Gravity Research: Strong Sell On Exact Sciences Corporation (EXAS)

Gravity Research Issues Strong Sell On Exact Sciences Corporation (EXAS)

EXACT Sciences Corporation (NASDAQ:EXAS) is an extremely timely and compelling short, with an imminent catalyst that we believe will cause shares to plummet as much as 75% in the near future. EXAS has one product in its pipeline, Cologuard, which is a non-invasive test for colorectal cancer that requires patients to deposit fecal matter into a jar, administer a preservative to the feces, and ship the jar to EXAS’ laboratory where EXAS evaluates the feces and diagnoses for colorectal cancer (“CRC”). Cologuard combines an existing non-invasive test, the fecal immunochemical test (“FIT”), with additional tests for DNA markers to increase sensitivity1 to cancer and large polyps at the cost of specificity2. In our discussions with investors, we have found that the consensus is that the current bear thesis for EXAS is predicated on a failure for EXAS in marketing Cologuard (similar to its predecessors, PreGen-Plus and ColoSure), while bulls believe Cologuard will achieve substantial market penetration. While we are very skeptical of Cologuard’s marketability, we view that as immaterial to our thesis and already well-covered by others, and we will refrain from making it a focal point of this report. We have no doubt that Cologuard will be approved by the FDA. However, we also believe that investors will soon find that FDA approval is a meaningless victory.

EXACT Sciences

EXAS’ Cologuard unsellable

Soon after the FDA decision (potentially even the same day), the Centers for Medicare and Medicaid Services (“CMS”) will announce its preliminary National Coverage Determination (“NCD”) for Cologuard. We believe the eventual CMS national reimbursement limit for Cologuard will be below EXAS’ gross cost per test—effectively making Cologuard unsellable for EXAS. Based on extensive diligence and consultations with industry experts (including a former senior CMS employee), we are confident that CMS and its Medicare Administrative Contractors (“MACs”) will establish a reimbursement rate for Cologuard that is at least 70-80% lower than the ~$500 rate EXAS has projected to investors due to CMS using a gap-fill process to price the test rather than the crosswalk analysis EXACT Sciences Corporation (NASDAQ:EXAS) has repeatedly claimed will be used. We also think there is a meaningful probability that CMS may simply decide to issue a negative NCD and refuse to cover Cologuard, as CMS did in 2009 with the CT colonography (“CTC”) when it became clear that while CT colonographies were capable of diagnosing cancer and allowing physicians to detect polyps, they were far from being cost-effective at the reimbursement prices required to make the test economical for practitioners.

There are two methods for CMS to determine reimbursement rates for diagnostic laboratory tests: crosswalk analysis and gap-fill. A crosswalk analysis is a cost-stacking approach where CMS adds up the reimbursements for the various components of a procedure/test to arrive at a reimbursement rate for the procedure/test. Crosswalk analyses are intended for procedures/tests that represent logical combinations of pre-approved procedures/tests that are already in use. The gap-fill process involves assigning a new test code, and allowing MACs to establish carrier-specific reimbursement rates for the first year of coverage. Gap-fill reimbursement rates depend heavily on cost-effectiveness data when it is available, and FITs serve as an excellent and relevant precedent for Cologuard.

CMS’ FITs pricing

In 2003, CMS evaluated FITs after Enterix (a pioneer in the FIT space) requested reimbursement from CMS of $28 per FIT. CMS priced FITs using the gap-fill process, and commissioned a cost-effectiveness study from the Agency for Healthcare Research and Quality (“AHRQ”, a HHS subsidiary) yielding a range of cost-effective prices (-$4.22 to $29.02) based on a range of inputted assumptions. The assumptions used to produce the prices at the very top and bottom of that cost-effective range were overly optimistic and pessimistic, respectively, and included sensitivity and specificity figures outside the range of appropriately-powered published results. Ultimately, CMS issued a national reimbursement limit for the test of approximately $22, which reflected the top of the cost-effective range for published results.

Via Gravity Research

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