Please ensure Javascript is enabled for purposes of website accessibility

The Mysterious Reason Behind EXACT Sciences Corporation's 14% Plunge

By Sean Williams – Updated Nov 21, 2016 at 4:19PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Insider sales send shareholders scurrying, but a deeper dive of the SEC filings suggests this is a non-event.

Image source: Getty Images.

What happened

Shares of EXACT Sciences (EXAS -1.27%), a molecular-diagnostics company that developed Cologuard, a non-invasive stool-based DNA test designed for the early detection of colorectal cancer, plunged as much as 14% during Wednesday's trading session after Securities and Exchange Commission filings showed that three top insiders sold some of their stock.

So what

According to Form 4 filings with the SEC, CEO Kevin Conroy disposed of 600,000 shares of EXACT Sciences stock, COO Maneesh Arora sold 562,932 shares, and chief science officer Graham Lidgard sold 311,112 shares. Combined, this works out to 1,474,044 shares, or $25.7 million worth of stock based on Tuesday's closing price. Insiders are often looked to for encouragement by shareholders, so if they see management selling stock, they sometimes take that as their cue to head for the exit.

However, if you really dig into the recent SEC filings, you'll also note that Conroy, Arora, and Lidgard purchased the exact same amount of shares they sold at a price that was far below market. EXACT Sciences has a habit of awarding its management and employees restricted stock units within the company, as well as paying its management team in options.

For instance, of Conroy's $5.66 million in total compensation last year, just $852,725 was based on cash compensation. The remainder came from option and stock awards. The simple fact that the recently bought number of shares exactly matches what all three insiders sold suggests that these sales could be something as simple as executing their options contracts before they expire.

In other words, today's insider selling is probably a non-event, and short-term traders are getting worked up over nothing.

Image source: Exact Sciences. 

Now what

What investors should really be focused on is how well or poorly the company's lead product, Cologuard, is performing. To that end, the results remain somewhat mixed.

For the third quarter, the company announced the completion of 68,000 Cologuard tests, which was a 100% increase from the prior-year quarter, and it remains on track to perform 240,000 tests in 2016. Its main facility has the capacity to handle about 1 million tests annually.

EXACT Sciences is also benefiting from its coverage under Medicare because its target audience is typically older. In sum, Cologuard usage is growing nicely, and its compliance rate of 67% is still notably higher than predecessor non-invasive colorectal cancer detection tests.

On the other hand, EXACT Sciences is going to need Cologuard tests to grow a lot more before it can pull itself toward profitability. Reinvestment in potentially new diagnostic tests coupled with the rollout and marketing of Cologuard likely means losses will continue for EXACT Sciences through the remainder of the decade. Ongoing losses could test the resolve of long-term shareholders.

While I remain very intrigued by the product and its potential to improve colorectal cancer screening rates, and thus lower deaths caused by colorectal cancer, I'll need to see a substantial ebbing in its annual net loss before I'd even consider EXACT Sciences as a worthy investment.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. 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

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.