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Billionaire Battleground: Exact Sciences Inc.

By Brian Feroldi - May 28, 2016 at 8:04AM

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Billionaire investors have been buying and selling millions of shares of Exact Sciences stock recently. Here's a look at the bull and bear case.

Image source: Exact Sciences.

Every few months the SEC requires billionaire investors to publicly disclose their holdings using a form called a 13F. These filings are filled with intellectual gold and are a great way for individual investors to follow what some of the smartest investors in the world have been buying and selling recently.

One company that has become a battleground stock among billionaires recently is Exact Sciences (EXAS 6.89%), a money-losing healthcare company that is focused on noninvasive cancer detection. The company's shares have had an awful year, and are down more than 75% due to slower-than-hoped-for sales of its noninvasive colon cancer detection test, Cologuard.

Several billionaire investors have greatly soured on the company's stock, including Israel Englander, the hedge fund manager of Millennium Management. This fund's recent filing showed that it sold more than 1.7 million shares of Exact Sciences stock.

On the other hand, Exact Sciences' falling share price has also attracted the attention of billionaire buyers, including David Shaw, the founder of D.E. Shaw & Co. Shaw's fund recently added more than 1.3 million shares of the Exact Sciences stock to its portfolio.

So what's going on at Exact Sciences that has left billionaire investors divided on the company's future? Here's the case for, and against, investing in Exact Sciences stock right now.

The bull case

Bulls point out that Cologuard was designed to fix a big problem with colon cancer detection, namely that very few patients actually follow current screening guidelines. Exact Sciences likes to point out that only three out of every 1,000 patients currently adhere to annual fecal blood testing guidelines over a 10-year period, which is a horrifically low rate.

Image source: Exact Sciences.

Exact Sciences Cologuard system has been shown to make huge strides in fixing this problem. Last quarter Cologuard's compliance rate was 69%, a massive improvement. Increasing compliance rates is important since patients stand a much better chance at beating colon cancer if the disease is detected early.

Still, Cologuard sales were slow out of the gate, which is a big reason why the company's stock has tanked. Management believes that Cologuard's lackluster start is caused by a lack of insurance coverage and low awareness among providers.

In order to address these issues, Exact Sciences has been laser-focused on getting more payers on board. The company recently convinced Anthem (ANTM -0.52%) to add Cologuard to its formulary, which is a huge win since Anthem already has nearly 40 million members under its umbrella. That number will also take a giant leap forward later this year if Anthem's pending acquisition of Cigna is closed. The odds look good of that happening since Anthem recently received regulatory clearance in 12 states and from 99% of both Cigna and Anthem's shareholders. 

With Anthem signed on it and Cigna joining the picture, Exact Sciences should have an easier time convincing other insurers to follow suit.

To help get the word out about Cologuard, management recently announced an ambitious marketing plan that includes a nationwide television campaign. Early testing showed a doubling of new physicians' prescriptions from TV ads, which hints that this strategy might actually work. 

Finally, bulls are banking on the company's ability to expand its technology beyond just colon cancer. Exact Sciences is currently exploring ways to use its technology to detect both pancreatic and lung cancer, and it is also working on a new version of Cologuard that should greatly enhance its margins.  

With better coverage on the way and awareness building, management believes that the company will process more than 240,000 Cologuard tests this year and produce $90 million to $100 million in revenue. That's more than double what it produced in 2015.

If the company can deliver on that target and continue to expand into other types of cancer, shares could dramatically rise from here.

The bear case 

Of course, while the prospects of amazing growth and margin expansion sound great, the company's bears have plenty of points to make as well.

For one, Cologuard is primarily targeted at seniors, which means that Exact Sciences' pricing will forever hinge on Medicare's reimbursement policies. Given that general healthcare inflation has been out of control for years, policymakers eventually may lean on companies like Exact Sciences to drop prices over time. In that case, the company's long-term profitability may come into question.

Image source: Exact Sciences.

Another concern is that while compliance for using Cologuard is much better than traditional methods, it's still far from perfect. After all, a compliance rate of 69% means that almost one out of three patients are ordering the system and then not following through with the actual testing. That represents a cost to the company that is not turning into revenue, which is a huge drag on the company's margins. 

Finally, bears point out that the company is going to have to significantly increase its spending in order to fund its marketing plan, which is going to be very costly. While revenue is expected to jump to $90 million to $100 million this year, losses will balloon too. Wall Street is currently estimating that the company will lose about $2 in earnings per share this year, which translates into roughly $190 million. That's a sizable chunk of the company's $262 million cash hoard, and could hint that yet another round of dilution could be on the way.

Looking ahead

With billionaires divided about whether this company is a buy or a sell, the smart play might be to watch its results for another few quarters before deciding which way to lean. The other thing to keep in mind is that the intentions behind billionaires' buys and sells may be very different from yours, and following blindly in their footsteps is never a good idea.

My take: While I think that Cologuard is a fascinating product that offers a great option to patients and providers, I have some big concerns about the company's long-term profitability. For that reason I'm content to keep watching this story unfold from the sidelines. 

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Stocks Mentioned

Exact Sciences Corporation Stock Quote
Exact Sciences Corporation
$45.15 (6.89%) $2.91
Anthem, Inc. Stock Quote
Anthem, Inc.
$469.87 (-0.52%) $-2.47

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