Our latest addition to the Perpetual Income Portfolio Club is Exact Sciences (EXAS), which we began trading on Feb. 25, 2019 (see alert).
Exact Sciences is a molecular diagnostics company that manufactures Cologuard, the only FDA-approved non-invasive screening test for colorectal cancer that can be done at home.
On a personal note, I have a family history of colorectal cancer and have been screened for it since I was 40. Cologuard is aimed at adults 50 years or older who are at average risk for colorectal cancer. One subscriber even shared in a recent webinar that the Cologuard test saved his life.
Cologuard tests a stool sample for DNA fragments and traces of blood that indicate polyps or colon cancer. It is included on the American Cancer Society’s recommended list of screening options for colorectal cancer, and the process is less expensive and less invasive than a colonoscopy, which many people try to avoid.
Exact Sciences is at the forefront of a massive R&D effort by dozens of companies to develop non-invasive tests for the early detection of various forms of cancer. In addition to Cologuard, the company is working on a blood-based test to detect a common form of liver cancer.
While Exact Sciences is not yet profitable, which is not unusual for a biotech firm at this stage, the growth of Cologuard has been impressive.
Cologuard was approved by the Food and Drug Administration in August 2014. In mid-February, the company reported fourth-quarter and full-year 2018 results. During 2018, roughly 934,000 Cologuard tests were completed — a 64% increase in test volume over 2017. And revenue from the test grew 71% last year to $454.5 million.
The company estimates the screening market for Cologuard in the United States to be 19 million people and says it now commands market share of just over 4%. With no competition in the space, I believe market share will grow rapidly. The company’s long-term goal is to control 40% of the market. To that end, Exact Sciences has entered into a sales and marketing partnership with Pfizer (PFE) through 2021 to help expand usage of the test.
In Q4 2018, close to 15,000 health care providers ordered their first Cologuard test for patients, which brings the total number of health care providers who have ordered the test to around 147,000. And Cologuard is covered by Medicare and most major health insurers.
Management is predicting strong growth for 2019. Even if revenue comes in at the low end of their $710 million to $730 million range, that will represent growth of more than 56%.
As I said earlier, the company is not yet reporting profits, but it is on sound financial footing with $1.1 billion in cash and cash equivalents at the end of the fourth quarter of 2018. And its cash utilization (or burn) for the quarter was just $61 million, which included $17.9 million for the acquisition of Biomatrica, which designs and manufacturers collection tubes for blood and saliva samples.
Be aware that while the company is fundamentally sound, the stock is speculative. It is prone to volatile swings — in both directions — especially around earnings. For example, the most recent earnings announcement resulted in the stock jumping 10.5% in one day.
This volatility translates into large option premiums, even for out-of-the-money options. While there is a chance we will sit out on earnings weeks, the chains should throw off plenty of cash week to week for us to capture.