vichallenge exas traviscocke

7/27/2019 VIChallenge EXAS TravisCocke

1/18

2013 Vlue Ivesig Cllege Filis

Short on Exact SciEncES (ExaS:US)By Travis Cocke, Southpaw Capital

CH ALLENGEBROUGHTTOYOUBYFACTSET


2/18

CH ALLENGEBROUGHTT

OYOUBYFACTSET

2d aul Vlue ivesg cllege Wes

tvs ckeSouthpaw Capital

tvis Ccke s ve seve yes f public mke ivesme expeiece icludig e ye s

pfli mge wi cmplee ivesme discei f pi f e public equiy pfli

f fmily ffice. Pi cfudig Supw Cpil LLC, e ws Pfli Mge Fey

Mgeme Cp., d alys asced adviss LLC. M. Ccke jied asced i 2009 s

geelis esec lys. M. Ccke ls ieed e texs teces reieme Sysem, $100

billi public pesi fud, i e summe f 2008, d ieed omeg adviss, $6+ billi lg/

s fud bsed i nYC. M. Ccke eceived BBa i Fice fm texs a&M Uivesiy.

Del W. LweeElmrox Investment Group

Diel W. Lwece is Mgig Pe d Fude f Elmx Ivesme Gup (EIG). EIG is

ivesme pesip fcused cpil pesevi d supei isk-djused eus lks

f igly idisycic, symmeic ppuiies usig cceed ppc ve muli-ye

iz. Pi fudig Elmx Ivesme Gup i 2013, M. Lwece ws Mgig Diec

d c-fude f tl Cpil Mgeme. Peviusly, M. Lwece ws Sei alys Cidel Ivesme Gup. M. Lwece beg is cee s ivesme bkig lys d equiy

deivives lys f Meill Lyc & C. M. Lwece is ls Fude d Picipl owe f Elmx

Medi LLC, glbl ce fim geig 18 34 ye lds. I ddii, M. Lwece s seved e

Bd f Diecs f SUS sice 2009. M. Lwece eed B.S. i Cmmece fm e McIie Scl

f Cmmece e Uivesiy f Vigii. he s sice bee gues fice lecue e Uivesiy

d picipes i UV?s Gl Cee f Eepeeusip.

Dvd Swz

Pacific West Land, LLC

Dvid Swz is ficil lys Pcific Wes Ld, LLC. Fuded i 1981, PWL is Sele-bsed el

ese ivesme fim wi me $100 milli i sses ude mgeme. Dvid Swz ssiss

PWL CEo Buce Gllwy wi equiy ivesmes. Dvid Swz s peviusly wked s equiy

lys d fud mge f ee edge fuds. he s B.a. i ecmics fm U.C. Bekeley d

M.a. i ecmics fm Yle Uivesiy.

www.VlueIvesigCllege.cm


3/18

Short on Exact SciEncES (ExaS:US)

Contributer: Travis Cocke

Title: Co-Founder/Portfolio Manager

Firm: Southpaw Capital

Firm Type: Hedge Fund

Location: Houston, TX

Prior Employers: Farney Management, Ascendant Advisors.

Ticker: EXAS:US

Recommendation: Short

Expected Timeframe: 1 to 2 Years

Country: United States

Situation: Other

Catalysts: None Listed

Market Cap: $1,100mm

Date of Recommendation: 7/24/13

Recommendation Price: $13.17

Target Price: $3.00

CH ALLENGEBROUGHTT

OYOUBYFACTSET

www.Vlueivesgcllege.m


4/18

+

EXAS|Exact Science Corp| Recommended Action: Sell Short |$14.47

Market Cap: $1.00 billion | Fully Diluted Market Cap: $1.14 billion

Price Target: < $3.00| Return Potential: > 80%|Timeframe: < 2 years

Once again the Fed has wittingly and without hesitation paid the princely sum of a ransom to free anim

spirits that have been previously held hostage by three erratic vagabonds: Pragmatism, Prudence and Uncertainty. No

that these spirits have been joyously liberated, Optimism and his sidekicks are running rampant in the streets o

downtown Manhattan, wreaking havoc on realists portfolios. This is acutely evidenced by the biotech indust

(Bloomberg: S5BIOT Index) being up 16.5% in the last 18 trading sessions, as well as being among the top four performin

industries year-to-date at +46% and up over 101% since the start of 2012 (versus the S&P 500 at +39.1% total return

In a wave of what I would characterize as fact-less speculation, the name of the game appears to be obtain as muc

exposure as possible to high beta equities with large end markets (e.g. growth opportunities). This is causing multi-ye

projections--especially those of a rosy hue--to be entirely priced in today, discounting little likelihood of operation

missteps along the treacherous trail of execution and with hardly a chance of fierce future competition crouching

waiting. All of this in a capitalistic society, no less. Promotional management teams and their guidance are being m

with scant skepticism and instead, in the majority of cases, are being parroted word-for-word by the sell-side. A risin

tide lifts all vessels, so needless to say, security analysis can afford to get sloppy. This of course leaves room for mor

keenly observant and patient investors to profit from the gap in expectations and the economic reality, should the latt

ever again regain significance.Enter stage left:Exact Sciences Corp (ticker: EXAS).


5/18

Quick Overview and Background

In the case of EXAS, we have over exaggerated expectations of a single product diagnostic company whose product

yet to be approved by the FDA and has a long history of spectacular commercial failure.

EXAS sole product, ColoGuard, is a non-invasive DNA based test that screens for colorectal cancer by thpatient pooping into a container, scraping some of that poop into a tube, then mailing both tube and th

bucket of back to EXAS for lab testing. The company has a long history of over promising and under delivering and, perhaps, this is where a bu

would say this time its different, but when is it ever, really? This is the companys third iteration of the "poop-in-a-bucket" product and the previous two hav

undeniably been total commercial flops and have never achieved sales more than $92 thousand dollarworth in a single quarter, yet the sell side is modeling in up to $100 million/quarter, and over $20million/quarter by 2019 in one instance.

The previous versions of ColoGuard, called PreGen-Plus and ColoSure, were launched in August 2003 anJuly 2008, respectively.

As you can see from the table above, if you take the four best quarters of EXAS product sales from thetwo diagnostic kits, the sales add up to a measly $318,000 (3Q04, 4Q04, 2Q05, 2Q06 combined).o Note if one were writing out for a check, this would be written: three-hundred and eighteen thousan

dollarsthe numbers above are not scaled in thousands or millions. The sell-sides estimates for thyear 2017 seem to go up to $394 million (source: Jefferies), which is 1,239x better than theprevious best four quarter combined, and only a mere 1,545xthe single best years sales.


6/18

Most of the companies past sales were the amortization of an upfront milestone payment by exclusive thi

party distribution partner, LabCorp. After an initial flop they literally sold almost none of these diagnosttests after a few quarters, as evidenced above by the product sales figures, e.g. as low as $6,000 worth in Q2003.

ColoSure had 77% sensitivity and 83-94% specificity, which at the time was superior to available FOBT, yEXAS was unable to garner any meaningful market share whatsoever.o A 2007 Press Releases from the company cited 88% sensitivity which did not materialize.o Note also the sensitivity did rise from PreGen-Plus to ColoSure, but at the cost of specificity (whicmeans more false positives)

Eight months after the initial launch of PreGen-Plus EXAS was putting out public material stating fancifthings such as preliminary market research indicates a very favorable consumer response to PreGenPlus.o Low and behold, sales peaked a distant two quarters later.

After signs of an initial sales flop, the then CEO on a July 18th, 2008 conference call continued to speaoptimistically about ColoSures future proclaiming it is very different from PreGen-Plus test previousoffered.o It was very different alright. Judging by the companys sales, it was worse.

Also important to know is that the price of ColoSure had dropped to as low as $200 retail (a prisubstantially below what ColoGuard is supposed to come to market at), so it was 40% of the price oPreGen-Plus and despite this fact, ColoSure was also a total commercial failure, as acknowledged in the 20110-K:o No sales of this product were reported to the Company during the year ended December 31 st, 2012 and no product

royalty fees were recorded. Product royalty fees were $20,000 and $26,000 for the years ended December 31st, 2011 and2010, respectively.

EXAS received a 15% sales royalty rate from LabCorp for sales of ColoSure, using this data we can bacinto an estimate of how many test were actually sold.o Total royalty revenue from Q3 2009 to Q3 2010 (using this time period because it appears to be the

best four quarter period) was $26,000. Dividing this by 15%, we see total ColoSure product sales wein the range of $173,333.33.

o Dividing this $173,333.33 by the lowest reported sales price of $200, we can estimate that they onsold at most 866 tests in that one year period.

There does not appear to be much different about the latest version, ColoGuard, except that a bevy of necompetition has entered and is entering the market and analysts/management are somehow expecting salto increase 1,500x from that of the first two product iterations.

As I will show, I believe southpaw author Mark Twain garners too much praise for his famous quotbecause in the case of EXAS history will indeed repeat itself.

Valuation

EXAS shares are both relatively and absolutely over-valued at 5.7x P/S of the most bullish analyst's 201sales estimates, and 9.0x consensus 2015 sales (it will still be largely EBIT negative then).

Compare this to other overvalued comps at ~3.5x 2014 sales estimates (ignoring big mature guys like DGat 1.3x P/S).

Given this is a single product company with a history of failure, it would be my predisposition to value it atdiscount comps, not a massive premium.

There is ~47% downside just to get in-line with the peer average 3.5x P/S ratio and that is if thdeliver on the optimistic projections (e.g. no fundamental upside from here even if the bull thesworks outrepresenting what could a truly asymmetric proposition from the short side).


7/18

Analysts downside cases still use 4.0x 2016 sales estimates, which is neither a very strenuous, nor particular

realistic downside case. (Source: Jefferies) The general consensus rating remains a Buy (69% buys) yet the stock is already 5% above the avera

consensus price target of $13.77, so to maintain a Buy rating makes no sense and I believe leaves room foseveral ratings downgrades in the near future.

A more realistic valuation scenario is that sales come in at < 50% of analysts' expectations and the P/S ratcompresses to under 2x, therefore the stock has >80% downside in a generous scenario.

o OSUR was overhyped and was at 6x sales, disappointed relative to projections and is now at 1.6forward sales; like EXAS, there are no earnings or EBITDA to use.

Trading Comps

Sources for comp table: Bloomberg and company SEC filings. Simplified comp table in Appendix on Page 12.

Note that each of the listed comps above possesses multiple diagnostic products on the market already and substantirevenues.

Colorectal cancer (CRC) is found in the large intestine and starts out as a benign polyp that develops over a long timinto a malignant cancer. The National Cancer Institute estimates that >143,000 cases will be diagnosed in the US 2013 and that 51,000 deaths will occur from CRC (evenly split between men and women). I have taken a personinterest in researching CRC after having a good friend recently pass away from CRC at the young age of just 25true negative black swan, as screening is not even recommended until age 50. A poor compliance rate fcolonoscopies is one of the main management points for optimism for EXAS stool -based diagnostic. However, th

cite outdated information saying the compliance rate is only 53% (which may have been true ten years ago), baccording to the CDC the colonoscopy screening compliance rate is up to 62.9% in American patients aged 50-7Since screening is not done effectively, the majority of colon cancer diagnoses are already in stage 3 or 4. If cancer detected in stage 1 or 2, the survival rate exceeds 90%.


8/18

Time to opine on the competitive environment for colon cancer diagnostics, which both the bull and bear theses shouhinge on. EXAS likes to point out that CRC is the second most deadly cancer, but one of the most preventable. This true and perhaps why the diagnostic environment for CRC is so competitive. There are many alternative ancompeting colorectal cancer screening options including the above mentioned colonoscopies, FITs - FecImmunochemical test, FOBTs - Fecal Occult Blood Test, several emerging blood base diagnostic screens, as well new ingestible cameras. The table below summarizes the various types of screening for CRC that the US PreventativServices Task Force recommends for starting at age 50:

When speaking about these diagnostic tests, sensitivity refers to the ability to accurately diagnose the cancer or pre-cancerous polyp-- the higher the better. And specificity refers to the measurement of not falsely labeling a non-cancerous polyp as cancerous, so the higher the specificity the lower the number of false positives. A comparison ofthe available products is presented below:


9/18

More about each available screening option:http://www.cancer.org/cancer/colonandrectumcancer/moreinformation/colonandrectumcancerearlydetection/colorectal-cancer-early-detection-screening-tests-used

Key Observations

Know that much more could be written and copious details contemplated, but I will try to keep the points to thosmost vital for an informed investment decision:

>10 million FIT/FOBT stool tests are sold annually and this is the market that EXAS is trying to displace.o Swift market conversion away from FIT/FOBT appears likely Jefferies 7/12/13o Management and sell-side are drastically over playing the potential market share gains (30% within tw

years) due to measures to attempt to increase compliance with getting the testing done, such as givinthe patient a courtesy follow-up call.

With the FIT/FOBT tests the customer just uses a stick to swab their stool onto a card and does this 1-3they don't have to handle their specimen as much.

As shown in the comparison table, ColoGuard will be 10-30x more expensive than single FIT/FOBT tests anup to 7x more costly over a full ten year testing cycle assuming a $350 ASP for ColoGuard.

The primary advantage of ColoGuard to competing products is the pre-cancerous diagnostic potentiHowever, if a person were to do the FIT test annually as is recommended, then this benefit wanes odisappears entirely.

Data released omitted sensitivity and specificity data for pre-cancerous detection likely due to not hittinmanagement's previously stated goals.

ColoSure and PreGen-Plus had not gone through the rigorous FDA trial approval process and were neveligible to receive Medicare reimbursement.

There are man ositive and ne atives for each t e of screen. Below is a eneral overview:
http://www.cancer.org/cancer/colonandrectumcancer/moreinformation/colonandrectumcancerearlydetection/colorectal-cancer-early-detection-screening-tests-usedhttp://www.cancer.org/cancer/colonandrectumcancer/moreinformation/colonandrectumcancerearlydetection/colorectal-cancer-early-detection-screening-tests-usedhttp://www.cancer.org/cancer/colonandrectumcancer/moreinformation/colonandrectumcancerearlydetection/colorectal-cancer-early-detection-screening-tests-usedhttp://www.cancer.org/cancer/colonandrectumcancer/moreinformation/colonandrectumcancerearlydetection/colorectal-cancer-early-detection-screening-tests-usedhttp://www.cancer.org/cancer/colonandrectumcancer/moreinformation/colonandrectumcancerearlydetection/colorectal-cancer-early-detection-screening-tests-used


10/18

o Getting Medicare coverage is already assumed and thus not considered an important part of my thesiso However, in a recent development the Centers for Medicare & Medicaid Services (CMS) proposed

review of the reimbursement rate for all lab based diagnostic tests. In the newly proposed rule, CMwould reduce the reimbursement rate for lab tests by as much as 26% starting as soon as 2014 (ClinicLaboratory Fee Schedule).

EXAS management may be intentionally misleading the market by not comparing ColoGuard to the leadinFIT tests that available on the market (e.g. only using PolyMedcos FIT-CHECK assay and not Que

Diagnostics InSure or any others).o EXAS is also claiming significant superiority over all FOBT, but data was very much lacking and it

unclear if FOBT was done with a single stool sample versus the standard three stool samples, etc.o This lack of clarity in top-line results from the DeeP-C Trial initially caused a share sell-off (befo

management spun the positives at the 30+ conferences theyve attended since) and could prove to ban insurmountable commercial hurdle for FDA approval, although the approval is unanimousaccepted as fact in Q1 2014 and failure is not necessary for the short to work handsomely.

Almost all available competing non-invasive products have a higher specificity and thus will cause less falpositives and unwarranted costly colonoscopies for individuals.

ColoGuard will give a false positive ~13% of the time at 87% specificity which is below the 90% maoriginally pre-defined by EXAS management.

I want to reiterate that the second generation product ColoSure's price was cut to $200, but sales were stworse than PreGen-Plus (less than $100k a quarter).

Now with the third iteration,were witnessing the same song and dance with management and sell side, as thCEO touts $2 billion market opportunity, completely downplaying the competitive landscape and shortfalls the nature of the repulsive ColoGuard screen.

Management suggest testing once every three years, at ASP of $333/test and 3 year intervals, cost over 10 yeawould exceed $1,000, which at least 4x higher than FIT and about on par with a more accurate colonoscopy.

The company plans to start a compliance center with a 1-800 number to help patients with questions and alsprovide outbound calls to buyers of the kits if they have not sent in results after a few weeks.

o Sell-side and management have really played this up, but I dont view it as very compelling or effectivat persuading a patient or physicians to choose ColoGuard.

Other competition that has been entirely disregarded altogether: Epigenomics proColon Assay, a blood basetest to screen for DNA that comes from colon; sensitivity 74%, specificity 81%.

o Sensitivity/specificity are lower, but its a much easier test to take as it is completed as the same time normal blood draw for cholesterol, etc.

Other blood based colorectal cancer screening diagnostics are forthcoming from Signature DiagnosticGeneNews, and Quest Diagnostics' ColoVantage which has been on the market for some time (70Sensitivity, 89% specificity)

There are reports emerging of development of other blood based CRC diagnostics that use microRNbiomarkers that have upwards of81% sensitivity in pre-cancerous polyp detection and 92% sensitivity in CRC detectionanthis could be a game changer.

o Compare the 81% sensitivity level for pre-cancerous detection utilizing a simple blood test tColoGuards rate of 41% and more complex and repulsive procedure.

o If such a new blood screen can hit the market within the next few years, it would appear to maColoGuard as a diagnostic product dead before arrival.

o Source: Bios Research (www.biosres.com). Observations on Pillcam Colon 2 from Given Imaging (ticker: GIVN)

o PillCams have great reputation and are well established in gastrointestinal physician community alreadas evidenced by GIVNs $179 million in TTM revenues.


11/18

o The cost of the new pill coming is ~$500 with 92% sensitivity/95% specificityalso far superior

ColoGuard.o The PillCams transmit 35 color frames per second for up to 10 hours. Patients just swallow a pill an

don't have to handle and mail a test tube of their feces.o This screening option would be available for almost the same cost and would not be required

frequently. Often doctors can swab a stool sample for a FIT test for men after a rectal exam that is completed during

check-up for prostate problems, which could also render the demand for additional take-home non-invasivscreens such ColoGuard as severely overstated.

EXAS CEO Kevin Conroy (CEO since April 2009) was previously CEO of Third Wave Technologies whwas successful at developing HPV screens via Pap Smears and was bought out by Hologic at a ridiculouvaluation.That is probably the biggest risk herea dumb acquisitionbut the comparisons of Third Wavand Exact Sciences are excessively augmented as the valuation of EXAS is already over twice that of thoverpriced Third Wave acquisition.

o Additional risk in this area include a very well connected management team who is taking a lot compensation in the form of options and is thus highly incentivized to increase share price.

As is the norm with money losing biotech firms, EXAS makes for great investment banking clients, bestowinfrequent gifts of large and dilutive follow-on offerings, which mean the equity research teams will generally b

supportive of share price and defend the stock. Bottom Line so far: EXAS has a long history of commercial flops with their "poop-in-a-tube" diagnosti

business model. Their sole product cost multiples of other superior available non-invasive tests ancompetition has greatly increased since the ColoSure launch, but analysts are oblivious and are projectinColoGuard sales to increase up to 2,500x the previous annual rate in the out-years.

A note on previous cycle price action:o The stock ran-up over 100% in the six months prior to PreGen-Plus launch.

From an $8.00 close on 2/28/03, to >$16.50 at the end of August 2003. The stock price then peaked within one month of the launch (~$17.50 range). Six months after the launch date the EXAS shares were back to $6.80, a 59% decrease.

Compare this 59% drop to the S&P 500s 13.5% rise over the same time period.

12 months after the launch date the price was down to $4.69, a 72% decrease. 24 months after the launch date the price was down to $2.54, an 85% decrease. The shares reached a low of $0.35 on 11/24/2008 for a peak-to-trough decline of 98%. Analysts remained undeterred in their optimism during the last product launches as well, callin

quarters in-line despite 50% revenue misses, and spinning drastic price cuts as a potentdriver of increased adoption. They have a history stubbornness even in the face of their thesbreaking down right before their eyes. (source: Thomas Weisel Partners reports from 2005).

I foresee the ColoGuard launch/flop playing out similarly and believe EXAS has very high likelihood beinglow single digit stock within two years from now.

Odds & Ends

EXAS shares have been buoyed by substantial passive ownership.o EXAS is a member of 25, count em 25, different ETFs, include five growth ETFs

Not sure what growth their criteria is based on ---share count, perhaps?o ETFs own a full 9.7% of the available float and as more retail money comes into the market and chase

biotechs recent outperformance, they will likely add fuel to the fire unfortunately creating moreindiscriminant buying of EXAS in the process.

Weak IP: ColoGuard is covered by a combination of owned, pending, and licensed patents.


12/18

o EXAS has an agreement in place with MDx Health to use two of their DNA methylated biomarkers

and in exchange for this MDx is entitled to an undisclosed percentage of net sales as a royalty, alongwith payments based on certain commercial milestones.

o EXAS must also pay Mayo Clinic an undisclosed royalty based on a percentage of net sales through2029, with a minimum payment of $25,000 each year.

A $500,000 milestone payment is due to Mayo upon FDA approval of ColoGuard. EXAS must reimburse Mayo for R&D related to their collaboration program. An undisclosed amount of restricted stock will be issued to Mayo based on fulfillment ofcertain milestones. Mayo retains some warrants in EXAS; has done cashless exercise of majority of their warrants Mayo conducted the Deep-C trial to determine ColoGuard's sensitivity and specificity which

seems a direct conflict of interest, given their financial interest in its success. The recent proprietary survey from Jefferies only polled 79 doctors and asked a series of leading questions tha

both ignored alternative screening options, as well as falsely assumed that ColoGuard was superior to availableFIT. Needless to say, the report does not scare me that the product will be widely adopted.

Although a takeout was cited as top risk, a takeover would be highly dilutive for the acquirer, possibly makingtakeover much less likely. Also, given I feel ColoGuard is inferior to available competition and with moreinnovative products hitting the market soon, I see zero strategic rationale for a would-be acquirer.

Like fast growing SaaS, biotech and medical devices are another industry where Wall Street has beenconditioned to value negative cash flow companies on a far-flung forward price-to-sales basis, so until EXASfails to deliver on the growth in 2H14 or 2015 and burns through their cash, the shares could stay elevated forquite some time.

Financials

What is often the case in some of my best investment ideas is that I do not require much conviction in my owdetailed financial projections and in most cases do not even attempt to make any, but rather I take a contrariaapproach to consensus views and have conviction against other peoples convictions and thus bet against whtheyve priced in.

I will simplify it down to this: I dont believe EXAS will ever achieve positive cash flow.

G&A was around $10 million in 2012. It is expected to be in the $17.5 million range in 2014. Combined wit$16 million in R&D and $36 million in sales & marketing expenses, operating expenses will be in the $7million range, though in 2015 G&A and S&M should ramp up meaningfully. With ~$150 million in cash on thbalance sheet and their burn rate, I project that EXAS has a maximum two-year runway.

They just completed a 6.32 million share offering in June at $12.35/share and perhaps can eke out one mowithin the next few months before the hype subsides and momentum fades.

Conclusion

With a history of commercial failures of stool based DNA products that have very little appeal to patients due unpleasant specimen collection, along with the now elevated price of the third iteration of their diagnostic relative the much improved and an increasingly crowded marketplace, EXAS parabolic spike represents a suitable short entfor savvy stock pickers. Much the same as today, a t the time of their release both PreGen-Plus and ColoSure wepersistently touted as superior to any available non-invasive diagnostic products on the market. EXAS managemeattended at least 20 different investor conferences in 2012 (and 10 so far in 2013) and is a well-oiled hype machinhighly dismissive of new competition (CEO: ...no other competition anywhere in sight... ~5 minute marhttp://www.youtube.com/watch?v=O7NCDRW9vHw) and now they are unlikely to come remotely close to living uto the egregious expectations implied by a $1.1 billion equity valuation. Sadly, this situation is more the norm than th


13/18

exception in the current ongoing speculative frenzy. Albert Schweitzer once said Happiness is nothing more thagood health and a short memory. In this particular instance, weve re-affirmed what we all already know and that memories on Wall Street are indeed short (naturally, most of the sell-siders covering EXAS were not covering it for thlast two product launches). And I hope for the sake of good health of thousands, if not millions of Americans thaEXAS gets more poop than they can scoopbut Im afraid it is the EXAS equitygroup who will not recoupanwill end up holding the bags full of excrement.

Thank you kindly for reading. I would appreciate any feedback and would be happy to continue discussion of the idand the more nuanced and technical aspects in the comments section.

Special thanks to biotech and healthcare equity research consultants: Bios Research,www.biosres.com.

Update 7/31: Article on forthcoming miR-21 blood based diagnostic added to attachments. While this CRC screen is still early in its

development, it is very important to take notice of, given that no one else has mentioned this and sell-side has baked in sales estimates of up t

$800 million by 2019 (in Jefferies case, over $1 billion by 2023), which implicitly and recklessly assumes ColoGuard will have the market to

itself six years from now.

Highlights of the article include:

-In an open label study of 186 patients using only a single biomarker this screen demonstrated 81% sensitivity in pre-cancerous polyp

detection. The 95% confidence interval ranged anywhere from 69% - 91%, which at the higher end would be twice as high as ColoGuard. N

only does this blow ColoGuard out of the water, but is an easy to administer blood based screen.

-They will likely be able to layer in additional biomarkers that will enhance the sensitivities even further.

-The sensitivity for CRC with the single biomarker was shown to be 92%.

-Baylor has indicated they are in discussions with several companies to develop this.

-Baylor is initiating a blind 1,000 patient study that they anticipate will be completed within six months.

-This could be on the market by 2016, cutting short Jefferies' dream numbers of $1 billion in annual revenue for ColoGuard by 2023, not to

mention the estimated $277 million in sales for 2016.

After more closely scrutinizing all of the sell-side I could get my hands on here are a few key takeaways:

-Roth models in almost zero share dilution over the next 5.5 years.

-Roth has EXAS doing $198.5 million in Operating Income in 2018 and bases their PT on a range of 19-23x 2018 EPS (that will likely never

materialize).

-JMP Securities' valuation method consist of pricing shares off of their "peak revenue" estimates four years out.

-Jefferies hockey-sticks revenues to above $1 billion by 2023. We have no idea what the competitive landscape will look like in 3 years from

now, much less 10.

-Ironically, Maxim has the only Sell rating and appears to be the only sell-sider acknowledging the other superior competition such as Given

Imaging's new PillCam COLON 2 and Epigenomics' Epi proColon 2 Septin 9 based blood screen. To wit, "Other innovative new products a

expected to launch before the ColoGuard."

-Even though Maxim is the most bearish, they still assume FDA approval, CMS coverage, and use a P/S ratio of greater than 4.0, which is to

generous.
http://www.biosres.com/http://www.biosres.com/http://www.biosres.com/http://www.biosres.com/


14/18

Appendix of Additional Information and Sources:

CEO 2013 Overview on Youtube:http://www.youtube.com/watch?v=g_lqHqmh_nc

Overview of Stool-Based DNA Screens for CRC: http://www.youtube.com/watch?v=VV-yTKWEYbw#at=68

National Colorectal Cancer Roundtable:http://nccrt.org/tools/

Centers for Disease Control and Prevention:http://www.cdc.gov/cancer/colorectal/

Exact Sciences website:http://www.exactsciences.com/

Colorectal screening options:http://www.exactsciences.com/col_cancer/what-are-the-screening-options/

Full trading comps table below:
http://www.youtube.com/watch?v=g_lqHqmh_nchttp://www.youtube.com/watch?v=g_lqHqmh_nchttp://www.youtube.com/watch?v=g_lqHqmh_nchttp://nccrt.org/tools/http://nccrt.org/tools/http://nccrt.org/tools/http://www.cdc.gov/cancer/colorectal/http://www.cdc.gov/cancer/colorectal/http://www.cdc.gov/cancer/colorectal/http://www.exactsciences.com/http://www.exactsciences.com/http://www.exactsciences.com/http://www.exactsciences.com/col_cancer/what-are-the-screening-options/http://www.exactsciences.com/col_cancer/what-are-the-screening-options/http://www.exactsciences.com/col_cancer/what-are-the-screening-options/http://www.exactsciences.com/http://www.cdc.gov/cancer/colorectal/http://nccrt.org/tools/http://www.youtube.com/watch?v=g_lqHqmh_nc


15/18

Simplified P/S Comp Tables:

Note in all of the comps I use 2015E/2016E sales f

EXAS as opposed to 2013E/2014E for comps,

EXAS is presented on a Price/3-Year Fwd Sales, ver

just Price/Forward Sales.

Above to the left is a picture of the ColoGuard screening kit. A user must place the white container into the toilet bowl,which would be suspended by the clear plastic bracket. They would then need to scrape a sample on a stick that is in the tubeshown. Next, theyd pour the DNA preservative from the jar onto the full stool sample in the white bucket and mail both thewhite bucket and tube of stool back to EXAS lab. If you do this later in the evening and miss the last FedEx or UPS pick-uptimes, you would keep the samples in your refrigerator. Compare that to the Quest Diagnostics InSure FIT on the right that

uses a small sample obtained with what looks like a water color paint brush.


16/18

Disclosures and Notices The information contained herein reflects the opinions and projections of Southpaw Capital, LLC(Southpaw) as of the date of publication, which are subject to change without notice at any time subsequent to the date ofissue. Southpaw does not represent that any opinion or projection will be realized. All information provided is forinformational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any

specific security. While the information presented herein is believed to be reliable, no representation or warranty is madeconcerning the accuracy of any data presented. This communication is confidential and may not be reproduced or distributedwithout prior written permission from Southpaw. This confidential report is only intended for the recipient and may not beredistributed without the prior written consent of Southpaw Capital, LLC. This report is provided for informational purposeonly and does not constitute an offer or a solicitation to buy, hold, or sell an interest in any Southpaw Value Funds or any

other security. An investment in any Southpaw Value Fund is speculative and involves substantial risks. Additionalinformation regarding the Southpaw Value Funds listed herein, including fees, expenses and risks of investment, is containein the offering memorandum and related documents, and should be carefully reviewed. An offer or solicitation of an

investment in any Southpaw Value Funds will only be made pursuant to an offering memorandum. There can be no guarantethat any Southpaw Value Fund will achieve its investment objectives. Southpaw and its affiliated funds are short shares ofEXAS and related derivatives and may change its opinion or positioning at any time without notice.

THIS SHALL NOT CONSTITUTE AND OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY AN

INTEREST IN ANY FUND MANAGED BY SOUTHPAW. SUCH AN OFFER TO SELL OR SOLICITATION OF A

OFFER TO BUY INTEREST MAY ONLY BE MADE PURSUANT TO DEFINITIVE SUBSCRIPTION DOCUMENT

BETWEEN A FUND AND AN INVESTOR.


17/18
http://www.valueinvestingcongress.com/VIChallenge


18/18

The Worlds Largest Community of Buyside Professionals. Since 2008.

What Is SumZero?SumZero is the worlds largest community of investment professionals working at hedge funds,

mutual funds, and private equity funds. With over 8,500 pre-screened professionals

collaborating on a fully-transparent platform, SumZero fosters the sharing of many thousands ofproprietary investment reports every year and offers several ancillary services in support of that

effort. SumZeros membership base is represented by analysts and PMs at nearly all of the

worlds largest and most prominent investment funds.

SumZero Research! Fast-growing research database with over 7,000 long-form research memos and 24,000

short-form pitches created by member analysts.

! Extensive search and filtering capabilities on a variety of standard metrics andproprietary data points.

! Deep, fundamental research supplemented with Excel valuations, PDFs, and PPT decks.! Global, cross-asset coverage.

SumZero Community! Access to a searchable rolodex of all SumZero members.! Search by current and past employers, firm type, AUM, research performance, site

ranking, sector/geographic/asset class expertise, job title, location, educational history,

and more.

SumZero Cap Intro! A searchable, two-sided platform designed to showcase SumZeros top funds and

managers through a qualitative, research-focused database.

! Exposure to a rapidly-growing group of over 50 large, institutional allocators.! Participating investors are 50% family office/multi-family office, 25% fund of funds, 25%

university endowment.

SumZero Careers! Fast-growing compensation database with hundreds of entries from member analysts,

detailing specifics on salary history, incentive fees, comp structures, and firm types.

! Access to internal Job Vault with dozens of exclusive listings at buyside shops.

L ea r n m o r e a t su m zer o .com
http://www.sumzero.com/http://www.sumzero.com/http://www.sumzero.com/http://www.sumzero.com/

vichallenge exas traviscocke

Documents