In May, Andrew Left of Citron Research blasted Exact Sciences (EXAS +0.97%), calling the stock "a poster child for what goes wrong when Wall Street gets a hold of a healthcare concept with no discrimination for whether it's good or bad medicine." Citron Research assigned a short-term price target for Exact Sciences of $20 per share, nearly 40% below where the stock traded at the time.
Five months later, Exact Sciences stock is up 50%. So far in 2017, the market cap for the company has soared more than 260%. Left wasn't right at all -- at least not over the short term. Exact Sciences continues to prove him wrong, recently hitting an all-time high yet again. Can the stock go even higher? Probably so.
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The sky isn't falling
Not long after Citron Research's scathing report about Exact Sciences, I attempted to look at the company and its stock from a bearish perspective. Keep in mind that I've been a fan of Exact Sciences for a while. However, I wanted to play devil's advocate.
There were three major challenges I saw for Exact Sciences. The first was that the price could fall for the company's Cologuard DNA screening test. While the list price for Cologuard is $649, Exact Sciences reported in the first quarter that the average recognized revenue per test was $485. In the second quarter, the company stated that the average recognized revenue per test was $428.
That's a drop of nearly 12% from one quarter to the next. Sound the alarm? Not at all. Revenue jumped 19% in the second quarter from the first quarter, and Exact Sciences reported a 35% increase in completed Cologuard tests between the two quarters. In other words, the company more than made up for lower per-unit revenue with higher volume. That's a trade-off any business would make.
The second challenge I identified was that physicians might not prescribe Cologuard as much as hoped. Has this been a problem? The increased revenue in the second quarter pretty much answers that question. Exact Sciences also noted that 11,000 new providers ordered their first Cologuard tests in the second quarter.
Third on my list was the prospects of new blood-based DNA tests that could render Cologuard obsolete. It's been only a few months, but there hasn't been any earth-shattering development that has Exact Sciences quaking in its boots. Also, the company is researching its own liquid biopsies for detecting cancer at early stages.
My conclusion in June is still what I see now: The sky isn't falling for Exact Sciences. Actually, the skies look quite blue.
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Tremendous opportunities ahead
In July, Exact Sciences upped its full-year 2017 outlook for revenue and Cologuard test volume. The company thinks it has a multibillion-dollar market potential ahead of it. Those expectations don't seem far-fetched to me.
Colon cancer is the second deadliest cancer, trailing only lung cancer in annual deaths. The good news is that it's very preventable through early screening. The bad news is that only 62% of Americans who should get screened do so -- and that percentage hasn't grown much in recent years.
Why don't more people get tested early for colon cancer? Because colonoscopies are probably less popular than the IRS on April 15. The preparation for undergoing a colonoscopy is yucky, people have to take off from work to have a colonoscopy performed, and they must be sedated.
Cologuard addresses all these issues. Your doctor prescribes the test for you, Exact Sciences ships a kit to your home, and all you have to do is collect a stool sample and send it back in the kit. The company does its DNA testing and provides the results to your doctor. No discomforting preparation, no invasive procedure, no time off work, and no undergoing anesthesia.
It isn't unrealistic, in my view, that Exact Sciences could continue to grow Cologuard revenue by leaps and bounds. More providers are opting to prescribe the test to patients reluctant to undergo colonoscopies, and more payers are covering Cologuard. Exact Sciences has also ramped up its marketing efforts to educate patients about the benefits of the DNA test.
On top of all this is the company's aforementioned efforts to develop liquid biopsies for early cancer detection. Exact Sciences has a top-notch partner with the Mayo Clinic. It's using cancer DNA markers that should be less expensive than next-generation sequencing. The liquid-biopsy market is projected to reach at least $13 billion by 2030. If Exact Sciences is successful, it could capture a nice chunk of that market.
Flying high, but perhaps a bumpy flight
I think Exact Sciences can go higher despite its big run-up this year. The potential for Cologuard and its pipeline is certainly there.
Exact Sciences' market cap now stands at $5.8 billion. There's a whole lot of expected growth baked into the stock price. The company believes it can capture 30% of the colorectal-screening market, which would represent annual revenue of around $4 billion. If it gets even close to that level, Exact Sciences' valuation could realistically double or more over time.
However, any bump along the way could cause the stock to fall quite a bit. I like Exact Sciences, but I recommend caution with exposing too much of a portfolio to what could be a volatile stock in the future.
