Wrong place, wrong time.
That might be the most succinct explanation for the bruising one-year performance of Exact Sciences (EXAS) stock.
Shares of the genetic-testing company have fallen 65% in the past year, including a 54% drop since the beginning of 2022.
Investors shouldn't be surprised to see Exact Sciences cough up a little valuation during a biotech correction. After all, considerable excess was baked into valuations across the biotech sector.
But the industry leader is just being downright disrespected at its current market cap of $6.3 billion. There's an explanation for that, too. Wall Street appears to be grouping in Exact Sciences with the doom and gloom of the broader competitive landscape in genetic testing.
There's a good chance investors will regret making the business guilty by association.
A Nuanced View Shows Many Advantages
A quick look across the competitive landscape shows why investors have turned sour on the industry at large:
- 23andMe (ME) reported an operating loss of $89 million and operating cash outflows of $73 million in the fiscal 2023 first quarter ended June 2022.
- Both Invitae (NVTA) and Sema4 (SMFR) have announced strategic pivots to focus on operational efficiency, not just revenue growth. The plans include new management teams and greatly reduced revenue guidance for the foreseeable future. The businesses delivered a combined operating loss of $667 million in the first six months of 2022.
- Fulgent Genetics (FLGT) initially guided for core genetic-testing revenue to decline in 2022 from 2021. An acquisition has since helped inject a little growth into the business. But the business also requires significantly more scale to be self-sustaining, and the current growth rate suggests achieving it will be challenging.
One particular statistic best illustrates the depth of the holes that were dug across the industry in recent years: Invitae expects to burn "only" $225 million of cash next year. That's actually considered a sharp improvement compared with the nearly $600 million of cash it may burn in 2022.
Investors are right to focus on operating losses and cash outflows across the industry, especially against the backdrop of tightening financial conditions. It's one of the primary critiques of Exact Sciences, too, but it overlooks important nuances.
- Product Mix: Every peer above generates a significant amount of revenue from hereditary screening tests, which don't require Food and Drug Administration approval and are highly commoditized in 2022. That means market share is earned by growing volumes -- but that requires an expensive buildout of the right kind of commercial infrastructure. By contrast, Exact Sciences expects to generate only 2% of full-year 2022 revenue from hereditary screening tools. Most of the company's revenue will be generated from differentiated FDA-approved products -- and the required commercial infrastructure is largely in place.
- Business Scale: Investors may not fully appreciate the size of Exact Sciences. The company expects to generate full-year 2022 revenue of roughly $1.98 billion. That's almost as much as the combined revenue guidance of $2.04 billion from Fulgent Genetics (core only), Invitae, Sema4, 23andMe, and Natera (NTRA).
- Cost Leverage: Differences in product mix and scale provide advantages in the cost structure. Exact Sciences wields nearly unmatched commercial infrastructure thanks to efforts focused on ramping its Cologuard product over the years. That enables each new product to launch more efficiently and with less risk, including products with thinner margins and higher volumes. The company expects only targeted, incremental growth in most operating expenses. By comparison, peers who started in commoditized products built commercial infrastructure that isn't always well suited to the market realities of more lucrative FDA-approved tests they hope to develop.
These factors have instilled management with the confidence to project the business will achieve profitable adjusted Ebitda on a full-year basis in 2024.
Although profitable operations are a new priority for many given the current market environment, it's important to remember that Exact Sciences publicly outlined that goal before the biotech correction took hold. By contrast, many peers announced plans to become more efficient only recently and only out of necessity.
The goal isn't as outlandish as it seems. Consider that Exact Sciences incurred expenses of $202 million in 2021 as part of a now-terminated co-marketing agreement with Pfizer (PFE). The genetic testing leader paid a one-time termination fee of an additional $35.9 million when the partnership dissolved and hired 400 sales reps from Pfizer.
The latter represents an increased ongoing expense for the business, but the nearly $238 million in other costs rolling off the books this year will more than make up the difference. That improvement alone will represent most of the financial progress required to achieve positive adjusted Ebitda in 2024.
So, sure, there's doom and gloom spread across the genetic-testing landscape. Red ink blankets income statements, including that of Exact Sciences.
But digging into the nuance behind the numbers reveals significant advantages that can be leveraged to make quick progress in the next 24 months. Investors who make this business guilty by association could miss out on an attractive long-term opportunity.
