Cancer diagnostic leader Exact Sciences (EXAS 0.18%) isn't having the best of years, and not just because of the COVID-19 pandemic. In February, the company announced it was selling approximately $1 billion in senior convertible notes to raise money. These notes will carry an annual interest rate of 0.3750% and will mature in 2028.
Investors were not thrilled at the prospect of Exact Sciences taking on more debt, and this round of fundraising probably contributed to the company's stock dropping by more than 40% in the first quarter. Still, Exact Sciences has since rebounded along with the broader market. As of this writing, the company's shares are down 6% year to date, while the S&P 500's loss stands at 12.2% over the same period.
It's difficult to assess how Exact Sciences will perform within the next few months. We have yet to see the full economic impact of the pandemic, and the company's stock could go either way. Looking further down the road, though, Exact Sciences boasts several exciting opportunities that could help its stock perform well for many years to come. But could this healthcare company turn ordinary investors into millionaires?
The target of Exact Sciences' diagnostics tests. Image source: Getty Images.
What's going on with Exact Sciences?
The company is best known for Cologuard, a noninvasive test for the early detection of colon cancer (the second deadliest form of the disease in the U.S., after lung cancer). Detecting any cancer early is often the key to finding the best treatment options and saving the lives of patients. Largely thanks to Cologuard, Exact Sciences continues to post strong revenue growth. During the first quarter, the company recorded revenue of $347.8 million, representing a 114.6% year-over-year increase.
The company's screening revenue, the bulk of which it generates from Cologuard, was $219.5 million and jumped by 35% year over year. During the quarter, about 9,000 new healthcare providers ordered Cologuard tests, down from 14,000 new healthcare providers who ordered the tests during the first quarter 2019.
This decline can be attributed to the ongoing pandemic. According to CFO Jeff Elliot, there was a 63% year-over-year decline in Cologuard test orders during the first 20 days of April as a result of the public health crisis. Elliot said things have stabilized since then, but the damage was already done.
Turning to Exact Sciences' precision oncology business, this segment generated $128.4 million in revenue, which, according to the company, was a record, driven by "growth across all major products and geographies."
But Exact Sciences is currently not profitable. During the first quarter, the company reported a net loss per share of $0.71, compared with a loss of $0.66 during the prior-year quarter. With that said, Exact Sciences sees a major growth opportunity within the market for colon cancer screenings.
As the company explains in its most recent annual report, "There are nearly 106 million Americans between the ages of 45 and 85 who are at average-risk for colorectal cancer. At a three-year screening interval and an average revenue per test of approximately $500, this represents a potential $18 billion market for Cologuard, of which our current share is approximately 5.4 percent."
Exact Sciences has other exciting opportunities, too. The company is developing a liquid biopsy for hepatocellular carcinoma, the most common type of liver cancer. It estimates that the market for liver cancer screenings is worth about $1.5 billion. That, combined with other growth opportunities the company is pursuing, as well as its already successful Cologuard, could help Exact Sciences grow revenue and earnings at a good clip in the future, and send the stock to new heights.
What about the competition?
Many companies ae looking to carve out a niche for themselves in this market. One of them is Grail, a privately held company that was created by Illumina (ILMN +1.71%). Grail is looking to develop a single blood test for the early detection of multiple deadly cancers.
A difficult task, but it shows that Grail and many other companies are working to make serious advances in this field. Exact Sciences could certainly keep these competitors at bay and maintain a solid share of the market, but these competitors could also derail the company's plans.
Myriad Genetics (MYGN 3.03%) is another company with a strong position in the cancer screening industry. Myriad offers genetic screens for several forms of the disease, including prostate cancer and breast cancer. The pandemic is severely affecting its business as well. During its latest reported quarter, Q3 2020, the demand for Myriad's products decreased significantly, with volumes for some of its cancer tests dropping by 40% to 45%.
Still, Myriad remains hopeful. Before the crisis, business was booming. Myriad's interim CEO, Bryan Riggsbee, said "prior to mid-March, volumes for our products were trending exceptionally well." Since the current situation is temporary, the company thinks its long-term prospects remain attractive. Its vice president, Scott Gleason, said, "We believe Myriad is well positioned given our strong balance sheet, scale within the personalized medicine industry and given a number of pending business catalysts that could further improve our profitability profile."
Could Exact Sciences make you rich?
Even with the challenge from Grail, Myriad, and others, I believe Exact Sciences stock has what it takes to perform well for many years to come. But there is a big difference between performing well and turning ordinary investors into millionaires. And while I don't think the competition will stop Exact Sciences from delivering market-beating returns, I think it will prevent the company from turning a relatively small sum of money into a fortune.
Even with this caveat, I still think it's a healthcare stock worth buying, especially given that its shares are a bit cheaper than they were at the beginning of the year.
