Below is an institutional research note written by the Hedgeye Healthcare team on Exact Sciences (EXAS). To read more of our institutional research email firstname.lastname@example.org.
Today Exact Sciences (EXAS) was down as much as -8% after Citron Research issued a short report on the company. EXAS has long been a controversial name and a popular target of short sellers with 28% of the float sold short as of 4/25. We know the short case well, and vetted it thoroughly prior to elevating EXAS as a Best Idea Long in January. Ultimately, there was nothing new released in the Citron report that we believe will matter to the stock over the next 9-12 months. Additionally, many of Citron's arguments around pricing are factually incorrect. Below is our rebuttal to Citron's short thesis.
- Citron argues that EXAS' has unsustainable acquisition costs related to its test growth. EXAS' marketing spend per incremental test was down sequentially in 1Q17. We expect the sequential delta to continue to decline as the number of tests per provider increases and ad spend remains constant. We believe it is likely that marketing spend will taper over time as physician practice patterns increasingly integrate Cologuard into colon cancer screening practices.
- Citron believes the business is not scalable, they are failing to gain leverage with doctors and consumers, and that EXAS' test per provider ratio "can only get worse." We expect that tests' per provider is more likely near an inflection point to the upside. It takes approximately 9-12 months to go from a coverage policy to a contracted rate, and then another 9-12 months to go from a contract to a benefit of the business. We have seen an inflection in tests per provider recently and expect this to continue as more insurers become contracted payors.
- Citron makes the point that United Healthcare has deemed Cologuard as not medically necessary, however we would note that over 70% of the insured population in the United States is currently covered, and commercial coverage has been steadily increasing since Cologuard was included in the USPSTF guidelines in June 2016.
- Based on discussions with management and a review of the PAMA regulations we believe ASP will remain relatively stable in 2018. PAMA rules include Medicare Advantage test price in the commercial ASP calculation and exclude commercial rates “under appeal.” This would imply non-contracted commercial volume and the net realized price, which is below the Medicare rate, will not be dilutive to 2018 PAMA price calculation.
- PAMA uses commercial rates to establish Medicare payments Jan 1, 2018 but Citron fails to mention that those commercial rates include Medicare Advantage plans which are required to cover any procedure, item or test covered by Medicare.
- Citron's report fails to mention that PAMA puts a 10% limit on the downside in 2018-2020, EXAS stated on the Q1 cc that their ASP was $442. Assuming 70% of their revenues comes from Medicare at its current reimbursement rate of $509 per test, the average insurance reimbursement rate would be $285
- We did our own google trends analysis which showed a 0.73 correlation between sequential providers added QoQ% and US Google Trends of "Cologuard" QoQ%. Our analysis predicted approximately 70k ordering providers at the end of 1Q17 which was in-line with their reported 70k.
- We think it is highly unlikely that Cologuard will be displaced by liquid biospsy in the near term. While we see it as a long-term risk, we think it could take more than a decade to gain traction and guideline inclusion even after the technology is developed based on the long development path that Cologuard underwent.
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