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Exact Sciences Misses Revenue Estimates by $1.8 Million -- But It Cost the Company a Lot More

By Keith Speights - Aug 2, 2018 at 6:31AM

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The high-flying maker of Cologuard DNA tests fails to deliver in Q2 on sky-high revenue growth expectations.

Just a couple of months ago, Exact Sciences (EXAS 7.96%) stock was soaring. The American Cancer Society (ACS) changed its guidelines to recommend the minimum age for colorectal cancer screening be lowered from 50 to 45. That was very good news, since Exact Sciences' Cologuard DNA test is one of the colorectal cancer screening methods that the ACS mentions in its guidelines. 

But the ACS change hasn't affected Exact Sciences' financial performance yet. And expectations for growth remain high.

Exact Sciences felt the pain of failing to meet those expectations when the company reported its second-quarter results after the market closed on Wednesday. Shares plunged more than 22% in after-hours trading after Exact Sciences' Q2 revenue came in lower than analysts projected. Here's what you need to know about the company's Q2 results. 

Cologuard packaging and instructions

Image source: Exact Sciences.

By the numbers

Exact Sciences reported Q2 revenue of $102.9 million. That's a 78% year-over-year increase. Impressive, right? Yes, but Wall Street expected the company to generate revenue of $104.7 million. This $1.8 million miss caused Exact Sciences to lose close to $1.6 billion in market cap -- at least temporarily.

The company's bottom-line performance beat analysts' estimates, though. Exact Sciences announced a net loss in Q2 of $36.4 million, or $0.30 per share. That was worse than the net loss of $30.8 million, or $0.27 per share, in the prior-year period. However, the consensus Wall Street earnings estimate was for a net loss of $0.33 per share.

Exact Sciences' cash utilization in the second quarter was $45.3 million. That reflects an increase from cash utilization of $43.9 million in the same period in 2017.

The company ended the second quarter with cash, cash equivalents, and marketable securities totaling $1.2 billion. At the end of the first quarter, Exact Sciences had a cash stockpile of $1 billion.

Behind the numbers

Let's first look at how Exact Sciences' revenue grew by a significant amount. The company reported Cologuard test volume of 215,000 -- up 59% year over year. Revenue was also boosted by a 12% increase in the average recognized revenue per test.

But why was second-quarter revenue lower than expected? Exact Sciences' management stated on the Q2 earnings conference call that it was tracking between the middle and the upper end of its expected range of Cologuard tests through June, but things went downhill after then. The issue appears to be that more patients didn't return the tests, possibly because of concerns that they might be stuck with a big bill that their insurers wouldn't cover. 

The company's net loss worsened from the prior-year period despite a surge in revenue, for a simple reason: Exact Sciences' spending growth outpaced its gross margin growth. The company's biggest percentage spending increase was on general and administrative costs. However, Exact Sciences also boosted spending significantly on research and development as well as sales and marketing. In addition, the company's interest expense increased greatly from the prior-year period.

This higher interest expense relates to the reason Exact Sciences' cash position improved in the second quarter. The company conducted an offering of convertible senior notes in June, generating gross proceeds of $202.4 million.

Looking ahead

Despite the revenue miss, Exact Sciences still expects full-year 2018 revenue will be between $420 million and $430 million. Before the second quarter, Wall Street projected that the company's full-year revenue would be $435.8 million. 

Exact Sciences is adding more sales representatives over the next few months. The company also plans to focus sales reps on a more concentrated number of providers that are most likely to prescribe Cologuard tests. These reps will hammer home the message that insurers are reimbursing for Cologuard.

In my view, the long-term prospects for Exact Sciences continue to look good. The need for early colorectal cancer screening is as great as ever, and Cologuard is an effective alternative for patients who don't want the inconvenience associated with undergoing a colonoscopy. If insurers adopt the ACS recommendation to lower the minimum age for colorectal screening, Exact Sciences' future should be even brighter.

However, I cautioned in April that investors shouldn't get greedy with Exact Science stock. The stock trades at a sky-high valuation because of sky-high growth expectations. As I stated a few months ago, there's intense pressure on Exact Sciences to deliver. We're now seeing what happens when the company doesn't deliver on what Wall Street expects.

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