Exact Sciences: This Is Not The Next Pap Smear - Debunking The Bull Case (4 of 5)

| About: EXACT Sciences (EXAS)

As a reminder, in part one, we illustrated why the Cologuard test is actually less effective than the Fecal Immunochemical Test (FIT). In part two, we took this a step further, and explained why it is not only worse than existing tests, but also significantly more expensive, and therefore would not be either approved by the FDA or reimbursed by CMS. In part three, we showed you why we feel that very few patients will actually use the Cologuard test due to the disgusting nature of the test, even if it gets approved by the FDA.

Now that we have given you the math at various sensitivities and specificities, as well as the specifics regarding the test itself, we are going to debunk the bull thesis on Exact Sciences (NASDAQ:EXAS), which states that Cologuard will become as universally used as the Pap smear and that it will be sold at a price of $400.

We believe that neither of these statements will prove to be anything other than words on paper, and that Exact Sciences should be aggressively sold or shorted price target of under $3 per share, which is the value of Exact's cash balance.

The Pap Smear Illusion

Exact Sciences wants investors to believe that Cologuard has the potential to become as successful as the Pap smear. In the past three investor conference transcripts available on Seeking Alpha (here, here, and here), CEO Kevin Conroy mentions the Pap Smear in every presentation and submits it as the benchmark for Cologuard. The Pap smear has been around for decades, has helped nearly eradicate cervical cancer, and is commonly administered. According to a study in 2004 (found here), 93% of women in the US have had at least one Pap smear screening in their lifetime, and 88% of women get a Pap smear screening at least every three years. If Cologuard can replicate the Pap smear's success, then Exact Sciences will be enormously successful.

However, there are clear differences between Cologuard and the Pap smear test, which we believe will prevent Cologuard from ever reaching the status of the Pap smear test.

The Cologuard Test vs. The Pap Smear:

The Pap Smear Has No Competition

The main difference between the two tests is that the Pap smear has virtually no competition. The Pap smear has been around for nearly six decades, and it still doesn't have much competition. It has an effective monopoly on cervical cancer screening, which is a large addressable market. Not only is it incredibly effective, but the Pap smear is also incredibly cheap, costing on average $40 per test, according to a recent USA Today article. That's 1/10th the price of Cologuard's $400 price point.

On the other hand, Cologuard faces incredible challenges competing with various non-invasive FITs which are already widely utilized, more effective in screening for colorectal cancer, more cost efficient, and easier to administer. In addition to the FOBT and FIT, there are also other options such as the CT (Virtual) Colonoscopy, Double Contrast Barium Enema, Flexible Sigmoidoscopy, and Capsule Endoscopy, as well as several tests under development today.

Compliance and Ease of Use

Another major difference between the Pap smear and Cologuard is the Pap smear's relatively easier administration. As discussed here, it is a "simple and quick test" performed by a doctor every 1-3 years during a pelvic examination in women between the ages of 21 and 65. In terms of compliance, the Pap smear is given in an office, by a doctor, which ensures 100% compliance in patients who actually go to the doctor. As a result, the American Cancer Center estimates that 87.6% of women age 21-64 are screened for cervical cancer as recommended, as seen here.

In contrast to cervical cancer tests, colorectal cancer screens suffer from low compliance rates. Just 61.9% of men between the ages of 50 and75 are screened for colorectal cancer as recommended, and the American Cancer Center notes that similar trends are found in women. When one considers how various colorectal screening tests are done, such as the InSure FIT, which we highlight in part three, it's easy to see why compliance is a challenge.

Taking this into consideration, we believe compliance with the Cologuard test will be an even greater challenge. Cologuard is given as a take-home test that needs to be mailed to a patient following its recommendation by a doctor and ultimately completed by a patient at his house and then mailed back by the patient. The test is also unpleasant, and patients are required to handle their own feces, as we described in part three of our series here.

Furthermore, Cologuard is expensive, costing 10 times more than the cheap and incredibly effective Pap smear. As a take-home cancer screen, we do not believe Cologuard will ever be as widely accepted as the Pap smear.

Scorecard: Cologuard Versus Pap Smear

So how does Cologuard stack up against the Pap smear? Can it ever rival the Pap smear in the colorectal cancer space, as Exact Sciences claims? Let's go to the scorecard:

EXAS 4 - Pic 1
(Click to enlarge)

It is crystal clear that the notion that Cologuard has the potential to be as successful as the Pap smear is an illusion. Due to the differences in competitive environment, compliance, and price, it is clear to us that the bull case for Exact Sciences that claims that Cologuard is the next Pap Smear is both illogical and reckless.

Mythical $400 Price Point: Ferrari Price For Yugo Performance

The Pap Smear Is Reimbursed, History Says That Cologuard Won't Be

The second part of the bull thesis for Exact Sciences is that Cologuard will warrant a high price of $400 per test and receive attractive reimbursement rates from CMS. Nothing could be further from the truth. We have proof from past CMS studies that show CMS approval for Cologuard to be a pipedream. Multiple studies have examined the efficacy and cost of Exact Sciences' products. These studies explicitly tell us that Cologuard will not be found to be cost-effective and will not receive reimbursement approval anywhere near the $400 price point that Exact Sciences envisions. We will focus primarily on the first study, which can be found here.

First, we should point out that the Cologuard test from Exact Science is not exactly novel. Investors may not know this, but Cologuard is the third iteration of Exact's stool DNA test. The first two, PreGen-Plus and ColoSure, were released in 2003 and 2008. We will get into the details and history of PreGen-Plus and ColoSure and their spectacular failures in our finale, but for now, just know that neither test was approved by the FDA nor received reimbursement by CMS. The two prior tests failed for the exact same reasons that we believe Cologuard will fail; existing tests were better and far cheaper than Exact's products.

The most important part of the first study evaluated the merits of Pre-Gen and ColoSure. In the report, PreGen-Plus is noted as "version 1.1" and ColoSure is noted as "version 2.0." The studies ran two model simulations on PreGen-Plus and ColoSure and compared the results (in terms of efficacy and resulting healthcare costs) to those of existing tests, such as FIT, FOBT, and colonoscopies.

With regard to PreGen-Plus (version 1.1), the study found that PreGen-Plus was less effective (measured in terms of discounted life years gained per 1,000 65 year olds) and more costly (measured in terms of discounted total costs per 1,000 65 year olds) than existing screening tests! The study even illustrated an efficient frontier examining cost vs. benefit analysis for two different analyses on pages 35 and 36, which makes version 1.1's inferiority clear. This is the exact same conclusion we showed you in parts one and two of our series for Cologuard. Our analysis is in line with how CMS has evaluated Exact Sciences' tests in the past.

The only way that the authors could justify PreGen-Plus was at $40-$60 per test, a far cry from its actual $350 cost. This can be seen in page 37 of the report, which we summarize here.

EXAS 4 - Pic 2
(Click to enlarge)

As for ColoSure (version 2.0), the test had not yet been officially released, so the study did not have pricing information to perform the same exact analysis as PreGen-Plus. However, the study performed the same cost justification analysis for ColoSure and calculated what ColoSure would need to be priced at in order for it to be cost-effective, based on its sensitivity and specificity.

Here it found that ColoSure needed to be priced at $17-$41 per test, which can also be found on page 37. The lower warranted reimbursement for ColoSure was due to its much lower specificity (85%) when compared to both PreGen-Plus (96%) and alternatives such as FIT (95-98%). This lower specificity is also a weakness of Cologuard, which reported a specificity of 87%.

EXAS 4 - Pic 3
(Click to enlarge)

What Does This Have To Do With Cologuard: Connect The Dots

The next part of the study is the most important for our analysis on Cologuard. The study then created multiple hypothetical stool DNA tests with improved sensitivity and specificity, one of which closely matches Cologuard's cancer sensitivity (albeit with much higher specificity and pre-cancer sensitivity). These sensitivities can be found on page 28.

EXAS 4 - Pic 4
(Click to enlarge)

Similar to the analysis on ColoSure (version 2.0), the study determined where these hypothetical tests needed to be priced in order to be cost-effective versus existing testing methods.

Here is what they found. Not one justifies a price anywhere near Cologuard's mystical $400 price point.

EXAS 4 - Pic 5
(Click to enlarge)

Notice that the 75% better hypothetical test is the most similar one to Cologuard in terms of cancer sensitivity at 92%. In contrast, it also assumes a specificity of 99% and an average pre-cancer sensitivity of 79%, both of which are significantly better than Cologuard's 87% specificity and 42% pre-cancer sensitivity. The study found that the justified price for the 75% better hypothetical test was $179-$247. The midpoint of that range is barely over 50% of Cologuard's suggested $400 price point, and assumes a 14% increase in specificity vs. Cologuard as well as an 88% increase in pre-cancer sensitivity.

Using this analysis, we can triangulate where Cologuard fits. On one end, we have ColoSure (version 2.0) which is a slightly worse test than Cologuard. On the other end, we have the 75% better hypothetical, which is significantly better than Cologuard.

EXAS 4 - Pic 6
(Click to enlarge)

If we take the midpoint of the cost-effective price range, we get $132, which is 67% lower than Cologuard's $400 price point!

Even the Company's management knows that Cologuard doesn't stack up relative to existing competition. This is why management tries to distract investors from the appropriate comparator on the Q2 earnings call by saying that their economic study shows "that Cologuard is significantly more cost-effective than, say for example, Pap screen and also mammography." Isn't this comparing apples and oranges? The correct comparison is relative to existing screening techniques for colorectal cancer and pre-cancerous polyps, such as FIT. However, since management knows that Cologuard isn't competitive with these existing tests, they divert attention from the appropriate comparator and try to mislead investors. We doubt CMS will be so easy to mislead, especially since it has already done the work to show Cologuard is not cost effective anywhere near $400 per test.

More Official Proof That Cologuard Is Ineffective And Overpriced

In a later study, the same authors updated the report, and the conclusions are the same (here). We focused on the longer, original study because it provided sensitivities, but just so you know, here are the conclusions from the shorter piece.

It found that stool DNA tests such as Cologuard are not competitive. Furthermore, stool DNA tests would have to be priced at comparable levels to FIT's $23 price point and nowhere close to Cologuard's $400 pipedream.

EXAS 2 - Pic 7
(Click to enlarge)

This is the proof that Cologuard won't be successful. CMS has already done the work and showed that it will not approve Cologuard for reimbursement anywhere near $400 per test. We have simply connected the dots for you.

More to Come

This article, article four in our five part series, deconstructed the EXAS bull case, by explaining why Cologuard will never become as widely accepted at the Pap smear.

In our finale, we will conclude by diving further into the facts, and explaining 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.