Shares of cancer diagnostics leader Exact Sciences (NASDAQ:EXAS) rose higher last week after delivering mixed results on its first-quarter earnings report on May 6. Investors liked what they saw even with the slight impact on sales from COVID-19. Revenue improved by 115% to $348 million year over year and the company posted a net loss of $105.7 million, or $0.71 per share. 

The stock is down more than 9% year to date, underperforming both the Virtus LifeSci Biotech Products ETF and SPDR S&P Biotech ETF. The company is one of the many health stocks hit hard by the market plunge in March. Down 16% since its February high, can investors expect this stock to climb back up? 


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Weaker demand in Q2

First-quarter results had minimal impact from the pandemic, but the second quarter may prove more difficult. Cologuard, its non-invasive colon cancer screening test for adults over age 45, contributed to the $220 million in screening revenue for the first quarter. Exact Sciences received orders from 9,000 new healthcare providers, but testing volume declined toward the end of Q1 due to stay-at-home orders and reduced wellness visits. Management noted that test orders were down double digits with a decline of 63% in the first 20 days of April. CFO Jeff Elliott said the last 10 days of April showed stabilization with 47% year over year declines and positive trends heading into May. 

Its precision oncology portfolio saw a similar trend, bringing in a record $128 million of revenue in the quarter – an increase of 18% from 2019. Oncotype DX breast cancer test was the key area of growth in all major products and areas. Management expects screening mammograms to decline because of the pandemic, leading to lower orders and test volumes for Oncotype DX.

Its international business experienced weaker demand but there was some positive growth in domestic areas of prostate cancer in the first quarter. Management expects to see prostate cancer products decline in the second quarter, with April showing a 26% year over year decline. With that said, investors should be prepared to see a decline in top-line growth in the second quarter, though it should be a short-term issue.

Revitalize and pivot

Investors were excited to hear that the company revised its priorities for 2020. The company's original plan emphasized growing its core business (Cologuard and Oncotype DX), enhancing the customer experience, and laying the groundwork for future cancer tests. But its new priorities focus on getting people tested, supporting its customers, and strengthening its finances. Exact Sciences remains operational, with labs in Madison, Redwood City, and Phoenix delivering critical solutions to patients during challenging times. 

It's committed to improving its technology platform and expanding its reach to healthcare providers and patients by devoting resources to patient education and by pivoting its strategy to telehealth. Cologuard is ideally positioned for the telehealth revolution. Its home convenience allows patients to be screened without visiting their physician. To increase awareness, the company is advertising on social media, digital media, and TV. Exact Sciences hopes these investments in telehealth and advertising will change the way people interact with their healthcare providers and position the company to stay at the forefront of this dynamic situation. 

Long-term opportunities

Exact Sciences has many opportunities for long-term growth. Cologuard is an ideal solution to alleviate the current backlog of patients requiring treatment for colon cancer. Management believes that the use of Cologuard will help healthcare providers prioritize procedures and triage those patients with higher risk.

Oncotype DX may provide another growth opportunity in the area of breast and prostate cancer. COVID-19 poses a higher risk to patients who require invasive procedures such as surgery. Oncotype DX may be a valuable tool to identify alternative treatments to reduce the number of invasive procedures.  

In March, Exact Sciences completed its acquisitions of Paradigm Diagnostics and Viomics to expand on its research and development capabilities and bolster the precision oncology portfolio. The company expects these assets to provide a foundation for more specialized therapy selection for patients across the cancer spectrum. The current paradigm diagnostic tool looks at specific biomarkers associated with 90 FDA-approved therapies and 24 different combinations to determine the best treatment for late-stage cancer patients. 

CEO Kevin Conroy said Exact Sciences "plans to expand the launch of the tissue-based Paradigm test by adding it to the Precision Oncology team's product portfolio later this year, followed by a full sales force rollout next year. In the future, we also plan to make an enhanced tissue-based and a blood-based version of the Paradigm test available to oncologists through our broader Precision Oncology team." Once launched, these opportunities should create new top-line growth, driving the stock higher.  

Looking forward

With $1.2 billion including proceeds from a convertible debt offering, the company has plenty of cash to operate. To minimize disruption from the pandemic, the company has identified cost-cutting measures to provide savings of $400 million from its original 2020 budget. 

In the most recent quarter, Exact Sciences' total debt grew to $1.7 billion, its debt-to-equity ratio (D/E) increased to 65.7%; a D/E ratio under 30% is ideal, and a higher value suggests that it is using its debt to cover its obligations. This is no cause for alarm for investors. The company's convertible debt offering and recent acquisitions are likely the reason for the increase, but in the long run, these moves will help it pay down debt and make more acquisitions.

Exact Sciences may be undervalued compared to its peers based on its price-to-sales ratio (P/S). It's P/S ratio is 10.6; this ratio is lower than peers including Sarepta Therapeutics (23.5) and Guardant Health (33.3), suggesting there's more room to run. However, its P/S ratio is higher than the overall healthcare sector (5.63), indicating overvaluation in the broader industry.

Another tool to consider is price-to-book (P/B) ratio; it compares a company's current market price to its book value. Exact Sciences' P/B ratio is 4.83, whereas the sector is 3.72. Compared to its peers Sarepta Therapeutics (8.7) and Guardant Health (10.6), the lower P/B ratio implies that it is undervalued to its peers and slightly overvalued to the sector. The stock is trading near $84, analysts have an average price target of $100.47, with a range of $90 to $127, suggesting that there's some room to run.

The impact of the second quarter, its strategy pivot, and financials indicate Exact Sciences' stock may not be a buy right away. Investors should stay tuned to updates and consider purchasing shares of Exact Sciences at its next dip, and holding shares for the long run.

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.