Tightening financial conditions have been squeezing the excess out of all genetic testing businesses. That has sucked for the whole competitive landscape, especially those that pursued a growth-at-all-costs business model built on innovation porn.

Luckily for Exact Sciences, it can lean on the world's most successful genetic diagnostic brand and plow ahead.

The colon-cancer screening tool Cologuard was responsible for nearly two-thirds of total full-year 2022 revenue, which crossed $2 billion for the first time. Importantly, efficiencies baked into the company's commercial infrastructure began paying dividends at exactly the right time. More efficient operations helped Exact Sciences reduce operating expenses compared to 2021 without hitting the panic button and achieve positive adjusted EBITDA during the fourth quarter – two years ahead of schedule.

Management's initial full-year 2023 revenue guidance was relatively subdued, but investors can expect the business to outperform guidance once again as the year progresses.

By The Numbers

It all comes down to Cologuard.

The colon-cancer screening tool generated a mindboggling $1.38 billion in revenue during 2022. It added $321.8 million in revenue during the year-over-year period – almost more than Natera, Fulgent Genetics, Invitae, Sema4, and 23andMe combined.

The world's leading genetic diagnostic tool powered the Screening segment, which also received a boost from PreventionGenetics. The acquisition in early 2022 gave Exact Sciences a portfolio of over 5,000 hereditary screening tests and contributed roughly $41 million in revenue during the year.

The Precision Oncology segment grew revenue 7%, or by roughly $40 million, compared to the year-ago period. COVID testing continued its inevitable decline, but still generated $58 million in annual revenue. It will make an immaterial contribution in 2023.

Data Source: SEC filing.

The full-year numbers hide a promising trend. Exact Sciences reported an operating loss of $593.5 million in 2022, but the quarter-by-quarter breakdown reveals a favorable trajectory.

• Q1 operating loss of $177.0 million
• Q2 operating loss of $159.6 million
• Q3 operating loss of $138.1 million
• Q4 operating loss of $115.5 million

That's a 35% reduction from the beginning to the end of the year.

Similarly, the business reported operating cash outflows of $223.5 million in 2022. The first-quarter outflow (negative) of $173.8 million flipped to a fourth-quarter inflow (positive) of $52 million.

Although seasonal tailwinds always help finish the calendar year strong, Exact Sciences reported a fourth-quarter 2021 operating cash outflow of $24.5 million. The year-over-year trajectory is certainly favorable – and it's expected to keep improving.

Management expects to generate full-year 2023 adjusted EBITDA of between breakeven and $25 million – a sharp swing from an adjusted EBITDA loss of $143.7 million in 2022.

Here's some nuance: I don't place much value on adjusted EBITDA. It's easy for companies to manipulate while still generating deep operating losses (operating income is the single-most important metric for most companies across any industry). Therefore, investors are reminded not to get too excited on this one metric.

Full-Year 2023 Guidance

Exact Sciences issued initial full-year 2023 revenue guidance that was a little weak compared to Solt DB Invest modeling. The details suggest management is underpromising so the business can overdeliver again this year.

Data Source: Press release.

Management noted several key tailwinds supporting a strong start to 2023.

Cologuard has screened over 500,000 individuals in the age 45 to 49 bracket, which was only recently added to screening guidelines. These individuals tend to be busier than older patients and therefore more likely to opt for a convenient at-home screening option.

Similarly, staff shortages at gastroenterology offices (where colonoscopies are performed) have funneled hundreds of thousands of additional individuals into the Exact Sciences ecosystem. Specialists are reserving limited resources for high-risk individuals, which is forcing physicians to alter their behavior when it comes to average-risk individuals. What may have been a mindless prescription for a colonoscopy 24 months ago is now an online order for Cologuard.

The confluence of these trends means Exact Sciences experienced a 63% electronic ordering rate for Cologuard in the fourth quarter of 2022 – up from just 30% before the pandemic. That increases screening volumes (revenue) and margins (profits), while potentially allowing the business to reduce or slow operating expenses further. It could lead to even faster increases in profitability metrics.

Finally, there's also recent history. This time last year Exact Sciences issued initial full-year 2022 revenue guidance that was similarly weak, especially compared to the performance that was actually achieved once the dust settled.

Data Source: Press release.

Investors might expect growth rates for existing products to look less impressive as the numbers grow larger. However, the absolute amount of revenue added from existing products will still be impressive. There's also growth opportunities ahead for new product launches, including Cologuard 2.0 in 2024, and the always-important improvement in margins.

Forecast & Modeling Insights

The margin of safety range shared in the dashboard is based on our 2025 model. The numbers are always a little fuzzier the further out you look, but there's a rare degree of certainty for Exact Sciences nonetheless.

Here's how our 2023, 2024, and 2025 models have been updated.

• Full-year 2023 revenue of $2.349 billion, representing about $60 million more than the midpoint of initial guidance.
• Screening revenue of $1.733 billion (vs. $1.675 billion initial guidance), including Cologuard revenue of $1.684 billion.
• Precision Oncology revenue of $610 million (matching initial guidance). There is sneaky upside from new product launches and international markets, but I don't have great insight into how those levers might get pulled at this time.
• Operating expenses of $2.202 billion, representing growth of about 5.4% from 2022. The increase is expected to be driven by R&D expenses to support various pivotal clinical trials, primarily in multi-cancer early detection (MCED).
• Full-year 2024 revenue of $2.751 billion, representing year-over-year growth of 17.1%
• Screening revenue of $2.080 billion, including Cologuard revenue of $2.021 billion. This may be an underestimate depending on the strength of operations in 2023, and how that strength might supercharge the launch of Cologuard 2.0.
• Precision Oncology revenue of $671 million. This expects new product launches to reaccelerate growth for the segment.
• Operating expenses of $2.276 billion, representing growth of about 3.4% from 2023. Operating expenses should begin to slow or decline during 2024, but the timing and development strategy is unclear at this time. Importantly, operating loss declines to less than $200 million and operating margin is in the (negative) mid-to-high single digits.
• Full-year 2025 revenue of $3.234 billion, representing year-over-year growth of 17.6%.
• Screening revenue of $2.496 billion, including Cologuard revenue of $2.425 billion. This expects an acceleration of market share capture from Cologuard 2.0. While the segment's growth rate remains flat compared to 2024, its share of total revenue increases due to the larger numbers involved. This increases the annual growth rate of total revenue #math.
• Precision Oncology revenue of $738 million. This expects continued momentum from portfolio expansion and evolution.
• Operating expenses of $2.342 billion, representing year-over-year growth of less than 3%. Importantly, the business delivers its first full year of profitability on an operating income basis.

Margin of Safety & Allocation

(Updated to reflect new 2025 model.)

Exact Sciences is considered an Anchor position. The current margin of safety range based on our 2025 model is below:

• Current Price (market close February 21):  $61.26 per share
• Likely Undervalued:          <$69.01 per share
• Midpoint:                           $86.26 per share
• Likely Overvalued:           >$103.51 per share
• Allocation Range:              Up to 15%

Exact Sciences reported 178.217 million shares outstanding as of February 20, 2023. It calculated this number one day before filing the annual 10-K – impressive! The margin of safety range for the 2025 model assumes 187.5 million shares outstanding, or dilution of about 5% through 2025.

Due to the fun times ahead in 2023, here's how the margin of safety range looks when based on our 2023 model. Investors can use this to rank the attractiveness of shares relative to other, nearer-term investment opportunities:

• Current Price (market close February 21):  $61.26 per share
• Likely Undervalued:         <$51.48 per share
• Midpoint:                           $64.35 per share
• Likely Overvalued:            >$77.22 per share
• Allocation Range:              Up to 15%

Exact Sciences reported 178.217 million shares outstanding as of February 20, 2023. The margin of safety range for the 2023 model assumes 182.5 million shares outstanding, or dilution of about 2.4% through 2023.

Further Reading

• February 2023 press release announcing full-year 2022 operating results
• February 2023 regulatory filing (10-K) detailing full-year 2022 operating results
• January 2023 article setting expectations for the upcoming BLUE-C data readout for Cologuard 2.0, which is now expected by mid-2023