There's a fine line between innovation and technological hype, and many investors aren't adept at identifying the difference.
Successful growth investing relies on identifying innovations that can succeed in the market. That means addressing the pain points of customers, navigating competitive landscapes, and understanding the nuances of commercial markets.
The dustbin of history is filled with best-in-class technologies that failed to become economically viable.
The $18 billion market for colon-cancer screening perfectly illustrates the difference between innovation and hype.
Two Solutions in Colon-Cancer Screening
A number of Wall Street analysts say that liquid biopsies can claim a significant share of the colon-cancer-screening market.
But clinical data and economics suggest so-called boring tools based on feces testing and colonoscopies will continue to dominate for the foreseeable future.
That's good news for Exact Sciences, which wields the at-home test known as Cologuard.
This test, officially a multi-target stool DNA (Mt-sDNA) test, detects genetic signatures from blood in the stool that may otherwise go unnoticed. It's a simple kit shipped to patients' homes, providing convenience and privacy and avoiding invasive tests like colonoscopies.
It must be prescribed by a doctor, but Cologuard can identify genetic mutations and diagnose colon cancer about as well as a colonoscopy can.
In 2021 the product became the first diagnostic test to eclipse $1 billion in annual revenue, and it's likely to receive a big accuracy upgrade soon. Exact Sciences is developing Cologuard 2.0, which improves detection rates, reduces false positives, and lowers its cost of goods sold.
Importantly, the next-generation diagnostic might be able to match colonoscopies in detecting precancerous lesions with roughly 60% accuracy.
That's one of the only blemishes on the current Cologuard, which falls well short with detection rates of only 42%.
That single improvement could help Exact Sciences meet its long-term goal of capturing 40% market share, representing annual revenue of roughly $7 billion at current reimbursement rates.
The improvements in Cologuard present a challenge for newer diagnostic modalities, such as liquid biopsies. These tests promise to detect cancers from a simple blood draw, which also is more convenient than a colonoscopy.
Guardant Health has identified colon cancer as one of the first markets for its Shield liquid-biopsy screening tool, which launched in May 2022. And Exact Sciences is developing a liquid biopsy screening tool to complement Cologuard.
Five Headwinds for Liquid Biopsies
Liquid biopsies are certainly a promising advance in diagnostics. They're made possible by an increasingly deeper understanding of biology, more powerful computational tools, and improved genomics.
But Exact Sciences management recently outlined five headwinds facing liquid biopsies -- including its own experimental tool -- in cancer screening.
Accuracy. Blood tests are less accurate than Cologuard and colonoscopies. Guardant Health's Shield product had a sensitivity of 91% and specificity of 92% in validation studies, but with lower detection rates for different stages of cancers. Sensitivity is the ability to correctly identify individuals with disease, while specificity is the ability to correctly identify individuals without disease. Shield detected only 20% of advanced precancerous lesions.
By comparison, early results from Cologuard 2.0 suggest a sensitivity of 95%, specificity of 92%, and precancerous lesion detection of 57%. Liquid biopsies are innovative, but they don't meaningfully improve colon-cancer screening.
Approval and claim language. Investors may not think there's much difference between liquid biopsies and existing diagnostics, but the U.S. Food and Drug Administration will.
Diagnostic tests must earn premarket approval to be included in screening guidelines and earn meaningful insurance coverage. Guardant's Shield tool launched as a lab-developed test, which doesn't require premarket approval and is unlikely to be competitive in this specific market.
For Shield to earn PMA and the same claim language on its label and in its marketing materials, it will need to prove equivalency to existing diagnostics and colonoscopies. Data from current-generation tools suggest that's unlikely.
Guideline inclusion. Liquid biopsies may struggle to be included in colon-cancer-screening guidelines until their accuracy improves. Regulatory and industry bodies evaluate existing tools when determining screening criteria. The bar set by existing tools and colonoscopies is high.
Pricing. The competitive landscape in colon-cancer screening pressures pricing. Cologuard and colonoscopies are currently reimbursed at less than $200 a test. Liquid biopsies may require only simple blood draw, but specialized processing and data interpretation are required for each sample. These tools may not be economically viable at the low price points for this specific market.
Elbow room. Where exactly does a liquid biopsy screening tool fit into the competitive landscape? Convenient, accessible, low-cost, and high-performing tools are available for patients today, and they're only getting better. Blood-based tests are unlikely to capture meaningful market share anytime soon, given the realities of the competitive landscape.
What Does This Mean For Investors?
The $18 billion market opportunity for colon-cancer screening is likely to attract many entrants. It's especially important to compete on cost, convenience, and accessibility, considering that 46 million eligible Americans aren't up to date on screening. An estimated 150,000 will be newly diagnosed and 53,000 will die this year alone. Improving detection can meaningfully improve outcomes.
While it's tempting to think newer technology is automatically better, that's not always the case. Nor is it so simple.
A liquid biopsy may be considered innovative, but Cologuard 2.0 is piggybacking on many of the same innovations in genomics. The difference is it does so while offering important advantages on cost, accuracy, and detection of precancerous lesions.
It's true that a fecal test isn't as sexy as a blood-based tool, but the potential to generate $7 billion in annual revenue and save lives is the outcome investors should focus on. That's why Exact Sciences and the Cologuard franchise is well positioned for the next decade.