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Exact Sciences Rides on Cologuard, Eyes Merger Synergies

Zacks Equity Research

On Jan 7 2020, we initiated coverage on Exact Sciences Corporation EXAS. While we are impressed with the company’s steady top-line performance, its overdependence on a single brand may be worrisome. The stock currently carries a Zacks Rank #2 (Buy).

Exact Sciences is a molecular diagnostics company focusing on the early detection and prevention of some of the deadliest forms of cancer. Over the past year, the stock has outperformed its industry, soaring 51.8%. While the industry has risen 10.6%.

Exact Sciences exhibited a stellar performance with better-than-expected earnings results in the third quarter of 2019. The company demonstrated strength across its entire business, driven by encouraging performances in its Cologuard business. It is also progressing well in terms of fulfilling its three priorities of 2019, which are strengthening its partnership with Pfizer, enhancing Cologuard and advancing its pipeline of blood-based cancer diagnostic tests.

Exact Sciences Corporation Price

Exact Sciences Corporation Price

Exact Sciences Corporation price | Exact Sciences Corporation Quote

In this regard, the company is confident about capturing at least 40% of the U.S. colorectal cancer screening market, showing a sharp rise from about 5% now. This is possible on the back of strong sales teams, alliance with Pfizer, an innovative marketing campaign and deep payer relationships providing a powerful commercial organizational support to Cologuard's growth. Pfizer tie-up has been valuable in driving Cologuard's adoption.

We are currently looking forward to Exact Science’s recently-closed merger with advanced molecular diagnostics company Genomic Health, which combined two of the strongest brands in cancer diagnostics, namely Cologuard and OncotypeDX, thus bolstering growth.

On an adjusted basis, the combined entity is projected to generate revenues of $1.6 billion and a gross profit of $1.2 billion in 2020. Annualized cost synergies of approximately $25 million are expected within the third year from the completion date of the deal, primarily via reduction of public company costs and purchase optimization.

On the flip side, escalating expenses are putting pressure on the company’s operating margin. Excessive reliance on Cologuard and competitive headwinds persist as major downsides.

Other Stocks Worth a Look

A few other top-ranked stocks from the broader medical space are Haemonetics Corporation HAE, West Pharmaceutical Services WST and Omnicell OMCL. While Haemonetics sports a Zacks Rank #1 (Strong Buy), the other two carry the same top Zacks Rank as Exact Sciences. You can see the complete list of today’s Zacks #1 Rank stocks here.

Haemonetics has an estimated long-term earnings growth rate of 13.5%.

West Pharmaceutical Services has an anticipated long-term earnings growth rate of 14%.

Omnicell has a long-term earnings growth rate of 12.5%.

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