Exact Sciences Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A leading, global advanced cancer diagnostics company, primarily focused on developing and commercializing innovative testing solutions for earlier detection and prevention of cancer.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Exact Sciences Corporation (EXAS) is primarily a diagnostics company. It focuses on developing and commercializing tests used to detect cancer earlier and allow for more effective treatment.

  • Core Business: Primarily involves the development and sales of non-invasive diagnostic tests for cancer. The company’s main products include the Cologuard test for colorectal cancer, and the Oncotype DX tests for breast, prostate, and colon cancer.
  • Revenue Sources: The company generates revenue from sales of its testing services, mainly from laboratories and healthcare providers across the US and in Europe. A significant portion of revenues is tied to screening programs, and reimbursements by insurance providers. In the most recent quarter, “precision oncology” accounted for 40% of their revenue, and “screening” another 51% and other revenues were 9%.
    • It’s important to note that despite revenue recognition across different categories, the cost of goods sold remains a fairly consistent 30%, and SG&A, research, and development have been around 60-65%, 20%, and 30% respectively (which has gone up recently).
  • Industry Trends: The cancer diagnostics industry is characterized by rapid technological advancements, increasing focus on early detection and preventative care, and the development of personalized medicine. This creates a dynamic environment with both opportunities and challenges.
  • Competitive Landscape: The market is characterized by several smaller players, and bigger companies have been acquiring smaller ones to expand their portfolio of diagnostic services. Competition in this market can be intense given the need for constant research, development and approvals by regulators.
  • Some companies are trying to expand into the space to offer similar services, including newer and more accurate tests. However, Exact sciences still has an advantage with its existing brand name and customer base.

The main things that make the company different are their focus on cancer diagnosis through non-invasive methods with an aim at preventing it as well as treating it.

Financials in Detail:

  • Revenues: In their latest quarter, Q3 2023, EXAS reported total revenues of $636.5 million, a 17% increase year-over-year. This was driven by a strong increase in screening revenue of 19%, with 51% of total revenues contributed to screening.
  • Gross Profit: The gross margins remained strong at 74%
  • Operating Expenses: They have been investing heavily into growth, hence operating expenses were high at $585 million, leading to an operating loss.
  • Net Losses: With high investments, a loss of around $274 million was reported for Q3 2023.
  • Cash flow: The company seems to be burning cash at a fast rate, while the free cash flow has been negative (about -$164 million in Q3 2023).
  • Guidance: The management has reaffirmed their full-year guidance, expecting about $2.505 billion revenue and a 73% gross margin.

A lot of their investments in marketing and operations will continue in the coming years. They are expected to achieve breakeven by 2024.

  • Moat Rating: 2/5
    • While Exact Sciences has established a strong market presence with its Cologuard and Oncotype tests, its moat is considered narrow at best.
    • Strengths:

Their brand name and customer base give the company a small pricing advantage which is a decent moat. They also have an edge due to their extensive distribution network. They are a leader in the cancer diagnostic field. * Their large R&D spending does give them an edge over other players as well.

  • Weaknesses:
    • Low switching costs for many of their tests. Although the Cologuard test for colorectal cancer is non-invasive, a competitor could easily come up with other tests that might be better or cheaper.
    • Regulatory approvals and the presence of larger companies make it difficult for smaller companies to be able to compete against them.

Despite having the first-mover advantage, multiple smaller companies are providing competing tests. The competitive landscape is constantly changing, as newer and cheaper testing procedures are being developed. They need to remain at the leading edge through constant R&D.

  • Legitimate risks that could harm the moat and business resilience
    • Competition: Increased competition from existing players and new entrants offering similar or better diagnostic technologies. This is a constant threat and it might reduce their market share.
    • Technological Disruption: The rapid pace of technological change could render their current tests obsolete, necessitating continuous innovation.
  • Regulatory Changes: Changes in health care regulations, including reimbursement policies, could greatly affect the company’s revenue streams. * Their Cologuard test is a colon cancer test, and there have been debates on how often they should be performed and who should get it. If these recommendations change, it might reduce sales.
  • Pricing Pressure: Increasing price transparency and consumer awareness, combined with growing competition in the market, can make it difficult to charge premium pricing. * This might be an issue for non-insurance markets as well as patients might seek cheaper alternatives.
  • Financial Instability: In Q3 2023, the company reported a net loss of $274 million. The company needs to reach breakeven soon, as it is rapidly burning through their cash reserves to grow.
  • Dependency on Third Party Logistics The ability to handle an immense amount of tests and distribute them properly and to different locations is very important for success. Any problem with this logistics could hamper revenue growth.
  • Data Breach Risk A diagnostics company manages sensitive patient data. A data breach could have huge consequences, including financial penalties, liability, and damaged reputation.

Business Resilience:

  • A business like this requires continuous efforts to retain market leadership. A major advantage they have is that earlier detection of cancer is one of the leading things they are aiming for, and therefore their products are essential for early diagnosis of cancer, which will make them very resilient during economic downturns.
    • The company is also focused on expanding to new markets in addition to their current US and EU operations, which also increases resilience by diversifying revenues. They also have a few strategic partnerships.
  • Understandability: 2/5
  • The company’s business is somewhat complex due to the technical nature of its products (diagnostic tests) and also the complex healthcare reimbursement landscape.
    • Many non-specialists may have difficulty understanding and analyzing the financial statements, which include things like cash flow per test, and research & development. It also includes the financial risks that are not immediately visible such as data breaches.
    • There have also been accusations in the past about their earnings being overstated through pro forma revenues, making the financial health not as easily understood.
  • Balance Sheet Health: 4/5
  • While Exact Sciences is not currently profitable, its balance sheet shows signs of improvement. The company’s total assets significantly exceed total liabilities. The increase in cash and equivalents during the previous few quarters indicate increased liquidity.
    • They have also been able to issue notes with favorable yields to shore up liquidity
      • However, long-term debt is high, which needs to be monitored.
      • The company is still not close to profitability, hence the high cash burn is a point of concern.

They have been making strong investments in R&D and marketing to take advantage of the new market opportunities and are expecting to grow massively in coming years. Their balance sheet currently looks healthy.

Overall, Exact Sciences appears to be a promising company in a growing industry, but needs to keep an eye on the ever-increasing competition and high operating expenses. If they manage to become profitable, their stock price can be expected to increase substantially.