Shares of Exact Sciences (EXAS 2.96%), a molecular diagnostics company focused on the development of diagnostic tools to detect and prevent cancer, lost 16% of their value in October, according to data from S&P Global Market Intelligence. The reason for the drop can be traced to the company's third-quarter earnings results, which were released on Oct. 26.
For the quarter, Exact Sciences wound up generating $28.1 million from its Cologuard colorectal cancer diagnostic test. According to the company, this was a 123% increase in year-over-year revenue, and the 68,000 Cologuard tests performed was roughly a double from the year-ago period. Some 50,000 physicians have now ordered the test.
With regard to the bottom line, Exact Sciences recorded a smaller net loss of $37.8 million, or $0.36 per share, compared with the $42.9 million, or $0.45 per share, it lost in Q3 2015. By comparison, Wall Street was looking for Exact Sciences to lose $0.42 per share on revenue of just $25.3 million. In this respect, Exact Sciences trounced the consensus.
However, investors were none too pleased with the outlook the company provided. With an expectation of 240,000 Cologuard tests being completed in 2016, management now expects full-year 2016 revenues between $93 million and 95 million. Previously, the company had guided to between $90 million and $100 million, so this tightened range is a tad lower at the midpoint than its previous expectations. This solitary sentence in Exact Sciences' press release is essentially responsible for the entire drop in Exact Sciences' stock in October.
On one hand, some people can argue that the swift move lower in Exact Sciences' stock was unjustified, given the minimal move in revenue at the midpoint. Having expanded its Cologuard test to an expected 240,000 in 2016 means it's ramped up its primary facility to about a quarter of its peak capacity. Furthermore, it's successfully been approved for reimbursement by Medicare, which is critical, since seniors are a major target audience of its non-invasive colon cancer screening device.
Also, it could be rightly opined that Exact Sciences; volatility is the direct result of high levels of short interest. Nearly a quarter of the company's float is held by short-sellers who are betting that Exact Sciences will fall. This type of pessimism can lead to a bumpy ride at times.
On the flipside, there's a genuine reason for skeptics to be concerned: Exact Sciences is unprofitable and may stay so for years to come. Thankfully, the company ended Q3 with a healthy $337.8 million in cash, cash equivalents, and marketable securities.
Considering that Exact Sciences has rallied so substantially from its 52-week low, I'm of the opinion that it's best observed from the sidelines. Until we see meaningful reductions in its net operating losses and/or substantive pricing power on its diagnostic devices, an investment seems far too risky.