Some investors are famous enough that their every move is scrutinized. That's the case with Cathie Wood, CEO of Ark Invest, an investment management firm. Wood's firm recently sold thousands of shares of cancer diagnostics specialist Exact Sciences (EXAS 0.10%).
While Ark Invest didn't close its position in the stock, just decreasing its stake may make some investors wonder if it's better to stay away from Exact Sciences. Let's find out whether it'd be wise to avoid investing in this stock right now.
The case for Exact Sciences
Can cancer be eradicated? That seems impossible, but it won't stop Exact Sciences from trying. By catching the disease earlier, thanks to the kinds of diagnostic tests the company develops, it's possible at least to increase survival rates for certain cancers.
Consider Exact Sciences' signature product, Cologuard. It's an at-home diagnostic test for colorectal cancer, which is the second-deadliest cancer in the U.S., despite high five-year survival rates when it's caught early. Regular screenings for people at average risk of the disease are supposed to start at 45. However, Exact Sciences estimates that 60 million eligible patients between 45 and 85 remain unscreened.
Cologuard was first approved in the U.S. in 2014. Since then, Exact Sciences' revenue has generally grown at a good clip:
EXAS Revenue (Quarterly) data by YCharts.
The test hit a mark of 10 million patients screened in 2022. Exact Sciences thinks it can triple that total by 2027, especially if it earns approval for its next-gen version of Cologuard, which has been shown in studies to decrease false-positive rates by 30%.
But Cologuard isn't the only product in Exact Sciences' arsenal. The company's Oncotype Dx tests help to monitor for recurrence and to choose the best therapy options for breast cancer patients. Exact Sciences is also developing multi-cancer early-detection tests, which boast massive potential. The company has been an innovator in helping fight this deadly disease, which could allow it to deliver outsized returns over the long run.
Some reasons to worry
Like every investment opportunity, Exact Sciences comes with its share of risks. First, it still isn't profitable. Through Sept. 30, the company reported a net loss per share of $0.86, although that was significantly better than the net loss per share of $2.82 recorded in the corresponding period of the previous fiscal year. Still, the longer Exact Sciences remains unprofitable, the more this factor will likely impact its stock price.
Second, there's plenty of competition in cancer diagnostics. For instance, Guardant Health (NASDAQ: GH) markets a test called Guardant Reveal that helps physicians find residual disease and monitor for recurrence in early-stage colorectal cancer (among other types). The Guardant Reveal platform doesn't directly compete with Cologuard, since the latter is an at-home test for people who haven't yet been diagnosed with the disease. However, Guardant Health seems close to earning marketing approval in the U.S. for Shield, a screening kit for undiagnosed patients at average risk of colorectal cancer.
Other players in this field are seeking to eat Exact Sciences' lunch, which points to another issue with its business: The company has arguably not yet developed a solid competitive advantage, making it difficult to fend off other cancer specialists like Guardant Health.
Is Exact Sciences' stock a buy?
Exact Sciences aims to address some of the problems it's facing. Its next-gen Cologuard will be cheaper to manufacture, helping to decrease its cost of goods sold by at least 5%. The company is also looking to reduce one of its largest expense categories: sales and marketing. Exact Sciences has had to advertise Cologuard aggressively to raise awareness, but it's been fairly successful in doing so.
Over time, as its tests become better established, marketing costs should decline, leading to stronger operating margins and a higher bottom line. That is already happening. Between 2016 and 2022, sales and marketing expenses went from 114% of revenue to just 41%. The company estimates they will drop further, to below 35%, for the full 2023 fiscal year.
The new version of Cologuard, with fewer false positives, should also help to boost revenue by attracting physicians and patients who are still somewhat skeptical. Although it will have some competition, Cologuard benefits from a first-mover advantage in the field, and arguably has better results than Shield in detecting early-stage colorectal cancer.
Lastly, the multi-cancer testing kit Exact Sciences is developing should open up a world of opportunities for the company.
Though the stock isn't the least risky in the world, Exact Sciences remains a buy, in my view. For investors in it for the long haul, this healthcare company could deliver solid returns.
