Exact Sciences processed its final COVID test this summer. Although it was always meant to temporary, COVID testing generated $443 million in cumulative revenue since 2020.

It's easy to overlook that contribution, especially considering Cologuard revenue is expected to grow by at least $419 million this year alone. Investors can thank the latest increase in full-year 2023 revenue guidance, which now calls for about $1.8 billion in Cologuard sales.

The increasing strength of the flagship brand is occurring at a fortuitous time for Exact Sciences. Management has been ruthlessly focused on operating efficiency in the last two years, which is the key to achieving profitable operations. As Cologuard smooths the path to profitability, investors can begin looking ahead to two new product launches in the coming years – each of which has the potential to become the next $1 billion brand.

By the Numbers

Exact Sciences generated record revenue in the third quarter of 2023, which is what investors should expect from a company still in growth mode. It's not terribly impressive. A handful of more granular metrics provide a better gauge of management's focus on operating efficiency than the headline figures.

For example, the business kept total operating expenses to less than 84% of total revenue. That marks the lowest since at least 2019.

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Similarly, the company recorded only $173 million in sales and marketing expense during the quarter. That's the lowest since the fourth quarter of 2020. It certainly hasn't impeded growth; screening revenue has grown 89% in that span.

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The most important metric for money-losing businesses is operating income. Or, more precisely, the "flippening" from generating operating losses to operating income. Not all growth stocks become great investments in the long run. Almost all that do achieve durable operating income and never look back.

Exact Sciences technically achieved operating income during the third quarter, but only because of a one-time gain from "other income," primarily from the sale of prostate testing assets. Still, removing the one-time benefit would've resulted in an operating loss of $65.2 million – the lowest since at least 2019.

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Rapidly improving operating efficiency positions Exact Sciences to achieve profitable operations by 2025.

The business grew total revenue 20% in the third quarter of 2023 compared to the year-ago period. That was driven by a 31% leap in screening revenue, but dragged down by a 3% increase in precision oncology revenue and the absence of COVID testing revenue. The seemingly poor performance for the precision oncology segment was impacted by the sale of the prostate cancer testing business. Management expects this business to grow by low double-digits in the years ahead.

If investors only look at core revenue from ongoing operations, then quarterly revenue grew 24% from the year-ago period.

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The numbers are similarly impressive when considering the first nine months of 2023 compared to the year-ago period. In this comparison, core revenue from ongoing operations grew 26.4% over 2022.

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Investors shouldn't be too concerned about the mismatch in core revenue growth rates from the quarterly vs. nine-month comparisons. Cologuard's growth rate (a percentage) will certainly slow as it gains market share, but the amount of incremental revenue (a dollar amount) added each year should continue to increase.

The flagship brand is expected to add at least $419 million in incremental revenue in 2023 compared to 2022. That's up from $322 million added in 2022 over 2021, and $247 million added in 2021 over 2020. Solt DB Invest expects Cologuard to grow by $457 million in 2024 and, thanks to the launch of Cologuard 2.0, $571 million in 2025.

The continued strength of Cologuard and progress on operating efficiency will be important as Exact Sciences prepares to launch OncoDetect, its molecular residual disease (MRD) portfolio, and a multi-cancer early detection (MCED) platform over the next two to three years. It will allow the company to self-fund investments in each, while also providing more room for error or delays.

Forecast & Modeling Insights

(Reduced revenue for 2024 and 2025.)

The last time Solt DB Invest reduced its revenue forecast for Exact Sciences, we were eventually forced to increase it again due to the company's outperformance. Nonetheless, we're reducing our revenue forecast for our 2024 and 2025 models. I want to be a little more conservative with respect to growth rates for both Cologuard and the molecular residual disease (MRD) platform.

2024 Model

• Our prior model expected $3.131 billion in full-year 2024 revenue. We now expect $3.031 billion. (For reference, the average Wall Street estimate sits at $2.82 billion.)
• Our prior fair valuation in 2024 was $84.64 per share. We now estimate a fair valuation of $81.93 per share.

2025 Model (current Margin of Safety)

• Our prior model expected $3.808 billion in full-year 2025 revenue. We now expect $3.683 billion.
• Our prior fair valuation in 2025 was $101.55 per share. We now estimate a fair valuation of $98.22 per share.

As for the last two months of 2023, Exact Sciences issued increased full-year 2023 guidance of $2.481 billion, including $1.850 billion from screening revenue. Solt DB Invest now expects $2.508 billion in full-year 2023 revenue, including $1.877 billion from screening revenue. Our updated 2024 and 2025 models take into account this lower revenue forecast for 2023 (we previously expected full-year 2023 revenue of $2.550 billion).

Margin of Safety & Allocation

Exact Sciences is considered an Anchor position. The current modeled fair valuation for the company based on our 2025 model is below:

• Market close November 1: $63.52 per share
• Modeled Fair Valuation: $98.22 per share
• Allocation Range: Up to 15%

Exact Sciences reported 180.850 million shares outstanding as of October 31, 2023. The Margin of Safety range above assumes 187.500 million shares outstanding, which is equivalent to 3.7% dilution.

Further Reading

• November 2023 press release for third-quarter 2023 operating results
• November 2023 regulatory filing (10-Q) for third-quarter 2023 operating results

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