Today, Exact Sciences (EXAS) announced a definitive agreement to acquire Genomic Health (GHDX) for close to $2.8 billion. The companies finalized the deal at a 19% premium to Genomic Health’s volume-weighted average price in the last 30 days. They expect it to complete by the end of 2019. Both companies are prominent players in the cancer diagnostics space.
Revenue performance of Exact Sciences
In the second quarter, Exact Sciences reported revenue of $199.9 million, a YoY (year-over-year) rise of 94%. The company reported Cologuard test volumes of 415,000, a YoY rise of 93%. It reported a net loss of $38.4 million, a YoY rise of 5.49%. Exact Sciences reported a gross margin of 74%.
Based on the robust uptake it saw in the first half of 2019, the company has revised its 2019 revenue guidance upward. It expects its revenue to be $800 million–$810 million in 2019. This estimate is higher than its previous guidance of $725 million–$740 million. It also doesn’t assume the addition of potential revenue from Genomic Health.
Revenue performance of Genomic Health
In the second quarter, Genomic Health reported revenue of $114.1 million, a YoY rise of 19.4%. The company reported Oncotype DX test volumes of 38,470, a YoY rise of 14.5%. The company reported a net profit of $16.0 million, a YoY rise of 92.77%.
Based on its solid performance in the first half, Genomic Health also revised its 2019 guidance upward. The company expects its revenue to be $448 million–$452 million in 2019. This estimate implies a YoY rise of 14%–15%. It also compares favorably with the company’s previous 2019 revenue guidance of $436 million–$448 million. The older guidance implied YoY revenue growth of 11%–14%. The company expects its net income to be $56 million–$60 million in 2019, higher than its previous guidance of $48 million–$54 million. It’s guided for 2019 diluted EPS of $1.44–$1.54, higher than its previous estimate of $1.23–$1.38.
Revenue and earnings growth
According to Exact Sciences and Genomic Health’s investor presentation, the deal is expected to combine the strength of the two leading cancer diagnostic brands, Cologuard and Oncotype DX. They expect the combined company to report pro forma revenue of close to $1.6 billion in 2020. They also expect it to report a pro forma gross profit of close to $1.2 billion in 2020. The combined company is expected to benefit from annualized cost synergies worth $25 million. This benefit should commence in the third full year after the deal’s completion. These cost synergies should arise from purchase optimization and reduced public company costs.
Increased market opportunity
Cologuard is targeting an average-risk colorectal cancer screening opportunity worth $15.0 billion in the US market. The test is currently approved for people who are 50 or older. The company has also submitted an application seeking FDA approval as a colorectal cancer screening test for people aged 45–49. If it’s approved, this label expansion will increase the test’s addressable market by an additional $3.0 billion. The company has set a long-term revenue target of $7.0 billion for Cologuard.
Genomic Health’s Oncotype DX tests help determine the appropriate treatment for patients suffering from breast, prostate, and colon cancer. The company’s tests overlap in the colorectal cancer market. Genomic Health is targeting the $700 million breast cancer screening market in the US. The company is also targeting the $500 million international breast cancer screening market. It’s also focused on the $600 million US prostate cancer screening market. Finally, the company is targeting an additional $200 million opportunity in other tumor indications.
Following the deal’s closure, Exact Sciences will be targeting a $20 billion market opportunity in the cancer screening space. According to SEER (Surveillance, Epidemiology, and End Results) data, colorectal, breast, and prostate cancer together account for almost 40% of solid tumor incidences in the US. Exact’s acquisition of Genomic Health will reduce its overreliance on the colorectal cancer screening market. Besides divestitures, the company will also secure products targeting high-growth areas in the cancer screening space.
Increased penetration and research funding
After the deal’s closure, Exact Sciences will have robust presences in more than 90 countries in the cancer diagnostics space. It will also have more than 1,000 employees in its commercial organization. The combined company will also have an annual research and development budget of $200 million—significantly higher than its peers’.
Exact Sciences’s and Genomic Health’s valuations
Exact Sciences is currently trading at $108.41, 8.06% lower than its previous close. Part of this fall may indicate investor concern about the deal. However, shares of acquirers can also fall because traders enter larger merger arbitrage positions during these deals. Genomic Health is currently trading at $71.02, 3.44% higher than its previous close.
The ten analysts tracking Exact Sciences have an average target price of $119.89 on its stock. This target indicates a 12-month potential upside of 10.63% based on its current trading price.
To read more about recent acquisition deals in the healthcare industry in 2019, read AbbVie Announces Acquisition of Allergan: What You Should Know and What Investors Should Know about BMY-CELG Deal.