Exact Sciences: Cancer Detection Stalwart's Bad Quarter Resets Its Overgrown Market Cap.

seekingalpha2024-11-11

This article updates the investment merits of Exact Sciences following its disappointing Q3, 2024 earnings.Recent approval of an improved version of its lead product will not show up in revenues for a...

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Surachai Chaikit/iStock via Getty Images  sec.gov This is my second Exact Sciences (NASDAQ:EXAS) article after 11/2020's \"Exact Sciences' Grand Endeavor\" (\"Grand Endeavor\"). Exact reported its Q3, 2024 earnings after market close on 11/05/2024 issuing its earnings press release (the \"Release\"), conference call (the \"Call\"), slide deck presentation (the \"Presentation\") and 10-Q (the \"10-Q\").  In this article I review Exact's disappointing Q3, 2024 and its new improved Cologuard product set to launch in mid 2025. By my assessment the stock is getting a much needed downsizing of its market cap. The company is well capitalized and will pass through this rough patch with undiminished prospects. Exact's Cologuard cash cow is headed for a refresh with FDA approval of Cologuard Plus. In its latest 10-K (p. 4-5) Exact refers to its Cologuard cancer screening test, FDA approved in 2014, as its flagship product. It notes:  \"...the Cologuard test, is a patient-friendly, non-invasive, stool-based DNA (“sDNA”) screening test that utilizes a multi-target approach to detect DNA and hemoglobin biomarkers associated with colorectal cancer and pre-cancer. Eleven biomarkers are targeted that have been shown to be strongly associated with colorectal cancer and pre-cancer. Methylation, mutation, and hemoglobin results are combined in the laboratory analysis through a proprietary algorithm to provide a single positive or negative reportable result. We believe the large, underserved population of unscreened and inadequately screened patients represents a significant opportunity for our Cologuard test. It is widely accepted that colorectal cancer is among the most preventable, yet least prevented cancers. ...  As an elderly American with no particular risk factors for colorectal cancer (\"CRC\"), I have taken several of these over the years. In terms of patient experience they are vast improvement over the alternative highly invasive colonoscopy screening with its noxious prep.  Cologuard is the primary revenue producer that has ushered Exact to its nosebleed market cap of ~$13.2 billion as I write on 11/5/2024 . Exact has achieved these heights despite having incurred losses since its formation with a majestic accumulated deficit of ~$3.6 billion. Exact's new Cologuard Plus, FDA approved in 10/2024 is set to launch in 2025. The release announcing its approval touted the following results from its pivotal clinical trial characterized as the largest prospective, head-to-head study ever conducted in CRC screening. The study data showed:  sensitivities of 95% for colorectal cancer and 43% for advanced precancerous lesions at 94% specificity; significant outperformance over an independent fecal immunochemical test (FIT**) for overall CRC sensitivity, treatable-stage CRC (stages I-III) sensitivity, high-grade dysplasia sensitivity, and advanced precancerous lesion sensitivity; cancer and precancerous polyps detection with greater sensitivity than Cologuard while reducing false positives by more than 30 percent.  During the Call there was extensive discussion of this product, the timing of its launch and its pricing. As for the timing of its launch in his opening remarks CEO Conroy pegged the launch as in Q2, 2025. In response to a question as why the launch was Q2 and not Q1 he noted that Exact was shooting for end of Q1 or early Q2. He also outlined the basics of the complicated interaction between Medicare and commercial pricing under its Advanced Diagnostic Laboratory Test process as follows:  ...you get paid by Medicare for ...[the] list price. And then at the end of a period, it reverts to the median of the commercial rate if there’s commercial rates that are where there are claims that have been processed ... And then you get that price for two years and then it readjusts and every year after that. So, you do have the ability to control that price and you get paid on the Medicare claims. Initially, it’d be the Medicare fee-for-service claims over time as you get commercial contracts or your commercial contracts that exist cover Cologuard Plus. You would start to have those patients access Cologuard Plus and then with the commercial deals and that just takes time to work through all of that.  In other words the list price is important but ultimately not controlling with final price determination taking time to work itself out. The impact of the new administration further obfuscates the situation. With Covid diagnostic revenues in the rear view mirror Exact has two remaining segments Exact's revenue contributors as shown by this latest 10-K (p. 51) are threefold:  sec.gov The 10-Q (p. 39) shows how the discontinued Covid testing leg of the stool has dropped off leaving its two more reliable over the long haul segments of screening and precision oncology. It further describes these as: Screening revenue primarily includes laboratory service revenue from Cologuard and Prevention Genetics, LLC (“PreventionGenetics”) tests while Precision Oncology revenue primarily includes laboratory service revenue from global Oncotype DX and therapy selection tests. Exact acquired Prevention Genetics in an 01/2022 deal bringing in a comprehensive genetic testing portfolio to complement Exact's advanced cancer tests. At the time Prevention had: ...a CLIA-certified and CAP-accredited clinical DNA testing laboratory, providing more than 5,000 predefined genetic tests for nearly all clinically relevant genes, additional custom panels, and comprehensive germline whole exome and whole genome sequencing tests. Oncotype DX covers a variety of genetic mediated tests to provide guidance in making treatment decisions related to breast cancer. A clunker of a Q3, 2024 exacted a heavy toll.  The market reacted to Exact's Q3 earnings and its downward revenue guidance with a stiff >25% price drop. The sorry trio of headlines below from Seeking Alpha's Exact Sciences news feed tell the story:   seekingalpha.com As I write on 11/09/2024 its price remains under pressure. During the Call analysts seemed most disgruntled by the contrast between results and their expectations following Q2, 2024. The very first analyst question asked: ...what changed in the second half outlook relative to where you stood 90 days ago? It’d be helpful if you could maybe unpack some of the moving parts and contribution ... Others of a similar ilk followed; some questioned management's forecasting ability. This is the sort of surprise that can generate investor anger and lawsuits. It is not a good situation. Presentation slide 6 shows the updated guidance cut which played such a significant role in Exact's disappointment: seekingalpha.com This miss might not have created such a downdraft if Exact had had a less engorged market cap or if management had prepared investors for this possibility. Instead during its Q2 earnings call CFO Bloomer had reported that it was confirming its prior guidance; painfully in retrospect he went on to list several key factors as providing particular confidence in achieving this guidance. To make matters still worse during his appearance in 09/2024's Wells Fargo 2024 Healthcare Conference he doubled down on his optimism. He expressed enthusiasm on Exact's progress supporting its guidance \"to date\". He gave no hint that Q3 would show any kind of miss. Despite this distressing miss Exact is in solid financial shape. Its Presentation slide 14 shows it with cash and equivalents of ~$588 million and marketable securities of ~$432 million. With this liquidity profile and net cash provided by operating activities of ~$138 million its operating runway is not an issue. Conclusion Exact has suffered >$3 billion loss in market cap from its ~$13.2 billion when I began this article to its $9.85 billion as I write on 11/08/2024. While it has certainly disappointed lots of Wall Street Analysts, the vast bulk of the 23 Wall Street Analysts as shown on Seeking Alpha continue to rate it as a \"Strong Buy\":   seekingalpha.com seekingalpha.com I am optimistic that Exact will start to level out from the tailspin that has seen its price drop from a high of >$72 on 11/05/2024 to a low of <$51 on 11/08/2024. but I am not expecting it to start a new climb any time soon.  Exact's long history of losses and its uninspiring future prospects lead me to rate it as a \"Hold\". Two factors contribute to my restrained rating\"  the alert from its 10-Q (p. 39) that it expects to incur net losses for the near future, and may never become profitable or sustain profitability; management's failure to acknowledge or, perhaps it was a failure to recognize, that its 2024 guidance was askew for so long into the year.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.30.2","shortVersion":"4.30.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2482829868"}