Exact Sciences (NASDAQ:EXAS), maker of the noninvasive Cologuard colon cancer detection test, is very clearly a battleground stock. On one hand, Exact Sciences has a compelling growth story with a potentially game-changing detection tool. On the other hand, 26% of shares are sold short, according to data provided by S&P Global Market Intelligence, and Exact Sciences' share price has fallen more than 70% in the past 52 weeks.
So, at current prices, is the stock a buy?
There are reasons to be bullish ...
Bulls argue that Cologuard is in the early stages of what could be a massive growth ramp-up. The colon cancer test has a 92% success rate in identifying colon cancer, and the test is popular, with 75% of patients in a study preferring it to a colonoscopy, and 84% of patients saying they would take another Cologuard test if it were recommended.
Management is guiding for 240,000 Cologuard tests to be administered this year -- more than twice the 104,000 kits completed in 2015. And remember, Cologuard is meant to be administered every three years, meaning that this would be recurring revenue. That's a powerful growth opportunity, and one that's reflected in Exact Sciences' peak sales estimates of $1 billion or so in annual revenue from Cologuard -- a great deal more than the $39.4 million Exact Sciences brought in last year or the $90 to $100 million management anticipates this year.
Cologuard's success will largely be determined by whether it ends up covered by insurers, and Exact Sciences got a big win with inclusion on Anthem's reimbursement list. Now management is working with Anthem in each of its 14 states to get in-network status on the company's branded Blue Cross-Blue Shield plans. As you can imagine, Exact Sciences is also working to get on a number of other insurer lists as quickly as possible.
And Exact Sciences' market cap is a hair over $600 million -- with its signature product potentially ramping up to $1 billion! In healthcare, that implies a stock that's pretty cheap, as most healthcare companies trade at well over an equivalent to sales.
With a test that's popular, effective, and ramping up quickly, and a stock that looks really cheap, what's not to like?
Yet a whopping 26% of share float is sold short. So at least according to a lot of investors, there's plenty not to like.
It turns out they also have a point.
There are reasons to be bearish ...
Exact Sciences is burning through cash like nobody's business. Just last quarter, Exact Sciences burned through $36.6 million in cash, and it's unclear when cash burn will begin to moderate as the company hopefully achieves some scale. While the $306.9 million in cash and equivalents the company has on its balance sheet is a plus and should provide a fair amount of runway, expenses could continue rising because of the evolving commercial strategy around Cologuard. Management is even testing out TV ads -- talk about a big potential expense.
And Cologuard isn't as high-margin a product as healthcare investors are used to -- Exact Sciences' gross margin was only 38% in 2015, as compared with the 80%-plus gross margins usually seen in biotech. With a lower-margin product on their hands, management will have to have to work harder to attain profitability than with other healthcare companies, and with losses mounting, it'll be a tough hill to climb. Last year's net loss was $158 million, 2014's was $100 million, and 2013's was $46.5 million -- a pretty clear trend. In Exact Sciences' annual 10-K, management noted that "we expect that our losses will continue for at least the next several years." Not exactly a confidence-building commentary on the company's profitability.
But when it comes down to it ...
The bears have a good point -- Exact Sciences doesn't look likely to become profitable anytime soon. But I believe the company has the potential to reshape the colon cancer detection market. With high patient satisfaction and a price point in between other colon cancer detection tests -- more expensive than the fecal immunochemical test, and less expensive than a colonoscopy -- Cologuard looks like a game-changer. I think that risk-tolerant investors should give the company a good, hard look before passing it up.