Please ensure Javascript is enabled for purposes of website accessibility

Investors Should Revisit Exact Sciences Now

By David Haen - Updated Mar 3, 2020 at 9:13AM

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

It's loaded up with a new round of financing and its stock price is hovering at recent lows, meaning investors may want to grab shares of this growing cancer diagnostics company.

The stock of Exact Sciences (EXAS 3.58%) has tumbled in the past few days. However, there is more going on here than the general market sell-off on fears about the COVID-19 coronavirus outbreak.

With Monday's severe market drop in the background, Exact Sciences forged ahead with a plan to raise more capital by offering debt. An $850 million offering of senior convertible notes was quickly increased to $1 billion. Additionally, the underwriters have an option to purchase up to another $150 million in principal from Exact over the next 30 days.

Let's dig in further to see what this really means.

A folded dollar bill with a series of negative numbers written on it

Image source: Getty Images.

Investors are eagerly buying Exact's debt

Debt investors clamored to get a piece of Exact's offering. The notes, due in 2028, carry an interest rate of 0.375%. That marks an exceptionally low cost of capital for an R&D-driven entity such as Exact. So, even with a very low interest rate, investors wanted a piece of the offering.

How do we know this? Six hours after launching the offering, the company and its underwriters increased the offering amount by $150 million and finalized the deal. Weak demand may have meant it would have taken the company one or a few days, rather than hours, to sell the debt.

The institutional investors buying the notes must be confident in Exact's prospects. We know this because their purchases indicate assurance that the company can service the debt, meaning its business will generate enough income to pay the interest. The notes pay interest semi-annually on March 1 and Sept. 1, beginning Sept. 1 of this year. Exact previously provided guidance that 2020 revenue would be in the range of $1.61 billion to $1.65 billion.

The investors who shelled out $1 billion collectively must also be confident that Exact's stock will appreciate enough to trigger the conversion feature. The notes convert into common stock at a ratio of 8.2076 shares of common stock per $1,000 of principal. This equated to an initial conversion price of approximately $121.84. The stock traded at $95.56 when the financing was announced.

Any time after March 31, 2020, and before Sept. 1, 2027, the debt holders may elect to convert into common stock under certain conditions. In one scenario, the stock needs to trade at 130% of the conversion price or higher for 20 days within a 30-day window. The conversion can also be triggered based on certain corporate events, including a fundamental change in the business such as a sale of the company.

Alternatively, investors can trigger a conversion if the price of the debt falls below a certain threshold for five consecutive trading days. The threshold is 98% of the result when the stock price and conversion rate are multiplied. For example, let's say the stock is $95.56 (the price when the notes were priced). Multiply $95.56 times the conversion rate of 8.2067 to get $784.23. Taking 98% of that results in a price of $768.55. Keep in mind, the notes are sold with a value of $1,000, so this is quite a drop in price.

What should investors do?

Take advantage of this buying opportunity. Exact's stock is roughly $20 per share cheaper than last week, when it traded at $102 per share. Who doesn't want a 20% discount? The stock dipped below $80 just before Thanksgiving last year. Risk-tolerant investors who capitalized on those prices could have made a 25% return in three months. Those who continue to own the stock will likely see the stock return to prior levels above $100 per share. Five years from now, long-term biotech investors will look back and see what a gift it was to be able to snap up the stock below $80 or in the low $80s.

Exact completed a $2.8 billion acquisition of Genomic Health last November.  This year, we'll see the fruits of that acquisition as well as growth from Exact's own pipeline of products. Importantly, management expects to gain marketing approval this year for their blood-based diagnostic test for hepatocellular carcinoma, the most common form of liver cancer. Thanks to its potential effect on treatment, it earned the FDA's "breakthrough device" designation, which allows for speedier development.

For these reasons and because the strong cash position should weather any hiccups, the stock looks attractive to me at these prices.

David Haen owns shares of Exact Sciences. The Motley Fool recommends Exact Sciences. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Exact Sciences Corporation Stock Quote
Exact Sciences Corporation
EXAS
$44.24 (3.58%) $1.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

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