Exact Sciences Moves Closer to Preventing the No. 2 Cancer Killer: Colon cancer

SATURDAY, MARCH 29, 2014

Exact Sciences Moves Closer to Preventing the No. 2 Cancer Killer

By ANDREW BARY | MORE ARTICLES BY AUTHOR

Exact Sciences could rise 50% if its colon-cancer test ramps up quickly. Short sellers are betting against that.

A new colon-cancer screening test got a big boost last week when a Food and Drug Administration advisory panel unanimously recommended that the FDA approve the test. Called Cologuard, it will likely gain approval in the next few months and hit the market by the end of this year.

The news was a relief for Exact Sciences (ticker: EXAS), which has spent more than a decade developing Cologuard and bet the company on the test. The company now faces the challenge of marketing it to doctors and physician groups throughout the country. CEO Kevin Conroy said the company remains “committed to addressing the growing unmet needs in colorectal cancer screening.”

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Exact Sciences CEO Kevin Conroy says the company is “committed” to advancing colon-cancer screening.

Even with a favorable recommendation, Exact Sciences shares were down 5% last week, to $12.86. The company is valued at $915 million, which anticipates some commercial success for Cologuard since the Madison, Wis., company has no products on the market and minimal current revenue.

The issue now is the commercial potential for Cologuard. That isn’t easy to handicap because revenue hinges on the as-yet-undetermined price of the test, and the adoption rate. The company sees a big opportunity, with possible annual domestic sales of $2 billion and total global revenue of $3 billion.

Those estimates may prove optimistic, but bulls argue the Cologuard market will be a hit with doctors. “We look at three things with small-cap diagnostic companies: the management, the product, and the market size. This checks all the boxes,” says Brian Weinstein, analyst at William Blair, who has an Outperform rating on the stock. He thinks Exact Sciences could be selling one million Cologuard tests annually by 2018 and generating about $300 million in revenue. If the test ramps up well, Exact Sciences could become a takeover target for a larger diagnostic company. The shares could hit $20, or six times potential earnings in about five years.

The bear case is that the test won’t get traction, resulting in a sharp drop in Exact Sciences’ share price. About 30% of the company’s shares have been sold short.

Barron’s published a favorable story on the company when the shares traded at around $11 (“A Better Test for Colon Cancer?” Oct. 8, 2012).

COLOGUARD, WHICH USES DNA markers to identify colon cancer and precancerous growths in a stool sample, has demonstrated greater effectiveness than the existing FIT test, which looks for blood in the stool. In a study involving 10,000 patients, Cologuard detected 92% of colorectal cancers, versus 74% for the FIT test, and 42% of advanced precancerous lesions, or polyps, against 24%. The cancers and polyps were identified in colonoscopies administered to all participants in the study.

Recent Price $12.86
12-Month Change 31%
EPS 2014E -$0.72
Market Value (mil) $915
Net Cash (mil) $132
E=Estimate
Sources: Thomson Reuters; Bloomberg, company reports

Colon cancer has been described as the most preventable and least prevented form of cancer. It’s the No. 2 cancer killer (behind lung cancer) in the U.S. with 140,000 new cases each year and 50,000 deaths. It’s preventable because malignant cancers begin as noncancerous growths that can take five or 10 years to become cancerous. Those polyps can be identified and removed during colonoscopies. Unfortunately, half of all colon cancer cases are identified after the cancer has spread from the colon, resulting in a high number of deaths.

U.S. colon cancer deaths have fallen 30% in the past decade, but there’s considerable room for improvement. Many Americans won’t get colonoscopies for several reasons, including a dislike of the preparation, which involves unpleasant bowel-cleansing laxatives. This has created an opportunity for Exact Sciences. Widespread use of its test could prompt people to get colonoscopies if the Cologuard test comes back with a positive indication.

“This is a very significant advance,” says Steven Itzkowitz, a professor of gastroenterology at Mount Sinai Hospital in New York and a co-author of a recently published article in the New England Journal of Medicine about the 10,000-patient study of Cologuard. “The sensitivity approaches that of a colonoscopy.”

Colonoscopies have an estimated detection rate of 95%.

In the study, the main negative with Cologuard was a false positive rate of around 10%, versus 4% for the FIT test. This means many patients who take Cologuard will be told of a positive result that turns out to be incorrect.

The Bottom Line

Exact Sciences could rise 50% if its colon-cancer test ramps up quickly. Short sellers are betting heavily that won’t happen.

Recognizing that Medicare coverage for the test is critical, Exact Sciences has worked with the Centers for Medicare and Medicaid Services, which determines what’s eligible for reimbursement under the program. If the test wins FDA approval, it’s expected the agency will OK it within a few months, even though the cost—possibly $300 or more—is much higher than the $25 FIT test. The advantage is its greater effectiveness. Commercial insurers also are expected to cover it. Colonoscopies can cost between $1,000 and $2,500, plus an anesthesiologist’s fee.

The Cologuard market is potentially large because more than 80 million Americans are age 50 or older. Over 10 million fecal blood tests are conducted annually for colon cancer. If Cologuard adoption hits three million tests annually by 2020, that could mean about $1 billion in revenue for Exact Sciences. With a net margin of 25%, that could mean $250 million in net income, or more than $3 a share, not including overseas revenue.

With a best-in-class test for colon cancer, Exact Sciences could improve the health of the public as well as shareholders.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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