Short interest is an important metric that could determine, at least in the near term, the general direction of a company's share price. Exact Sciences (NASDAQ:EXAS) has been one of the most heavily shorted stocks in the health-care sector this year, despite making significant progress on the clinical and regulatory fronts for its noninvasive "Cologuard" colorectal cancer screening test. Even so, the company's share price has ballooned upward by over 40% to date in 2014.
Exact's strong performance in the face of high short interest is directly tied to Cologuard's march toward approval. Specifically, an advisory committee for the Food and Drug Administration voted unanimously in March in support of the product's approval.
With peak sales estimated at between $1 billion and $2 billion annually for this novel molecular diagnostic, shorts would appear to have ample reasons to hit the exits prior to final approval and commercialization. The latest short numbers demonstrate a small dip in short interest in recent weeks, as shown by the chart below. With this in mind, let's look at the key takeaways from Exact's second-quarter earnings release yesterday and consider whether shorts should continue their exodus.
Exact Sciences is gearing up for Cologuard's launch
Although Exact's second-quarter numbers aren't pretty from a fundamental perspective, they tell the story of a company on the cusp of morphing into a commercial operation. For the quarter, the company's net loss per share grew to $0.24 from $0.19 for the same period a year ago. Management noted on the earnings conference call that a big chunk of this increase was due to the hiring of a 120-member sales team that averages over 10 years of experience in the field.
As a result, Exact's run-rate rose to approximately $6.5 million per month for the quarter, compared to roughly $3.8 million a year ago. Going forward, the company expects its sales force to grow up to 150 by year-end and the run rate to potentially exceed $7.5 million a month. With $234.8 million remaining in cash and cash equivalents, the company should have a cash runway of two-plus years, excluding revenue from Cologuard. Put simply, Exact should have more than enough cash to successfully launch this product, assuming final approval is forthcoming.
Regulatory and payer updates
Management also noted on the call the final FDA approval looks to be about 30 to 45 days away. The FDA inspection wrapped up without finding deficiencies in Cologuard. As a result, the last major hurdle appears to be the details of the required post-marketing studies.
On the call, we also learned that Exact has formally discussed a proposed reimbursement scheme for Cologuard with the Centers for Medicare & Medicaid Services, with the proposed total price coming in at $502. Management expects a decision from CMS in the fourth quarter of this year, but private payers won't make their decision until after final FDA approval.
The major effect of these payer issues will be that revenue from Cologuard, assuming approval, will probably be minimal this year. Essentially, the vast majority of the initial group of patients will have to pay out of pocket. With reimbursement issues seemingly set to be resolved late this year, we should get a better feel for Cologuard's real commercial potential in the first quarter of 2015.
Based on what we know now, investors and shorts alike should be asking themselves if Exact looks like a long-term winner. My view is that Exact will probably do fairly well with Cologuard in the near term, but its long-term prospects are less favorable.
The main problem is that Exact will be highly dependent upon Cologuard for top-line growth and the diagnostic field is known for its extreme level of competition. If Cologuard begins to take off, I would imagine diagnostic makers such as Meridian Biosciences and Thermo Fisher Scientific will get in on the act. Indeed, these two companies are already battling over a number of diagnostic tests, especially in the C. difficile product arena.
Perhaps seeing the writing on the proverbial wall, Exact's management noted that it is actively developing additional GI diagnostic tools based on this same technology. That being said, I don't believe Cologuard will end up garnering the lofty sales numbers projected initially, because this area is simply too prone to attracting copycats, many of which have far more resources than Exact.