Exact Sciences Corp: We admit to being early. But the science won’t be held back.

For Immediate Release – January 25, 2018

Timely Catalyst Based Short Selling.

Cellmax, a company you  never heard of 8 months ago, just put out a press release that should make all EXAS shareholders poop in their pants

As you read this article, CellMax CEO was just on stage at the 2018 Precision Medicine World Conference (PMWC), in Silicon Valley with 11,000 attendees, presenting the future of cancer testing.

Atul Sharan, CEO of CellMax Life, a leading cancer diagnostics company, today led a panel discussion discussing the the future of early cancer detection for the cost to payer of $150. And just in case you think CellMax’s test is not serious, it is one FDA approval from rendering Exact Sciences terminal.

http://www.prweb.com/releases/2018/01/prweb15132068.htm

Look at this chart from Cowen.

CellMax is clearly advancing its detection technology into a position of efficacy sufficient to earn FDA approval — for a $150 blood test.  Note the specificity (avoiding false positives) is already far superior to Cologuard.

As you read this article, CellMax CEO was just on stage at the 2018 Precision Medicine World Conference (PMWC), in Silicon Valley with 11,000 attendees, presenting the future of cancer testing.

Atul Sharan, CEO of CellMax Life, a leading cancer diagnostics company, today led a panel discussion discussing the the future of early cancer detection for the cost to payer of $150. And just in case you think  CellMax’s test is not serious, it is one FDA approval from rendering Exact Sciences terminal.

http://www.prweb.com/releases/2018/01/prweb15132068.htm

Last year was difficult for short-sellers to say the least. While Citron had our share of winners and losers, it has become apparent that a stock will not sell off on valuation regardless how bubblicious the price may be. Analysts and the street have given stocks a long runway to fly.

In this market, it’s obvious that no stock will sell off WITHOUT A CATALYST.

It is rare that a company has 3 catalysts at the same time affecting the 3 tentpoles of their business … and with that we are forced to revisit Exact Sciences (NASDAQ:EXAS).

When Citron first reported on Exact in May of 2017, our report focused on the difficulty of growing future test volumes while maintaining high reimbursement prices from insurers for their Cologuard product.

While we hypothesized about what “might happen in the future” regarding blood-test detection of colon cancer” (no catalyst), the longs stayed focused on the key metric, which was test volumes.

Give full credit to Exact CEO Kevin Conroy.  Exact was able to handily beat test volumes over the next two quarters and quell reimbursement fears by signing a deal with United Health. Combining a high short interest and Wall Streets optimism, Exact was able to double share price.

  1. Test volumes:  Growth Rate Flattening

Two weeks ago, before the JP Morgan conference, Exact Sciences disclosed its Q4 test volume: 176,000 units. For Exact’s management, who has run a pattern of under-promising and over-delivering, this test volume was disappointing. This was the first time since Citron put out its initial report that Exact has not handily beaten their own estimates, the one metric that has driven the stock:

Guidance Test Volumes Beat %
Q2 2017 115,000 135,000 17.4%
Q3 2017 150,000 161,000 7.3%

Failing to demonstrate a double-digit beat indicates a weakness in their story’s armor.  Exact should be blowing out unit volumes, and using their hardball marketing effort to beat expectations decisively. For Wall Street to continue to extend them a license to lose money, unit volume hypergrowth has to be there. We think Exact’s weak unit volume metric indicates the company is facing headwinds a lot sooner than expected.

We give credit to research firm Hedgeye for acknowledging this alarming trend.

Last May, Hedgeye critiqued Citron’s bearish piece on Exact, and claimed it was a buy. They were right. At the time, Citron had no catalyst to point to.

Hedgeye pounded the table on January 5, 2018 when they published a report followed by a conference call claiming.

BEST IDEA | Long EXAS: More Fuel In the Tank

Two days later Exact announced their Q3 test volumes. Then, on January 8 Hedgeye abruptly changed its outlook:

“WE ARE REMOVING EXACT SCIENCES (EXAS) FROM INVESTING IDEAS”

This abrupt downgrade was directly due to test volumes that failed to impress. Exact is well aware of this problem. They commented at the recent JPM healthcare conference:

“Moving forward, further growing the Cologuard business is a prime objective for Exact Sciences. To that end, the firm plans to grow its primary care sales force to 350 this year from 250 in 2017.”

Notice their primary objective is to grow their sales force, not to innovate. Let us not confuse this high multiple lab company with an innovative science thought leader.

  1. Pricing pushback  

While Exact has updated their test volumes run rate, we won’t know their receivable until the end of next month. The company has habitually played hide-the-ball with disclosure of its current reimbursable run rate with insurers.

This particular catalyst from Anthem might be the first of many we see in the future.

Anthem Blue Cross issued a network update covering Ohio, Kentucky, Missouri Indiana, and Wisconsin. Exact is no longer considered an in-network provider for that insurer.

In-network laboratory update

Effective January 1, 2018, Exact Sciences Laboratories, LLC, will no longer be an in-network provider for Anthem in Indiana, Kentucky, Missouri, Ohio and Wisconsin. Providers should use in-network laboratory providers, such as LabCorp and Quest Diagnostics, for non-invasive colon cancer screening testing for your Anthem patients beginning January 1, 2018. Using an in-network laboratory helps your patients maximize their laboratory benefits and minimize their out-of-pocket expenses.

Bulls want to call this hardball negotiation, but let’s be honest about what is going on. Insurance companies work on cost/benefit economics. They will not pay $500 for a Cologuard test without pushback, when they can do 3 FIT tests at $25 each.

If, as we write this column, Exact’s receivable as a percentage of revenues is inflating beyond the revenue growth rate , then it is already game over as insurance companies are not reimbursing at the rate analysts pegged. This is a possibility because the company has not released any negotiated rates with private insurers.

Reimbursement issues in the past have led to a lawsuit with Humana, and Exact just eight months ago posted an 11th hour agreement to be covered by United Healthcare, just before an equity raise. Yet, Wall Street still does not know what price UNH agreed to.  

Analysts have pegged reimbursement in the mid to high $400’s and the actual UNH rate has never been questioned.

Until Now

  1. Liquid Biopsy — The Black Swan meets the Elephant in the Room

When Citron first reported on Exact, we mentioned the future potential of liquid biopsy technology to render Exact a zero terminal value. In presenting our initial analysis we mentioned Grail as a potential entrant in the space.

The sell side and company alike immediately dismissed all possibilities of the threat of liquid biopsy detection of colon cancer. This is what Bank of America published only seven months ago:

“Liquid biopsy: Management continues to believe that developing a highly-sensitive early detection screen for colorectal cancer in the blood is a biological problem rather than a technological problem. Exact has been working to develop a CRC screening liquid biopsy test in conjunction with the Mayo clinic for many years. To our knowledge, neither Grail nor Guardant (very well-funded companies in the liquid biopsy space) are developing blood-based CRC screening tests.

Enter Catalyst

Eight months later, the hottest topic in oncology and possibly science, is the widespread use of liquid biopsy technology to detect all types of cancer.

The conversation was not only all the buzz at the recent JP Morgan Conference but it has hit industry and mainstream news. Better for humanity and worse for Exact Sciences, this is not just one company who could pass or fail, this has become a worldwide movement.

1)  Cellmax unveils 84% to 88% accuracy at ASCO.

https://www.asco.org/about-asco/press-center/news-releases/liquid-biopsy-test-shows-promise-detecting-early-stage   

“However, this CTC test is highly affordable and can potentially cost less than $100,” Dr Nimgaonkar said. He noted that colonoscopy would remain the gold-standard diagnostic test and would be needed to sample tumors or to remove polyps if the CTC test results were positive.

https://www.medpagetoday.com/meetingcoverage/mgics/70552

2)  Israel’s Medial is getting traction:

https://www.bloomberg.com/news/articles/2018-01-11/colonoscopy-how-about-a-blood-test-instead  Israel’s Medial

3) Thought leaders from: Sloan Kettering, Johns Hopkins, and American Cancer Society are excited about prospects for liquid biopsy for colon cancer as published in

https://www.cbsnews.com/news/excitement-as-early-blood-test-for-8-types-of-cancer-advances/  

Unlike the path dismissed by Wall Street analysts, the new blood testing detects mutations in 16 genes tied to cancer and measures eight proteins often elevated when cancer is present.  

It must be noted that none of these tests are ready for commercialization.  Citron is not naive enough to think they will disrupt the market in the next 12 months.  However, the chances of one or more of these tests becoming available before Exact achieves breakeven with Cologuard is high.  

The research coming out from the American Society of Clinical Oncology is directly targeted at replacing Cologuard.

“Our study is important because there is still some reticence among patients to use stool-based tests or have an invasive exam like colonoscopy to detect colorectal cancer”

https://www.asco.org/about-asco/press-center/news-releases/liquid-biopsy-test-shows-promise-detecting-early-stage

We are also not naive enough to believe that Kevin Conroy’s determination is sufficient to hold back science and the billions of dollars dedicated to early cancer detection. Liquid Biopsy screening for colorectal cancer was never considered a real threat and now all of a sudden in the past three weeks it has transformed into … a Catalyst.

Without naming names, Citron  expects to see more announcements of advancements to this technology in the next 30 to 60 days.

What does the Mayo Clinic Say About this?

And if you own the stock because of the two words “Mayo Clinic” – even more catalysts can be observed. Optimism for science and lower  pricing were expressed in this one tweet from last 2017

Conclusion

Was Citron wrong?  Or just early?  It is all a matter of timing.

Citron will agree that taking a Cologuard is better than taking no test at all. We also give much credit to Kevin Conroy and team at Exact for understand the Medicare/insurance “game” and using it to their advantage to sell a $500 at home screening test.

Citron also acknowledges that while we believe our first report was intellectually honest, it was early and lacked the immediate catalyst. That day is now here!!

We could go on and on about discussing their failed promises in Europe and Asia or the lack of scientific progress of their pipeline but all of that would be off topic to the real catalysts and drivers of the stock.

Exact Sciences’ chips are all on Cologuard, a low compliance diagnostic test that will always face scientific, reimbursement, and distribution headwinds. Fortunately for humanity, before Exact nears profitability,  genomic blood-based/lab testing for pre-cancer at an affordable price will be a reality for all Americans. Who cares about stocks….that is just plain awesome.

Cautious Investing to ALL.