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Why Exact Sciences Is Sinking and Genomic Health Is Rising

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What happened

In response to a surprise merger agreement, shares of Exact Sciences (NASDAQ: EXAS) and Genomic Health (NASDAQ: GHDX) are on the move today. Exact Sciences' stock is down 12% as of 11:15 a.m. EDT while Genomic Health's is up about 2%.

So what

Both cancer diagnostics companies have announced their intention to join forces to create a "best-in-class commercial, research, development and clinical organization."

Here are the key details of the transaction:

  • Exact Sciences will combine with Genomic Health, which is a $2.8 billion deal.

  • Genomic Health shareholders will receive $72 per share, consisting of $27.50 in cash and $44.50 in shares of Exact Sciences stock, subject to a 10% collar centered on Exact Sciences' volume-weighted average price for the 45 trading days ended July 26.

  • While this price represents a 19% premium to Genomic Health's volume-weighted average price for the last 30 trading days, it is only a 5% premium when compared to Friday's closing price.

  • After closing, Exact Sciences shareholders will own about 91% of the combined company and Genomic Health stockholders will own about 9%.

  • More than 25% of Genomic Health stockholders have already agreed to vote in favor of the deal.

  • The transaction has already been unanimously approved by the boards of directors of both companies.

  • The deal is expected to be completed by the end of 2019.

Two businessmen shaking hands and exchanging cash.
Two businessmen shaking hands and exchanging cash.

Image source: Getty Images.

Management also shared some details about what the combined company would look like:

  • It is expected to generate about $1.6 billion in revenue next year and produce a gross profit of approximately $1.2 billion.

  • Cost savings of approximately $25 million are expected to be realized in the third full year following close, primarily through reducing public company costs and purchasing optimization.

  • Exact Sciences' Cologuard and Genomic Health's Oncotype DX will continue to help detect cancer and inform treatment decisions in approximately 40% of all solid tumor incidence.

  • The combined market opportunity is more than $20 billion.

  • The combined commercial organization will have more than 1,000 employees in sales, marketing, and reimbursement teams.

Wall Street doesn't appear to share management's enthusiasm for the potential of the deal and is reacting accordingly.

Now what

Exact Sciences also announced second-quarter results in a separate news release today, and the headline numbers looked great. Revenue rose 94% to $200 million, crushing the consensus estimate of $182 million. Gross margin expanded slightly, and management raised its revenue outlook to $800 million to $810 million for the full year (up from its prior range of $725 million to $740 million.) That's also much higher than the current estimate of $747 million.

Exact Sciences' blowout quarterly numbers are normally greeted with a soaring share price, but the surprise merger with Genomic Health is taking center stage today. Genomic Health is growing at a much slower rate than Exact Sciences -- Wall Street is currently projecting 12% top-line growth for Genomic Health in 2019 -- so traders might be worried that the combined company might not be growing fast enough to justify the premium valuation.

However, since the board of each company has already approved the transaction, the odds look very high that the deal will go through. That might not be sitting well with Exact Sciences' shareholders, so investors might want to brace themselves for more volatility ahead.

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Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Genomic Health. The Motley Fool has a disclosure policy.