SAN FRANCISCO – Investor confidence in Exact Sciences Corp. has started to stumble in recent months. The Madison, Wis.-based company’s valuation peaked at about $15.5 billion just a few short weeks after it announced that it would acquire Genomic Health Inc. in late July. Its market cap trajectory has been uneven since and took another hit when the company preannounced 2019 earnings at the J.P. Morgan (JPM) Healthcare Conference, falling to around $13.5 billion.

That comes even as its revenues were consistent with Wall Street expectations. Investors seem to be waiting for a clear signal that Exact Sciences will be able to maintain its rapid revenue growth rate even as the colorectal screening market starts to mature and as it digests the sizeable Genomic Health deal that was worth $2.8 billion in cash and stock.

Cologuard backbone

“Cologuard revenue and volume were at the high end of management guidance[,] and Genomic Health volume exceeded our expectations for the full quarter,” commented Cowen analyst Doug Schenkel. “While some may have been looking for a bit more, we don’t think investor expectations were too much higher. This was a good close to a solid 2019 that positions Exact Sciences to generate 2020 revenue at least in line with consensus.”

The total revenue for the fourth quarter is expected to be between $294 million and $296 million. This is an increase of 61% over the same period in 2018. That range includes $229 million to $230 million from the legacy screening business and $65 million to $66 million for the precision oncology business from Genomic Health. The acquisition closed Nov. 8.

Total 2019 revenue was between $874.5 million and $876.5 million. Genomic Health revenues grew much more slowly than those of Exact Sciences; the overall 2019 revenue growth rate was 16% for the former and 78% for the latter. Exact Sciences will provide 2020 guidance on its February earnings call.

Upbeat analyst assessments of the company figure entirely around continued momentum for the core Cologuard colorectal cancer screening test, rather than any expectations for the Genomic Health acquisition.

“Since Cologuard was approved in 2014, Exact has secured broad reimbursement coverage, developed a large and experienced sales force, increased its lab capacity to 7 million tests per year, and made significant investments in IT infrastructure,” opined BTIG analyst Amanda Murphy. “We believe Cologuard is currently at an inflection point and expect the company to hit its long-term goal of 40% market penetration by the end of 2030.”

Better together?

In his JPM presentation, however, Exact Sciences chairman and CEO Kevin Conroy tried to emphasize the strength of Cologuard, as well of Oncotype Dx, the lead product from Genomic Health. “Our key priorities for 2020 are, number one, delivering more answers from our current core products, our current tests; secondly, to enhance our customer experience. We know that we can grow the number of people ordering Cologuard tests and the frequency that they order Cologuard if we can make that ordering process easier,” he said. “So, it's really important for us to make screening inevitable and to make the use of Oncotype Dx inevitable in prostate cancer patients and breast cancer patients.”

The current U.S. screening rate using Cologuard is 5.4%, well short of the 40% it’s aiming for in the long term. Exact Sciences is working on a next-gen version, Cologuard 2.0, which is expected to improve the specificity, thereby decreasing the false positive rate and requiring fewer unnecessary follow-up colonoscopies. The company recently started a 10,000-patient colorectal cancer study with the next-gen version, which is slated to wrap up in 2021.

Exact Sciences picked up Genomic Health in a bid to become the leading cancer diagnostics company to enable both early and precision treatment, while the field is still relatively wide open. It is playing a long game, but it’s not clear how well that will pay off in the near term as the deal tamps down the company’s existing high growth rate and may distract it from its own burgeoning internal pipeline.

Cologuard is a mail-in stool test that uses DNA biomarkers to identify patients with colorectal cancer. It was developed as part of a deal with Mayo Clinic.

Mayo and Exact have continued their joint R&D efforts, expanding into 15 different cancers. Up next, Exact Sciences plans to roll out a liquid biopsy liver cancer test later this year. That is expected to be followed by screening tests for cancers of the pancreas, esophagus and bladder.

Genomic Health is focused primarily on cancer treatment guidance testing, while Exact Sciences’ arena has been early screening tests. It remains unclear whether the acquisition was just for breadth, or if the technologies can reinforce one another internally.

Conroy sought to make the case that the pairing will enable unique benefits. “Will we see cross-pollination between the two companies – Exact Sciences and Genomic Health?” he said, repeating an audience question in the breakout. “One proof point of us coming together, validating the reasons why is we're bringing up our liver cancer test in California with incredible laboratory facilities and capabilities and team in the Palmetto district. So, that's one of the things that we were looking at for several years is how could we bring up a new lab in a MolDX state. Our oncology sales force should be able to carry the Cologuard test and bring that to the physician – or to the patients who need it.”

Genomic Health was based in Redwood City, Calif. The Molecular Diagnostic Services (MolDX) Program was developed by Palmetto GBA in 2011 to identify and establish coverage and reimbursement for molecular diagnostic tests. Palmetto GBA is one of the largest Medicare administrative contractors.

He added another example, “Early-stage breast cancer patients, per the TAILORx data, are more likely to recur with another cancer that is not breast cancer than they are breast cancer. Those people need to be screened. They've had a lot of medical procedures. Why not introduce Cologuard as a screening opportunity if they're out of date or out of compliance with colon cancer screening?

“Over the long term, the pipeline team, the research and development capabilities in Redwood City will certainly help us bring some of the capabilities,” Conroy summed up. For example, we're looking at a bladder cancer test. We think our work with the Mayo Clinic can help us there and help deliver a new test to the urology team that has about 50 people in the field. That's part of the synergy that we see is a positive revenue synergy and impacting patients over time.”