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Exact Sciences Stock Downgraded in Wake of Q1 Earnings Report

NEW YORK (GenomeWeb) – Mizuho Securities today downgraded Exact Sciences to Neutral from Buy and cut the stock's price target nearly in half to $6.50 from $12.

Mizuho analyst Eric Criscuolo said the investment bank sees too much risk in the molecular diagnostics firm's guidance for the number of Cologuard colorectal cancer screening tests it expects to complete in 2016. Exact completed 40,000 tests in the first quarter and expects to complete 48,000 in the second quarter. But given that the company has guided for 240,000 completed tests in 2016, Criscuolo said, the guidance implies that the company will need "a sharp acceleration" in the second half of the year.

If Exact can complete 48,000 tests in Q2, that would be a 20 percent increase over Q1, he added. However, that still falls short of Mizuho's previous expectations for 55,000 tests completed in Q2. Further, he said, test volume in the second half of the year has to reach 152,000 in order to reach the full-year guidance, which would be a 73 percent increase over the 88,000 tests the company expects to complete in the first half of 2016.

"Another modest increase in test volumes expected in 2Q implies an even greater jump in 2H volumes than we had been expecting. We were already at the edge of our comfort zone, and this pushed us over," Criscuolo wrote in his note. "The hope is that a new, national TV marketing campaign will produce the 2H acceleration. It appears to us that without the national campaign's potential, the test volume guidance would almost certainly have been lowered at this point. We think the campaign has a chance to produce the acceleration needed, but we don't have significant conviction that it will."

Further, the company's cash burn remains significant, Criscuolo said, and that is likely to increase in Q2 thanks to the money the company is spending to market Cologuard through a new nationwide television ad campaign. "We expect the cash burn will probably leave about a year of cash or less at end of year, adding a financing overhang," Criscuolo wrote.

Mizuho lowered its 2016 revenue estimate for Exact to $88.9 million from $94.8 million and test volume estimate to 236,667 from 242,000. For 2016, Exact said it expects revenues of $90 million to $100 million. The bank also lowered its 2017 revenue estimate to $140.3 million from $152.6 million and test volumes estimate to 373,000 from 387,000.

Overall, Criscuolo wrote, "We think there is still potential for Exact to establish a significant, long-term business. … Right now, however, our visibility has become too clouded on volume growth and investment levels, and we move to the sideline."

Exact's shares were down more than 5 percent to $5.98 in morning trading on the Nasdaq.

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