Early cancer detection is a lot more common these days than it was a decade ago. Exact Sciences (EXAS 3.64%) can't claim all the credit, but the non-invasive cancer tests that it markets play an important role. The company's cancer tests screened around 4 million people in 2021.
Despite a big audience for its products, shares of Exact Sciences fell about 40% last year, and they are still down about 56% from their peak in early 2021. Is this beaten-down growth stock a bargain now, or is it still too risky for most investors? Here's what you should know.
Reasons to buy Exact Sciences stock
Exact Sciences made its mark with Cologuard, a non-invasive colon cancer screen. It's steadily funneled Cologuard revenue into innovative new modes of cancer detection that include a multi-cancer early detection (MCED) test for the broad public. Success in the highly coveted MCED arena could drive this stock through the roof, and Exact Sciences is making progress.
Last September, a blood-based test set that examined 1,132 samples for four different signs of a malignancy flagged 61% of samples known to have cancer. This isn't incredibly sensitive, but the lack of false positives is encouraging. Exact Sciences also recorded a 98.2% specificity rate, which means nearly all of the samples it flagged actually came from people known to have cancer.
Exact Sciences' flagship test, Cologuard, could soon get an upgrade, called Cologuard 2.0. In early 2022, the company ran samples from the Deep-C trial that led to Cologuard's initial approval using Cologuard 2.0, and the results were highly encouraging.
Investors were nervous about potential competition with the blood-based Shield test from Guardant Health (GH -0.06%) Fortunately for Exact Sciences, the Shield test produced disappointing results last December that strongly suggest Cologuard 2.0 will prevail.
Reasons to stay cautious
Exact Sciences clearly knows how to market millions of cancer tests, but earning any money from those tests is a different story. The company keeps investing heavily in new ventures, such as its MCED program, that haven't paid off yet. As a result, the company has posted some heavy losses in recent quarters.
EXAS Net Income (Quarterly) data by YCharts
It isn't unusual for younger businesses in a high-growth phase to post losses in an attempt to gain market share. Unfortunately, Exact Sciences' share of the cancer screening space is stagnating. In the third quarter of 2022, the company's flagship cancer screens tested 960,000 people, which was only 10,000 more than it tested in the previous year's period.
A buy now?
Exact Sciences is way below its former peak, but there's still a lot of optimism baked into its present price. The stock currently trades at 6 times trailing sales. That's relatively low for Exact Sciences but extremely high when compared with high-volume peers Quest Diagnostics and Labcorp, which trade at 1.7 and 1.6 times sales, respectively.
With differentiated tests, Exact Sciences should be able to maintain healthier profit margins than Labcorp or Quest. Unfortunately, staying ahead of the competition has required so much investment that the company doesn't think it can report adjusted earnings before interest, taxes, depreciation, and amortization, until the third quarter of 2023. Management doesn't have a timeline for when it can report positive earnings, according to generally accepted accounting principles.
There isn't a lot of brand loyalty in the diagnostics industry. Physicians generally choose the best test they're allowed to order based on clinical trial data. Cologuard has had a good run, but it's always just a matter of time before someone else builds a better mousetrap. For that reason, I wouldn't buy shares of Exact Sciences or any diagnostics business that doesn't already have a history of steadily growing profits.
