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Evercore ISI Initiates Coverage of Exact Sciences at Outperform

NEW YORK – Investment bank Evercore ISI has initiated coverage of Exact Sciences' stock at a rating of Outperform and a price target of $70.

In a note to investors on Thursday, Evercore analyst Luke Sergott called Exact "one of the most compelling names in our universe," noting that while the company's colorectal cancer test Cologuard has already had significant growth, it still continues to penetrate the market and gain share. Further, Sergott said, colonoscopies and other stool-based alternative tests are invasive and largely inferior to Cologuard, which offers ease-of-use and high accuracy and predictability.

According to Evercore's note, Exact's total addressable market is 106 million patients that are about 65 percent compliant with current colorectal cancer screening protocols. "We see +30 percent three-year growth [at a compound annual growth rate] as the market is only 6 percent penetrated and Cologuard will continue to gain share with new and existing screening patients," Sergott wrote.

There are three issues facing the company, the bank noted. First is the impact from the COVID-19 pandemic. "We expect a severe but relatively short-lived impact," Sergott wrote. "Channel checks suggest physician visits and elective procedures will be down 60 percent to 80 percent in April."

Evercore's model further predicts that such visits and procedures will be down 30 percent in the second quarter, with growth rebounding in mid-May or June, accelerating through the second half of 2020, and coming back to normal in 2021. Sergott noted there may be upside potential from increased online ordering of Cologuard starting in April and steep productivity ramp for new sales reps, which would translate to faster volume recovery for the company.

Indeed, Exact has already signaled it may face some headwinds from the pandemic. Two weeks ago, the company said that the continued uncertainties from the impact of the pandemic were forcing it to withdraw its previously announced first quarter and annual guidance for 2020, and that it was suspending field-based, face-to-face interactions by its sales force, and allowing the majority of its workforce to work from home.

However, Exact also announced on Thursday that it plans to devote significant resources educating patients about the ability to order Cologuard online through a telehealth provider.

"Cancer doesn't stop for anything. As the country faces a pandemic, we are letting people know they can request Cologuard online from a healthcare provider, without an office visit," Exact Chairman and CEO Kevin Conroy said in a statement. "While Americans are at home trying to prevent the spread of COVID-19 in their communities, they can address another pressing public health issue and get screened for colorectal cancer."

Any positive Cologuard test result would be referred for a diagnostic colonoscopy. Though that would be challenging to schedule during the COVID-19 pandemic, Exact said it is actively exploring ways to support patients in navigating those next steps. The company's testing labs remain open and business continuity plans are in place at all sites to sustain operations.

Evercore's note also asked whether Exact has enough cash to see itself through the next few difficult quarters. The company raised $1.2 billion in a convertible debt offering in late February, Sergott noted, and it was on pace to burn about $250 million in 2020. Assuming a continued burn at this rate, Exact has more than two years' worth of cash.

And finally, Sergott addressed the competitive threat from liquid biopsy tests. He noted that the best-case scenario for liquid biopsy players is about five years before they're able to deliver a commercially viable test. The US Preventive Services Task Force is meeting now to update recommendations for colorectal cancer testing by 2021. And while an approval by the US Food and Drug Administration could force an off-cycle USPSTF meeting to revisit current recommendations, CRC screening is big enough for more than one player to gain significant share, Sergott added.

"Following COVID-induced sell-off, we look at multiples resetting below five-year ranges and believe the reaction is overdone," he wrote. "Thus, we initiate Outperform with a $70 price target… implying +25 percent price upside."

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