Fall and bonfires. Extra legroom and long flights. Twitter and trolling. Some combinations are simply meant for each other.

Exact Sciences delivered another solid performance in the third quarter and improved full-year 2022 guidance from two directions. Revenue is now expected to be higher, while costs are now expected to be lower. That's a dirty combination in the world of business and investing.

The swift progress has management expecting to achieve positive adjusted EBITDA during the fourth quarter of 2022, which instills more confidence in the company's projections for claiming profitability on the same basis across all of 2023. It's a nice stepping stone, but adjusted EBITDA isn't very meaningful for investors. Nonetheless, the company's momentum and strength were on full display in the most recent quarter, in recent milestones, and in upcoming product launches.

By The Numbers

Exact Sciences is continuing to lean on the strength of the Cologuard brand. The product generated almost $1 billion in revenue during the first nine months of 2022, notching growth of over 26% from the year-ago period. For perspective, it became the first and only genetic diagnostic product to eclipse $1 billion in annual revenue just last year. That's really impressive.

Precision Oncology is growing faster than expected, which is a positive sign ahead of new portfolio-expanding product launches in 2023. Meanwhile, Hereditary Screening is meeting expectations in the early goings. PreventionGenetics was small but profitable at the time of the acquisition, and profitable growth with products that slot into the care continuum strategy of Exact Sciences remains the focus.

It's important to keep the focus on Cologuard. When a company's by-far largest brand is delivering the by-far fastest growth, good things generally follow.

Data Source: SEC filing.

Exact Sciences is doing an excellent job keeping operating expenses in check, too.

• The business achieved its second-lowest quarterly operating loss since the beginning of 2021 and the best operating margin since the first quarter of 2020 – before several large, margin-busting acquisitions were completed.
• Quarterly cash outflow (meaning negative) from operations of $41 million was among the lowest in the last three years.
• Cash outflow (meaning negative) from operations during the first nine months of 2022 was $275.6 million, driven by a $173.7 million outflow in the first quarter. The current annualized rate is roughly $164 million and quickly improving, suggesting the business has a multi-year runway with its current cash balance ($669 million at the end of September 2022).

Exact Sciences raised revenue guidance and lowered operating expense guidance for every category provided.

Image Source: Exact Sciences investor presentation.

The previous revenue guidance always seemed way too conservative, but the operating expense guidance is a pleasant surprise. However, the new guidance ranges still seem too conservative.

• To meet full-year 2022 revenue guidance, Cologuard revenue in Q4 would be slightly lower than in Q3. That's not absurd considering the holidays can present a headwind for prescriptions, but it might be too low. Precision Oncology revenue in the final three months of the year would be the lowest in over five quarters. That's slightly more absurd, but might also bake in negative impacts from currency fluctuations. There's room for upside on revenue.
• To meet full-year 2022 operating expenses guidance, every category excluding amortization would deliver higher costs in Q4 than in Q3. That seems unlikely given the ruthless focus on operating efficiency and accelerating the path to profitability. There's room for upside on expenses.

What's Ahead?

Exact Sciences expects to launch a handful of products by the end of 2023. These will help the company achieve its cancer care continuum strategy, which aims to provide products for screening, therapy guidance, disease monitoring, and therapy optimization.

• Hereditary Cancer Screening: A pilot for Riskguard is now available. The product is a 32-gene panel that can quantify risk levels for a handful of cancers driven by known mutations. It includes well-known oncogenic genes such as BRCA1/2 and TP53, as well as those garnering increased attention in the global pharma pipeline such as STK11. A sample Riskguard report can be downloaded on the company's website.
• Precision Oncology: A new minimal residual disease (MRD) product is expected to launch in 2023. These diagnostics detect and quantify small amounts of cancer remaining near the end of successful treatment ("residual") or re-emerging after being put into remission ("recurrence"). Exact Sciences plans to initially focus on colon cancer and breast cancers, the two largest MRD opportunities, with a laboratory developed test (LDT). An LDT doesn't require full regulatory approval and is unlikely to earn reimbursement coverage, meaning individuals will need to pay out of pocket. That limits the near-term opportunity, but can be used to collect real-world data to go along with clinical data for a future regulatory submission requesting full approval.

Margin of Safety & Allocation

(Increased from Oct. 9, 2022)

Exact Sciences is considered an Anchor position. The current margin of safety range for the company is based on forecasting into 2025:

• Current Price (market close November 3):  $32.34 per share
• Likely Undervalued:         <$67.62 per share
• Midpoint:                            $84.53 per share
• Likely Overvalued:           >$101.43 per share
• Allocation Range:             Up to 15%

Exact Sciences reported 177.684 million shares outstanding as of November 2, 2022. The margin of safety range above assumes 187.5 million shares outstanding to account for expected dilution.

• What changed? The margin of safety range has been updated to reflect higher revenue, lower expenses, and improved operating margins through 2025 compared to the prior forecast.
• The share count used to determine share prices has been increased from 185.0 million to 187.5 million, primarily to account for additional dilution related to product launches from acquired companies. Product launches will trigger stock-based milestone payments.

Exact Sciences is accompanied by the longest forecast in the Solt DB Invest coverage ecosystem due to the rare level of certainty for the business, which is primarily driven by the strength of Cologuard. The forecasts may prove too conservative if one projection from the company's Q3 2022 presentation becomes reality.

The company provided a timeline of past and future potential milestones for the Cologuard brand.

• 1 millionth patient was screened in early 2018
• 10 millionth patient will be screened this month (November 2022)
• 30 millionth patient is expected to be screened in 2027

If the business delivers on that goal, then Cologuard should generate at least $8.8 billion in revenue from 2023 through 2027. That lines up almost perfectly with Solt DB Invest forecasts, which model roughly $8.6 billion in revenue in that span.

My revenue models for hereditary screening and precision oncology are more conservative due to more fogginess in the timeline for product launches, reimbursement for precision oncology tests, and the mid-term strategy for hereditary cancer screening overall. There's no need to jump ahead with modeling only to backtrack later, so I'll let the company drag my forecasts higher over time, if needed.

Importantly, the company's ability to rapidly slow or reduce operating expenses in 2022 presents opportunities to deliver larger cumulative impacts over the forecast period. The benefits of higher revenue and lower expenses compounds at a meaningful rate. Solt DB Invest now expects Exact Sciences to return to pre-acquisition-binge margins in 2023 and to achieve near breakeven operations in 2025, compared to a previous forecast near negative 15%.

Further Reading

• November 2022 SEC filing for third-quarter 2022 results
• November 2022 press release for third-quarter 2022 results
• November 2022 presentation for third-quarter 2022 results
• October 2022 company update discussing previous forecasts and the importance of Cologuard 2.0
• October 2022 company update discussing the nuances of multi-cancer early detection (MCED) diagnostics
• Riskguard sample patient report

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