The sell-off in biotechnology stocks — witness the 9% drop in the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) since mid March — is creating buying opportunities for value investors. Perhaps even more so for prospective buyers of EXACT Sciences Corporation (NASDAQ:EXAS). EXAS stock is down almost 29% in the same period.
After all, indiscriminate selling in profitable companies growing at a pace above the sector’s average — which describes EXAS — must eventually end. When it does, a stock tends to bounce back.
Exact is a promising laboratory and research firm in the business of screening patients for colon cancer. With the American Cancer Society’s a goal of boosting the cancer screening rate from 62 percent in 2015 to 80 percent this year, the biotech firm is well positioned to help it meet that goal.
Cologuard’s High Sensitivity
Cologuard, which Exact Sciences developed with Mayo Clinic, has a 94% early-stage cancer sensitivity. Patient compliance for the screening test is at a modest 65% . If that goes up, doctors will favor this form of screening over colonoscopy and the more common lab test used to check stool samples for hidden blood. Since its debut, Cologuard’s been used to screen more than a million people and detected 4,700 early-stage cancers.
Last year, the company generated $266 million in revenue, screened 571,000 people and added more than 40,000 new ordering physicians and other healthcare workers. Insurance coverage rose to 90%, helping drive the increase in screening tests. Management set a goal to improve the per-test profitability but still has work to do. In the fourth quarter, cost of sales totaled $134 per test, up $5. The near-term cost increase is not a concern since Exact Sciences invested in labs, personnel, and manufacturing capacity.
The company is gearing up for an increase in volume, which also puts some strain on cash flow. Last quarter, it spent $37.8 million in cash, ending the period with $425 million in cash. Its move to raise $671 million, through a convertible notes offering, put selling pressure on shares. The company’s timing for raising cash proved timely — the stock peaked at $60.50 in November and could not hold the $50 level last month.
Opportunity in Lab Upgrades
Seasonal weakness in first quarter follows a slow fourth quarter. Flu season hurt patient visits and weakened screening test counts in the fourth quarter. But after the next earnings report sometime in May, EXAS stock may get a boost when revenue growth strengthens in the second quarter.
The company’s lab upgrades create an opportunity for Exact Sciences’ revenue potential. Assuming doctor orders for the screening test keep growing, the company is in a good position to meet the higher volume. The new labs raise its capacity to 4.5 million tests.
Exact Sciences has just a 2.5% market share in colon screening but aims to take that to 40%. To get there, the company needs more physicians who are aware of the test. It must also convince doctors that this test is favorable over colonoscopies. Otherwise, screening growth rates will lag, putting pressure on the share price and justifying the stock’s recent drop.
The potential for EXAS stock increases even further with the company’s screening trials for lung and liver cancer. Management said there are three million people in the U.S. who are eligible for surveillance for liver cancer.
Bottom Line on EXAS Stock
Of the eight models built on finbox.io, the average fair value target on EXAS stock is $44.46. This implies the stock has upside of almost 10%. Wall Street has an average price target of $56.60, based on coverage from 10 analysts. Jefferies’ Brandon Couillard, who is ranked #30 out of 4,756 analysts on financial rating engine TipRanks, recently reiterated his $60 a share target.
Of the financial models available, the 10-year DCF growth exit model may most accurately estimate what EXAS stock is worth. Assume that revenue grows in the double-digits through to FY 2023. As this slows to the single digits from FY 2024-2027, EBITDA as a percentage of revenue increases. At a discount rate of around 9.5%, EXAS could have an upside of more than 25% from its most recent price of $37.84.
As of this writing, Chris Lau held no position in the aforementioned securities.