Thursday, May 9, 2024

Brief Blog: Molecular Pathology Industry Is Pretty Capital Intensive

Header: Exact Sciences May 2024 investor call:  Molecular testing is capital-intensive, and sales and marketing need to be on the upswing again.   


During COVID, there was an public equities bubble (for public companies) or a valuation bubble (for nonpublic companies) in both biotech and genomics.   Since 2023, funding has been more challenging.

One example of the principal, "it takes money to make money" aka "it's capital intensive" is in the latest investors call at Exact Sciences (Cologard; Oncotype).   Revenue has risen from $1.5B in 2020, to $2.5B in 2022.   At the same time, operating losses have been substantial (-$558M in 2020, -835M in 2021, -577M in 20222, and -214M in 2023).   

Efficiency, in dollarized terms, has improved.  Revenue in 2020 ($1.5B) was less than operating expenses ($1.7B), but revenue ($2.5B) was greater than operating expenses ($2.1B) in 2023.  


But you have to spend money to make money; $2B of operating expenses (and $650M in COGS) are big numbers.  Here's a quote from the investor call which was highlighted by Jack Meehan at Nephron Research:

...We turned down our sales and marketing investments, as you know, over the last year and really over the last couple of years, while we saw about approaching $1 billion of growth. 

And the truth is we probably turned that down a little bit too much. We recognized that at the back end of last year. And starting in Q1, we increased our marketing investments...

And it's clear the more time, the more frequently our reps call on an office in a position or a nurse or physician assistant, you see a straight-line increase with no flattening from zero to six calls per quarter. That gives us confidence that by adding reps, we will see it. ,,,You will see an increase in the total number of test orders. 

Professional sales staff for up to 6 calls, per quarter, is part of that substantial total SG&A in molecular pathology.

As Meehan concluded in his note, "You have to spend money to make money," and the capital intensivity is a kind of moat.