Risk-Reward Still Suggests Exact Sciences Is A Buy, But Be Cautious

Following EXACT Sciences Corporation EXAS's beat-and-raise quarter, Bank of America Merrill Lynch said risk/reward still suggests the stock is a Buy, although suggesting to proceed with caution due to valuation.

Analysts Anne Edelstein, Derik de Bruin, Michael Ryskin and Juan Avendano noted that second quarter Cologuard volume rose 150 percent year-over-year to 135,000 tests, exceeding the buy-side expectations of 125,000 and the firm's estimate of 121,000. The analysts attributed the upside to increased new doc orders and re-orders from the 70,000 docs already in the system.

BofA also noted that gross margins expanded 16 basis points to 69 percent. Management raised its 2017 test guidance by 80,000 tests to more than 550,000 compared to the firm's estimate of 500,000. The firm clarified the guidance assumes about 150,000 tests completed in the third quarter and 165,000 in the fourth quarter.

Consequently, the firm raised it 2017-2020 volume estimates by around 70,000/90,000 tests to 570,000/845,000 tests, implying 2-3 percent penetration of the average risk colorectal cancer screening market.

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Additionally, the firm is encouraged by the 16 percent sequential increase in ordering docs, with word of mouth and the DTC campaign paying dividends. Going forward, the firm believes the opportunity to get 30 percent, plus, penetration of the overall market depends on the depth of practice penetration.

"We believe that re-ordering rates will continue to accelerate in 2H17 given the benefit from broadly publicized commercial payer coverage decisions/contracts that were announced in 2CQ," the firm added.

As such, BofA reiterated its Buy rating on shares, with a $40 price target.

However, it's somewhat cautious on valuation, given that the stock trades within 5-10 percent of its base approximation of discounted future cash flows from Cologuard.

At time of writing, shares of EXACT Sciences were rallying 9.63 percent to $40.92.