Wednesday, April 12, 2017

A current AIM Fund holding: Exact Sciences (EXAS) by Tim Donovan. "Things continue to look up - increased margins, lower cash burn, and continued growth throughout 2017"

 Exact Sciences Corp. (EXAS, $22.73): “The Test Results are Looking Positive”
By: Tim Donovan, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Exact Sciences Corp. (NYSE: EXAS) is a molecular diagnostics company, which focuses on a non-invasive, cost effective screening to detect early stage colorectal cancer in its target market of individuals above the age of 50.
• EXAS generates its revenue ($99.38MM in 2016) in the United States from the sale of Cologuard, its FDA approved non-invasive colon cancer screen.
• Aetna has agreed to provide Cologuard as a commercial product to its clients who are not enrolled in Medicare. 
• With 135,000 new cases of colorectal cancer in 2016 the demand for a cost effective and accurate screening product is very high.
• A successful marketing campaign for Cologuard has created a spike in SG&A expenses in 2016, but provides EXAS with an opportunity to decrease its cash burn moving forward.  
• 69.5% growth in share price since the beginning of 2017 was a result of over 240,000 Cologuard tests being delivered throughout 2016. This is a 134.5% increase in sales compared to 2015.

Key points:
Exact Sciences currently has one FDA approved product called Cologuard, which generates all of the company’s revenues. Cologuard is a non-invasive colorectal cancer screen based on stool DNA science. This in-home procedure has yielded accuracy of above 90% and has been recently accepted as a more cost effective method to detect colon cancer.

2016 was a critical year for Exact Sciences. Cologuard’s shaky start during 2015 left EXAS in a tight spot moving into 2016. While the 104,000 tests delivered in 2015 showed promise, a report written on cancer screening methods left Cologuard off of the list, and referred to it as an alternative test, resulting in a price drop of over 70%. Fortunately for EXAS the damage caused by this report was rectified, resulting in a more widespread acceptance of Cologuard as a screen for colorectal cancer.

This past year was a period of rebuilding and growth for Cologuard. 2016 SG&A of 223.2MM for 2016, a 31.4% increase from 2015, was in part a result of a large marketing push for their FDA approved screen. This promotion aided in the 240,000 tests delivered in the year. This number of tests represents about 72% of the addressable market, leaving room for new market penetration during 2017. This successful marketing campaign has also given EXAS the opportunity to ease back on marketing expenses resulting in lower cash burn moving forward.

A feature of Cologuard that will drive revenues into the future is the fact that it is a test recommended to be conducted once every 3 years. This repeat usage will not be seen for the next few years, however it will give EXAS the ability to maintain healthy levels of revenue when new market penetration growth slows down.

With strong support from Medicare and an increase in the commercialization of Cologuard by other healthcare providers we see EXAS reaching 80% of its target market so far in 2017. These new partnerships in 2017 will drive its market capture closer to its 100% goal.

What has the stock done lately?
So far this year Cologuard’s performance has driven the share price of EXAS up 69.5% to a near 52 week high. Much of this growth can be attributed to the release of 2016 Q4 and annual performance data. Cologuard’s 2016 growth reached 134.5% increasing to over 240,000 delivered tests growing from 104,000 tests in 2015. 

On top of this in March Cologuard has received commercial coverage by Aetna, a large healthcare insurance and service provider in the United States. This new partnership has expanded Cologuard’s market coverage to 80% of the addressable market from their pervious 72% coverage. With new partnerships being formed Exact Sciences has set the goal in front of themselves to reach close to the 100% coverage mark in 2018.

Past Year Performance:
EXAS has increased 234.26% in value since this time in 2016. Much of this can be explained by a significant decrease in share price at the beginning of 2015 followed by strong growth during the 2016 year. Positive test results and an increase in the acceptance of the non-invasive test have given EXAS the opportunity to climb out of the $5.36 per share hole that it found itself in at the beginning of 2016. EXAS currently sits near the top of its 52-week high of $24.50.

 Source: FactSet

My Takeaway
Cologuard’s strong performance throughout 2016 has driven a large rebound in Q1 of 2017. With robust growth in the number of tests being delivered and new relationships being developed to further the product’s exposure, EXAS could cater to nearly 100% of the addressable market by the end of next year. Despite no new products in the foreseeable pipeline this growth teemed with a decrease in marketing expenses will provide EXAS with an opportunity for increased margins, lower cash burn, and continued growth throughout 2017.

Source: FactSet




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