Could Exact Sciences (NASDAQ:EXAS) be worth a lot more than its current price? Just three months ago, the stock traded 30% higher than current levels. It's been downhill for the most part since that point. Some of the decline could be profit taking, but some could be investors worried by short-seller arguments against the company.
Back to the initial question, though. The answer is "yes." Exact Sciences could possibly be worth a lot more. Will the stock climb in value? The answer to that more important question is a definite "maybe." Exact Sciences could jump quite a bit, depending on these three critical keys.
1. Approval for Cologuard
By far the most important step is for the company's Cologuard colorectal cancer screening test to gain approval from the U.S. Food and Drug Administration. Exact Sciences submitted the last of three premarketing approval modules to the FDA in June. A meeting is scheduled in November for the company to meet with the agency to review comments related to the submission.
In April, Exact Sciences released preliminary results from an analysis that included 10,000 adults between the ages of 50 and 84 with an average risk of colorectal cancer. This analysis found that Cologuard achieved 92% sensitivity for the detection of colorectal cancer and 42% sensitivity for the detection of pre-cancerous polyps, including 66% sensitivity for polyps equal to or greater than 2 cm.
Those numbers topped the results announced by Quest Diagnostics (NYSE:DGX) in 2008 for the InSure fecal immunochemical, or FIT, test. InSure detected 86% of colorectal cancers and 63% of tumors greater than 10 mm. InSure went on to become a market leader, but Quest sold the business unit that markets the test in September.
2. Buy-in from Medicare
Another big decision is expected around the same time the FDA announces its verdict on Cologuard. Exact Sciences plans to make a national coverage decision submission to the Centers for Medicare and Medicaid Services, or CMS, during the first quarter of 2014. CMS should make its decision on coverage and a potential reimbursement rate around 90 days afterward.
The importance of obtaining buy-in from CMS to pay for Cologuard can't be overstated. About half of the target population for the cancer screening test is covered under Medicare. If Medicare provides reimbursement for Cologuard, many private insurance companies will likely follow suit.
Exact Sciences anticipates that the reimbursed amount for Cologuard could be around $500. That's considerably more than FIT tests cost. However, the company will argue that increased compliance makes its test attractive from a financial standpoint. Patients only have to use the Cologuard test once every three years, while FIT tests should be taken annually. The operative word there is "should," because less than 10% of patients who should be screened every year actually are.
3. Cooperation from health-care providers
Assuming that Exact Sciences wins with the FDA and CMS, the next hurdle is to sell Cologuard. That requires cooperation from health-care providers. On this front, the company seems to be in a pretty solid position.
Market research commissioned by Exact Sciences found that 96% of physicians interviewed said that they were likely to prescribe Cologuard for their patients. Over two-thirds of the physicians stated that they were very likely to do so.
Efforts are well under way to build the sales organization needed to promote the product. Exact Sciences has already made some key hires. The company plans to target large health-care systems that employ physicians as well as physicians who currently rank among the nation's highest prescribers of fecal blood tests.
These might be A-B-C steps, but they're not necessarily easy. Exact Sciences appears to have a decent shot at jumping all three hurdles, though. What happens if it does?
Since the FDA and CMS decisions should come roughly around the same time, look for shares to skyrocket if both go well. I don't think it's out of the question that Exact Sciences could leap well ahead of its July price levels in that scenario.
Don't be surprised if Exact attracts acquisition interest on good news from the FDA and Medicare. Sequenom (NASDAQ:SQNM) tried to buy the company a few years ago. Exact Sciences now claims a market cap over twice as large as Sequenom, so you can probably safely cross that potential buyer off the list.
LabCorp (NYSE: LH) is one possibility, though. The giant diagnostics company licensed technology from Exact Sciences for use in its own ColoSure fecal test. If Exact Sciences is successful with Cologuard, LabCorp might be interested in snatching up a newer product.
Everything hinges, of course, on how well the next six months or so unfold. This could be a situation where buying call options that expire well in the future present a better approach than buying the stock. Taking this approach limits your downside risk while providing a way to profit if Exact Sciences hits the trifecta next year.
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Laboratory of America and Quest Diagnostics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.