Other than the out-of-whack stock price, nothing seems to be going exactly right for Exact Sciences (EXAS).
In the 21 years since the Madison, Wisconsin company first began trying to develop and sell a DNA-based colorectal cancer screening tool, it has produced three failures and one product whose fate remains to be seen.
The first three products, PreGen-Plus, Effipure and ColoSure initially attracted a partnership with commercial lab, Laboratory Corporation of America Holdings (LabCorp). Just four years after the 2003 launch of PreGen-Plus, Exact got slapped with an FDA warning letter noting “serious regulatory problems.” The medical device couldn’t seem to rise above that issue or a general lack of popularity despite the efforts of LabCorp’s 1,100 sales people.
LabCorp discontinued both PreGen-Plus and Effipure in June 2008. ColoSure was launched the following month, but soon suffered bad press and very disappointing sales, generating paltry royalties of $20,000 to $26,000 yearly in 2011 and 2010 respectively. Finally, in 2012, LabCorp reported “no sales,” thus no royalties for Exact. Now LabCorp had its third failed product by Exact.
About half-a-billion dollars had gone down the latrine by the time Exact launched its most recent DNA-based colon cancer diagnostic, Cologuard, in 2014.
But last quarter only 54,000 Cologuard tests were processed at $21.2 million revenue, generating two times more operating losses than revenue.
The company has been so desperate to prove Cologuard that it funded its own study of the product.
But disappointment struck this time, too.
Researchers recently released results showing the more traditional screening is both less expensive (FIT’s ~$30 versus Cologuard’s ~$600, though covered by Medicare and some insurance companies) and, in apparent conflict with an earlier study, more effective than Cologuard (referred to as MT-sDNA.)
In fact, researchers found Cologuard would only be comparable with FIT (fecal immunochemical test) if consistent participation by users jumped 68% or Cologuard’s cost fell a whopping 60%.
But Exact can’t discount Cologuard 60%.
Why? Because Exact spends so much to generate revenue. The company reports spending 62% of revenue to capture those sales.
The self-funded study bummer is just part of what is not exactly right with Exact. Investors may find other viewpoints here, while we consider other risks that could send their investment straight down the water closet.
*1. Clinician’s Guide: Patients Resist Cologuard Requirement
Cologuard costs some 20 times greater than other stool tests. And it turns out that patients resist the stool sample collection and preparation required by Cologuard (referred to below as sDNA).
That’s according to doctors who wrote a clinician’s guide to fecal blood testing that was published last April in the Southern Medical Journal:
“With sDNA, the patient must self-collect the entire stool and ship the specimen via delivery agency to the laboratory for analysis. In contrast, FIT requires only one stool sample. Patients seem resistant to sample their own stool. The requirement of collecting the entire stool and shipping the specimen for sDNA testing …”
(Photo source: Cologuardtest.com)
“rather than taking a small sample for FIT and dropping it off at a local laboratory is concerning for many,” researchers wrote.
In fact, Exact has noticed the ewweeww factor with Cologuard – which still requires whole-stool collection like that used by its previous failed products. Patient compliance for Cologuard was already low at 69% in the first quarter … but fell even more in the second quarter to just 68%.
*2. Dangerous False-Positive Results
Another concern is Cologuard’s high level of false-positive results.
That’s according to final recommendations from the US Preventive Services Task Force (USPSTF). The group noted that FIT-DNA (Cologuard) found 92% of cancers versus FIT’s 74%, however Cologuard correctly identified 8% fewer true negatives than FIT identified.
The stock had moved on hope the panel’s update to its earlier report would remove Cologuard from “alternative” testing to “recommended” testing. But the final recommendation simply dropped the terms alternative and recommended.
The USPSTF provided the table below, summarizing various screening techniques.
(Source: USPSTF, TheStreetSweeper note, click to see more)
The task force also wrote that FIT-DNA (Cologuard) produces “… more false-positive results per screening test and an increased probability of harm from diagnostic colonoscopy.”
(True negative means the disease being tested for was not found. False positive means the proportion of people who are actually free of the disease but test positive.)
The task force added that the FIT-DNA (Cologuard) false-positives mean “a higher likelihood of follow-up colonoscopy,” an invasive procedure which has downsides of anxiety, discomfort and even morbidity.
The bottom line: Insurance companies want to pay as little as possible. Insurer sign-up may be slower than anticipated, as indicated by Exact’s lawsuit against Humana for refusing to pay for Cologuard.
Though Exact would like a transfer of wealth from insurance companies to itself, doctors want to get reimbursed. If doctors don’t start with a colonoscopy, they would likely order FIT first … rather than an expensive, roughly equally effective test that some insurance companies won’t cover.
*3. Expensive Direct-To-Consumer Marketing
Exact has found itself in the position of trying to counteract the results of its self-funded study, plus issues noted by the Southern Medical Journal piece and the task force.
A couple months before the results of its self-funded study came to light, the company began pilot TV commercials in May featuring its only product.
Our chart below shows that with the nationwide direct-to-consumer marketing campaign just beginning, costs have already jumped nearly 18% to over $30 million.
(Source: Company SEC filings)
Those marketing expenses may be indispensable as Exact tries to convince more people to collect a box of poop, prepare it and mail the sample to the company for DNA processing.
Despite the company’s marketing efforts, Cologuard isn’t exactly blowing up the Internet. SemRush shows searches for the product have been rather flat for a year:
Searches for “Colonoscopy” have recently been 25 times higher than lowly “Cologuard,” according to Google Trends:
(Source: Google Trends)
*4. Fierce Competition
Apparently unwilling to give Exact a fourth chance, LabCorp launched a DNA cancer test in May developed by EpigenomicsAG (EPGNY).
Many other competitors use a blood process and charge far less than Exact’s $600 test (though the average revenue is just $393 each):
*Second Generation FIT ($30)
*InSure FIT ($187)
*EZ Detect Colon Disease Test ($13)
Many companies are also developing blood-based or DNA-based tests for colorectal cancer including:
*Applied Proteomics, Inc.
*EDP Biotech Corporation
*Grail. Illumina spin-off Grail is developing a “liquid biopsy” test using next-generation gene sequencing technology. Investors include Bill Gates and Amazon CEO Jeff Bezos.
*Given Imaging. Another intriquing concept is the FDA-cleared PillCam Colon 2 (~$700, though Medicare reimbursement applies), marketed by Medtronic. A tiny camera encased in a capsule scoots down the intestinal system ala the classic movie “Fantastic Voyage,” snapping pictures along the way. Given Imaging says doctors for 1.5 million patients have taken this scenic route.
Challenging all that competition won’t come cheap. And Exact is already caught in a cash-burn spiral …
*5. Out Of Control: Cash Burn
Exact’s cash burn is out of control as the company rips through $39 million per quarter.
Most analysts expect no relief for a long time as operating losses are expected to continue, thanks in large part to increasing advertising and diagnostic lab costs:
After the July stock offering to help pay for advertising, the company has about $126 million in its coffers. Exact will probably make it through another three quarters on that but over time, more capital raises appear inevitable.
Along with advertising’s impact on cash burn, there’s another huge impact …
*6. Growing: Executive Compensation
About half of the cash burn – $17.3 million – winds up in employee compensation. Most of the money goes to the relatively new team of leaders installed in 2009, after PreGen-Plus and Effipure failed but before wobbly Colosure completely fell apart.
COO Maneesh Arora got an extra $1 million. Science officer Graham Lidgard got another $660,000.
And CEO Kevin Conroy’s compensation boost exceeded $2 million … for his total compensation of $5.66 million.
The combined executive compensation hit $15.4 million – or 39% of all the 2015 revenue.
(Sources: Morningstar and company SEC filing)
*7. What About Shareholders?
What exactly has Exact done over the past year for loyal shareholders?
Well, while executives have been living the dream, our chart below shows that shareholders are likely having nightmares:
*8. Analysts: Cooling Off
The stock is receiving a cooler reception from Wall Street, considering the roaring market. Overall, analysts have given this stock a lowly “hold” rating:
That indifference is not too surprising since Exact is the field’s most expensive stock, priced from ~2 to 37 times higher than all rivals, most of which have positive earnings.
The stock costs ~23 times the projected revenue this year. In fact, the stock is so overpriced that it is above the consensus price target for the year:
Exact’s price closed Aug. 9 at $18.83 per share versus the consensus 12-month price target of $17.22.
This suggests Wall Street expects the stock value to decline 8.6%.
*9. Stock: Ready To Drop
Exact’s shares rocketed 180% from $7 in June due to a short squeeze and momentum traders, we believe. It’s nothing but air now and the stock is poised to suddenly drop.
With market optimism so high, investors might expect to give maybe a $250 million valuation to a company with a good, unproven product. But never $2 billion.
Let’s say Exact somehow provided a virtually impossible one-quarter of the 14 million screenings yearly – and exceeded current lab capacity by 3.5 times and completed 34 times more tests at 53% more apiece. Only in that fantastically optimistic scenario could the company generate around $2 billion. Yet Exact now sits on a $2.13 billion valuation.
This aging, one-trick company offers a test that is no better than those already on the market and may or may not be as good as the cutting-edge tests under development. Its technology has issues with false-positives and the same patient resistance that plagued the earlier generation tests. And we can’t forget that Exact’s earlier tests failed to generate meaningful revenue year after year … and finally resulted in its commercial partner giving up on Exact.
This is exactly the right time to flush this stock down the john … before the price plunges to $7 per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in EXAS and stand to profit on any future declines in the stock price.
Editor’s Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to firstname.lastname@example.org.