Thanks to its highly sensitive tests that can detect cancer earlier, less invasively, and with more confidence than the alternatives, Exact Sciences (EXAS -3.97%) has already made a home for itself in the oncology screening market.
But it's no surprise why investors might be divided about the merit of buying the stock. Its operations are perennially unprofitable, not to mention that its pace of revenue growth is often meandering. Are these blemishes dealbreakers, or are they bumps in the road along the trajectory of a growth stock? Let's look at two arguments in favor of buying Exact Sciences and then consider one point in favor of selling it to find out.
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1. It has diagnostic products at every step of the cancer care chain
The biggest reason to buy Exact Sciences stock is that it's already positioned to capture several different segments of the market for cancer diagnostics. For everything from making genetic tests to screening for predisposition, to liver and colon cancer, to planning for treatment selection, and monitoring for relapses, it has a product or is developing one.
That means a single oncology clinic might purchase five or six different Exact Sciences diagnostics. And, with the help of the diagnostic products, patients have a better chance of getting their cancers detected earlier when intervention is more likely to be successful. Plus, tests that help doctors pick the appropriate treatment course also make the entire care process more effective.
Finally, the benefit of specializing in cancer testing means that the business will have a better chance to outcompete larger players in the diagnostics space who don't have the resources to develop oncology tests that are as sensitive or informative.
2. Cologuard is providing more and more recurring revenue over time
Cologuard, Exact Sciences' diagnostic for detecting colorectal cancer, has been an important driver of growth for the company since its approval by the U.S. Food and Drug Administration (FDA) in 2014. As regular screening for colorectal cancer is a part of good health maintenance in middle age and beyond, there's a potential to capture recurring business from people over time.
And that's exactly what Exact Sciences is planning to do. By the end of 2021, more than 1 million of its prior patients will be eligible for rescreening, which will require repurchasing of Cologuard kits. In the last three years, the combination of first-visit screening and follow-up screening has helped to drive quarterly revenue growth of 219.2%, and things are just getting started.
Compared to third-quarter 2020, revenue from the company's screening offerings like Cologuard increased by 31% year over year in the third quarter, reaching a grand total of $280.4 million. By the end of this year, management expects screening products to bring in at least $1.05 billion in revenue.
When Exact Sciences finishes developing Cologuard 2.0 and gets it approved by regulators, growth might even accelerate. And since the updated version aims to use only a blood sample, it might even find a larger market than the original.
3. COVID-19 testing is no longer supercharging top-line growth
The one reason that I'd propose selling this stock is that one of its more recent cash cows appears to be drying up at a shocking speed.
Though Exact Sciences is primarily an oncology testing business, it developed a coronavirus test in 2020, a hot seller for a few quarters. But per its latest earnings report, COVID-19 testing revenue is down 70% year over year, bringing in only $30.6 million in Q3.
Given that the pandemic is still in full swing, it's unclear why coronavirus testing income collapsed so aggressively. Nonetheless, management doesn't seem too concerned. It's also essential for shareholders to remember that infectious disease testing was never one of the company's strategic priorities or core competencies.
So, if you bought this stock last year to benefit from the growth of its newly developed COVID-19 segment, it's definitely time to sell. However, for other shareholders, it's probably not anything to be concerned about, as long as revenue from Cologuard and other testing products continues to rise over time.
