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High Growth Non-Invasive Cancer Test Technology: Guardant Health Vs. Exact Sciences

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About: Exact Sciences Corporation (EXAS), GH
by: Quantitative Insights
Quantitative Insights
Long/short equity, long-term horizon
Summary

Guardant Health (blood-based liquid biopsies) and Exact Sciences (stool-based colorectal cancer detection) have both announced plans to compete directly in each other's core market.

Guardant Health may be able to achieve a potential data advantage by leveraging data from its liquid biopsies to guide screening test development.

Exact Sciences has higher revenues giving it more optionality for entering the liquid biopsy space through acquisition of innovative startups.

Introduction

Over the past year, there has been a lot of coverage on Seeking Alpha about Exact Sciences (EXAS) and Guardant Health (GH), two companies playing in the emerging precision oncology space. This article focuses on comparing the two companies which are both chasing the same market for non-invasive cancer diagnostics albeit from different entry points. For detailed coverage of each company individually, please see some recent articles from Seeking Alpha:

Here is a very brief summary of how each company is addressing the market for non-invasive cancer diagnostics - for a more detailed discussion, please see the above articles. Exact Sciences has entered the market with its Cologuard stool-based colon cancer detection test which is a non-invasive alternative to a traditional colonoscopy. Guardant Health has entered the market with its Guardant 360 liquid biopsy test - a blood-based test for determining the genetic profile of tumors as a non-invasive alternative to a traditional biopsy. Both products have clear value propositions as being better, faster, cheaper vs. the more invasive traditional method. As such, both companies are seeing tremendous market adoption of their products and revenue growth.

Increasing Competition Between Guardant Health and Exact Sciences

Moving forward, it is clear that both companies intend to compete more directly as both try to establish leadership positions in the broader cancer diagnostics space. As such, it is important to consider both stocks simultaneously when evaluating either for investment. In the future, it is likely that developments at one company will impact the other. The most recent Exact Sciences investor presentation clearly shows that Exact Sciences intends to expand into the liquid biopsy space, which it sees as an adjacent market. The most recent investor presentation dedicated an entire section to the subject of liquid biopsy (a portion of the slides are reproduced below for reference).

(Source: Exact Sciences Investor Presentation)

Guardant Health has similarly identified colorectal cancer detection as one of its next big growth opportunities. Guardant has even gone so far as to publish some early results for a blood-based colorectal cancer screening test and has announced plans for conducting a more thorough study in the near future. The most recent investor presentation had a whole section dedicated to the subject of colorectal cancer screening (a portion of the slides are reproduced below for reference).

(Source: Guardant Health Investor Presentation)

To further complicate things, there are a number of smaller venture-funded competitors that are chasing this market. Two notable startups are Grail and Freenome which are both backed by reputable investors. For the purposes of this article, it is sufficient to note that there are multiple startups looking to develop blood draw based cancer detection tests. For more detailed coverage, please see these articles:

It is no surprise that there are so many companies competing for this market. Intuitively, cancer detection and treatment are a large important market: 38% of Americans will be diagnosed with cancer in their lifetimes. For reference, the most common cancer types (approximately 50% of all cases) are colorectal, lung, breast (primarily women), and prostate (primarily men). To give some numbers, Exact Sciences estimates the US colorectal screening market to be $18B/yr (106M average risk asymptomatic adults between 45-85, average revenue per test $500-$525 at a 3yr interval, source: most recent investor deck). EXAS projects the US market for liquid biopsies to be $13B by 2030. A quick gut check for these market sizes: let's assume that in the future, the typical American will do a routine cancer screen every 2 years for their last 40 years of life and that 40% will be diagnosed with cancer and do 10 additional tests as part of their treatment. Assuming 300M Americans with 85yr lifespans and a $500 selling price per test gives a market of approximately $40B in the US. Taking the global market to be 1.2B people living in developed countries gives a $160B global market for cancer detection and liquid biopsies.

Comparison of GH and EXAS

The table and figures below compare some key metrics for each company side by side. At a glance, Exact Sciences is the current leader on a revenue/gross profit basis with 4x the revenue of Guardant Health with a similar gross margin profile. Both companies are losing money with about -20% net margin. EXAS has $800M in debt as of 19Q3, and at the time of writing, the balance sheet does not reflect the impacts from its recent acquisition of Genomic Health ($2.8B transaction of which $1B is cash). Guardant is debt free.

Metric Guardant Health Exact Sciences
Market Cap $7.4B $12B
Revenue (TTM) $180M $720M
Gross Margin (%) 70% 76%
Net Margin (%) -22% -18%
SGA Efficiency (%) 90% 54%
YoY Revenue Growth (%) 181% 85%
Working Capital $515M $839M
Debt to Equity Ratio 0 1.1
PS Ratio 27.6 7.4

ChartData by YCharts

Both companies are growing revenues at a high rate, though Guardant is currently growing almost twice as fast vs. Exact Sciences (181% vs. 85% YoY revenue growth). Looking at growth estimates for the fiscal period ending December 2020, forecast revenue growth for Guardant is 30% and Exact Sciences is 86%. It seems a little surprising that Guardant's growth is expected to decelerate so rapidly over the next year, but I was unable to find a clear explanation. It's possible that GH is set up for an earnings raise/beat - Guardant does have a consistent history of both raising guidance and beating estimates. Measuring the health of each company's growth with SGA efficiency (Revenue growth divided by SGA spend), GH appears more efficient at 90% vs. EXAS at 54%. Nevertheless, GH is a little earlier in its growth phase and growing off of a smaller base, so it's hard to make the comparison. Thus, it appears that for the foreseeable future that EXAS will remain the larger company.

The size difference lends a major advantage to EXAS. Going by analyst estimates, by the end of 2021, EXAS will be bringing in $2.1B in revenue vs. $375M for GH. This translates to a difference around $1.2B/yr extra gross profit for EXAS vs. GH which can be re-invested into R&D. This first-mover advantage coupled with a profitable "beachhead" market of colorectal cancer screening leads to a significant financial advantage. This should give EXAS some extra optionality for M&A pathways to growing in this market, which could be advantageous given that there are multiple smaller startups eyeing this market as well. That said, it should be noted that Guardant Health is backed by SoftBank (OTCPK:SFTBY) which has proven itself more than willing to inject billions of dollars in follow on funding to its portfolio companies (recall the recent $9.5B bailout of WeWork).

When it comes to technology, there is a significant amount of uncertainty. Neither company has demonstrated the technological capability to move into the other's domain. Furthermore, it would take years of trials to demonstrate efficacy and gain FDA approval. While I am not an expert in this technology, it would seem to me that from a technology development strategy point of view, it would be easier to pivot liquid biopsy technology into early detection technology. This is because the collection of liquid biopsies on different types of cancers would provide a rich source of data for honing in on the markers that best indicate the presence of a certain type of cancer. In my mind, this gives Guardant a natural data advantage - in theory, they can use the insights from their core liquid biopsy business to enhance their future early detection business (their investor deck actually devotes a slide to describing this synergistic strategy). Exact Sciences' advantage, on the other hand, seems to be really in the area of colorectal cancer and stool-based testing - it's not clear if the learnings in these areas can be directly leveraged to create an advantage in liquid biopsies. From Exact Sciences' investor presentation, it appears that the company will attempt to access the relevant data through partnership with the Mayo Clinic.

Finally, looking at valuation, GH trades with a P/S of 38 on a ttm basis and 28 on a 1yr forward basis. EXAS trades at 14 on a ttm basis on 7.3 on a 1yr forward. GH is clearly trading at a significant premium vs. EXAS, which may reflect the higher technological optionality discussed above for extending Guardant's liquid biopsy platform into new spaces. When it comes to the competition for colorectal cancer detection, it seems that in principle a blood-based screening test (which Guardant is attempting to develop) might be more favorable to patients over a stool-based test (Exact Sciences' current product). Despite the potential benefit of a blood-draw test format, it would take years to gain FDA approval and choices on test type would likely be made based on efficacy vs. form factor alone. Even though GH trades at a significant premium, it seems that EXAS will have much more optionality for growth from a pure financial point of view owing to its large and growing colorectal cancer screening business. In my opinion, this financial advantage could be quite important in the future, given that there are a number of interesting small startups attempting to directly compete with GH in the liquid biopsy space.

Conclusion

Both Guardant Health and Exact Sciences have established profitable routes for growing in the precision oncology market - Guardant through its liquid biopsy product and Exact Sciences through its colorectal screening product. For the foreseeable future, EXAS is expected to have significantly higher revenue vs. Guardant, thereby leveraging its first-mover advantage into a financial advantage. This could create optionality for both increasing R&D and/or M&A of smaller startups. Exact Sciences also has the advantage of starting in the larger colorectal cancer detection market. Guardant's technology may give Guardant a data advantage over Exact Sciences since liquid biopsies of late-stage cancer patients may be able to provide data that will improve early detection technology. It is harder to see a technical path to extending a stool-based colorectal cancer detection test into a more general liquid biopsy market.

EXAS has a significantly lower valuation vs. GH, making it, in my opinion, a better buy for the moment given that both companies have a credible competitive advantage. Over time, I would expect the valuations to converge, although new test results - especially on the progress of Guardant's colorectal screening trials - will clearly influence valuations. Overall, my strategy is to buy both. The future market is sufficiently large to support the growth of both companies for many years. Both companies have a significant first-mover advantage vs. smaller competitors as both Guardant and Exact Sciences have managed to establish profitable beachhead markets that can be used to continuously fund new R&D. Thus, I would expect both of these companies to have the best shot at growing to be a leader in the precision oncology space and would anticipate acquisitions of smaller related companies in the future as they grow.

Disclosure: I am/we are long EXAS, GH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.