Exact Sciences - Flushing $$$ Down The Drain (2 Of 5)

| About: EXACT Sciences (EXAS)

As a reminder, in part one we illustrated why the Cologuard test by Exact Sciences (NASDAQ:EXAS) is actually less effective than the Fecal Immunochemical Test (FIT).

In part two of our five part series, we examine the economics of the Cologuard test and find that Cologuard is significantly more expensive than the FIT. We believe Cologuard's high costs don't make sense and don't support reimbursement. Remember, for the Company to be successful it will need to show that Cologuard is an effective test, gain reimbursement, convince doctors to prescribe the test, and make a simple enough test that patients will use it. If Exact Sciences fails in any of these endeavors, it is worth at best the value of the cash on its balance sheet, or less than $3 per share. We believe Exact should be aggressively sold or shorted.

In order to show that Cologuard is not economically sensible and doesn't support reimbursement, we are going to show an economic comparison between using Cologuard and using FIT. We will use the same results as we did in our first article and the data from the June 2013 EXAS Presentation. This time, we are also going to show the actual costs of these tests. We will then sensitize the total costs based on various price points for colonoscopies. Finally, we will get to the bottom of what actually matters: an economic comparison of Cologuard vs. InSure FIT, the current leader in non-invasive colon cancer screening.

Inside The Numbers

First, we need to review known expenses so that the tests can be compared:

  1. The expected cost of the Cologuard test is $400, and is designed to be given once every three years (see Canaccord Genuity estimates here)
  2. The cost of the FIT is $23, and is designed to be given every year ($69 over three years) also per the Canaccord Genuity estimates
  3. The average cost of a colonoscopy is $2,777,1 ranging from the low end of $900 to the high end of $3,764

Below are the Cologuard and FIT trial statistics as they were presented by the Company:

EXAS 2 - Pic 1

  1. Taken from slide 16
  2. Taken from slide 20, the true precancerous sensitivity for the Cologuard test
  3. Taken from slide 18

Next, we can examine the expected cost of testing 10,000 people with the Cologuard test:

Cologuard Is 53% More Expensive, Even Though It Is Less Effective

EXAS 2 - Pic 2

Over the course of the three-year period, if each of the 10,000 patients represented here took a Cologuard test in year 1 for $400, it would cost a total of $4 million for the tests alone. Then, each expected correct positive result (both cancerous and pre-cancerous) and each expected false positive result would be subject to a colonoscopy at the average cost of $2,777, or approximately another $4.4 million. Therefore, the total expected cost for these 10,000 patients, as shown in the table would be nearly $8.4 million.

If these same 10,000 patients each took a FIT in year one, it would cost $230,000 for the test in year one. In year two, because colonoscopies (which are good for 10 years) were already given to 652 people, only 9,348 tests would be needed. Continuing this methodology through year 3, these 10,000 patients would have taken a total of 28,125 tests for $646,884, or approximately 16% of the cost of the 10,000 Cologuard tests. Over the three years, a total of 1,738 colonoscopies would be needed for a total cost of about $4.8 million, adding up to a total cost over three years of approximately $5.5 million. After all is said and done, Cologuard would cost 53% more than a generic FIT despite generating worse results.

One last thing to note is that all of this cost of additional colonoscopies for FIT patients isn't necessarily negative. Over the three years, the FIT is expected to catch 53 more patients in need of colonoscopies (2 cancerous and 51 precancerous). At an average price of $2,777, this amounts to $147,181 in colonoscopy charges that the Cologuard test did not register because it simply missed finding people who really should have gotten a colonoscopy.

So, in summary, below is a side by side comparison of the expected results and costs of the two tests:

EXAS 2 - Pic 3

It is blatantly obvious that the FIT is the better and more cost effective test. The FIT is expected to find more people with cancerous polyps (61 vs. 59) and more people with precancerous polyps (367 vs. 316), while letting fewer people in need of colonoscopies go undetected (388 vs. 441). And despite the worse outcomes, Cologuard is expected to cost 38%-145% more than FIT. This table also clearly shows that regardless of the price of a colonoscopy, the FIT will ALWAYS outperform the Cologuard test, and will do so for less money!

In order for Cologuard to have a chance, Exact would need to price Cologuard at about $112 per test, or 72% less than Exact envisions. Only then would it be cost neutral to FIT based on the relative performance of Cologuard and FIT when Colonoscopies are priced at $2,777. Such a reduction would still not fully account for the overall worse efficacy of the Cologuard test, though the lower price would probably make the test uneconomic and accelerate the downward spiral in the Company's finances.

The Minimum Comparison that the CMS and Insurers Will Likely Use

In this section, we will run the same calculations with the data that we strongly believe that the Centers for Medicare & Medicaid Services (CMS) and insurers in general will use to determine reimbursement. It should be noted here that it is becoming increasingly difficult to obtain reimbursement from CMS, as evidenced by the fact that they will be cutting reimbursement for independent laboratories by 26%. This can be seen on page 588 here. Further to that, we will no longer be using the outdated and insignificant results the Company propagates. Instead, we believe that CMS and insurers will take a more holistic view of the sensitivity and specificity of FIT and use metrics closer to the seven study average we compiled in part one. As a reminder, the comparison between Cologuard and an average FIT would be:

EXAS 2 - Pic 4

Using FIT Historical Averages, Cologuard Is 40% More Expensive, And Even Less Effective

EXAS 2 - Pic 7

Based on the above information, we believe that CMS and insurers will be extraordinarily unlikely to approve Cologuard for reimbursement. Not only is Cologuard expected to be more expensive than FIT, but it is also expected to have worse outcomes:

  • FIT correctly finds 63 cancerous tumors while Cologuard finds only 59
  • FIT correctly finds 579 of pre-cancerous lesions while Cologuard finds 316
  • FIT only misses 174 patients in need of a colonoscopy while Cologuard misses 441
  • FIT results in 1,277 unnecessary colonoscopies while Cologuard results in 1,194

The Comparison that CMS and Insurers Should Use: InSure FIT

While CMS and insurers are likely to look at broad averages when they consider Cologuard for reimbursement, there's a decent chance that they actually focus on the InSure FIT, which is the single best FIT we have been able to identify. The reason for focusing on the InSure FIT is because InSure is designed as a take-home test, much like Cologuard, while many other FITs are designed to be done in the doctor's office. To review, the results of the InSure FIT can be found here. To be 100% fair to the Cologuard test, we sent an inquiry to InSure to find out how much it costs. They responded by saying that, "The test is priced regionally - between $75-$100." While InSure FIT is more than three times the average FIT price of $23, it is still less than a quarter of Cologuard's $400 price. We will be making these comparisons over a relevant three-year period using $100 as the price for the InSure FIT in order to prove that nobody, regardless of the region that they live in, would be better off using Cologuard instead of the InSure FIT.

In a table format, the data are the following:

EXAS - Pic 6

Compared To The InSure FIT, Cologuard Is 16% More Expensive, And Significantly Less Effective

The Cologuard results will not change at approximately $8.4 million in total. In contrast, the InSure FIT results, using $100 as the price point would be as follows:

EXAS 2 - Pic 7b

Using these accurate and relevant data, we can now see that in all cases, we would expect the InSure FIT to have substantially better results than the Cologuard test, while the Cologuard test would be expected to cost 16% more:

  • InSure FIT correctly finds all 64 cancerous tumors while Cologuard finds only 59
  • InSure FIT correctly finds 610 of pre-cancerous lesions while Cologuard finds 316
  • InSure FIT only misses 142 patients in need of a colonoscopy while Cologuard misses 441
  • InSure FIT results in 905 unnecessary colonoscopies while Cologuard results in 1,194
  • InSure FIT's 97% specificity allows it to cut down so much on false positive results that, similar to our prior example, it is better than the Cologuard test at any colonoscopy price point

In conclusion, the InSure FIT dominates the Cologuard test in every applicable category over three years at a lower cost. Under these conditions, we do not see any possible scenario in which CMS or insurers will provide reimbursement at $400. For Cologuard to be cost neutral, it would need to cost only $284 per test and it would still underperform the InSure FIT by missing 299 additional patients who need colonoscopies. Adjusting for those 299 patients who really should get colonoscopies would further lower the breakeven cost that Exact could charge for Cologuard to $201, about half the expected price. Indeed, we could even argue that the downstream cost of future cancers in these missed patients who should have gotten colonoscopies should also count against Cologuard, which would further depress Cologuard's breakeven reimbursement price.

Further, even if patients taking the InSure FIT were only compliant in two out of the three years, the InSure FIT would still have better patient outcomes as we explained in part one. At this level of use for InSure, Exact could only charge $86 for its test for the test to be cost-neutral to CMS and insurers.

More to Come

This article, number two in our five part series, proved that the top existing tests in the market, the FIT and InSure FIT, provide a better economic value and a better set of outcomes than Cologuard.

In part three, we will discuss why we feel that very few patients will actually use the Cologuard test even if it gets approved. In part four, we will deconstruct the bull case, and explain why the Cologuard test will never be the Pap smear. Finally, we will conclude by diving further into the facts, and explaining how Exact Sciences has misled investors (again). Stay tuned.

Footnote 1) The average colonoscopy cost was taken from the following sources:

Source Link Range Average
costhelper.com Link $2,010-$3,764 $3,081
healthhype.com Link None Given $3,000
chacha.com Link $2,010-$3,764 $3,081
buzzle.com Link $2,010-$3,764 $3,081
ehow.com Link None Given $3,000
howmuchdoesitcostto.com Link $2,000-$3,000 $2,500*
officecolonoscopy.com Link None Given $3,000
surgery.com Link $900-$2,040 $1,470*
Average $2,777

Note: * denotes that the average was not given, so the middle of the range was used

Disclosure: I am short EXAS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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