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Much as investors may wish it were true, it's not always the case that a great drug, test or medical device meets with real commercial success. Launching new med-tech products always involves an intricate dance between efficacy, patient control (in other words, doctors' "turf"), compliance, cost/benefit, and reimbursement. That could prove to be especially relevant in the case of Exact Sciences (NASDAQ: EXAS) and its non-invasive Cologuard colorectal cancer test.

The Waiting Is Close To An End

With over 9,000 patients enrolled as of the last report and 6,000 through the colonoscopy and pathology portion of the study, Exact Sciences is pretty much on schedule with its pivotal clinical trial. What's more, while management didn't go into full detail, they did indicate that enough patients with cancer and precancerous cells/lesions (more than 400 in total) have been enrolled to achieve the needed statistical significance.

On a related note, the company recently completed its cut-off study, which included over 900 patients. This study included the use of an automated system and management stated that results were not only satisfactory, but consistent with prior study results. Based on their guidance, it seems reasonable to expect clinical data within a few months - most likely at the American Association of Cancer Research International Conference on Frontiers in Cancer Prevention Research in mid-October.

At this point, the larger Deep-C study is still likely to finish in the fourth quarter of this year, with the last components of the modular FDA filing going in around Q1 of 2013. Investors who want a little more information on the test can also review my earlier piece here.

What's The Real Market … And How Much Can Exact Sciences Really Charge?

While Exact Sciences isn't really a very controversial name by the standards of biotech, that isn't to say that there's a universal consensus on the company's addressable market.

There are over 75 million Americans above the age of 50, the age at which the CDC recommends people begin regular colorectal cancer screening, but that's about the only number people are likely to agree on. Estimates of testing compliance range from less than 50% to over 65%, depending upon the definition of compliance, with about 10 million fecal occult blood tests (FOBTs) each year and 14 million colonoscopies (though not all for cancer screening purposes).

It seems reasonable to me to that addressable market for the Cologuard is at least 25 million and should likely be higher. The question though is cost. FOBTs cost only about $5-$30 and while Septin9 tests (a competing technology) are listed at triple-digit prices, they're not reimbursed at that level. So can Exact Sciences get the $300 or so in reimbursement that management seems to be targeting?

On one hand, the benefits do seem to argue in favor of such a price - the Cologuard offers significantly better sensitivity and selectivity, is still much cheaper than a colonoscopy, and should result in fewer false signals. On the flip side, the CMS has been whacking reimbursement rates left and right, and it may be difficult for the company to establish that its test is indeed so much better that it deserves that sort of reimbursement premium (though private payors could be more accepting).

There's also the question of Exact Science's cut to consider. If the company partners with labs, it may have to surrender as much as 50% of the list price to the lab - putting even more pressure on securing a favorable reimbursement rate and/or code-stacking (which could take the effective price north of $500).

Competition And Selling The Doc

Exact Sciences doesn't, and won't, have the only option in the colorectal screening market. Not only are there established options like FOBTs and colonoscopies, but others are looking to enter the market. Given Imaging (GIVN) is working on the PillCam COLON 2, while Germany's Epigenomics is hoping to get approval for its Epi proColon Septin9 from the FDA and get it on the market before Exact Sciences (though the technology has been available as a lab-developed test).

There's also an outside chance that larger diagnostics companies, including names like Abbott (NYSE:ABT) or Becton Dickinson (NYSE:BDX), could look to develop tests for this market if the reimbursement looks good enough. It's also worth noting that while fast-growing diagnostics company Cepheid (NASDAQ:CPHD) has talked about a test for the colon cancer market, it sounds more like a monitoring test than a screening option.

As is so often the case, competition will come down to performance, compliance, patient control, and cost-benefit. To that end, while some may think Exact Sciences could represent the loss of more lucrative colonscopy revenue, I take a different stance - namely, that compliance issues in colorectal testing are such that there's more to gain by offering a test that people will actually submit to once a year. That said, this is where management may have a tough decision to make - go it alone and keep all of the ASP, but face sizable investments in marketing, or partner with a company like LabCorp (NYSE:LH) or Quest (NYSE:DGX) and surrender some of the revenue.

The Bottom Line

Unlike most biotechs, I see little risk that Exact Sciences' Cologuard works and can reach the market. On the other hand, the revenue modeling is a great deal more complicated.

I do think that the company can get 10% share in five to seven years' time, and I think that translates into about 2.3 million annual tests (and does not include potential approval/sales in Europe or Japan). At an ASP of $150, that works out to $345 million, while the full $300 works out to $690 million; average them together and you have one scenario calling for $500 million in revenue. Give that a 6x multiple (well below Cepheid, but above Myriad Genetics (NASDAQ:MYGN) and in-line with Genomic Health (NASDAQ:GHDX)) and discount it back, and you end up with a fair value target between $15 and $16. That also includes no incremental value for cash on hand, nor future products that may emerge from the company's collaborative efforts with the Mayo Clinic.

I fully expect both the bulls and the bears to howl about these numbers - bulls will say that 2.3 million tests is way too conservative, bears will probably say that even an ASP of $150 is too optimistic. So be it - I'm simply laying out the investment case that I'm using for my own investment decisions. As it stands then, Exact Sciences still looks like a meaningful undervalued emerging diagnostics player with a potentially highly effective non-invasive test for a significantly under-served market. Do your own due diligence, but with data and filings fast approaching, this could be an active stock later this year.

Source: For Exact Sciences, Approval May Be The Easy Part