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Goldman Sachs Initiates Coverage of Exact Sciences with Buy Rating

NEW YORK (GenomeWeb) – Goldman Sachs today initiated coverage of Exact Sciences with a Buy rating, calling the company's colorectal cancer screening test "the best new product cycle in our coverage."

In a report, analyst Isaac Ro gave Exact Sciences' shares a six-month price target of $19 and noted three catalysts to the molecular diagnostic firm's stock — US Food and Drug Administration approval and Centers for Medicare and Medicaid Services reimbursement; a concentrated sales channel that is undervalued; and an undemanding valuation on the company's shares.

Madison, Wis.-based Exact Sciences is currently awaiting word from FDA on its premarket approval submission for the Cologuard stool-based, non-invasive molecular screening test for colorectal cancer. In March, an FDA panel unanimously recommended approval for the test, and while the agency does not have to follow the panel's suggestion, it is widely expected that FDA will approve the test.

In his note, Ro noted that in addition to the FDA panel's recommendation, Exact Sciences has provided strong data from its DeeP-C pivotal clinical trial. The importance of clinical data was spotlighted earlier this week when Exact Sciences' potential competitor Epigenomics announced that the FDA has determined its Epi proColon colorectal screening test to be not approvable due to a lack of data. In particular, the agency wants additional data that demonstrates Epi proColon would increase compliance with colorectal cancer screening in its intended use population — patients who don't currently undergo screening by guideline-recommended methods, such as fecal immunochemical testing or colonoscopy.

In its Deep-C trial, Cologuard demonstrated superior sensitivity compared to fecal immunochemical testing but slightly lower specificity, but Ro said that in a screening test, sensitivity is a "key metric" and lower specificity "would ultimately have minimal impact on patient outcomes, as the only ramification of a false positive result is a reflex colonoscopy to rule out potential disease."

Ro said he anticipates FDA approval by mid-September.

Meanwhile, CMS is conducting a coverage review of the test as part of a parallel review process and Ro said that it is likely CMS will issue a positive coverage decision if FDA approves the test. If approved by CMS, the company expects a crosswalk method to be used in determining the reimbursement level for Cologuard. Exact Sciences has estimated the total reimbursement value of the test to be about $476.

In his own analysis, Ro estimated an average sales price for the test of $320, which implies Exact Sciences will receive $99 combined for the two methylation biomarkers on Cologuard. He said, however, that "this is conservative and note that precedent does exist for methylation markers to receive as much as $140 in reimbursement each."

On the private payor front, he said that the company expects the test to receive an A or B rating from the US Preventative Services Task Force, "implying high likelihood that the net benefit of the test is moderate or substantial." The firm is in discussions with private payors "and we see a high likelihood that Cologuard ultimately achieves coverage from private payers," Ro said.

Furthermore, he said that the value of Cologuard's sales channel concentration is being undervalued by investors. About 10 percent of prescribing doctors account for half of non-invasive colorectal cancer screens, Ro said. "This concentrated sales channel is an underappreciated opportunity in [Exact Sciences'] business model in our view, which gives us confidence in our above-consensus assumptions."

Lastly, he said that his $320 average sales price for Cologuard and estimated market penetration of 3 percent by 2017 is "appropriately conservative and we see risk/reward for [the company] as positively skewed." He called Exact Sciences one of the fastest growing firms in Goldman Sachs' life science tools and diagnostics portfolio and said that he sees "significant upside potential to current valuations."

In afternoon trading today on the Nasdaq, shares of Exact Sciences were up 3 percent at $14.08.

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