2023-08-16 09:00:00 ET
Summary
- Exact Sciences reported strong Q2 earnings with a 24% YoY growth in core revenue and a 31% YoY surge in screening revenue.
- The company raised its full-year revenue guidance, but the market reacted negatively, causing a drop in share price.
- Despite the drop, I maintain a bullish outlook on Exact Sciences, citing its strong growth track record and promising prospects.
Exact Sciences (EXAS) recently reported their Q2 earnings with a solid beat on EPS and revenue. The company’s core revenue growth was up 24% year-over-year and screening revenue surged 31% year-over-year. As a result, Exact raised its full-year revenue guidance. However, the market was not happy with the earnings and EXAS has dropped from about $96 per share to about $82 per share.
Were the earnings that bad?
This prompts a closer examination of the earnings and consideration of a revised strategy after booking profits above my Sell Target 2 of $99.
First, I will provide a brief introduction to Exact Sciences. Then, I intend to review the company’s Q2 earnings and will highlight some of the key highlights for the bulls. In addition, I will discuss a new downside risk that EXAS investors should consider when managing their position. Finally, I reveal my updated strategy and adjusted targets.
Introduction to Exact Sciences
Exact Sciences is a top-tier player in the field of cancer diagnostics, leveraging cutting-edge technologies such as DNA, RNA, and proteins. The company is fixated on enhancing contemporary tests and pioneering new ones to transform how we screen, prevent, and treat cancer. The company's advanced labs, impressive IT infrastructure, successful commercial teams, and embedded payer relationships, have put Exact Sciences on a heading to maintain their position as a leader in cancer diagnostics. Notable achievements include a strong growth track record, positive outcomes from a study on their next-gen Cologuard test, collaborations with respected institutions like the Mayo Clinic , Baylor Scott & White, and Broad Institute, and successful efforts to expand their reach outside the United States.
The company's optimistic growth outlook is backed by impressive financial results, increased revenue guidance, and recent innovations, all aimed at cancer care, enhancing diagnostic readings, and improving the experience for both patients and providers.
Q2 Earnings Review
Exact Sciences reported robust Q2 earnings , with revenue reaching $622.1M, marking a 19.3% year-over-year increase and surpassing expectations by $20.97M. Core revenue amounted to $617.5M, reflecting a noteworthy 24% year-over-year growth. This growth was primarily driven by an impressive 31% increase in screening revenue, reaching $462.8M. Additionally, Exact's Precision Oncology segment generated $157.2M in revenue, representing a 2% year-over-year increase.
Exact Sciences Q2 Earnings Revenue (Exact Sciences)
Revised 2023 Guidance
Bolstered by these positive results, Exact has upgraded their full-year 2023 revenue guidance to a range of $2.441B to $2.466B , up from the previous range of $2.38B-$2.42B.
Exact Sciences 2023 Updated Guidance (Exact Sciences)
Financial Update
The company also reported $100M in cash provided by "operating activities", with free cash flow at $66M. Despite the significant growth, Exact Sciences reported a net loss of $81M, a decrease from the $166.1M reported in Q2 of 2022. In terms of cash, the company held $775.7M in cash, cash equivalents, and marketable securities at the end of Q2.
Key Highlights From Q2
Apart from the company's financial performance, Exact provided some updates concerning their flagship product, Cologuard. During the Q2 earnings call , it was revealed that over 9K healthcare professionals ordered Cologuard for the first time in the quarter, with a total of more than 321K orders since its launch. Impressively, Cologuard has been ordered by approximately 75% of all primary care physicians in the United States, underscoring how it has become the name-brand in colorectal cancer screening.
Exact continues to focus on enhancing retest intervals, a move that is expected to bolster revenues. Furthermore, the company is making strides with its next-gen Cologuard, sometimes being referred to as "Cologuard 2.0", which is nearing approval. This advanced version is anticipated to deliver significant improvements in detection and sensitivity, including a 30% reduction in false positives. Moreover, the cost per test for Cologuard 2.0 is projected to be at least 5% lower than the original version. The company anticipates filing the last module of the PMA to the FDA before year-end, paving the way for potential approval in the second half of 2024.
Importance of Cologuard and Growth Potential
While Cologuard's recognition among primary care physicians is substantial, questions remain about the frequency of repeat prescriptions and usage. Exact has an opportunity to tap into physicians who initially tried the original Cologuard, leveraging the improved data of Cologuard 2.0, which demonstrates reduced false positives and heightened sensitivity for both cancer and pre-cancer conditions. These enhancements complement the benefits of the original Cologuard, including ease of use, non-invasiveness, and lack of preparation requirements.
Exact Sciences Cologuard Benefits (Exact Sciences)
This favorable data should encourage physicians to consider early and more frequent orders for Cologuard 2.0, potentially leading to increased revenue and improved margins due to lower manufacturing costs. This effect is expected to materialize in late 2024 or early 2025.
Impact on Thesis
My original article on Exact Sciences titled "Exact Sciences: Defending ARK's Call Of $140 Per Share By 2027" emphasized the feasibility of ARK Invest's projection that EXAS would reach $140 per share by 2027. Despite initial skepticism due to EXAS trading around $50 per share at the time of ARK's note, I believed the call was plausible based on the company's strong fundamental outlook. The removal of Guardant Health Guardant Health, Inc. (GH) as a major competitor further supported this outlook, as Guardant's Shield blood-based cancer screening test exhibited inferior sensitivity and specificity compared to Cologuard. With EXAS already surpassing $100 earlier in the year, a target of $140 by 2027 seemed reasonable.
Continuation of Bull Thesis
My bullish perspective on EXAS remains robust, fortified by improved financial performance, upgraded guidance, promising clinical data, and expanding market opportunities. The core tenets of my bullish thesis remain intact and have even strengthened.
Exact Sciences Next-Gen BLUE-C (Exact Sciences)
I would like to highlight that Exact has a strong record of growth and exceeding expectations. Looking at the company’s earnings record below, we can see Exact has beaten EPS estimates 65% of the time since Q3 of 2018 and 95% of the time for quarterly revenue.
Exact Sciences Earnings History (Seeking Alpha)
Yes, we can’t always rely on past performance to determine if the company will maintain this trend, but it does show that Exact has a history of executing and should provide some confidence.
New Risk Consideration
Despite the positive trajectory, a new risk has emerged for Exact Sciences. While the company's core business is rebounding post-COVID-19, COVID-19 testing revenue in Q2 amounted to only $2.1M , representing an 84% year-over-year decline. While this decline was anticipated, market algorithms may latch onto such figures, causing short-lived negative reactions. Managing positions around earnings calls may become more complex due to these reactions. Investors should remain mindful of the negative COVID-19 remarks in earnings reports and their potential market impact. Although declining COVID-19 revenue is ultimately a net positive for the company, it introduces a risk factor until testing volume stabilizes.
Revised Investment Strategy
In the context of a trend where positive earnings reports yield negative market reactions in 2023, influenced by intrinsic valuations and technical analysis, I maintain my long-term bullish outlook on EXAS. However, it's crucial to acknowledge that the stock is currently trading at a premium.
EXAS Valuation Grades (Seeking Alpha)
Examining the valuation grades, it becomes evident that EXAS is relatively expensive compared to its peers, especially considering its ongoing cash burn. While I am willing to pay a premium for a company with a proven growth track record, attractive margins, and promising prospects, there is a point where momentum may disconnect from intrinsic value. This appears to have happened with EXAS.
Considering the Daily Chart, the recent negative reaction to the earnings report is evident, with the share price rebounding off previous support at approximately $82 per share. This move placed the share price at the lower boundary of the Keltner channel, leading to the expected bounce.
EXAS Daily Chart Enhanced View Trendspider (Trendspider)
Looking ahead, it's important to anticipate the potential rejection of the share price at the anchored VWAP from the July high, currently around $90 per share. Should this rejection occur, the light green uptrend ray from the October low could serve as another potential reversal point.
Adjusting My Buy and Sell Targets
While maintaining my bullish sentiment on EXAS, I am making adjustments to my investment thresholds. I am raising my Buy Threshold to $62 per share, along with my Buy Targets, which are now set at $45 and $52.50 per share. My current Sell Targets will remain in place until technical ratings improve.
Balancing my bullish outlook with prudent risk management, I aim to keep my position in a "house money" state, avoiding overloading and being prepared to take profits at my established Sell Targets. My commitment to my trading system remains unwavering, allowing for gradual position growth within my Bio Boom Portfolio through multiple compounding trading cycles until EXAS graduates to the "Bioreactor" growth portfolio.
For further details see:
Exact Sciences: Adjusting My Strategy After Encouraging Q2 Earnings