Everyone is Making Exact Sciences Too Complicated

Bottom-Up Insights
  • Let's dig into the forecasts and modeling for Exact Sciences.
  • Why the hell are these price targets so high? They're based on forecasts through 2025 – the longest of any company in the Solt DB coverage ecosystem.
  • There's an unusual amount of certainty for the business thanks to Cologuard. Many analysts are making this way too complicated. Individual investors should resist the doom and gloom for this specific stock.
MVP Article Disclosure: Please note this article was from our MVP platform and was written prior to September 2023. We've made numerous refinements, which means article structure, image and data visualization formats, and terms may have changed.

During the biotech correction, Wall Street and investors are lumping every unprofitable genetic testing company into the same pile. That includes Exact Sciences. That's a mistake.

Management is attempting to deliver positive adjusted EBITDA on a full-year basis by 2024. That's a good start, but investors should be careful getting too excited about non-GAAP metrics. Numbers calculated using GAAP, or generally accepted accounted principles, should always be the focus when making investment decisions.

Luckily, it may not take long to achieve more meaningful profitability on a GAAP basis. My modeling suggests Exact Sciences could shrink its negative operating margin down to the mid-teens by 2025. For reference, it was negative 48.4% in 2021. The business could begin squeaking out operating profits by 2026 or 2027, although they may be choppy and irregular on a quarter-to-quarter basis initially. Either way I don't see any other analyst forecasting similar outcomes or thinking in terms of 2025 and beyond.

The business is already undervalued at a market cap of $5.4 billion, but it could earn a valuation of at least $15 billion by 2025. Solt DB price targets are based on forecasts through 2025 – the longest of any business in our coverage ecosystem as of this writing. In general, Anchor positions should have less uncertainty and longer-duration forecasts available.

Importantly, there's a rare degree of certainty for Exact Sciences. It all comes down to the colon cancer-screening diagnostic product Cologuard. Or, more accurately, Cologuard 2.0.

Cologuard is an Unstoppable Brand

Solt DB is not an investment platform. The bulk of our work will focus on data analysis and data visualizations for the bioeconomy. I think in graphs and charts and numbers and pretty pictures. I'm a Nerd.

My nerdery will extend to the investment research platform, which I think will become something truly unique. We don't have our flashy interactive graphics available for the soft launch here on Ko-fi, but even simple data visualizations can still be quite powerful.

I've published a handful of graphics to communicate the strength of Exact Sciences relative to the competitive landscape. The company has multiple industry-leading brands, but most of the success is driven by Cologuard. The product is an at-home kit that allows individuals to send a stool ("poop") sample through the mail to a central processing lab, where nerds in lab coats can detect the presence of tumor DNA. It's more convenient, private, and cost-efficient than a colonoscopy.

It also powers much of the business. Exact Sciences expects full-year 2022 revenue of $1.98 billion, including $1.31 billion from Cologuard, $585 million from precision oncology tools, and $41 million from hereditary cancer screening tools. Cologuard is expected to generate two-thirds of the company's total revenue, which will be more than Natera, Invitae, 23andMe, Sema4, and Fulgent Genetics (core revenue) combined.

Cologuard also powers the company's margins. Exact Sciences will have the highest gross margin of any peer once Fulgent Genetics fades into a post-pandemic equilibrium. It won't even be close.

In fact, last year Cologuard became the industry's first and only genetic diagnostic product to eclipse $1 billion in annual revenue. That alone is more revenue than all the individual companies above hope to generate in 2022. If Cologuard was a standalone company, then it would be adding more revenue year over year than any of the peers above.

The combination of scale and margins is an envious advantage in the competitive landscape. To be fair, most of the peers above are focused on hereditary screening tools, such as detecting inherited genes that increase the risk of cancer or having children with certain diseases. Exact Sciences only jumped into that market in 2022 with the acquisition of PreventionGenetics – a small but profitable hereditary cancer screening company that slots into existing infrastructure.

But investors should still focus on the sweet, sweet opportunity represented by the Cologuard franchise.

Right Place, Right Time

The decision to focus bandwidth on Cologuard has paid off handsomely. Colon cancer screening is a well-defined $18 billion market with a costly, inconvenient, and awkward standard-of-care. It's important to acknowledge that colonoscopies are still needed. High-risk individuals require them regularly. Individuals who receive a positive test with Cologuard require a follow-up colonoscopy.

However, there's some nuance. Although colon cancer-screening is required in the general population for individuals aged 45 and older, that doesn't necessarily require a colonoscopy. A non-invasive, private, accurate, and convenient test such as Cologuard is a fine replacement for over 120 million eligible Americans. Half of them remain unscreened.

Exact Sciences has invested heavily in the opportunity. The company has plugged into over 215 health systems and delivered prescriptions to over 315,000 physicians in the United States as of June 2022. That's up from a cumulative 200 health systems and 273,000 physicians as of March 2022.

The sudden leap in growth is no fluke. Exact Sciences and Pfizer previously had a co-promotion agreement, which required the genetic testing leader to pay certain fees and royalties to the pharma titan. In 2021, the total compensation paid to Pfizer amounted to $202.3 million.

The co-promotion agreement was terminated for a fee of $35.9 million, plus accrued liabilities for services provided prior to November 2021. Exact Sciences also immediately hired the nearly 400 sales representatives previously employed by Pfizer. Those costs will roll off the books or become part of steady-state operations in 2023. In other words, Cologuard's gross margins are about to surge.

They'll surge again in 2024.

Next-Generation Cologuard is Overlooked

Cologuard is an unstoppable brand because of the commercial infrastructure that exists today and the technical upgrades coming tomorrow. This is missed by many analysts and investors, but presents close to a slam-dunk opportunity for investors.

What's the role of a colon cancer screening tool, be it a colonoscopy or Cologuard? The goal is to detect DNA signals from cancerous lesions in individuals, but also to detect precancerous lesions. Colonoscopies can detect about 60% of precancerous lesions. Cologuard's detection rate is about 42%. It's the primary headwind to further adoption and displacing colonoscopies in the general population – an opportunity representing 120 million Americans.

It may seem silly to call a low detection rate of precancerous lesions a headwind for a tool expected to generate $1.3 billion in full-year 2022 revenue. But keep in mind that's only about 7% of the total market opportunity. If done correctly, then Cologuard should be able to capture at least half of the $18 billion market in the next decade. Maybe more.

A next-generation version of the flagship screening tool seeks to improve sensitivity, specificity, cost of goods, and the detection of precancerous lesions. A case-control study of Cologuard 2.0 demonstrated a detection rate of 83% of high-grade dysplasia (a type of non-cancerous lesion) and 57% for advanced adenomas (the most worrisome precancerous lesions). That makes it roughly equivalent to a colonoscopy.

The slight improvements add up to significant real-world impact. Cologuard 2.0 alone could result in 150,000 fewer follow-up colonoscopies, reduce the incidence rate of colon cancer by 3%, and reduce the number of colon cancer deaths by 2% across the United States. That's no joke.

Cologuard 2.0 may launch initially in 2023, but the full rollout and regulatory approval shouldn't be expected by investors until 2024. It makes no difference to the forecasts. Solt DB projects a next-generation Cologuard diagnostic could generate $1.89 billion in full-year 2024 revenue and $2.27 billion in full-year 2025 revenue. Even that would only represent 12.6% market share. The company's end-of-decade goal is 40%, or roughly $7.2 billion in annual revenue (including a liquid biopsy colon cancer screening tool). These projections may be too conservative.

Importantly, the launch of a next-generation Cologuard could propel the company to positive operating margin by 2026 or 2027. An acquisition spree in 2020 and 2021 tanked margins, but there's room for swift improvement with the technology stack rounded out and Cologuard firing on all cylinders. The business is actually ahead of Solt DB's projections with a first-half 2022 operating margin of negative 33.4%. The company's full-year operating margin is likely to be better than that, and better than my projection in the graphic below.

Image Source: SEC filings and Solt DB projections.

Solt DB projections adopt a relatively conservative outlook for hereditary cancer screening tools and precision oncology. However, both portfolios could be augmented through acquisitions of profitable companies, especially smaller businesses falling on hard times during the upcoming recession.

Price Targets & Allocation

(No change from October 9.)

Exact Sciences is considered an Anchor position. Current entry range price targets for the company are as follows:

  • Current Price (market close Oct. 18): $35.29 per share
  • Prioritize Below:                $61.52 per share
  • Midpoint:                            $79.95 per share
  • Caution Above:                 $98.38 per share
  • Allocation Range:              Up to 15%

Exact Sciences reported 176.96 million shares outstanding as of August 1, 2022. The price targets above assume 185 million shares outstanding, which prices in 4.5% dilution expected in near-term payouts for recent acquisitions.

Further Reading

  • October 2022 company update discussing the opportunity and competitive landscape in multi-cancer early detection (MCED) diagnostics