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Why Exact Sciences Dropped 13.2% in February

By Anne Burdakin - Mar 3, 2020 at 4:05PM

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This cancer diagnostics company has produced one breakthrough product and is developing more.

What happened

Shares of cancer diagnostics company Exact Sciences (EXAS 4.42%) dropped 13.3% in January, according to the latest report from S&P Global Market Intelligence. That move erased 2019 gains and reduced the stock price to new 52-week lows.

The company produces Cologuard, the non-invasive screen for colon cancer, as well as other cancer diagnostic and monitoring products.

So what

Such a precipitous drop in a stock recommended as a buy by 15 out of 15 Wall Street analysts is pretty attention-getting and demands analysis. Was it caused by a fundamental issue or an unfortunate confluence of events?

Doctor and patient conferring in a serious way.

Image source: Getty Images.

Exact Sciences reported fourth-quarter 2019 earnings on February 11, which looked pretty good at first glance but not so much on closer inspection. Total revenue was $295.6 million, slightly more than double the $124.9 million reported in the fourth quarter of 2018.

A one-time income tax benefit of $184.6 million contributed significantly to the reported profit of $77.9 million for the quarter. Without the tax benefit, the picture changes dramatically, with the profit shifting to a loss before tax of $106.7 million, double the previous year's loss for the same quarter.

The stock price began to slide after reporting earnings.

Then, on Feb. 24, Exact Sciences shares fell some more after announcing an upsized $1 billion public offering of 0.375% convertible senior notes maturing in March 2028. The company is expecting to use $150 million of the net proceeds to repurchase some of its 1% convertible senior notes due in 2025, with the remaining proceeds funding general corporate purposes.

Some investors voiced concerns that the company has never made money, and relying on more debt for operations is ill-advised. 

These events, combined with coronavirus fears creating a market downdraft, resulted in Exact Sciences shares dropping 13.2% in February, and they're now trading at 52-week lows.

Now what

The concerns over burgeoning losses are understandable, but on the other side of the ledger are the positives to Exact Sciences of having acquired Genomic Health in November 2019. The deal diversified Exact Sciences' cancer diagnostic products to include breast and prostate cancer and added Genomic Health's extensive oncology sales force.

In a statement, the companies said the combined company is expected to generate revenue of approximately $1.6 billion and gross profit of approximately $1.2 billion in 2020.

Exact Sciences still has much to prove and has assembled the tools to succeed, and investors should keep it on their watch lists. The company has a lot of potential, but investors should monitor execution before investing.

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