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Bull of the Day: Exact Sciences (EXAS)

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Exact Sciences (EXAS - Free Report) , maker of the revolutionary Cologuard cancer detection test kit, recently gave investors a preview of its Q4 earnings report scheduled for release in mid-February. 
 
On January 12, Exact's preliminary look at the quarter showed expected total revenue of $294-296 million, including Screening revenue (i.e., Cologuard) of $229-230 million, an increase of 61% from 2018, and Precision Oncology revenue -- from the recently closed acquisition of Genomic Health -- of $65-66M for the period Nov. 8, 2019 through Dec. 31, 2019.
 
The combined company did not offer full-year 2020 guidance, but investors can expect that outlook at the upcoming conference call. Unexpected was the 14% drop in shares the next day which seemed to be focused on sequential Cologuard test volume growth of under 5%.
 
For the quarter, Cologuard crossed 477,000 tests for 63% year-over-year growth. But that was an increase of just 4.6% from Q3.
 
I saw the drop in EXAS shares as a good opportunity in a premier oncology diagnostics company. And we began buying for my Healthcare Innovators portfolio after the company's presentation on January 15 at the JPM Healthcare Conference.
 
Expansion Into Multiple Cancer Threats
 
In the presentation by CEO Kevin Conroy at the JPM event, investors actually got another negative surprise: the company projected revenues for 2020 to be $1.6 billion, which implies only 26% growth from 2019 total revenue of 1.266 billion.
 
And shares sold off to $86 over the next two days, giving us even better buying opportunities as lots of investors were missing the bigger and better news.
 
The good news in the presentation from CEO Kevin Conroy at the JPM Healthcare Conference was very bullish in terms of their expansion into other leading cancer diagnostics. The next big test area will be for liver cancer for which they are partnered with Mayo Clinic.
 
Conroy, with a 32-slide presentation deck also detailed the growth opportunities for Exact in other vital detection markets like pancreatic, esophageal, bladder, ovarian, cervical, stomach, lung, lymphoma, melanoma, kidney, and uterine cancers.
 
Analysts Busy Adjusting Their Models
 
Wall Street analysts have to re-work their earnings models for Exact to include the new contributions of Genomic Health (GHDX). Until then, there will be some confusion in the year-over-year comps and growth rates. Still estimates have gone up and the bullish investment calls for the stock are also rising.
 
In early January, Exact Sciences was initiated at BTIG with a Buy rating and $127 price target. Analyst Amanda Murphy told investors she still sees meaningful room for growth in utilization of colorectal cancer (CRC) screening. The analyst says market penetration of Cologuard is currently around 5%, and assumes Exact can get to 40% market penetration by 2030. Additionally, she says the acquisition of Genomic Health adds a key sales channel in oncology.
 
After the company's pre-announce, Oppenheimer analysts said they believe current Street consensus under-estimates operating leverage offered by the acquisition of Genomic Health. They see upside to consensus 2020 and 2021 EPS estimates based on potential upside to the merger synergy target of $25 million by the end of 2022 and continued healthy uptake of Cologuard. While not having visibility on future business development, the analyst team believes there is a strategic rationale for acquiring additional products to sell through GHDX’s medical oncology distribution channel. They reiterated their $130 price target.
 
Intelligent Diagnostics
 
Recently, I recommended Exact Sciences to investors as a healthcare "AI" play because the use of data mining, modeling, and machine learning (ML) in detecting and treating cancer will continue to be a growing trend.
 
Exact and Genomic have never used the words "artificial intelligence" in reference to their science. But their diagnostic intelligence systems are not only heavily based on precision data analysis, but benefit from building a large database of test outcomes.
 
The Oncotype DX portfolio of breast, colon and prostate cancer tests applies advanced genomic science to reveal the unique biology of a tumor in order to optimize cancer treatment decisions, helping to guide treatment decisions for more than 1 million cancer patients worldwide.
 
The company's flagship product, the Oncotype DX Breast Recurrence Score test, is the only test that has been shown to predict the likelihood of chemotherapy benefit as well as recurrence in invasive breast cancer.
 
On Jan 22, following the release the night prior of abstracts for the 2020 American Society of Clinical Oncology (ASCO) Gastrointestinal Cancers Symposium, EXAS shares popped 10% up to $96.
 
The catalyst was that initial trial data from two private competitors couldn't match Cologuard. An anticipated subset of data from Freenome’s AI-EMERGE study used AI/ML to identify patterns of cell-free biomarkers in the blood to detect cancer early. Freenome's blood-based screening test was able to detect 80% of early-stage colon cancers and 83% of late-stage tumors, whereas Cologuard detected 92% of all colon cancers in its pivotal clinical trial.
 
Another private company Grail, presented data from its Circulating Cell-free Genome Atlas (CCGA) study, which tests for tumor DNA in patients' blood. The study found 82% of all colon cancers, including 96% of stage 4 tumors, but only detected 72% of tumors in earlier stages 1-3.
 
At least for now, Exact will maintain a leading position in cancer diagnostics, especially given its partnership with Mayo Clinic on liver cancer detection. I recommend accumulating the stock on dips into the mid-$80s.
 
Disclosure: I own EXAS shares for the Zacks Healthcare Innovators portfolio.
 
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