Legendary American football coach John Madden once asked a rhetorical philosophical question, "What happens when an unstoppable force meets an immovable object?" We now know the answer. The unstoppable force wins.

Exact Sciences grew first-quarter 2023 screening revenue 44% from the year-ago period thanks to the ascendence, or perhaps transcendence, of Cologuard. That growth clip is insane given the scale of revenue. For perspective, the business generated almost as much screening revenue in the first three months of this year as it did in all of 2018.

Solt DB Invest now expects Cologuard to deliver full-year 2023 revenue of $1.868 billion. Our 2025 model now expects positive operating income on a full-year basis. As a result, our 2025 model provides a fair valuation of roughly $19 billion, which is equivalent to nearly $101 per share. This would be the fair valuation expected based on forward 12-month performance, or the estimated fair price for shares expected in December 2024.

By The Numbers

Exact Sciences delivered an impressive performance during the first three months of 2023. There are no meaningful flaws in the reported numbers. It's relatively rare to see a no-doubter performance quite like this, so I encourage investors to appreciate what just happened. The last time I observed anything similar was during the initial growth trajectory of Repligen, which is my best investment of all time at a 12x return.

Screening revenue jumped over 44% from the year-ago period, while total revenue increased over 23% in that span. If investors only look at core revenue (excluding COVID testing revenue), then year-over-year revenue increased 30%.

Every segment reported record revenue. Total operating expenses decreased from the year-ago period. Gross margin reclaimed levels last achieved in 2021. Operating loss was the lowest in 13 quarters.

For the cherry on top, Exact Sciences delivered record efficiency with respect to sales and marketing (S&M) expense. A quarterly S&M cost of $186.9 million was the lowest since the business spent $186.1 million during the first quarter of 2021. The nearly identical investment yielded 50% more revenue this time around.

Data Source: SEC filings.

As always, there's some additional context and nuance behind the data.

Although Precision Oncology revenue increased only 1.8% from the first quarter of 2022, the growth rate was nearly 8% when the divested prostate cancer tools are excluded. Additionally, Exact Sciences reported that international sales grew 26% in the year-over-year comparison and now comprise 24% of segment revenue, up from just 19.6% during all of 2022. The sudden international growth surge is being driven by increased orders for Oncotype DX breast cancer tests, specifically in node-positive breast cancers following new data from the RxPONDER study.

This was a key metric the finch had been watching. As we wrote in February 2023:

There is sneaky upside from new product launches and international markets, but I don't have great insight into how those levers might get pulled at this time.

This is a sneaky growth catalyst – and now we feel more confident in modeling these aspects of the business (see below). Exact Sciences is nearing the launch of minimal residual disease (MRD) diagnostics for several solid tumor cancers, beginning with colon cancer. Accelerating international sales and the expansion of the tech stack into relatively large MRD markets should allow the Precision Oncology segment to grow revenue at a 10% or greater clip by the end of 2023. This will line up with the expected launch of Cologuard 2.0 and multi-cancer early detection (MCED) tools in the next 24 months. That's a dirty trifecta if execution continues.

Unstoppable*

The all-around excellent execution in recent periods is no fluke and will make a meaningful impact on long-term value creation, especially considering the compounding effect of efficiency gains and the accelerating march toward profitability.

Although planet Earth doesn't seem to be enacting much of a gravitational pull on the business right now, there's one force that should be on the radar of investors: community hospitals.

Exact Sciences has a 50% higher market share among the 400 largest health systems than independent systems and community hospitals. On the one hand, focusing resources on the largest clusters of accounts (and patients) is smart. It's been driving significant efficiency increases. It's legitimate and durable.

On the other hand, an estimated 80% of Americans receive treatment at community hospitals. It will take longer and be more difficult to penetrate these types of accounts, but they will be key to serving the 60 million Americans who are eligible for colon cancer screening but unscreened. It will be key for future growth.

Little nuances like that can show up "out of nowhere" to lead to slower-than-expected, or even stagnant, growth. Considering Cologuard represents about 73% of the company's total revenue, this future potential tailwind shouldn't be dismissed by investors.

Solt DB Invest is monitoring several metrics for ordering rates for insights into this market dynamic, but our current modeling expects this will have limited to no impact through 2025 given the size of the colon cancer screening market and Cologuard's share of it.

Forecast & Modeling Insights

(Increased.)

Our previous models were shared in February 2023. Here's how our 2023, 2024, and 2025 models have been updated.

• Full-year 2023 revenue of $2.550 billion, compared to company's updated guidance of $2.400 billion at the midpoint
• Screening revenue of $1.917 billion, including Cologuard revenue of $1.868 billion. The company's updated guidance expects total Screening revenue of $1.782 billion at the midpoint.
• Precision Oncology revenue of $627.5 million. The company's updated guidance expects total Precision Oncology revenue of $612.5 million at the midpoint.
• Operating expenses of $2.118 billion vs. our previous forecast of $2.202 billion.
• Full-year 2024 revenue of $3.131 billion, representing year-over-year growth of 22.8%
• Screening revenue of $2.382 billion, including Cologuard revenue of $2.441 billion.
• Precision Oncology revenue of $690 million
• Operating expenses of $2.201 billion, representing growth of about 3.9% from 2023. This could allow for positive operating income on a full-year basis, or at least during the second half of 2024. This milestone may be delayed into 2025 depending on investments made to support the launch of MCED tools.
• Full-year 2025 revenue of $3.808 billion, representing year-over-year growth of 21.6%.
• Screening revenue of $3.048 billion, including Cologuard revenue of $2.978 billion. This expects an acceleration of market share capture from Cologuard 2.0, although the tool's growth rate declines from 2024.
• Precision Oncology revenue of $759 million. This expects continued momentum from portfolio expansion and evolution.
• Operating expenses of $2.265 billion, representing year-over-year growth of less than 3%. Importantly, the business delivers its first full year of profitability on an operating income basis.

Margin of Safety & Allocation

(Increased.)

Exact Sciences is considered an Anchor position. The current Margin of Safety range for the company based on our 2025 model is below. This is the model reflected in our Margin of Safety dashboard:

• Current Price (market close May 9): $71.00 per share
• Likely Undervalued:          <$81.24 per share
• Midpoint:                           $101.55 per share
• Likely Overvalued:           >$121.86 per share
• Allocation Range:             Up to 15%

The Margin of Safety range for the company based on our 2024 model is below:

• Current Price (market close May 9):  $71.00 per share
• Likely Undervalued:          <$67.71 per share
• Midpoint:                            $84.64 per share
• Likely Overvalued:            >$101.57 per share
• Allocation Range:              Up to 15%

The Margin of Safety range for the company based on our 2023 model is below:

• Current Price (market close May 9):  $71.00 per share
• Likely Undervalued:         <$55.90 per share
• Midpoint:                           $69.87 per share
• Likely Overvalued:            >$83.85 per share
• Allocation Range:              Up to 15%

Exact Sciences reported 180.388 million shares outstanding as of May 8, 2023. The Margin of Safety ranges above assume 187.500 million shares outstanding by 2025, 185.000 million shares outstanding by 2024, and 182.5 million shares outstanding by the end of 2023.

Further Reading

• May 2023 press release announcing first-quarter 2023 operating results
• May 2023 regulatory filing (10-Q) detailing first-quarter 2023 operating results
• February 2023 research note sharing our analysis and updated models based on full-year 2022 operating results and initial guidance. Note the models in the article linked in this bullet point are now outdated.

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