Could Exact Sciences Corporation Really Be Worth $3 Billion?

Source: Exact Sciences, Facebook.

I don't know about you, but when I see the day's stream of analyst rating and price target changes I tend to roll my eyes a bit. It's not that Wall Street analysts don't have a grasp of the underlying fundamentals and trends for the companies or industries they cover, because they generally do. It's that they tend to focus on short-term price drivers instead of looking to the long-term when establishing their price targets.

But every once in a while a price target will absolutely grab my attention, such as the high-end estimate out of 12 Wall Street firms that suggest molecular diagnostics company Exact Sciences could be worth $34 per share, or $3 billion in total market value. Based on Exact Sciences' closing price Thursday (ironically following a downgrade from Goldman Sachs), this high-end estimate implies that Exact Sciences could still increase in value by 59%.

Could this wild price target estimate become a reality for shareholders?

Let's take a look at both the catalysts and headwinds that could help and hinder such a scenario, and then I'll divvy out my thoughts at the end. First we'll begin with Exact Sciences' headwinds.

Risks Exact Sciences will have to overcomeFirst and foremost, Wall Street and investors are going to need to see a better uptake of Exact Sciences' Cologuard DNA colon cancer screening system than what was reported in the fourth-quarter.

Source: Exact Sciences.

According to Exact Sciences' Q4 press release, the company reported just $1.5 million in revenue and "over 4,000 Cologuard test results." Understandably, Exact Sciences deserves a little bit of breathing room, since it's launching a revolutionary, noninvasive product capable of detecting DNA abnormalities based on cells shed on a patient's stool, which are then analyzed in a lab. However, with the Food and Drug Administration giving Exact Sciences the green light to market its product in August, and in October getting Medicare reimbursement approval from the Centers for Medicare and Medicaid Services, investors were clearly expecting more.

Source: Department of Health and Human Services, Facebook.

Another big concern for Exact Sciences is that the Affordable Care Act, better known as Obamacare, is designed to lessen third-party businesses' reliance on government-sponsored healthcare (i.e., Medicare and Medicaid) over time. In short, this could mean that the $502 Exact Sciences is being reimbursed for each Cologuard test by Medicare may shrink in the coming years. It also means Exact Sciences may place added focus on targeting a significant number of private-insurance payers.

Lastly, there's a genuine concern that Exact Sciences will continue to dilute existing shareholders in order to finance operations. Just last year Exact Sciences issued 10 million shares at $12.75 in April and another 4 million shares at $25.75 in December. The end result was the company ending the year with a somewhat healthy $282.8 million in cash. But Exact Sciences lost $100 million on the dot in 2014. If Cologuard's uptake is slower than expected and the company needs to beef up its marketing effort, Exact Sciences may need to dilute shareholders once again with a common stock offering.

Why $3 billion could be within reachDespite these headwinds, there are plenty of reasons to also believe that Exact Sciences could hit a valuation of $3 billion.

To begin with, it's dealing with an enormous market opportunity. According to Exact Sciences, colon cancer is the most preventable form of cancer, and there are 23 million people aged 50 and older who are advised to get a colon cancer screening regularly who fail to do so, providing a massive market potential for Exact Sciences. If even 1% of these 23 million decide to get screened (and using the prior Medicare reimbursement of $502 as its payout figure), Exact Sciences could bring in $115 million in annual revenue. To be clear, Cologuard is not meant to take the place of a traditional colonoscopy, but merely provide a noninvasive starting step to guide patients and physicians as to whether a colonoscopy is necessary.

Source: Exact Sciences, Facebook.

Secondly, Exact Sciences has practically no competition. The closest competitor is Germany's Epigenomics, which was turned away by the FDA in 2014 with the request for additional information. Although Epigenomics' blood-based colon cancer test is approved in Europe, it doesn't appear to have a shot at being approved in the United States unless it runs another trial. This could give Exact Sciences ample time to build an insurmountable early mover advantage in the field of noninvasive colon cancer screening tests.

Finally, Cologuard has cleared the biggest hurdle of all: Medicare and insurer coverage. Insurers would much rather pay a little bit for their members to be tested now in order to catch adenomas early than pay tens or hundreds of thousands of dollars on specialized cancer therapies down the road. This mode of thinking, combined with a reduced uninsured rate vis--vis Obamacare, could result in wide acceptance of Cologuard as the standard-of-care prior to a colonoscopy.

Could $3 billion be reality?Now that you have a better idea of what Exact Sciences' headwinds and catalysts are, let's return to the original question: Could Exact Sciences actually hit a market value of $3 billion?

Source: Exact Sciences.

Although Cologuard sales limped out of the gate rather than launching, I do believe Exact Sciences has all the tools necessary to hit a $3 billion valuation. If Exact Sciences can meet Wall Street's 2018 consensus EPS estimate of $1.94, it'd be valued at a forward P/E of 17.5, but would still be supporting a revenue growth rate of 30%-40%. That works out to a PEG ratio of around 0.5, which is pretty cheap in my opinion.

Of course, Exact Sciences is going to need to find a way to get physicians and consumers to be comfortable with the product. The insurance coverage is falling into place nicely, it's just a matter of educating physicians and consumers of its convenience and superior results compared to the prior standard of care. It could take some time for this to happen, but I believe patience will pay off, and Exact Sciences could, one day, explode past even the most bullish Wall Street estimate.

The article Could Exact Sciences Corporation Really Be Worth $3 Billion? originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.