The Gorilla would like to share a personal story with you. About 20 years ago, his mother went to her annual OB/GYN appointment. Among other things, she was due for a pap smear test. This time, however, she was offered a choice. The doctor explained that he could do a conventional pap smear test or she could pay $35 extra for a new pap smear test called ThinPrep. The Gorilla’s mother asked why she would want to pay $35 extra for a routine pap smear test. The doctor explained that although insurance companies would not cover the extra charge, the results were much clearer and cancer could be detected much earlier and more accurately with this new test. The Gorilla’s mother decided to pay the $35. Luckily, her results were negative.
When the Gorilla began to question his mother about the test, she suggested calling her doctor for the details. The doctor explained to the Gorilla that the average patient, at the time, was not forking over an extra $35 for the new test when the old test worked just fine. However, the results were remarkable! Cancer was being detected with the new Cytyc ThinPrep test MUCH earlier and MUCH more accurately than with the original.
The Gorilla thought about this: if this test is THAT great, and cancer is being detected in women at a much earlier stage, wouldn’t the large insurance companies eventually figure out that they were saving a significant amount of money in the long run- in the actual battle with cancer- by covering the small extra cost to have it detected early?
The ThinPrep Pap Test quickly became the most accurate and comprehensive cervical cancer screening tool. Insurance companies began approving its cost one at a time at a very rapid pace!
The Gorilla was so sure this stock was bound for great things that, in 1998, he bought each of his children 300 shares at $9 each of Cytyc (old symbol CYTC), the manufacturer of the new test. Since the initial $2700 purchase, the stock split 2-for-1 and then 3-for-1 several years later. In 2007, it was acquired by Hologic (HOLX) at a premium ($6.2 billion). With the splits and the buyout, each of the Gorilla’s children now (and still) hold 2860 shares of HOLX, valued at a whopping $118,000! (By the way, HOLX recently introduced 3-D mammography, which is making the conventional mammogram look like a pre-schooler’s drawing.)
The ThinPrep is now arguably the most successful cancer screening tool known today. One thing the Gorilla knows for sure is that mother knows best!
So, why is the Gorilla telling you this story? He thinks lightning may have just struck for a second time in the same spot nearly 20 years later! He has found a company in its early stages with a product and story that is a nearly identical story to Cytyc’s.
In the Spring of 2016, the Gorilla’s mother went to her gastroenterologist with stomach issues. She just knew that she was going to need a colonoscopy and certainly didn’t want one! However, she was shocked when the doctor said, “No, we have a new test to detect cancer. You will be mailed a container. You will then send your bowel movement back in the same container by mail. It will be analyzed and you will have your results within days.
Its accuracy rate is 97% in detecting cancer. The problem? The insurance companies would not cover it. It would cost $600 out-of-pocket. Sound familiar?
The Gorilla’s mother quickly called him to tell him about this amazing new test, Cologuard. The Gorilla quickly determined that it was produced by Exact Sciences (EXAS).
You see, a colonoscopy is the best way to determine a patient’s risk of colon cancer, but colonoscopies are costly and invasive. And as a result, many people who should be tested avoid it. According to the guidelines of the American Cancer Society, everyone should be evaluated for colon cancer at age 50 and then every 3-5 years thereafter, but only 58% of people in this target population are doing so.
That’s a pretty poor rate, especially given that colon cancer is the second-deadliest cancer, and it can be much more effectively treated if it’s caught early. Clearly, there’s room for a new testing alternative, and that’s good news for Exact Sciences’ Cologuard; a lower-cost, non-invasive colon cancer screening test that looks for cancer markers in stool samples. The U.S. Food and Drug Administration has approved Cologuard for use as a non-invasive colorectal screening test; the only such test that is approved by the FDA.
The keys to Cologuard’s success? Exact Sciences is focusing on the physicians who already order Cologuard. In an effort to expand coverage, the company is seeking to sign up large commercial insurance companies and further involving current users. The result? The number of primary-care physicians ordering Cologuard has increased from 4,000 per quarter at the beginning of 2014 to 81,000 per quarter at the end of the second quarter of 2017! Other diagnostic tests have not experienced such strong launches. For example, it took years for breast cancer products marketed by Myriad Genetics (MYGN) and Genomic Health (GHDX) to reach 20,000 tests per quarter.
EXAS’s recent earnings announcement confirmed that it is, in fact, on the right track. On July 25, 2017, Exact Sciences said in its second-quarter earnings release that it completed about 135,000 Cologuard tests in the second quarter, exceeding management’s previous forecast of 88,000 tests, and up 149% from a year ago. Gross margin increased year-over-year from 52.5% to 69%. EXAS reported second quarter revenue for 2017 of $57.6 million; a 172% jump from the same period a year ago. The company holds more than $484 million in cash, cash equivalents and marketable securities. More importantly, 1100 cases of early-stage cancer were detected, and 1500 cases of cancer were detected in 2016 alone!
The company again raised guidance for full-year 2017, and now expects revenue of $230-$240 million, up from its previous estimate of $195-$205 million. (The consensus revenue estimate was $212 million!) Exact Sciences expects to complete 550,000 tests in 2017, up from 470,000 previously. And, keep in mind that the company’s guidance has always been on the conservative side, and in 2Q17 it again surprised to the upside! With huge growth of adoption, approximately 235 million people now participate in health plans that cover Cologuard (up from 190 million a quarter ago) and 86% of the addressable population is covered for the company’s noninvasive screening option (up from 80% in 1Q17). Since June 2016, when Cologuard was recommended for colorectal cancer screening by the U.S. Preventive Service Task Force, coverage has increased by nearly 120 million patients. One reason for Cologuard’s increasing popularity is that, at just above $600, it is much cheaper than a colonoscopy, which costs more than $6,000. In addition, there is no rigorous preparation or extreme discomfort associated with the test as there is with a colonoscopy. In addition, all of the risks associated with a colonoscopy can be avoided: bleeding, perforation of the colon wall, adverse reaction to the sedative.
In the U.S. alone, there are approximately 80 million patients who need to be tested for colorectal cancer. Exact Sciences expects to capture about 30% of that market, which translates to about $4 billion in potential annual revenue.
What about the future? Exact Sciences has plans to grow beyond colorectal cancer testing. The company and the Mayo Clinic are joining forces to develop technology which identifies specific DNA methylation cancer biomarkers to detect cancer. The company has cited studies using liquid biopsy technology that proved highly accurate in detecting lung cancer, liver cancer, and pancreatic cancer. Exact Science estimates the market for liquid biopsies could by 2030 surpass $13 billion per year.
In fact, on March 1st, EXAS announced promising study results for its blood-based lung cancer test. The data was released by the American Association of Cancer Research (AACR). The actual presentation is set for April 2nd at the AACR 2017 annual meeting.
This 398-subject study, conducted with the Mayo Clinic, showed that biomarkers in plasma achieved high accuracy for all ty
pes and stages of lung cancer. Specifically, a panel of four novel methylated DNA markers demonstrated sensitivity of 91-96% and specificity of 90-94%!
David E. Midthun, M.D., a pulmonologist at Mayo Clinic, says, “More studies are needed to corroborate accuracy. However, this plasma DNA test approach appears to be a promising new method. It may serve as a rational follow-up to the common findings of lung nodules on CT scanning and may have application in screening for lung cancer.”
Exact Sciences has solidified its foundation for long-term, sustained growth. It is positioned to become the standard of care. Although EXAS is still losing money as a result of its substantial media advertising campaign and provider education programs, if the company continues to grow as quickly as management predicts, then it’s only a matter of time before profits begin to flow in! And here’s the real kicker (and something the Gorilla did not realize until after he wrote this report): There is good why Exact Sciences reminds the Gorilla so much of Cytyc. It’s because the same individual, Stanley Lapidus, founded both companies!
Folks, even with its recent run-up after its earnings were released, Exact Sciences is only in the second or third inning of the game. The Gorilla has already bought in, and continues to accumulate the stock. Based upon your personal risk tolerance and financial position, you may want to seriously consider a purchase for yourself. The Gorilla suggests that you purchase only the amount that will not tempt you to look at it for years down the road. As for stop loss orders, the Gorilla believes that they are used most appropriately with “trades.” Keep in mind that CYTC/HOLX had more than 50 pullbacks of +10% during the 20-year period the Gorilla has owned the stock. If you have to watch the price of EXAS daily, you have invested too much money!
*Prior performance is not an indicator of future results. Owners, employees and their family members hold shares of HOLX and EXAS. This report is for information purposes only and is not a recommendation of any particular investment strategy. Investing in the stock market involves risk which may not be appropriate for all investors. GorillaTrades was not compensated in any manner for the publication of this material.