Test volumes: Growth Rate Flattening
Two weeks ago, before the JP Morgan conference, Exact Sciences disclosed its Q4 test volume: 176,000 units. For Exact’s management, who has run a pattern of under-promising and over-delivering, this test volume was disappointing. This was the first time since Citron put out its initial report that Exact has not handily beaten their own estimates, the one metric that has driven the stock:
Failing to demonstrate a double-digit beat indicates a weakness in their story’s armor. Exact should be blowing out unit volumes, and using their hardball marketing effort to beat expectations decisively. For Wall Street to continue to extend them a license to lose money, unit volume hypergrowth has to be there. We think Exact’s weak unit volume metric indicates the company is facing headwinds a lot sooner than expected.
We give credit to research firm Hedgeye for acknowledging this alarming trend.
Last May, Hedgeye critiqued Citron’s bearish piece on Exact, and claimed it was a buy. They were right. At the time, Citron had no catalyst to point to.
Hedgeye pounded the table on January 5, 2018 when they published a report followed by a conference call claiming.
BEST IDEA | Long EXAS: More Fuel In the Tank
Two days later Exact announced their Q3 test volumes. Then, on January 8 Hedgeye abruptly changed its outlook:
“WE ARE REMOVING EXACT SCIENCES (EXAS) FROM INVESTING IDEAS”
This abrupt downgrade was directly due to test volumes that failed to impress. Exact is well aware of this problem. They commented at the recent JPM healthcare conference:
“Moving forward, further growing the Cologuard business is a prime objective for Exact Sciences. To that end, the firm plans to grow its primary care sales force to 350 this year from 250 in 2017.”
Notice their primary objective is to grow their sales force, not to innovate. Let us not confuse this high multiple lab company with an innovative science thought leader.