Here's Why the Best Is Yet to Come for Exact Sciences

Millions of Americans forego getting tested for colon cancer; however, a new colon cancer test from Exact Sciences (NASDAQ: EXAS) is changing that, and as a result, patients are catching their cancer sooner. The simple test is resonating with aging baby boomers who might otherwise skip testing, and since guidelines call for testing everyone between age 50 to 74, there's still a lot of untapped market opportunity that could reward Exact Sciences' investors.

Too few people are getting tested

Colon cancer is easy to treat if it's caught early. However, historically low testing rates mean too many people are being diagnosed in the late stages of this disease, when it's far more difficult to fight.

Despite doctors recommending a colonoscopy once every 10 years beginning at age 50, over 20 million Americans aren't up to date on their colon cancer screening, according to American Cancer Society estimates.

Although a colonoscopy can identify and remove polyps that can turn into cancer, patients are reluctant to follow through with getting one because of the preparation that must be done beforehand, and its cost. Patients have to take strong laxatives to prepare for a colonoscopy, and taking time off from work can be difficult. Furthermore, a colonoscopy can cost patients hundreds of dollars or more, depending on insurance coverage and if polyps are removed.

Another testing option becomes available

Exact Sciences developed its stool sample test, Cologuard, so that doctors and patients have another testing option. The Cologuard kit includes a bracket that allows it to easily attach to a toilet, making collecting a sample simple. The test is then sent to Exact Sciences' lab, and if signs of colon cancer are present, patients are told to get a colonoscopy.

In trials, Cologuard was evaluated head to head against fecal immunochemical test, or FIT, a test that also looks for signs of cancer by evaluating a stool sample. FIT uses a smaller stool sample, and in trials, Cologuard did a better job catching colon cancer identified by a colonoscopy. Specifically, Cologuard identified 92% of cancers that were found by a colonoscopy, while FIT found just 74% of them. Cologuard also detected 42% of potentially cancer-causing polyps caught by colonoscopy, while FIT found only 24%.

Cologuard's performance led to it being included in the latest U.S. Preventative Services Task Force recommendations for colon cancer screening. These guidelines suggest one of three testing schedules: colonoscopy every 10 years, FIT every year, or Cologuard every three years.

A huge market opportunity emerging

There are 76 million aging baby boomers, and while Cologuard may not be the best option for all of them, it's fast-becoming a valuable alternative for many.

Since its launch, Cologuard's sales have grown substantially. Sales spiked to $99.4 million in 2016 from $39.4 million in 2015. This year, Exact Sciences thinks Cologuard's sales will eclipse $230 million. There's reason to think it will hit that target. In Q2, sales were $57.6 million, up 172% from the same quarter last year.

The rapid increase in revenue is due to more insurance companies including Cologuard in their coverage formulary and an increasingly larger number of physicians prescribing it. Cologuard is now available to over 235 million health insurance customers, and 81,000 physicians have prescribed it, up from 60,000 physicians in 2016.

What's next for this stock?

As physicians become more comfortable with Cologuard, I think they'll begin recommending it more frequently to patients who might avoid a colonoscopy. Currently, Cologuard has only 2% market share, and the company estimates its market opportunity is $4 billion.

Undeniably, tapping into this market offers considerable chances for Exact Sciences to reward investors, but many investors have taken issue with the company for losses due to its marketing expenses. Management spent $37 million on sales and marketing in the second quarter alone, and as a result, the company's net loss was $31 million.

Exact Sciences plans to continue spending heavily on marketing, but there's evidence that it's making headway toward profitability that investors ought not ignore. Last quarter's loss was an improvement from a $45 million loss in the same quarter of 2016, and the company's loss through the first six months of 2017 is over $25 million smaller than it was through the first six months of 2016. As test volume grows and revenue is leveraged against fixed costs, those losses should continue shrinking. Overall, I think it's only a matter of time before this market's size and the big, unmet need for screening allows Exact Sciences to turn a profit.

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Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.