What happened

Despite high-profile criticism of its market valuation from short-sellers last month, Exact Sciences' (NASDAQ:EXAS) share price catapulted 16% higher in May, according to S&P Global Market Intelligence.

So what

Exact Sciences has long been a target of short-sellers who were convinced that sales of its colon cancer screening test, Cologuard, wouldn't live up to the hype. So far, those bearish bets haven't paid off, but that didn't stop Citron Research from issuing a scathing report in May questioning Exact Sciences valuation and Cologuard's market opportunity.

A Cologuard testing kit on display.


Initially, shares in Exact Sciences declined after the report's release, but by the end of the month, when UnitedHealth Group (NYSE:UNH) agreed to cover Cologuard, they were significantly higher.

UnitedHealth Group is the nation's largest health insurer, so securing reimbursement from it was a big win for Exact Sciences. That news followed a decision by No. 3 health insurer Aetna in March to cover Cologuard. 

Now what

Regardless of whether or not you believe Exact Sciences' stock price is too high or too low, there's undeniably a big need for new colon cancer screening options. Guidelines recommend all Americans aged 50 to 74 get screened regularly; however, a large fraction of the 80 million or so people in that age range aren't doing so.

Colon cancer is much more effectively treated when caught early, but delays in diagnosis because of inadequate screening make it the second-most-deadly cancer in the United States.

A colonoscopy remains the gold standard in screening, but the procedure's cost and invasiveness have been hurdles for patients. Cologuard, which screens a stool sample for the presence of cancerous and precancerous cells, appears to be overcoming those hurdles and improving screening rates.

Since its launch, over 450,000 patients have been tested for colon cancer using Cologuard, and 45% of tests were conducted on people who had previously been inadequately screened. This year, Exact Sciences expects to complete 470,000 tests, up from 244,000 tests in 2016. Based on that prediction, it forecasts sales will grow to $195 million this year from $99 million last year.

Locking up coverage from UnitedHealth should go a long way toward helping Exact Sciences hit its numbers. Industry watchers believe that following UnitedHealth's decision, coverage is in place for about 95% of Cologuard's addressable market. UnitedHealth alone adds 30 million covered lives.

However, even if Exact Sciences hits its sales target, it's unlikely to turn a profit this year. The company's still pouring a lot of money into marketing, and as a result, its operating expenses are running at nearly a $270 million annual pace. Ultimately, the answer to the question of whether its shares are undervalued, overvalued, or fairly valued will depend on if, when, and how much net income this company can generate.