By Kathleen Gallagher of the Journal Sentinel
With investing, as in life, there’s nothing like a second chance.
After a recent stock price slide, investors have such an opportunity with Madison-based Exact Sciences Corp. (EXAS), said James T. Evans, chief investment officer at Thompson Investment Management Inc., Madison.
Evans recommended Exact just about a year ago, when shares of the maker of Cologuard, a DNA-based, noninvasive test for detecting colon cancer, were trading below $20. Back then, Exact was in the early stages of bringing Cologuard to market.
The U.S. Food and Drug Administration had recently approved it to be sold commercially, and Mayo Clinic had said it would be the first health system to offer it. But Exact was waiting for a decision on pricing from Medicare.
Medicare in October confirmed it would cover the test, and a short time later set its reimbursement level at $492.76 — significantly higher than was expected, Evans said. Exact shares took off, peaking in December at $29.65 and again in June at $31.16.
Evans had said in September 2014 he believed Exact’s shares could double over the next 24 months. They haven’t reached that level, but here’s where investors’ second chance comes in.
The stock market in general has sold off, Exact’s tests haven’t gained traction with private insurers as quickly as some hoped, and the company did a secondary stock offering in July that diluted its total number of shares by 8%. So Exact shares — which closed at $18.90 on Friday — have fallen below the level they were at when Evans originally recommended them.
“It has rolled completely back over and investors have a second chance,” Evans said. “And it was a thesis before; now you have evidence backing the thesis.”
By the end of the second quarter, patients had completed 21,000 of Exact’s Cologuard tests. The company estimates 32,000 will be completed by the end of the third quarter, and analysts are expecting Exact to cut its losses to $1.74 a share for 2015, Evans said.
A decision expected to come in the next few weeks from the U.S. Preventive Services Task Force could end the standoff over price between Exact and private insurers that has delayed adoption of the test, Evans said.
Investment Trends – Price slide on Exact Sciences gives investors a second change
Exact’s average patient is 70 years old, and 80% of them have ordered through Medicare, he said. But if the task force determines there is a high enough benefit to the test, private insurers will be required to cover it, Evans said.
Colon cancer is the second leading cancer killer in the United States. It can be prevented by identifying and removing abnormal growths early, but it is estimated as many as one-third of Americans don’t comply with doctors’ recommendations to get colonoscopies because they are leery of having the invasive procedure. Exact’s Cologuard requires users to take a stool sample in their home and mail it to a lab.
The secondary offering Exact did in July was priced at $25.50, so the company is in a good financial position to fully launch Cologuard and pursue development of tests in other areas, Evans said. Exact has said publicly it is working on tests to detect pancreatic, esophageal and lung cancer.
The company is hoping to build a new headquarters in downtown Madison, a move that might give some investors pause.
“There’s a rule among some investors that any company building a new headquarters is not worth investing in —but I think that’s more aimed at companies building marble and gold-plated palaces, and I don’t think that’s what Exact is doing,” Evans said.
The biggest risk here is the possibility that Exact wouldn’t get the U.S. Preventive Services Task Force approval, which would hurt its pricing for Cologuard, he said.
“That wouldn’t impact long-term volume, but the price insurers paid would be much less,” he said. Another risk is the possibility that a competing biotech company might develop an easier test for colon cancer than Cologuard, but there is always an innovation risk in this field, he added.
“We still think the stock could double, and that’s just with Cologuard,” Evans said. “If some of the tests under development pan out, it could go even higher.”
– Article originally appeared on JSOnline.com