By Andrew Bary
(FROM BARRON'S 3/31/14)
A new colon-cancer screening test got a big boost last week when a Food
and Drug Administration advisory panel unanimously recommended that the FDA
approve the test. Called Cologuard, it will likely gain approval in the next few
months and hit the market by the end of this year.
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The news was a relief for Exact Sciences (ticker: EXAS), which has spent
more than a decade developing Cologuard and bet the company on the test. The
company now faces the challenge of marketing it to doctors and physician groups
throughout the country. CEO Kevin Conroy said the company remains "committed to
addressing the growing unmet needs in colorectal cancer screening."
Even with a favorable recommendation, Exact Sciences shares were down 5%
last week, to $12.86. The company is valued at $915 million, which
anticipates some commercial success for Cologuard since the Madison, Wis.,
company has no products on the market and minimal current revenue.
The issue now is the commercial potential for Cologuard. That isn't easy
to handicap because revenue hinges on the as-yet-undetermined price of the test,
and the adoption rate. The company sees a big opportunity, with possible annual
domestic sales of $2 billion and total global revenue of $3 billion.
Those estimates may prove optimistic, but bulls argue the Cologuard market
will be a hit with doctors. "We look at three things with small-cap diagnostic
companies: the management, the product, and the market size. This checks all the
boxes," says Brian Weinstein, analyst at William Blair, who has an Outperform
rating on the stock. He thinks Exact Sciences could be selling one million
Cologuard tests annually by 2018 and generating about $300 million in revenue.
If the test ramps up well, Exact Sciences could become a takeover target for a
larger diagnostic company. The shares could hit $20, or six times potential
earnings in about five years.
The bear case is that the test won't get traction, resulting in a sharp
drop in Exact Sciences' share price. About 30% of the company's shares have been
sold short.
Barron's published a favorable story on the company when the shares traded
at around $11 ("A Better Test for Colon Cancer?" Oct. 8, 2012).
Cologuard, which uses DNA markers to identify colon cancer and
precancerous growths in a stool sample, has demonstrated greater effectiveness
than the existing FIT test, which looks for blood in the stool. In a study
involving 10,000 patients, Cologuard detected 92% of colorectal cancers, versus
74% for the FIT test, and 42% of advanced precancerous lesions, or polyps,
against 24%. The cancers and polyps were identified in colonoscopies
administered to all participants in the study.
Colon cancer has been described as the most preventable and least
prevented form of cancer. It's the No. 2 cancer killer (behind lung cancer) in
the U.S. with 140,000 new cases each year and 50,000 deaths. It's preventable
because malignant cancers begin as noncancerous growths that can take five or 10
years to become cancerous. Those polyps can be identified and removed during
colonoscopies. Unfortunately, half of all colon cancer cases are identified
after the cancer has spread from the colon, resulting in a high number of
deaths.
U.S. colon cancer deaths have fallen 30% in the past decade, but there's
considerable room for improvement. Many Americans won't get colonoscopies for
several reasons, including a dislike of the preparation, which involves
unpleasant bowel-cleansing laxatives. This has created an opportunity for Exact
Sciences. Widespread use of its test could prompt people to get colonoscopies if
the Cologuard test comes back with a positive indication.
"This is a very significant advance," says Steven Itzkowitz, a professor
of gastroenterology at Mount Sinai Hospital in New York and a co-author of a
recently published article in the New England Journal of Medicine about the
10,000-patient study of Cologuard. "The sensitivity approaches that of a
colonoscopy."
Colonoscopies have an estimated detection rate of 95%.
In the study, the main negative with Cologuard was a false positive rate
of around 10%, versus 4% for the FIT test. This means many patients who take
Cologuard will be told of a positive result that turns out to be incorrect.
Recognizing that Medicare coverage for the test is critical, Exact
Sciences has worked with the Centers for Medicare and Medicaid Services, which
determines what's eligible for reimbursement under the program. If the test wins
FDA approval, it's expected the agency will OK it within a few months, even
though the cost -- possibly $300 or more -- is much higher than the $25 FIT
test. The advantage is its greater effectiveness. Commercial insurers also are
expected to cover it. Colonoscopies can cost between $1,000 and $2,500, plus
an anesthesiologist's fee.
The Cologuard market is potentially large because more than 80 million
Americans are age 50 or older. Over 10 million fecal blood tests are conducted
annually for colon cancer. If Cologuard adoption hits three million tests
annually by 2020, that could mean about $1 billion in revenue for Exact
Sciences. With a net margin of 25%, that could mean $250 million in net
income, or more than $3 a share, not including overseas revenue.
With a best-in-class test for colon cancer, Exact Sciences could improve
the health of the public as well as shareholders.
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