Shares of Exact Sciences (NASDAQ:EXAS), the company behind all of those Cologuard advertisements, popped last week after management convinced some investors it had the means to quickly expand beyond colon cancer screening and genetic tumor profiling.
Encouraging results from a study with Exact Sciences' new noninvasive pan-cancer screening recently drove shares of the company up about 25% higher overnight. The method could become the standard technique for detecting multiple forms of cancer in their early stages.
Is Exact Sciences a good healthcare stock to buy right now, or was the recent stock price bounce just a flash in the pan that investors should ignore? Let's weigh reasons to buy the stock against reasons to avoid it.
Reasons to buy Exact Sciences
Colorectal cancer (CRC) is relatively easy to treat when caught in its earliest stages, but roughly 45% of Americans ages 45-85 at average risk aren't getting screened every three years as recommended. Exact Sciences' flagship product, Cologuard, is the only option available to this population of roughly 106 million Americans that doesn't require a fasting period and a very uncomfortable trip to a healthcare provider.
In the first half of 2020, sales of Cologuard reached $351 million, and it's not the Exact Sciences' only revenue stream at the moment. In 2019, the company entered the competitive market for post-diagnosis cancer screening with a $2.8 billion acquisition of Genomic Health.
Currently, the Genomic Health segment provides test services that oncologists use to determine which genetic mutations are driving the progression of a patient's disease. Tumor profiling is important, but a pan-cancer screen for healthy adults would create a much larger revenue stream.
Genetic sequencing giant Illumina (NASDAQ:ILMN) is in the process of acquiring Grail for $8 billion in hopes of becoming the leading pan-cancer screen provider.
Shares of Exact Sciences surged recently because it seems like it's developing a pan-cancer diagnostic of its own that is capable of competing with the test Grail plans to launch in 2021.
Exact Sciences' test correctly identified 86% of positive cases of cancer across six types of cancer, while Grail's test only correctly identified about 60% of confirmed cancer cases as positive. Grail's test looks unlikely to report false positives, with an impressive 99.3% specificity rate; Exact's test showed an acceptable 95% specificity rate. If both are approved, physicians will likely conduct widespread screening with Exact's test, while keeping Grail's test on standby to rule out false positives.
Reasons to remain cautious
The Food and Drug Administration hasn't cleared pan-cancer screens from Grail, Exact Sciences, or their peers, but other companies are getting close. This summer, the FDA officially cleared Guardant360, a pan-cancer liquid biopsy from Guardant Health (NASDAQ:GH) that oncologists use to identify which gene mutations are driving a patient's disease.
Roughly one in four cancer diagnoses involve tumors that aren't easily accessible; at the moment, cancer treatment guidelines only recommend Guardant360 for patients that fall in this category. The FDA's approval doesn't require physicians to assess whether a tumor biopsy is a reasonable option, though, which could give it a big leg up on Exact's precision oncology segment.
Guardant Health could also step on Exact's CRC screening business in the not-so-distant future. Guardant's currently developing the blood-based Lunar-2 assay to detect early stage cancer in asymptomatic individuals. In a study with around 200 samples, 113 of which had been diagnosed with CRC, Lunar-2 correctly flagged 90.3% of positive cases. That's probably good enough to compete with Cologuard's 92.3% sensitivity rate.
Guardant's test also appears much less likely to report false positives, with a 96.6% specificity rate compared to the 86.6% specificity rate Cologuard exhibited in a study that led to its approval.
A stock to watch
Exact Sciences thinks the COVID-19 pandemic will accelerate the adoption of Cologuard, but that wasn't the case in the second quarter. Screening revenue tumbled from $219.5 million in the first quarter of 2020 to $131.2 million in the second. Over the same time frame, precision oncology revenue slid from $128.4 million to just $103.0 million.
If Exact Sciences were generating steady profits for investors now, it might be worth a closer look. Unfortunately, Exact Sciences doesn't appear to be heading for profitability in the foreseeable future. Trailing revenue rose 184% over the past two years, but sales, general, and administrative expenses followed along with a 155% gain over the same period.
If Exact Sciences can't make ends while it has the market for noninvasive CRC screening all to itself, it's hard to see how the company will make any money for investors once it actually has to compete with other diagnostic service providers like Guardant Health and Illumina. It's probably better to keep an eye on any progress Exact Sciences makes with its pan-cancer screen than to bet your hard-earned money on its success.