Why Exact Sciences Shares Rallied 16.7% in October

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What happened

After reporting third-quarter financial results that were better than expected , Exact Sciences (NASDAQ: EXAS) shares gained 16.7% in October, according to S&P Global Market Intelligence .

So what

Exact Sciences' quarterly results show that more doctors and patients are choosing its Cologuard test for colon cancer screening.

In the third quarter, sales jumped 158% year over year, to $72.6 million. The company completed 161,000 Cologuard tests in the quarter, and management reports that 91,000 doctors have now ordered a Cologuard kit for a patient, up from 60,000 physicians exiting 2016.

The ramp in sales may suggest that the headway the company's making toward profitability will continue. In the third quarter, gross margin increased to 71%. Third-quarter cost of sales totaled $129 per completed test, down slightly from $133, and on its way toward the company's goal of $125 per test. Price per test improved 9% because of the timing of collections, and that price stability, along with improvements in costs per test, contributed to operating expenses falling to 110.6% of revenue from 192.9% of revenue in Q3 2016.

Data source: Exact Sciences.

Now what

Based on its third-quarter performance, Exact Sciences is now guiding for full-year 2017 sales of at least $250 million. That's far north of the roughly $200 million expected earlier this year, yet the company may only be in the early innings of its growth.

There are about 80 million people in the U.S. who should be regularly screened for colon cancer, but roughly 20 million are behind schedule on their screening. Too often, avoiding a costly and invasive colonoscopy results in patients being diagnosed with tough-to-treat late-stage colon cancer. Cologuard's low cost and ease of use could go a long way toward improving those figures.

Over time, Exact Sciences thinks that it can eventually serve up to 40% of the 80 million people who should be regularly screened. Currently, only about 55,000 of the more than 200,000 primary care doctors in the United States are ordering Cologuard, so the ability for its growing sales force to call on more primary-care physicians could help it reach that 40% goal.

In addition to growing the number of tests ordered, Exact Sciences also has room to grow revenue by increasing its compliance rate. In the third quarter, only 66% of people for whom a Cologuard was ordered followed through and submitted a sample to Exact Sciences for evaluation. If Exact Sciences can make headway in improving that rate, then sales will benefit, too.

Additionally, Exact Sciences has an opportunity to develop additional tests to detect other cancers in their earliest stages and grow revenue. The company's working with the Mayo Clinic on a variety of approaches, and in its quarterly conference call, management highlighted the work it's doing in lung cancer. Specifically, its next test may help differentiate between benign lung nodules and lung cancer. Currently, this is often done by an invasive and expensive procedure, so the potential for a new blood-based biomarker test from the company could be big.

Overall, every year, 14 million people globally are diagnosed with cancer and about 9 million people die from the disease. As a result, there's an important need to develop tests that allow earlier intervention and lead to better cure rates. Serving that market could be worth billions of dollars in sales annually, and for this reason, I think Exact Sciences ought to be a stock on growth investors' radar.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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