FDA Approval of its Proven and Cost-Effective Cologuard Cancer Detection Kit Paves Way for Revenue and First-Mover Advantage

Exact Sciences Corp. (NASDAQ: EXAS) is a drug development company that recently received U.S. FDA approval for its patent-protected Cologuard non-invasive, home-based colorectal cancer screening kit. The test analyzes DNA bio-markers (from cancerous tissue) and blood in stool for signs of colon cancer. Exact is currently focused on commercializing Cologuard for the screening, detection and treatment of colorectal cancer, and has partnered with healthcare advocacy organizations to raise awareness of this form of cancer and the benefits of timely screening. Colon cancer is the #2 cause of cancer related fatalities in the U.S. and Cologuard can save significant lives and billions spent on patient treatment. In addition, the company is expanding its R&D to address detection of other forms of gastro-intestinal cancers. Mayo Clinic has already signed-up and plans to offer Cologuard through its 600 primary care physicians across the U.S. Mayo views this as a tremendous innovation that is a potential game-changer in early detection and treatment of colon cancer.

Exact was formed as an offshoot of research by Dr. David Ahlquist at the Mayo Clinic who licensed his invention to Exact in an agreement where Dr. Ahlquist and Mayo Clinic received equity in Exact and will share in royalties from future sales. Mayo Clinic is also the first healthcare system that has agreed to offer Cologuard to its patient population through its primary care physicians (PCPs).

Shares Reflect Long-Term Revenue Potential

Exact is an early stage company with a breakthrough product and zero revenues. But its income statement is at an inflection point and should soon see revenues grow as Medicare and other major and minor health plans agree to offer Cologuard to their patient populations. Currently, Cologuard is the only non-invasive home-based alternative to a colonoscopy procedure to test for colon cancer, and this first mover advantage should give the company a sizable lead in this niche. In addition, Cologuard can be administered for about a quarter of the price of a colonoscopy. Through early detection, Cologuard could save billions of dollars in treatment costs for advanced-stage colon cancer, which makes the product very compelling.

Since the August 12, 2014, FDA approval announcement, Exact shares are up 27% from $17.46 to $21.76 (close on 9/5/14), and are up from a 52-week low of $9.53, giving the company a market capitalization of $1.8 billion, about 7.4x their book value. Shares are slightly off their 52-week high of $23.20 and are well above their 200-day moving average of about $14, trading close to their upper Bollinger band.


Exact does not pay dividends.

Recent FDA Approval, Parallel CMS Study for Medicare Approval

On August 12, 2014, the Food and Drug Administration (FDA) approved Cologuard for
public use making it the industry’s first prescription-based, non-invasive home-use colorectal cancer screener kit. FDA approval was based on Exact’s DeeP-C study that tested Cologuard on 10,000 patients in the most extensive colorectal cancer study ever. Study results were printed in the April 2014 issue of the prestigious New England Journal of Medicine in an article titled Multi-Target Stool DNA Testing for Colorectal-Cancer Screening that has drawn significant and favorable media and medical attention.

In the 10,000-patient study, Cologuard registered a 92% success rate in detecting cancers and a 69% success rate in spotting pre-cancerous growth tissue (called polyps) along the colon or rectum walls.

Immediately after FDA approval, the Centers for Medicare and Medicaid Services (CMS) said it would work in parallel with the FDA on reviewing initial test results so Medicare can quickly approve coverage, with National Coverage Determination expected by late October or early November after receiving public feedback.

Large Addressable Market of Over $2 Billion

With 80 million U.S. adults eligible for screening, the company has an addressable market of over $2 billion assuming 30% penetration. The company plans to aggressively grow its sales reps and key account execs, and has a high-quality sales force.

Colon cancer kills 50,000 people each year in the U.S. But if caught early and treated, colon cancer is highly curable and can potentially be eradicated.


The high level of fatalities and the large late-stage colon cancer patient population is largely attributable to a 50% refusal rate for traditional colonoscopy in a timely preventive manner. As a result, 60% of all colon cancers are detected at a late stage, with more expensive and painful treatment options, and higher fatality.


Colorectal cancer is the second highest source of cancer related deaths in the U.S. simply because about 23 million adults (between the at-risk ages of 50 and 75) do not get screened for it. Research shows that this form of cancer is easily preventable through early testing, with a 90% 5-year survival rate if detected at an early stage. But because of a lack of awareness and an aversion to colonoscopy screening, colorectal cancer isn’t detected until it’s in the final stages in over 60% of all cases. So Cologuard gives adults an easy-to-use non-invasive screening option, in the privacy of their homes, and could help prevent almost 50% of all colorectal cancer fatalities with millions of lives extended and billions of dollars saved through early detection and treatment.


Exact recommends Cologuard for at-risk adults over the age of 50. The kit is easy-to-use at home, without clinic or doctor visits, and will initially be made available through healthcare providers or PCPs with a physician’s prescription.

Once the doctor orders screening, Cologuard is mailed directly to the patient who simply collects a stool sample – without worrying about diet, bowel preparation or medication restrictions – and sends a stool sample back to Exact using a pre-paid UPS mailer. The company then uses its automated system to look for cancer DNA biomarkers and get a positive / negative result – all within two weeks of the initial mailing. Exact shares test results with the physician who then informs the adult.

Cologuard Priced 75% below Colonoscopy Cost – Should Drive Rapid Adoption

Cologuard offers a powerful value proposition to health care providers because it offers quick and easy detection that costs 75% less
than colonoscopy, the only other current detection option, and can significantly cut down on $14 billion in annual treatment costs.

Cologuard, if used either annually or every five years, is far more cost-effective than breast cancer and other screens. Around 40 million U.S. adults – aged 50 to 84 – are covered by Medicare, which pays 75% of all colon cancer treatment costs, so MediCare is very keen on early detection and prevention where patient compliance is high.

Cologuard’s commercial list price of $599 per kit is based on its value from a pharmacological standpoint versus about $2,000 – $2,500 per colonoscopy; so at $599, the price point offers strong value. Exact plans to price Cologuard at $502 for MediCare because of MediCare’s higher patient volumes. Management is not looking at heavy discounts to the price because they have already priced the test very attractively.


Commercialization Strategy In-Place; Sales and Marketing Ready to go

Exact’s commercialization strategy has three components – driving provider demand through physician and system outreach, medical education and publications; securing payment from payers through the CMS parallel review (for Medicare approval) and a dedicated sales team for managed care; and promoting testing compliance by patients through direct advertising and public relations.

Cologuard’s launch will be supported by three stakeholders: a national sales team (with sales reps and key account managers) which has been recruited and trained on pitching the product; the marketing department which will support sales through strong PR, print and digital collateral, and motivate patients to speak with their physicians about signing up with Cologuard; and R&D support with continued focus on internal and external processes.

The company’s sales team has divided the U.S. into three addressable regions – East, Central and West – and plans to target 10 large systems through hospital reps, 80 sales reps targeting primary care physicians (PCP reps), 10 area managers and 6 clinical liaisons.

Initial surveys indicate that about 67% of surveyed physicians are very likely to order Cologuard while 29% are moderately likely to order the product, for a total of 96%. And 92% of all patients surveyed favorably view Cologuard and will likely use it for colorectal cancer screening.

Expansion beyond Colon Cancer

While Sales and Marketing focus on Cologuard sales, R&D plans to also focus on developing detection and diagnostics for gastrointestinal cancers of the pancreas, esophagus and stomach, which accounted for 25% of the 580,000 cancer deaths in the U.S. in 2013.


Experienced Entrepreneurial Management Team

Exact is headed by Chairman and CEO Kevin T. Conroy who has held this position since April 2009 and has prior experience with GE Health Care and two early-stage venture-backed technology companies in Northern California. Conroy is a lawyer and has substantial experience with intellectual property and enterprise management.

Graham P Lidgard is the Chief Science Officer and has been with the company since August 2009. He brings hands on scientific experience through multiple product development positions in the past. Dr. Lidgard holds a doctorate in biological chemistry.

Maneesh K. Arora serves as Chief Operating Officer, a post he has held since February 2012 after being promoted from his earlier position as CFO. He has worked with Conroy in the past and has an economics and management background.

Q2 Financials – Still In the Red but FDA Approval Should Drive Revenue

For its second quarter ended June 30, 2014, Exact reported zero revenues because its five-year license fee arrangement with Genzyme Corp. ended in January 2014. The company reported a net loss of $(19.4) million, or ($0.24) per share, well below a net loss of $(12.3) million or $(0.19) per share in the year ago quarter due to a sharp rise in operating expenses to $19.6 million as the company scales sales and marketing for Cologuard’s commercial launch.

At quarter end, Exact had 234.8 million in cash and marketable securities, with $137.7 million in net proceeds from a public offering of common shares that closed in early April 2014. The company has $1 million in long-term debt and $242.9 million in stockholders’ equity.


Summary

With FDA approval of Cologuard, parallel CMS review for MediCare, Mayo Clinic’s agreement to approve the product for distribution and recruitment of its sales and marketing team, Cologuard is well set to move ahead with steady commercialization progress. In a recent webinar, the company’s CEO warned Wall Street that sales will take time because of lengthy approval and sign-up cycles in the medical industry, thereby setting low sales expectations for the next few quarters.

Cologuard has clear advantages over colonoscopy – the biggest being patient willingness to do this non-invasive test and its first-mover advantage in a large addressable market. In addition, success beyond colon cancer detection to other GI cancers could be a significant game-changer on valuation but such developments will take time to materialize. As a result, Exact shares are suitable for holders willing to stick it out for the long run.

Early commercialization success could spur a quick acquisition though there are no indications that the company has been approached for a buyout. While shares appear rich on their $1.8 billion valuation at over 7x book value on non-existent sales, their valuation reflects future sales potential and positive announcements could send shares even higher because they appear to have significant momentum with heavy institutional ownership. But a broad downward move by the market could impact shares because of high short-interest and investor sentiment, so this is a high-risk, high-return play for tough investors, not for the faint of heart.

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