2023-11-01 21:44:52 ET
Summary
- Exact Sciences Corporation focuses on early cancer detection and prevention through products like Cologuard, Oncotype DX, and Oncotype MAP.
- Despite the Q3 2023 earnings beat, the company's lack of substantial earnings cast valuation doubts at a market cap of $11.5 billion.
- Still, it's evident that EXAS's Cologuard continues to be promising and should be a value driver for the stock for the foreseeable future.
- Overall, I lean neutral on EXAS because it looks fairly valued at the present levels, giving it a "hold" rating.
Exact Sciences Corporation ( EXAS ), a leader in the molecular diagnostics sector, underscores the importance of early cancer detection and prevention through its innovative products like Cologuard, Oncotype DX, and Oncotype MAP. These offerings have considerably strengthened EXAS's position in colorectal cancer screening and diagnostics. However, despite a favorable earnings beat in Q3 2023, the current earnings potential appears insufficient to support significantly higher valuations. The company's present market capitalization of $11.5 billion seems justified, which diminishes the stock's allure. Although Cologuard shows encouraging market penetration figures, the absence of substantial profitability moderates my enthusiasm, nudging me towards a neutral stance on EXAS's stock, categorizing it as a "hold."
Business Overview
Exact Sciences is a notable player in global molecular diagnostics and prioritizes early cancer detection and prevention. The core of its operations revolves around developing molecular diagnostic tests, initially focusing on colorectal cancer, but it has since broadened its scope to encompass other types of cancer. Among the key products from EXAS, Cologuard is prominent, launched in 2014 as an innovative stool DNA test for detecting colorectal cancer. Additionally, Oncotype DX and Oncotype MAP are significant offerings from the company in cancer diagnostics. Looking at EXAS's latest earnings slides , it's evident that it's forging ahead with new solutions and partnerships to improve cancer diagnostics and patient care.
Source: Third-quarter 2023 earnings slides.
Tracing back to its inception in 1995 in Marlborough, Massachusetts, the company embarked on a mission to develop a non-invasive test for colorectal cancer. A significant milestone of transitioning to a public entity in 2001 was reached in 2009 through a fruitful collaboration with Mayo Clinic , and the same year witnessed Kevin Conroy ascending as the CEO and president, alongside the head office's relocation to Madison, Wisconsin.
The growth narrative for EXAS is peppered with strategic acquisitions, a prime example being the 2019 procurement of Genomic Health for $2.8 billion . This move not only enriched the product portfolio but also bolstered its international presence, courtesy of Genomic Health's OncotypeIQ suite of precision tests. Additionally, on September 12, 2023, Agilent Technologies and EXAS agreed to sell Resolution Bioscience to EXAS. This acquisition, coming from Agilent, who bought Resolution Bioscience in 2021, is significant for EXAS as Resolution Bioscience's blood-based oncology diagnostic tests will complement EXAS' OncoExTra test, aiding patients in determining optimal cancer treatment.
The acquisition trail didn't end there; it further facilitated the establishment of EXAS’s global footprint with offices in several European and Asian countries, all orchestrated under EXAS International , previously Genomic Health, initially based in Geneva, before transitioning to Zug, Switzerland.
Strategic Advancements and Market Challenges
On October 10, 2023, following a 36% drop in stock value since July, Piper Sandler upgraded its rating for EXAS from Neutral to Overweight. This optimism is rooted in the 10% market penetration of Cologuard, EXAS's flagship product, among individuals aged 50-85, with a projected steady growth rate of 21% from 2022 to 2025. Cologuard has a 75% margin, which suggests that EXAS could lead profitable growth in its industry, targeting an over 80% margin. Despite the competitive landscape, the low market penetration of Cologuard indicates room for market expansion, which, if realized, could significantly enhance EXAS's revenue.
The Cologuard test is a significant revenue generator for the company. The management highlighted that the revenue generation for the next year heavily leans on the commercial success of both Cologuard and Oncotype DX breast cancer tests. The US Centers for Medicare and Medicaid Services (CMS) has recently suggested alterations to its 2023 Physician Fee Schedule that would cover any colonoscopy performed in the US following a stool-based screening test, thereby removing a significant obstacle to the broad adoption of Cologuard.
The colorectal cancer screening market presents a challenging competitive landscape for EXAS. Numerous well-funded companies compete with EXAS. The primary competitors, such as Quest Diagnostics ( DGX ), Laboratory Corporation of America Holdings ( LH ), Natera ( NTRA ), and Guardant Health ( GH ), align closely with EXAS in terms of providing diagnostic services to healthcare providers and patients. This level of contenders could challenge market penetration and growth for EXAS.
Source: Third-quarter 2023 earnings slides.
The company is nearing the FDA submission for next-gen Cologuard , targeting its availability by early 2025 to improve cancer and pre-cancer detection. The reimbursement for Oncotype DX Breast test in Japan has opened a significant market, with ongoing advancements in molecular residual disease and multi-cancer early detection platforms, anticipating partial results from their ASCEND 2 study this fall. The strategic market expansion into Japan through Oncotype DX test reimbursement, in particular, is a prudent move in diversifying revenue.
EXAS's 3Q 2023 report showed substantial financial growth and progress towards cancer eradication, with over a million test results provided to patients and $628.3 million in revenue (a $105.2 million YoY rise). Noteworthy advancements include positive outcomes from the BLUE-C study, reimbursement for the Oncotype DX test in Japan, and new collaborations to propel cancer diagnostics forward. CEO Kevin Conroy emphasized the team's role in leveraging advanced technologies to improve and create new cancer tests, expecting the firm's strong infrastructure and payer relationships to help extend these tests to more patients, promoting profitable growth.
Source: Third-quarter 2023 earnings slides.
Currently, EXAS projects its 2023 revenue to be between $2.48 billion and $2.49 billion. Yet, at its current growth pace, my calculations suggest a more realistic revenue figure 2023 is $2.52 billion. Nevertheless, EXAS's forecast includes an estimated $1.848 to $1.853 billion from screening, $622 to $627 million from Precision Oncology, and $6 million from COVID-19 testing services. The updated figures mark an increase from the earlier revenue projection, which ranged from $2.441 billion to $2.466 billion, attributed partly to the integration of 40 new electronic connections with large US health systems, facilitating easier ordering and results viewing for healthcare professionals and patients. By 2023, 13 million Cologuard tests have been completed. The company reported a net income of $800 thousand for Q3 2023, a significant improvement from the net loss of $148.8 million recorded in the corresponding quarter of the previous year.
A Valuation That's Hard To Justify
From a valuation standpoint, EXAS's recent growth trajectory is noteworthy, escalating from $523.1 million in the third quarter of 2022 to $628.3 million in the third quarter ending September 30, 2023, marking a 20.1% YoY increase. This uptick underscores the company's successful initiatives in early cancer detection and precision oncology. A major milestone was achieved when encouraging data was unveiled at a medical congress, alongside the announcement of a successful trial for the next-generation Cologuard test. This test, designed for efficient detection of colorectal cancer, epitomizes EXAS's revenue model, which predominantly relies on providing cancer screening and diagnostic tests.
Then, looking at EXAS’s M&A potential, they’ve signaled openness to M&A that would align with its strategic objectives, especially within the colorectal cancer screening domain. However, there has been a conspicuous absence of updates regarding any significant acquisitions or restructuring initiatives, except the Resolution Bioscience acquisition. This acquisition is viewed as a smaller venture for EXAS, as the terms were not disclosed in the announcement, and it wasn’t material to be not material for either Agilent Technologies, Inc. ( A ) or EXAS. The lack of meaningful M&A activity is pivotal, as such endeavors are typically instrumental in enhancing biotech valuations. In my opinion, it is notable that EXAS is likely to assume the role of the acquirer in any M&A venture rather than being the target. However, it’s common for acquirers not to realize immediate outsized returns from such transactions, which, I infer, also somewhat constrains EXAS’s valuation in the biotech sector.
Therefore, I believe a reasonable strategy for pricing EXAS would normally be a DCF model predicated on its recent revenue metrics and restrained growth assumptions. Nonetheless, a stumbling block arises from the company's unprofitability. Concretely, EXAS’s current operating expenses approximate $2.1 billion yearly, with gross margins of approximately 74%. Thus, for a positive EBIT, EXAS necessitates at least roughly $2.6 billion in total revenues. Given the latest quarterly results , EXAS's growth should justify its present valuation. Given EXAS’s existing OpEx cadence and gross margins, this delineates an annual EBIT of around $111.2 million by 2024.
As you can see, the latest quarterly results validate EXAS's improving trajectory. As a result, I think the current growth rate may be enough to make EXAS reasonably valued at the current levels. Yet, a plausible alternative for evaluating its valuation might be to shift the focus onto its sales. The revenue projected for 2024 is pegged at $2.9 billion. By applying the sector's P/S multiple of approximately 3.25, this suggests a valuation of $9.4 billion. Nonetheless, this valuation is still about 18.0% lower than the current market capitalization of $11.5 billion. So, it's hard to make a case for EXAS being substantially undervalued. Instead, I think its market cap roughly aligns with its current intrinsic value.
EXAS has had a disappointing price performance over the last 5 years. (TradingView.)
Consequently, adopting a neutral outlook appears rational, primarily fueled by EXAS’s fair valuation at the present levels, sustained profitability coupled with potentially promising growth. Thus, despite the enticing technology on the table, from an investment perspective, I believe that a "hold" rating is warranted for EXAS.
Conclusion
EXAS's pioneering products, including Cologuard, Oncotype DX, and Oncotype MAP, demonstrate a noteworthy progression in cancer treatment and diagnostics. These products significantly strengthen EXAS's position in colorectal cancer screening and diagnostics, potentially leading to a more extensive influence in the oncology sector. However, despite the revenue uptick in the third financial quarter of 2023, EXAS's present valuation, with a hefty $11.5 billion market cap, seems fairly valued. Although Cologuard’s promising market penetration figures are a silver lining, the journey toward robust profitability, which could justify EXAS's elevated valuation, remains challenging. Hence, I incline towards a neutral outlook on EXAS's stock, rating it a "hold."
For further details see:
Exact Sciences Looks Fairly Valued After Its Q3 Earnings Beat