Exact Sciences - Line Your Pockets, Not Your Toilet Bowl (3 Of 5)

Jul.26.13 | About: EXACT Sciences (EXAS)

Today, in part three of our five part series, we are going to continue to explain why we believe that Exact Sciences (NASDAQ:EXAS) is worth under $3 per share and that the stock should be aggressively sold or shorted. As a reminder, in part one (here), we illustrated why the Cologuard test is actually less effective than the Fecal Immunochemical Test (FIT) and is therefore unlikely to receive FDA approval. In part two (here), we took this a step further, and explained why Cologuard is not only worse, but also not economically sensible, and therefore would be unlikely to be reimbursed by CMS or insurers.

In part three, we will show why we believe the addressable market for Cologuard is very limited. While Exact Sciences wants investors to think Cologuard's market potential is vast, the patient population is likely to be small, and we believe very few doctors will actually prescribe Cologuard, due to likely patient compliance issues and problems with the test's efficacy. To explain this, we will explain the standard of care for Cologuard's target market, adults over age 50. We will then give a graphic description of the application of the Cologuard test and compare it to that of the InSure FIT.

The Addressable Market Is Much Smaller Than People Think

Adoption of the Cologuard test will depend on doctor's choosing Cologuard. Since Cologuard requires a full stool sample, it will most likely be given to patients as a take-home test. We believe this inherent feature significantly shrinks the addressable patient population for Cologuard. The vast majority of the female and older male populations may be screened without a take-home test such as Cologuard. As a result, the primary addressable market for Cologuard is the younger male population, which is a small market. Exact Sciences grossly exaggerates the total addressable market (TAM) for Cologuard.

While colorectal cancer is the third most common cancer in both men and women, excluding skin cancers, it can be regularly screened for in the doctor's office. This reduces the need for a take-home test such as Cologuard. Colorectal cancer is primarily seen in people after the age of 50, and more than 9 out of 10 people with colorectal cancer are at least 50 years old. Men, starting at age 50, are recommended to begin screening for prostate cancer, which is the most common cancer in men, other than skin cancer. As part of this screen, it is recommended that a Digital Rectal Examination (DRE) be performed during routine annual check-ups, as explained here. A DRE, as explained here, is an examination of the lower rectum in which a doctor inserts a gloved, lubricated finger into the anus. DREs are also performed to collect stool for sampling, which allows the doctor to perform the FIT or FOBT, as seen here and here. Even FOBTs, as reported here, can reduce the chances of dying from colon cancer by up to 30% if taken regularly. Women are not spared DREs as they are part of a pelvic exam, which as explained here, start at age 21 and are recommended to be repeated annually through age 70.

Therefore, if a doctor thinks a colorectal screening test is warranted, the doctor can perform a FIT or FOBT as part of an annual check-up or gastroenterologist appointment for men, or as part of an annual gynecologic examination for women using the fecal matter that is left on the doctor's glove during a DRE. This way, a doctor can ensure 100% compliance with an FIT as part of both men's and women's already recommended annual check-ups. While these in-office tests may not be as powerful as the take home versions, and should be taken in conjunction with other colon cancer screens, the fact that the doctor can ensure 100% compliance every year is very important and impossible to match with a take-home colon cancer screen. Simply put, if a patient is unwilling to undergo this screen while at the doctor's office as part of another regularly scheduled procedure, we feel that he or she is very unlikely to administer it to him or herself at home.

Further, by giving the tests themselves, doctors can eliminate the potential for patient error that exists with a take-home test. Lastly, these tests are done annually, so they benefit from the cumulative effect of multiple years of testing, as explained in our first article.

Since men older than 50 can receive screens during DREs and women get them during annual gynecologic examinations starting at the age of 21, we believe that the only untapped market for a take-home colon cancer screen consists of men 30-49 years of age, or only about 41 million people per the U.S. Census Bureau. This is a far cry from the 100 million average and high risk patients that Exact claims make up the potential U.S. market for its test. Furthermore, men in the 30-49 age group have very low risk of developing colon cancer, and it is unclear that they should even be tested on a regular basis. Because DREs are invasive and because this demographic is at low risk for cancer, doctors usually avoid performing DREs in men age 30-49. It is in this age group, that a doctor, who wants to perform a colon cancer screen, will choose a take-home test such as Cologuard.

EXAS 3 - Pic 1bClick to enlarge

What is the potential size of this market? According to the National Cancer Institute (here), 4.82% of men and women born today will be diagnosed with cancer of the colon and rectum at some time during their lifetime. A male younger than 50 is only recommended to receive colorectal screening tests if he is at high-risk with a family history of colorectal cancer. 36.1% of colorectal cases are found in men and women over the age of 75, which means that by the time he or she gets colon cancer, his or her children are likely older than 50 years old. This means that the probability of a person getting colon cancer before the age of 75 is actually 3.08% (i.e. 4.82% x 63.9%), which means that 6.07% of men younger than 50 have a mother or father who has/had colorectal cancer and are therefore at high risk.

The math is 1 - [(1 - 3.08%)^2] = 6.07%.

Of a population of 41 million men 30-49 years of age, 2.5 million of them (i.e. 41 million x 6.07%) are at high risk of colorectal cancer. Compliance within colorectal cancer is notoriously low. As an example, of the 100 million average and high risk patients in the US, only 12 million FOBTs and FITs are actually sent to the lab, or just 12%. Since men 30-49 years of age are overall at low risk of colorectal cancer, we believe an even lower percentage of them are likely to get screened with an FOBT or FIT. The true market is likely to be around 100,000 men who receive FOBT or FIT tests, which is a tiny number. Even if Cologuard captures 50% of this market, that's only 50,000 tests or $20 million in revenues per year at a $400 price point. The current market cap of Exact Sciences is $840 million.

We believe even 50% market share is too high of an estimate due to the compliance difficulties Cologuard is likely to face, which we address next.

Compliance Is A Big Challenge

In the unlikely event that a doctor recommends a take-home colon cancer screen to one of his or her patients, we believe that the choice of the test will depend on the expected compliance with the test (i.e. the chance that the patient actually follows through and administers the test to him or herself) and the expected quality of the test.

Compliance is significantly more important than the quality because the test itself becomes completely irrelevant if the patient doesn't actually take the test. We believe that compliance is directly related to the simplicity of the test and inversely related to the amount of feces that a person is forced to handle. The grosser the test, the less likely patients will actually do it. Quality is also important because doctors want the test not only to catch as many true positives as possible, but also to flag as few false positives as possible in order to avoid unnecessary colonoscopies.

Let's first compare the expected compliance of the two tests.

A picture of the Cologuard test can be seen on slide 13 (below) of the June 2013 presentation, found here.

EXAS 3 - Pic 2 Click to enlarge

The Cologuard test works as follows:

First, a patient must obtain a sample of his or her own excrement. Just like taking a urine test, he or she must defecate into a container inside the toilet bowl. The patient then collects a sample of the stool from the bucket and inserts it into a small vial that comes with the test. Next, a preservative is poured over the remaining excrement in the bucket and the lid is screwed on. Finally the patient puts both the vial and bucket either in the mail or physically delivers them to a local lab. The lab then tests the stool samples for abnormal DNA. If the test comes back positive, the patient then schedules a colonoscopy to have any cancerous or precancerous polyps removed. As we previously showed, about 76% of these positive readings will actually be false positives and will result in unnecessary colonoscopies. If the test comes back negative, the Company recommends that the patient repeat this test every three years.

Now that we have an overview of the test, let's take it step by step. When the patient has the urge to defecate, he or she gets the Cologuard test, opens it, and finds this clear plastic bucket holder:

EXAS 2 - Pic 3Click to enlarge

The patient places the holder over the bowl. This is the piece that the patient will be aiming through. Now that the appliance above is secured over the toilet, he or she suspends the bucket in the middle of the holder:

EXAS 3 - Pic 4

This is the bucket where the feces will end up. It is about the size of a large ice cream container.

The patient then has to defecate into the bucket suspended over the toilet.

Once defecation is complete, the patient needs to get up and grab the vial. The patient unscrews the top to find a small spoon, similar to a tube of mascara.

EXAS 3 - Pic 5

Then, the patient needs to reach into the bucket and use the spoon to extract a sample from the stool. Remember that because the liner holding the can is still presumably lying across the top of the bowl, the patient will be unable to wipe for the duration of the procedure since it is in the way. The patient can remove the entire assembly and put it either on the floor or in the sink; however, remember that it has been sitting in toilet water and is likely to drip.

After obtaining the sample and placing it into the vial and screwing on the top, the patient needs to pour the bottle of preservative shown below over the stool in the bucket. The patient then has to screw on the lid to the bucket.

EXAS 3 - Pic 6

Finally, the patient needs to put both the sample in the vial and the larger stool sample in the bucket into a box, tape it and secure it, and then mail it to a lab for examination.

The InSure FIT Is Much Easier

How does this compare to the InSure FIT, the leading take-home colorectal screening test? A picture of the test itself is below. While more details about the actual process can be found here, the basics are fairly simple. Subjects of the InSure FIT simply brush the surface of their stool as it lies in the toilet bowl. The brush is then applied to a test card so that the water sample retained within the brush bristles is deposited on the card. This is then repeated for sample B. Then, just as a patient would need to do with the Cologuard test, the Insure FIT needs to be mailed to a lab for review. At no point does the patient have to handle his or her own stool, which is a point that the test highlights, as can be seen here. While the InSure FIT is not without some inconvenience for the patient, it is clearly a much easier test to administer, even on an annual basis.

EXAS 3 - Pic 7

Given what you know about the tests, if you are a doctor and compliance is a real issue, which test would you choose? Given our belief that compliance is directly related to the simplicity of the test and inversely related to the amount of feces that subject is forced to handle, we think that it is clear that patients will be more likely to complete the InSure FIT than the Cologuard test. In addition, the simplicity of the InSure FIT is likely to result in fewer patient errors than with Cologuard. In our view, Cologuard's likely worse compliance and greater number of patient errors relative to competing tests will impede its adoption.

Normalizing for Compliance Makes InSure Fit Even Better

Now let's compare the quality of the two tests:

Because of the compounded efficacy of FITs in general, and the even further compounded efficacy of the InSure FIT due to it being a 2-sample test, the results are stunningly obvious. Over the course of three years (the fair amount of time to compare the two tests based on their designs), in a sample of 10,000 patients, the InSure FIT would be expected to correctly identify more cancerous polyps (64 vs. 59) and more precancerous polyps (610 vs. 316) than the Cologuard test. The InSure FIT would also be expected to miss fewer true positives (142 vs. 441) and cause fewer unnecessary colonoscopies for healthy patients (879 vs. 1,194).

Over the course of any single year (a comparison that is severely skewed in favor of the Cologuard test, yet still looks better for the InSure FIT), Cologuard would be expected to correctly identify more cancerous polyps (59 vs. 56). However, it will have more misses (441 vs. 440). Having said that, the InSure FIT would be expected to correctly identify more precancerous polyps (320 vs. 316), and would save 882 healthy patients from getting unnecessary colonoscopies (312 vs. 1,194). The reason for this final eye-popping number is the expected difference of false positives detected, determined by the difference in the specificity of the InSure FIT (97%) and the Cologuard test (87%). Accordingly, a colonoscopy resulting from InSure FIT has a 45% chance of being unneeded, while a colonoscopy resulting from Cologuard has a 76% chance of being unneeded. Based on these facts, we think that it is clear that a doctor would recommend the InSure FIT over Cologuard.

In addition to the fact that the InSure FIT is not only the easier test to comply with, but also the much better test over three years, we are now going to show that even if a patient is only compliant in only two out of the three years, that its results under every reasonable testing metric are still superior:

EXAS 2 - Pic 8bClick to enlarge

As can clearly be seen, even when the efficacy is only compounded over two years for the InSure FIT, it is still the far superior test:

  • InSure FIT correctly finds 63 cancerous tumors while Cologuard finds only 59
  • InSure FIT correctly finds 504 pre-cancerous lesions while Cologuard finds 316
  • InSure FIT only misses 249 patients in need of a colonoscopy while Cologuard misses 441
  • InSure FIT results in 614 unnecessary colonoscopies while Cologuard results in 1,194

Hence, InSure FIT can have just 67% patient compliance (2 of 3 years in which it is recommended) and still be better than Cologuard with 100% patient compliance.

Let's Go To The Scorecard: Cologuard Vs. InSure FIT

Knowing what we know about the tests, let's compare Cologuard to InSure FIT and see how it stacks up. The data is pulled from our part two write up (here), which compares Cologuard and Insure FIT on an apples-to-apples comparison over the same timeframe.

EXAS 3 - Pic 9 Click to enlarge

The Conclusion: The Addressable Market For Cologuard Is Small And Doctors Won't Choose Cologuard Due to Compliance Issues

In summary, we strongly believe that based on the market for take-home colon cancer screening, the expected compliance, and the expected quality of the results, that doctors will recommend the InSure FIT over the Cologuard test for patients who need take-home colon cancer screens. We would like to leave you with four main conclusions:

  1. Due to regularly scheduled check-ups for men (starting at the age of 50) and women (starting at the age of 21), the market for non-invasive take-home colon cancer screening is largely limited to men 30-49 years of age, or about 40% of the size of the market that Cologuard claims.
  2. The actual need for colon cancer testing in men under 50 is minimal and Cologuard is therefore unlikely to be widely prescribed in that population.
  3. Based on our belief that compliance is directly related to the simplicity of the test and inversely related to the amount of feces that a person is forced to handle, patient compliance with the Cologuard test will be lower than with alternative tests like the Insure FIT.
  4. Based on the quality of the expected results, even if patients are only 67% compliant with the InSure Fit vs. 100% compliant with the Cologuard test, the results still favor the InSure FIT and will lead doctors to continuing to recommend it regardless of whether or not Cologuard is approved by the FDA.

More to Come

This article, number three in our five part series, showed you why we feel that very few patients will actually use the Cologuard test, even if it gets approved.

Our next article 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, highlight management's history of misrepresentation and product failures, and explain how Exact Sciences has misled investors (again). Stay tuned.

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.