Cancer diagnostics powerhouse Exact Sciences (EXAS) appears on track to easily beat full-year 2022 revenue guidance. Despite the trend through the first half of the year, management opted to maintain guidance set in May.
That prompted a few questions from analysts on the conference call to discuss second-quarter 2022 operating results. "Why the conservatism?," asked one analyst.
Management had a simple reply: "Cash rules everything around me."
Okay, I'm paraphrasing a bit. Exact Sciences is focused on profitable growth, rather than growth for the sake of growth. It remains confident in the ability to achieve positive adjusted EBITDA on a full-year basis in 2024. If it hits that milestone, then investors with a long-term mindset could be handsomely rewarded.
Another Strong Performance
Exact Sciences easily beat its own revenue guidance for the quarter. The diagnostics leader reports two segments: screening and precision oncology. Screening is powered by the flagship colon-cancer screening tool Cologuard, which became the world's first $1 billion diagnostic product last year. Precision oncology has a broader collection of tools used to better understand cancerous tumors and guide treatment decisions for patients.
- Screening revenue was $354 million for the quarter and $660 million for the first half of 2022. The latter represents an increase of 31% compared to the year-ago period.
- Precision oncology revenue was $154 million for the quarter and $306 million for the first half of 2022. The latter represents an increase of 15% compared to the year-ago period.
- The business also generated $14 million in revenue from covid testing. This is a shrinking part of the business, although guidance was raised to $55 million at the midpoint. The previous expectation called for $45 million at the midpoint.
It's interesting to note the business is seemingly on a trajectory to beat full-year 2022 revenue guidance. Exact Sciences expects screening revenue to grow 27% compared to last year, while precision oncology revenue is expected to grow only 4% this year. Both are well above trend through the first half of the year.
The focus on achieving adjusted EBITDA on a full-year basis in 2024 is driving the conservativism. Management pledged not to focus on growing the top line in the short term if it hurts operating efficiency. Indeed, Q3 2022 revenue guidance of $497.5 million at the midpoint would mark a roughly 5% decline from the most recent quarter.
A Strategic Decision Shows the Commitment
If analysts or investors don't believe in management's unwavering commitment to driving the business to profitability in the next 17 months, then look no further than updated full-year 2022 revenue guidance.
Exact Sciences reduced expectations for precision oncology revenue for the year. The portfolio is now expected to generate $580 million to $590 million, down from a previous range of $595 million to $610 million. Although currency headwinds account for some of the reduction, the majority of the change can be chalked up to a strategic decision.
The company jettisoned the Oncotype DX Genomic Prostate Score test from the portfolio to focus on the most profitable opportunities. The product has found a good home. It was sold to a smaller company that focuses exclusively on prostate diagnostics for $30 million upfront, while another $70 million in performance-based milestone payments could be heading to Exact Sciences in the next few years.
The strategic decision will result in slightly lower revenue growth in the near term, but will also lower selling, general, and administrative (SGA) expenses. That will help close the gap between current operations and positive adjusted EBITDA by the end of 2024.
What's Next for Exact Sciences?
The business is well-positioned to ride numerous tailwinds in the next few years. A next-generation Cologuard test, sometimes called Cologuard 2.0, is likely to launch in 2024. It could be key to capturing market share from colonoscopies at an accelerated pace. That's because it has a much higher accuracy detecting precancerous lesions than the first-generation test.
A change to how Medicare reimburses colon-cancer screening services could provide a meaningful boost to revenue starting in January 2023. In the same vein, a multi-cancer early detection liquid biopsy test could launch soon, but it's unlikely to have full reimbursement in place. The initial launch will be used to gauge demand and collect feedback from health care professionals.
Above all else, analysts and investors will now begin focusing on the march to achieving adjusted EBITDA on a full-year basis in 2024. There's a long way to go, but progress is being made. Exact Sciences reported an adjusted EBITDA loss of $46 million in Q2 2022, an improvement from a loss of $53 million on the same basis in the year-ago period.
Management thinks the path to success is paved in profitable revenue growth, a slightly improved gross margin, and thoughtful decisions regarding operating expenses. Is it realistic? Absolutely.
If Exact Sciences grows annual revenue by 15% in each of the next two years, then it could generate an additional $650 million in annual revenue by 2024 compared to 2022. That would provide an additional $450 million in gross profit at current margins. While some of that would be devoted to continued growth investments, it leaves plenty of room to deliver profitable adjusted EBITDA.
Simply put, the path to success in cancer diagnostics is achieved through scale. And no company in the competitive landscape has more scale than Exact Sciences.
