The large print giveth, and the small print taketh away.

Liquid-biopsy pioneer Guardant Health announced data from its SHIELD diagnostic candidate in detecting colon cancer. The blood test delivered an overall detection rate of 83% and only incorrectly detected cancer 10% of the time. Both are above minimum thresholds for earning U.S. Food and Drug Administration (FDA) approval and Medicare reimbursement. However, the product candidate isn't a slam dunk for either.

That's because regulators also require colon cancer screening tools to detect precancerous lesions. On this metric, SHIELD had a detection rate of only 13%. That's well below sensitivity rates of low-cost immunochemical assays (24%), stool-based DNA tests (42%), and colonoscopies (60% alone, 95% when paired with diagnostic).

Solt DB Invest developed a simple metric for ranking the competitiveness of colon cancer screening tests that correlates with Medicare reimbursement levels and decisions. It highlights the uncertainty surrounding liquid biopsy tests, explains the staying power of colonoscopies, and supports the steady market capture by Cologuard. Furthermore, it shows the significant potential of Cologuard 2.0.

Will Liquid Biopsy Screens Earn Reimbursement?

The FDA has clearly communicated the key metrics for a colon cancer screening diagnostic candidate:

• Sensitivity of colon cancer: The ability to correctly identify individuals with colon cancer. Overall sensitivity is most often communicated, which is the rate of detecting cancer at any stage. Tests are differentiated by their ability to detect early-stage cancers (Stage I and Stage II). It's easier to detect advanced cancers, which makes early-stage detection the biggest driver of overall sensitivity.
• Specificity of colon cancer: The ability to correctly identify healthy individuals. It's generally not great to scare the shit out of people by telling them they have cancer when they don't.
• Sensitivity of precancerous lesions: The ability to detect benign masses that can become cancer. Precancerous lesions are more important for some cancers (cervical or colon) than others (lung).

These are important because they make the biggest contribution to calculations for life-years gained and positive predictive value. For example, nearly 67% of life-years gained for a colon cancer screening diagnostic come from precancerous lesion detection. Costs, adherence rates, patient age, and prevalence rate also play a role.

Life-years gained and positive predictive value – including comparisons to existing diagnostics – play a crucial role in decisions for FDA approval, Centers for Medicare & Medicaid Services (CMS) reimbursement, and treatment guidelines. Previously approved and covered products can be replaced in treatment guidelines when better options become available, such as when low-sensitivity guaiac-based fecal occult blood tests (FOBT) were replaced by more sensitive options and less restrictive fecal immunochemical tests (FIT).

That's a potential problem for liquid biopsy tools in a highly competitive landscape.

• Colonoscopies are very sensitive and specific, but require trained medical professionals to complete and are inconvenient. The awkwardness of the invasive procedure leads many eligible individuals to forgo colon cancer screening altogether.
• FIT are sensitive enough and very specific, but have a low rate of detection for early-stage cancers and precancerous lesions. Their ease-of-use makes them the most prescribed screening test – and also one of the lowest cost options, with reimbursement levels of just $28.
• Multi-target stool DNA (MT-sDNA) tests such as Cologuard strike a good balance between sensitivity, specificity, and precancerous lesion detection. Cologuard is relatively convenient because it's conducted in the privacy of a patient's home, but about one-in-five prescribed tests are never completed. Still, it earns the second-highest reimbursement level in the competitive landscape and has stolen market share from colonoscopies and FIT since 2016.
• Liquid biopsy tools can achieve sensitivity and specificity above the minimum threshold set by the FDA and CMS, but struggle with early-stage sensitivity and precancerous lesion detection.

To rank the competitiveness of each diagnostic option, investors can multiply the three key metrics together. The combined metric correlates with Medicare reimbursement rates and suggests a minimum threshold exists in the market. Guardant Health's SHIELD product candidate ranks worst in the field.

It's important to acknowledge two things.

First, adherence rates are important in determining life-years gained, but are secondary to precancerous lesion detection. Epigenomics earned FDA approval for its Epi proColon liquid biopsy test in colon cancer screening, primarily due to a 99.5% adherence rate and roughly matching FIT tools with a precancerous detection rate of 21%. However, it was rejected by CMS for reimbursement. Guardant Health's SHIELD liquid biopsy product candidate has an adherence rate of 90% and a precancerous detection rate of 13%.

Second, colonoscopies are conducted primarily for high-risk individuals with comorbidities such as gastrointestinal diseases, but continue to play a role in the average risk population as well. Colonoscopies could be supplanted as the first-line diagnostic if non-invasive screenings improve across the three key metrics.

For example, the chart above only includes screening tests with data from pivotal studies. Cologuard 2.0 came close to matching colonoscopies in a case control study, which evaluates a diagnostic against biobanked tissue samples with known outcomes. The next-generation product candidate achieved sensitivity of 95%, specificity of 92%, and precancerous lesion detection of 57%. That's a combined metric of 0.4982, which would be the highest in the competitive landscape – better than colonoscopies.

Case control studies usually overestimate real-world performance, but staying close to these preliminary values on the three key metrics could place Cologuard 2.0 on the path to becoming the preferred first-line treatment diagnostic later this decade.

The key nuances for investors are that precancerous lesion detection is a primary metric in colon cancer screening, and there are already numerous screening options available. Regulators are under no pressure to fulfill an unmet market need or provide generous reimbursement. That creates a challenging landscape for liquid biopsy product candidates, which will primarily be ranked against FIT.

Exact Sciences is developing a liquid biopsy screening test of its own. However, management has been careful to set expectations. A blood test won't beat Cologuard in early-stage cancer sensitivity or precancerous lesion sensitivity. But the company has used its commercial experience and insights to prioritize precancerous lesion sensitivity compared to the competitive landscape, which could offer meaningful differentiation to FIT and other liquid biopsy options. Data are expected to be announced in 2023.

Meaningful reimbursement coverage isn't expected until 2028 at the earliest, according to the company's own expectations.

Forecast & Modeling

Exact Sciences is accompanied by the longest forecast in the Solt DB Invest ecosystem due to the rare level of certainty for the business, which is primarily driven by the strength of Cologuard. That provides confidence in modeling through 2025.

The forecasts may prove too conservative if one projection from the company's Q3 2022 presentation becomes reality.

The company provided a timeline of past and future potential milestones for the Cologuard brand.

• 1 millionth patient was screened in early 2018
• 10 millionth patient was screened in November 2022
• 30 millionth patient is expected to be screened in 2027

If the business delivers on that goal, then Cologuard should generate at least $8.8 billion in revenue from 2023 through 2027. That lines up almost perfectly with Solt DB Invest forecasts, which model roughly $8.6 billion in revenue in that span. It's always good to have multiple, independent calculations arrive at the same number.

My revenue models for hereditary screening and precision oncology are more conservative due to more fogginess in the timeline for product launches, reimbursement for precision oncology tests, and the mid-term strategy for hereditary cancer screening overall. There's no need to jump ahead with modeling only to backtrack later, so I'll let the company drag my forecasts higher over time, if needed.

Importantly, the company's ability to rapidly slow or reduce operating expenses in 2022 presents opportunities to deliver larger cumulative impacts over the forecast period. The benefits of higher revenue and lower expenses compounds at a meaningful rate. Solt DB Invest expects Exact Sciences to return to pre-acquisition-binge margins in 2023 and to achieve near breakeven operations in 2025.

Margin of Safety & Allocation

(No change.)

Exact Sciences is considered an Anchor position. The current margin of safety range for the company is based on modeling through 2025:

• Current Price (market close December 16): $51.92 per share
• Likely Undervalued:          <$67.62 per share
• Midpoint:                            $84.53 per share
• Likely Overvalued:            >$101.43 per share
• Allocation Range:              Up to 15%

Exact Sciences reported 177.684 million shares outstanding as of November 2, 2022. The margin of safety range above assumes no change in the number of shares outstanding.

Further Reading

• November 2022 company update discussing third-quarter 2022 operating results
• October 2022 company update discussing the importance of precancerous lesion detection in colon cancer screening and the trajectory for Cologuard 2.0
• October 2022 company update discussing the head-to-head comparison between multi-cancer early detection (MCED) diagnostics from Exact Sciences and GRAIL

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