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Better Buy: Exact Sciences Corporation vs. Quest Diagnostics

By Cory Renauer – Jul 13, 2016 at 12:05PM

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Does recent news for Exact Sciences make it a better buy now than this diagnostic industry heavyweight?

Image source: Getty Images.

Vague guidance for colorectal cancer screening recently boosted shares of Exact Sciences (EXAS -1.75%), which gained about 78% over the past month. The past few weeks have been less eventful for Quest Diagnostics (DGX -1.02%), and over the past year the stock has gained just 13%. Exact Sciences stock has fallen about 54.5% over the same period, despite the recent bump.

If the new guidelines help Exact Sciences reach its estimated patient population, investors who bought in a year ago could recoup their losses or even realize a gain. Quest, on the other hand, is so large that it isn't going anywhere fast, though the odds of losing more than half your investment over the next year with this market leader are long.

With these differences in mind, let's look closer at the pair to see which stock is the better buy.

Recent performance

Although it's one of the more preventable malignancies, colorectal cancer often goes undetected in its easily treatable stage. That's part of the reason why each year, it claims the lives of 50,000 Americans and costs them about $14 billion to treat. Increased screening could significantly reduce that staggering loss of money and human life.

Nearly two years ago, Exact Sciences earned FDA approval to market the first self-administered, stool-based DNA (sDNA) colorectal cancer screening test, Cologuard. Assuming a 30% adoption rate among the millions of patients recommended for screening every three years, Exact Sciences estimates its annual U.S. sales potential at more than $4 billion.

Reality hasn't met such lofty expectations, and Exact Sciences reported revenue of just $39.4 million last year after completing only 104,000 Cologuard tests. In the first quarter of this year, the company recorded $14.8 million in lab service revenue, but after subtracting out the cost of sales, the reported gross profit of just $5.8 million wasn't encouraging. Heavy operating expenses leading to a $47.5 million loss in the first quarter were downright disturbing.

Quest Diagnostics, on the other hand, hasn't posted an annual loss in over 15 years, although top-line growth over the past several has been elusive, and its bottom line has been erratic.

DGX Revenue (TTM) Chart

DGX Revenue (TTM) data by YCharts

In a nutshell, Quest Diagnostics tried entering markets it probably shouldn't have. In 2011 it bought genetic sequencing company Celera Genomics for $344 million, net of cash on Celera's books. In 2013, Quest made a huge error when it sold Celera's rights to mid- to high-single-digit royalties of all sales of Imbruvica -- a drug with peak annual sales potential of more than $5 billion -- for a pre-tax gain of just $474 million. 

The good news is that Quest is taking steps to focus on the spaces it dominates. Its diagnostic information services segment is now responsible for more than 90% of its net revenue.

Looking forward

Quest has been making some smart moves, such as cutting less profitable operations -- like Celera's genetic sequencing business, which couldn't compete with Illumina -- and contributing its clinical-trials business to a joint venture, Q Squared Solutions, formed with Quintiles. If the venture succeeds at using data science to inform clinical trial decisions for drugmakers, then Quest's 40% ownership interest in the venture could be a huge winner.

Image source: Quest Diagnostics.

More importantly, Quest isn't continually diverting resources to the risky venture. Instead, it's leveraging its size in the diagnostic information services space to boost profitability through economies of scale. This might not lead to exciting gains, but it could provide steady, predictable growth for decades.

Quest has raised its dividend five times since it began paying one in 2012, and it only used about 57% of its trailing-12-month profits to make payments. With a yield of 2% at recent prices, it could provide a steadily growing source of income well into your retirement years.

Exact Sciences is almost the polar opposite. Its operations are currently so small that it's bleeding money. It could, however, be on the cusp of terrific growth. The hiring of a former diagnostic research analyst recently spurred the stock higher on hopes the company might be pursuing some form of collaboration.

Cologuard kit image source: Exact Sciences.

The U.S. Preventative Services Task Force (USPSTF) recently updated its guidelines for colorectal cancer screening, stating that Cologuard's method leads to a higher number of false positive results -- and, in turn, a higher rate of colonoscopy-related adverse events -- than fecal blood testing. In its recommendation to the American Medical Association, USPSTF basically threw its hands up, saying: "Multiple screening strategies are available to choose from, with different levels of evidence to support their effectiveness, as well as unique advantages and limitations, although there are no empirical data to demonstrate that any of the reviewed strategies provide a greater net benefit."

It only took the USPSTF a few years to reach this brilliant conclusion, but Exact Sciences doesn't have nearly that much time to ramp up its operations. It finished March with about $262.6 million in cash and securities, but it also lost $47.4 million in the first quarter alone.

If exact Sciences reaches its projected patient population, the stock could soar. But if it can't ramp up sales and start turning a profit in the quarters ahead, investors could face further losses. This makes it the company I want to watch, but Quest is the business I'd prefer to own -- and the better buy.

Cory Renauer has no position in any stocks mentioned. You can follow Cory on Twitter @TMFang4apples or connect with him on LinkedIn for more healthcare industry insight. The Motley Fool owns shares of and recommends Illumina. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Quest Diagnostics Stock Quote
Quest Diagnostics
$148.92 (-1.02%) $-1.54
Exact Sciences Stock Quote
Exact Sciences
$45.55 (-1.75%) $0.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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