2023-07-19 13:57:09 ET
Summary
- Exact Sciences, specializing in advanced cancer diagnostics, is recognized for its cutting-edge tests facilitating early cancer detection.
- 2022 saw significant milestones, testing over 12 million individuals and broadening its global healthcare network to over 350,000 providers.
- Moving forward, the company is prioritizing colon cancer screening, precision oncology, and molecular residual disease detection as key growth strategies.
- Exact Sciences' next-gen Cologuard test, backed by promising data from the BLUE-C study, offers improved accuracy, bolstering the company's competitive advantage.
- I recommend a 'Buy' for Exact Sciences' stock, highlighting promising growth prospects and strong product portfolio, albeit cautioning on near-term profitability and debt.
Company Overview
Exact Sciences ( EXAS ) is a leading international company specialized in advanced cancer diagnostics. Renowned for its development of impactful cancer diagnostic tests, the company aims to facilitate earlier cancer detection as part of regular medical care. Its primary revenue comes from laboratory testing services for its Cologuard colorectal cancer screening test and Oncotype DX cancer diagnostic tests. In 2022, the company achieved several milestones, including testing over 12 million people for cancer and expanding its global network of healthcare providers to more than 350,000. With a focus on early cancer detection and precision oncology tests, its product portfolio includes the Cologuard Test, Oncotype DX Breast Recurrence Score Test, Oncotype DX Breast DCIS Score Test, Oncotype DX Colon Recurrence Score Test, and OncoExTra Test.
This article offers a comprehensive assessment of Exact's financial performance, stock performance, growth prospects, next-generation Cologuard, and presents a detailed analysis along with an investment recommendation.
Financial Performance
Exact Sciences reported Q1 2023 results with total revenue of $602.5M (up 24% from 2022). Core revenue increased by 33% to $597.8M, led by a 45% surge in screening revenue to $443.2M. Precision Oncology revenue rose by 2% (8% on core basis) to $155.4M, but COVID-19 testing revenue dropped by 86% to $3.8M. Gross margin was 71% (74% non-GAAP), and the company recorded a net loss of $74.2M ($0.42 per share). Adjusted EBITDA was $45.9M, and cash totaled $698.6M. 2023 revenue forecast is $2.38B-$2.42B, surpassing the $2.3B consensus.
Stock Assessment
According to Seeking Alpha metrics, EXAS appears to be in a promising position as per its financial data. Earnings per share [EPS] estimates for 2023, 2024, and 2025 show continuous improvement, with FY2023 EPS at -1.56, improving to -0.74 in 2024, and turning positive to 0.16 by 2025. This shows a YoY growth of over 50% for 2023 and 2024. Sales are also projected to grow consistently over these years.
The earnings revisions indicate a positive trend with 15 upward revisions for FY1 and no downward revisions. However, most of the valuation metrics are not available ((NM)), which might make it hard to assess the stock's value.
The company has demonstrated solid growth, with a YoY revenue increase of 18.83% and a 3-year compound annual growth rate [CAGR] of 27.48%. The gross profit margin is substantial at 72.89%, but negative EBIT and net income margins point towards profitability issues.
In terms of momentum, the stock has outperformed the S&P500 with an impressive increase in value over the past 3M, 6M, 9M, and 1Y periods.
The company has a market cap of $17.48B and an enterprise value of $19.36B. However, it carries a sizable total debt of $2.57B against cash reserves of approximately $698.65M.
Future Strategies and Growth Prospects
As discussed on their most recent earnings call , Exact Sciences has made the prioritization of colon cancer screening, precision oncology, and molecular residual disease [MRD] detection a key component of its growth strategy. The company's Cologuard product specifically targets the substantial market of "60 million" unscreened Americans who are at risk for colon cancer. To expand screening rates, Exact Sciences has formed partnerships with health systems, which account for more than half of the market. Additionally, the company has implemented electronic ordering interfaces to facilitate smoother integration into healthcare workflows.
In addition to colon cancer screening, Exact Sciences offers precision oncology tests such as Oncotype DX and OncoExTra. These tests are instrumental in guiding treatment decisions for over "200,000" patients annually. The company's success in this area is attributed to robust clinical evidence and extensive physician education efforts. Furthermore, Exact Sciences is continually enhancing its product portfolio. The upcoming release of the next-generation Cologuard product is supported by top-line data from the BLUE-C trial, demonstrating noteworthy improvements compared to the previous version. Additionally, the company is actively gathering more data on multi-cancer early detection and MRD.
Exact Sciences maintains a comprehensive focus on innovation, backed by strong clinical evidence and a commitment to improving customer experience. This strategic approach is expected to continue driving growth, expanding profit margins, and ensuring long-term profitability.
Next-Gen Cologuard: Enhanced Accuracy Redefines Cancer Diagnostics
Exact Sciences has recently announced encouraging top-line results from the pivotal BLUE-C study. The study demonstrates that the next iteration of their key product, Cologuard, has outperformed the original in all measured parameters. Notably, the next-gen Cologuard test has a 30% lower false positive rate compared to its predecessor, as demonstrated in the DeeP-C, the FDA registrational trial for Cologuard.
The importance of these improvements in Exact Sciences' product can be dissected into three key areas:
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Improved Patient Care: The enhanced accuracy of the next-gen Cologuard, as demonstrated by higher specificity and sensitivity, implies that patients will receive more precise diagnoses. This reduction in false positives can potentially prevent unnecessary invasive procedures like colonoscopies, thus reducing patient anxiety and healthcare costs.
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Competitive Advantage: By continuously refining their product, Exact Sciences strengthens its positioning in the cancer diagnostics market. The enhanced test performance of the next-gen Cologuard not only offers a better product for patients and healthcare providers but also provides a substantial competitive edge over other screening methods or tests available in the market.
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Intellectual Property: Further development and fine-tuning of their existing products allows Exact Sciences to expand their intellectual property portfolio. This is crucial in the biotech and healthcare sector, as it offers protection from competitors.
My Analysis & Recommendation
As I delve into the financials and overall position of Exact Sciences, it is clear that the company sits at an exciting junction. While its balance sheet and near-term profitability may raise concerns, a deeper analysis of its fundamentals tells a different story.
The projected improvement in earnings per share is encouraging, hinting at a bright future in terms of profitability. While it is important to bear in mind that these are just projections, the past trend and the number of upward revisions lend credibility to this positive outlook. Investors should keep an eye on how closely the actual figures align with these predictions in the coming years.
As for the current financial health, Exact's significant gross profit margin demonstrates the strength of its business model. However, the negative EBIT and net income margins point to an urgent need for cost management and operational efficiency improvements. A strategic focus on these areas could significantly enhance the profitability of the company, propelling it towards its positive EPS forecast.
While the debt load may seem alarming, it's essential to view it within the larger context of the company's growth plan. The focus on early cancer detection and precision oncology tests shows a commitment to carving out a dominant position in a rapidly expanding market. Investors should take note of this because, in the long run, an expansive market can more than justify initial high investments, providing opportunities for high returns.
The stock's outperformance against the S&P500 across several periods also shows significant momentum, hinting at market confidence in the company's strategy. The stock seems to be an attractive proposition for long-term growth-oriented investors. However, the missing/non-meaningful valuation metrics would make it hard for investors to gauge the intrinsic value of the stock. Therefore, potential investors need to keep this in mind while making their investment decisions.
Given the promising position of Exact Sciences in a rapidly growing market, the projected improvement in earnings, and the positive stock momentum, I would recommend a 'Buy' for this stock. However, this recommendation is based on a long-term growth perspective and assumes that the company will successfully manage its cost structures, and leverage its innovative product portfolio to capture the sizable market. Investors with a lower risk tolerance or a short-term perspective should consider this recommendation with caution due to the existing debt and near-term profitability issues.
Risks to Thesis
When the facts change, I change my mind.
There are three main risks to my 'Buy' recommendation on Exact Sciences that we need to consider:
- Profitability Challenges: My primary concern revolves around the company's current profitability issues, highlighted by its negative EBIT and net income margins. While the forecast suggests an improving EPS in the coming years, there is a risk that the company might not be able to meet these expectations if it fails to address its cost management and operational efficiency challenges.
- Debt Burden: The second risk pertains to the company's substantial debt. Even with a solid business model, high debt can become a serious problem, especially if interest rates rise or if the company experiences a downturn in its operations. If Exact Sciences struggles to manage its debt efficiently, it could impact its future growth prospects and place additional financial stress on the company.
- Market Acceptance and Regulatory Risks: The third risk is related to the market acceptance of its upcoming products and potential regulatory hurdles. While Exact Sciences is investing heavily in new product development, the success of these products is not guaranteed. The healthcare industry can be unpredictable and heavily regulated. Any delays in regulatory approvals, or if the new products fail to gain traction in the market, could have a significant impact on the company's revenue growth and overall financial performance.
For further details see:
Exact Sciences: Revolutionizing Cancer Detection With Innovation