Exact Sciences: Could Decline More in 2022

Exact Sciences (EXAS) is a molecular diagnostics company that focuses on the early detection and prevention of colorectal cancer.

Exact Sciences was incorporated in 1995 and is headquartered in Madison, Wisconsin.

I am bearish on EXAS stock. The company has strong revenue growth, but it is unprofitable with a cash burn problem that makes it hard to be optimistic about its financial performance and valuation.

Exact Sciences Business News

On January 9, Exact Sciences announced that “it has acquired PreventionGenetics, a genetic testing laboratory, to complement its advanced cancer diagnostics portfolio and support its entrance into hereditary cancer testing (HCT). PreventionGenetics provides the clinical lab, expertise, and foundational technology necessary to accelerate the availability of HCT and help more patients know their germline risk of cancer and other diseases.”

“PreventionGenetics is a natural fit with Exact Sciences, and we’re thrilled to have their talented team join in our mission to make earlier cancer detection a routine part of medical care,” said Kevin Conroy, Exact Sciences chairman, and CEO. “We share in PreventionGenetics’ belief that genetics can transform medicine, improve lives, and help eradicate cancer. With our deep relationships in primary care and PreventionGenetics’ strong reputation among genetics specialists, Exact Sciences can help more people understand their inherited risk of cancer to catch it earlier and treat it more effectively.”

On January 18, Exact Sciences “announced performance data for a second-generation Cologuard (multi-target stool DNA) test showing overall sensitivity of 95.2% for colorectal cancer (CRC) at specificity of 92.4% for negative samples confirmed by colonoscopy.” It is notable that “Cologuard is the first and only FDA-approved, non-invasive stool DNA test used to screen average-risk people for CRC.”

Preliminary Q4 2021 Results

The firm announced preliminary Q4 2021 financial results on January 9.

Total fourth-quarter revenue is expected to be in the range of $472 million to $475 million, and that total revenue for the year 2021 — excluding COVID-19 testing — increased 29% compared to 2020, including a 30% increase in Screening revenue and a 27% increase in Precision Oncology revenue.

On the negative note for the full-year 2021, the firm announced that COVID-19 testing revenue would be between $142.5 million and $143.5 million, a decrease of 39%.

Fundamentals – Risks

The company is unprofitable for all years in the 2016-20 period. For the first nine months of 2021, it remained unprofitable, and this should also be the scenario for full-year 2021. Shareholders have been diluted in the past year, with total shares outstanding growing by 2.4%.

The Piotroski F-Score of 3 is too low, which implies poor business operations. Revenue has been growing by 106.83% on average over the past five years. However, looking at the cash burn problem in the first nine months of 2021, things do not look rosy. The cumulative negative free cash flow generated was $200.29 million.

The D/E ratio of 0.59 as per last quarter is considered neutral to high, but liquidity is strong, although it deteriorated in the latest quarter compared to full-year 2020.

Efficiency is very poor as indicated by the asset-turnover ratio of 0.32 per the latest quarter. There is strong revenue growth, but a net margin of -46.50% per the latest quarter shows a structural problem to the business model.

The company accumulates net losses and fails in what matters most, creating shareholder value and maximizing it.

Valuation

EXAS stock is relatively overvalued based on its P/B Ratio (3.8x) compared to the U.S. Biotech industry average (2.1x).

EXAS stock has a P/S (Q3 TTM) ratio of 7.45, much higher than the P/S ratios of 1.64 and 2.37 for the medical laboratories industry and healthcare sector, respectively.

Wall Street’s Take

Exact Sciences has a Strong Buy consensus based on seven Buys and one Hold. The average Exact Sciences price target of $120.86 represents 69.1% upside potential.

Conclusion

Vey poor fundamentals, and slowing sales growth makes EXAS stock too risky in 2022. It’s also not cheap either.

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