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Exact Sciences Stock Drops After Short-Seller Report Claims Cologuard 'Inferior' to Colonoscopy

This article has been updated to include a statement from Exact Sciences.

NEW YORK (GenomeWeb) – Exact Sciences' shares fell as much as 7 percent on Monday after short-seller Citron Research released a report calling the company's Cologuard colon cancer test "inferior" and claimed it had proof that the company's stock "will soon be cut in half."

In its report, Citron said its short-term target for Exact stock was $20, and noted that it believed the stock would be worth nothing in three to five years. Exact's shares were down 4 percent to $32.34 in afternoon trading on the Nasdaq.

The short seller claimed Cologuard is "a seriously inferior product and a disastrous business model" that has funded "a $4 billion company … because some men think they are 'too cool' (or too scared) to get a colonoscopy, despite the real dangers of colon cancer."

What's more, Citron said, Exact fully admits that Cologuard is not as good as colonoscopy at detecting colon cancer, and cited a recent decision from United Healthcare not to cover Cologuard because there is insufficient evidence to show that fecal DNA tests accurately screen for colorectal cancer in asymptomatic, average-risk patients.

Further, Citron said, although Exact noted in its quarterly earnings report that it completed 100,000 tests for the first time, the acquisition costs are "unsustainable," and each physician is only ordering 1.4 tests per quarter. "If doctors were each ordering more, this business might become scalable," the report said. "But, in a reaffirmation in the trust we put in healthcare providers … despite the millions of dollars spent on sales force and marketing, doctors are not ordering more Cologuard tests."

Exact Sciences, Citron concluded, "is what happens when Wall Street meets bad medicine."

Analysts who cover the molecular diagnostics firm, however, seemed to refute Citron's report. Canaccord Genuity analyst mark Massaro released a note to investors reiterating his Buy rating and $38 price target on Exact's stock, and called the thesis behind the short report "flawed in several key areas."

For example, Massaro wrote, although Citron claimed colonoscopy is 100 percent sensitive, it's actually only 95 percent sensitive. Further, Exact has shown that Cologuard is 92 percent sensitive and 87 percent specific, despite Citron's claim that the test is not effective.

Also, although Citron said Exact will never be profitable, Massaro believes the company could see profitability as early as the third quarter of 2019, not including any potential future coverage of the test from United Healthcare. "However, by law, we expect UNH to cover Cologuard in 2018, which we believe could push forward EXAS' path to profitability," Massaro added.

Overall, Massaro disagreed with Citron's view that Exact's terminal value may approach zero. "Our view is that [Exact] is well positioned to become a broad-based platform based company for early cancer detection," he noted. "Together with the Mayo Clinic, we believe the company is well positioned to bring a number of additional tests to the market, beyond its stool-based Cologuard test. While early, the company is actively developing additional tests using blood, plasma, and even 'pancreatic juice' for a number of additional cancer types."

Cowen's Doug Schenkel, who rates Exact shares at Outperform, also released a note to investors saying he saw nothing new or incremental in the Citron report that would change his view of Exact. He noted that Exact and investors alike don't dispute that colonoscopy is "a good test" for colorectal cancer detection, but such tests are not done enough. "If an easier to use test increases screening rates and detects more cancers, it saves lives," Schenkel wrote, pointing to the reason why Cologuard has been included in screening guidelines and why it is getting reimbursed by most payors.

While United Healthcare declined to cover Cologuard, Schenkel added, it is in the minority. "Aetna released a positive coverage decision for Cologuard just a week before UNH's … announcement," he noted. "Aetna covers 18.6 million lives, which expanded Cologuard coverage in the US to ~190 million total covered lives and ~80 percent of all addressable lives (from 72 percent)."

Schenkel concluded that Cologuard's momentum has just started to ramp up. "While many of the things outlined in the short report have been discussed for the better part of a decade, it is important to note that guideline and reimbursement momentum just started to build over the past year — the Cologuard role out is still at an early stage, even though the momentum might suggest it is late," he wrote.

In an email, Exact said it remains "extremely confident in the near and long-term growth of Cologuard," and noted that despite doubts from research institutions about the test's growth trajectory and ability to detect early-stage cancer, "the Exact Sciences team continues to prove them wrong, as patient demand increases, provider ordering rises, and insurance coverage accelerates."

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