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Is Exact Sciences Stock a Buy?

By David Haen - Nov 19, 2019 at 11:28AM

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Exact Sciences just completed its multibillion-dollar acquisition of Genomic Health, setting the stage for the company’s future.

This month, Exact Sciences ( EXAS 3.48% ) finalized its purchase of Genomic Health, creating a formidable player in the realm of cancer diagnostics. Exact shelled out approximately $1.06 billion in cash and issued roughly 17.4 million shares to Genomic Health shareholders.

Currently valued at just over $12 billion, Exact's market cap looks cheap compared to this summer, when it exceeded $15 billion. And the recent valuation includes the newly issued shares from the acquisition. Before and right after the acquisition news at the end of July, Exact traded at around $117 per share. Buying today at a share price around $82 with the upside of the combined company seems like a steal.

Doctor holding graphical representation of a pill.

Source: Getty Images.

What can investors expect?

Exact projects approximately $1.6 billion in revenue in 2020 with a pro forma gross profit of $1.2 billion. That's an 80% gross margin. For the three and nine months ended Sept. 30, Genomic Health attained revenues of $114.4 million and $337.3 million, respectively. Those revenues will be Exact's going forward.

Exact expects to see $25 million in cost savings over the next three years. This fairly low number showcases how the two companies complement rather than overlap with each other. The savings will primarily come from reduced public company expenses and optimized purchasing.

Exact's infrastructure now spans more than 90 countries, with commercial outreach extending beyond oncology to primary care, gastroenterology, urology, and OB/GYNs. This global reach positions Exact as a leading marketer for future tests, whether discovered in-house or developed in partnership with other companies.

The company's products Cologuard and Oncotype DX together seek to gain traction in what Exact claims is a $20 billion market opportunity. Keep in mind, the Oncotype DX is not just for diagnosing cancer. The test results can help oncologists select a specific course of treatment based on a tumor's genomic profile.

In September, the U.S. Food and Drug Administration (FDA) expanded the approved Cologuard patient population to include average-risk individuals ages 45 and older, whereas ages 50 and above had been the prior limit. That translates into 19 million more people who could receive the Cologuard test.

On its third-quarter conference call, Chairman and CEO Kevin Conroy spelled out its goal for Cologuard to "capture at least 40% of the U.S. colorectal screening market," a significant increase from the current 5% penetration.

Don't forget that Pfizer ( PFE -0.62% ), in partnership with Exact, continues to pound the pavement to bring awareness to physicians about colorectal cancer and Cologuard. What's motivating Pfizer? More diagnosed patients mean a greater number of potential patients for its colorectal cancer treatments.

Development of its next-generation colorectal test, Cologuard 2.0, is underway. It aims to achieve greater specificity by using new markers and a lower cost of goods due to different lab processes.

A breakthrough liver cancer test to launch next year

At the American Association for the Study of Liver Disease annual meeting, aka "the Liver Meeting," Exact presented data on its blood-based test for hepatocellular carcinoma (HCC), the most common form of primary liver cancer. The results garnered a Best of the Liver Meeting distinction from the conference's scientific committee.

The FDA designated the HCC test a Breakthrough Device. This distinction expedites development and the review process by the FDA.

Using six markers in the blood, the liver cancer test showed 80% sensitivity at 90% specificity. (Sensitivity measures the test's ability to correctly identify those with the disease and specificity measures how accurately the test detects those who do not have the disease.) For early-stage HCC, the results demonstrated 71% sensitivity at 90% specificity. For comparison, the currently available test, called the alpha-fetoprotein (AFP) test, only has 45% sensitivity at 90% specificity for early-stage HCC.

Current guidelines call for using both ultrasound and AFP for detecting HCC. When they're used together, early-stage detection increases to 63% sensitivity. However, Exact's blood test at 71% sensitivity surpasses that. Further, the individual does not have to be subjected to two procedures. A more accurate and simpler approach should be well received by physicians and patients alike. Exact plans for the HCC test to be commercially available in the second half of 2020.

In summary, Exact has all the makings of a solid investment. First, next year will see the first fruits of the Genomic Health acquisition. Second, growing awareness and usage of both Cologuard and Oncotype DX will potentially generate up to $1.6 billion in sales. Third, the Breakthrough Device designated diagnostic for HCC, the fourth-deadliest form of cancer, will hit the market in the second half of 2020. Lastly, future products including Cologuard 2.0 provide for future revenue streams.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Exact Sciences Corporation Stock Quote
Exact Sciences Corporation
$86.26 (3.48%) $2.90
Pfizer Inc. Stock Quote
Pfizer Inc.
$51.40 (-0.62%) $0.32

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