[Updated 7/29/19, 10:19 am CT. See below.] With ambitious sales goals and its stock trading at an all-time high this year, cancer diagnostics firm Exact Sciences decided to go shopping. The result is a deal announced Monday to acquire Genomic Health for $2.8 billion in cash and stock, a combination that Exact CEO Kevin Conroy argues will create a global leader in the sector.
“Together we have a stronger financial profile than on our own, allowing us to continue to invest in growth opportunities,” Conroy (pictured above) said on a conference call Monday with financial analysts. “We’re bringing together complementary capabilities to create a leading cancer diagnostics company.”
By mid-morning, Exact’s stock (NASDAQ: EXAS) was down about 10 percent to around $106 per share, while Genomic Health’s stock (NASDAQ: GHDX) was up about 3 percent to nearly $71 apiece. [Updated stock info.—Eds.]
It’s the biggest acquisition to date for Madison, WI-based Exact, which has undergone a 10-year turnaround led by Conroy. The company was on the brink of death in 2009, but is now valued at more than $15 billion as sales of its flagship product—a stool-based colorectal cancer diagnostic dubbed Cologuard—have surged. Exact delivered $454.5 million in revenue last year, and in its latest quarter it saw sales of $200 million, a 94 percent jump from the same period in 2018. It screened approximately 415,000 patients with Cologuard in the latest quarter, a 93 percent year-over-year increase.
But the company isn’t profitable, and one of the big questions has been where its next source of growth would come from. Exact is developing experimental diagnostic tests for other types of cancer, including conducting research on DNA-based liver cancer diagnostics in partnership with Mayo Clinic. But it’s unclear if or when those products might hit the market; the company was aiming to launch a prospective clinical study of the liver cancer test this year, Conroy told Xconomy in March.
Acquiring another company could be a faster way to boost the business. Genomic Health generated $394.1 million in revenue and a $25.7 million profit in 2018, after posting losses in each of the previous four years. Today it reported $114.1 million in second-quarter revenue, a 19 percent year-over-year increase. The company also raised its financial guidance for all of 2019, projecting it will deliver between $448 million and $452 million in revenue and a profit of $56 million to $60 million. The earlier guidance was $436 million to $448 million in revenue and $48 million to $54 million in net income.
Exact also raised its full-year revenue guidance to $800 million to $810 million, up from an earlier projection of $725 million to $740 million. The updated guidance doesn’t include the potential impact of acquiring Genomic Health, Exact said. [Added guidance figures for both companies.]
Genomic Health, a Redwood City, CA-based company founded in 2000, sells diagnostic tests that analyze gene activity in tumor tissue samples from patients with breast, prostate, or colon cancer. The idea is to glean biological information that can enhance treatment decisions. Most of the company’s flagship tests, branded Oncotype DX, are developed in-house, but it also markets a test developed by a partner firm, San Diego-based Epic Sciences.
Genomic Health said it delivered 38,470 Oncotype test results in the second quarter, up 14.5 percent from the year-ago period. Notably, the number of tests conducted for patients located outside the US grew 21.2 percent year-over-year; international tests represented 23.9 percent of total test volume in the second quarter, the company said. [Added this paragraph.]
The deal will enable Exact to move into new types of cancer diagnostics and expand internationally, and both companies could benefit from combining their product pipelines and potentially selling multiple tests as kits, according to a research note from financial analysts at SVB Leerink.
But there are early questions about the deal. For one, SVB Leerink analysts see “limited synergies” in uniting the two companies’ teams selling to primary care doctors and oncologists, although there could be beneficial overlaps in the OB/GYN and gastrointestinal practices.
“Investors, we believe, are going to question the near-midterm strategic rationale for the deal despite a still-attractive valuation,” SVB Leerink analysts wrote. [Added analysts’ comments.]
Under the deal terms, for each share of Genomic Health common stock they own, Genomic Health shareholders will receive $27.50 in cash and $44.50 in Exact shares, subject to a 10 percent “collar” based on Exact’s volume-weighted average stock price for the 45 trading days ended July 26.
The deal has been unanimously approved by both companies’ boards, but still needs the approval of regulators and Genomic Health stockholders. If all goes well, the companies expect the deal to close by the end of this year.
Together, the companies project they could generate about $1.6 billion in revenue and $1.2 billion in gross profit in 2020. During the third full year after the transaction closes, they expect to generate annualized cost savings of about $25 million, mainly by “reducing public company costs and purchasing optimization,” according to a press release.