.
First, Cologuard 2.0 has been shown to reduce false positive rates by 30% compared to the current version. Some physicians have hesitated to recommend Cologuard because of its false positive rates. The new version could sway many of them, in addition to those who were already sold on Cologuard. Second, Cologuard 2.0 will be at least 5% cheaper to manufacture than the current version, according to management. Exact Sciences is currently unprofitable. So anything to reduce the company's expenses will help it get closer to profitability.
Exact Sciences should request U.S. approval for Cologuard 2.0 in the coming months.
Exact Sciences could be a great long-term pick
Exact Sciences' revenue has grown rapidly in the past five years, but the bottom line hasn't made much progress. Cologuard 2.0 should help the company's top line maintain its momentum. Exact Sciences expects to have more than 30 million people screened by 2027; it hit the 10 million mark in November 2022. Cologuard was originally approved in 2014, and its adoption has been accelerating.
EXAS Revenue (Quarterly) data by YCharts
Exact Sciences has other products as well. Its Oncotype Dx platform helps test recurrence in breast cancer patients and guides physicians in recommending the best treatment options. The company is working on developing new ones. Its multi-cancer early detection test looks particularly promising, and is the subject of an ongoing large trial, with full results expected next year. Depending on the result of this and other studies, Exact Sciences could get approval here within the next three years.
With all that going on, expect the company's revenue to continue growing rapidly. As far as the bottom line is concerned, Exact Sciences boasts excellent gross margins.
EXAS Gross Profit Margin data by YCharts
However, much of the company's expenses go into sales and marketing. During its fiscal 2022, this was the largest category of expenses. The good news is that Exact Sciences' sales and marketing expenses in 2022 dropped in comparison to 2021. That trend should continue this year. Still, Exact Sciences will continue spending money to raise awareness of its newer products (just as it has had to market Cologuard aggressively).
Exact Sciences is building a brand it hopes will become intimately linked with cancer testing. Once it does that, it will not need to spend as much on sales and marketing to attract customers. Will that happen in the next five years? Of course, no one can answer that question for sure, but even assuming it doesn't, and Exact Sciences remains unprofitable, there is still an excellent case to be made for the healthcare company, especially for long-term investors.
In the near term, Exact Sciences is likely to be somewhat volatile. But the company's long-term prospects look exciting -- provided it can deliver regulatory wins and expand its cancer-screening platform. Given the company's track record, that seems like a relatively good bet.
