Colorectal cancer is the third most common cancer diagnosis in the United States.
The American Cancer Society estimates it'll see 95,270 cases on colon cancer, 39,220 new cases of rectal cancer… and as many as 49,190 deaths this year alone.
Fortunately, that death rate has been falling in both men and women for years because colorectal polyps (a small clump of cells that can develop into colon cancer) are now being found much earlier with proper screening and removed before they advance.
But new technology has been stepping in to make such cancer investigations easier, cheaper and safer for patients… and potentially rewarding for smart investors.
Ripe for Innovation
When it comes to the colon, most patients would prefer the most non-invasive procedures, which is where molecular diagnostics company, Exact Sciences (EXAS) Cologuard comes into play.
Every day, the lining of your colon sheds cells. If you have a cancerous growth, or pre-cancerous growth in the lining of your colon, eventually such growths are picked up by stool and passed.
By collecting a sample with Cologuard, and mailing it to the company, patients have completed the necessary test. That’s as non-invasive as you can get.
Not only can you administer the test in your own home, there are no special preparations, diets, or medication changes needed.
Prior to the launch of the EXAS product, colon cancer screenings were primarily done using a fecal occult blood test (FOBT), fecal immune-chemical tests (FIT) sigmoidoscopy, colonscopy or double-contrast barium enema.
Unfortunately, most of those can be messy and uncomfortable procedures.
What’s interesting is that the Cologuard has been found to successfully detect 92% of colorectal cancers and up to 42% of advanced tumors.
Meanwhile, a standard FIT test was found to detect 74% of cancers, and just 24% of advanced tumors. At the same time, a sigmoidoscopy is much more intrusive and expensive than a stool test.
Upon FDA approval in August 2014, shares of EXAS ran as high as $31.24 – a 7,520% jump from a $0.41 low in 2009. Its commercial launch was off to a great start.
But there was a problem.
In late 2015, shares of EXAS plummeted from $31.24 to $4.93. Not because the product didn’t work. But because the U.S. Preventive Services Task Force (USPSTF) suggested that Cologuard only be used as an “alternative screening test” rather than a “recommended” test.
In response, the stock plummeted. Without support, the top and bottom lines for the company are greatly impacted, and the chances that health insurance would cover it fall to the wayside, too.
Essentially, the treatment was now out of reach – and costlier – for millions of Americans.
The shine wore off, if you will.
But in recent days, the USPSTF changed its language, removing the words “alternative screening test” from its previous report.
As a result, more doctors may begin to prescribe Cologuard… and perhaps more insurance companies will begin to reimburse for it, thereby boosting EXAS’ top and bottom lines.
Shares of EXAS bounced from a low of $4.93 to $11.38.
However, as exciting as the news may be, we must keep in mind that EXAS is still losing money.
In 2015, the company sold 104,000 tests, producing revenue of $39.4 million. Unfortunately, the company booked a $158 million loss on the year, thanks to promotional, advertising, and staffing costs to push the product into the medical community.
EXAS is a great example of Wall Street hyping a stock to unrealistic prices because of the potential of its hot product. The reality is the Company is expecting to complete more than 240,000 tests with sales of $90 million this year. While that may sound encouraging, first quarter of 2016 losses amounted to an annualized $190 million.
For EXAS to be a long-term success story, it needs a profitable licensing agreement with a major company. If it can do that, and reduce overall cost, it could begin to capture part of an addressable $4 billion colon cancer market. If it doesn’t, EXAS’ price will continue to fall as it burns through its cash.
Please note that we are not recommending a buy on EXAS. We simply want to point out the importance of watching beaten down stocks that still have strong potential, as we’ve shown can be quite profitable in The Cheap Investor.