Why Exact Sciences Is A Great Short At $10

Whitney Tilson profile picture
Whitney Tilson
7.47K Followers

Summary

  • The U.S. Preventative Services Task Force’s Colorectal Cancer Screening Draft Recommendation issued yesterday is devastating for Exact Sciences' only product, Cologuard.
  • I think this is the beginning of the end for the company.
  • My price target for the stock a year from now is $3, so I shorted more yesterday.

The shares of one of my largest short positions (~3%), Exact Sciences, crashed by more than 46% yesterday to close at $9.98 after the U.S. Preventative Services Task Force's Colorectal Cancer Screening Draft Recommendation listed Exact's sole product, Cologuard, a poop-in-a-bucket screening test, as an "Alternative Test" rather than a recommended one, and said numerous damning things such as:

  • The USPSTF found no studies that assessed the impact of screening with FIT-DNA [Cologuard] on cancer incidence, morbidity, quality of life, or mortality.
  • Evidence on the optimal screening interval, if any, is lacking.
  • A theoretical concern about FIT-DNA is whether its use might lead to more frequent and invasive followup testing in persons who are not at increased risk of colorectal cancer because of patient or clinician concerns about abnormal DNA results.
  • There are no data that evaluate how to implement FIT-DNA into a longitudinal colorectal cancer screening program.
  • …empiric evidence is lacking on appropriate followup of abnormal results, making it difficult to accurately bound the potential net benefit of this screening test.

I haven't written about Exact Sciences prior to now because it isn't a fraud/scam or doing nefarious things like so many of the stocks I've written about on Seeking Alpha (see Chris DeMuth's summary of my calls on WRLD, LRN, LL, IOC, DDD and UNIS). Exact has a real product that addresses a very serious problem, the low screening rate for colorectal cancer, the second-leading U.S. cancer killer. Nevertheless, I felt (and still feel) that it's a great short because the test has significant drawbacks that will severely limit its adoption and, in light of this, the valuation is absurd.

While I've never published an article about it before now, I did pitch this stock as my favorite short at the Robin Hood Investors Conference a year ago

This article was written by

Whitney Tilson profile picture
7.47K Followers
Whitney Tilson is the founder and CEO of Empire Financial Research, which aims to provide advice, commentary and in-depth research and analysis to help people around the world become better investors. In the year prior to launching Empire, he founded and ran Kase Learning, through which he taught a range of investing seminars around the world and hosted two conferences dedicated solely to short selling. Mr. Tilson founded and, for nearly two decades, ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Mr. Tilson has co-authored two books, The Art of Value Investing: How the World's Best Investors Beat the Market (2013) and More Mortgage Meltdown: 6 Ways to Profit in These Bad Times (2009), was one of the authors of Poor Charlie’s Almanack, the definitive book on Berkshire Hathaway Vice Chairman Charlie Munger, and has written for Forbes, the Financial Times, Kiplinger’s, the Motley Fool and TheStreet.com. He was featured in two 60 Minutes segments in December 2008 about the housing crisis (which won an Emmy) and in March 2015 about Lumber Liquidators. He served for two years on the Board of Directors of Cutter & Buck, which designs and markets upscale sportswear, until the company was sold in early 2007. Mr. Tilson received an MBA with High Distinction from the Harvard Business School, where he was elected a Baker Scholar (top 5% of class), and graduated magnacumlaude from Harvard College, with a bachelor’s degree in Government. Mr. Tilson is an avid mountaineer – he has climbed Mt. Kilimanjaro, Mt. Blanc, the Matterhorn and the Eiger, and is currently training to climb the Nose of El Capitan. He also regularly competes in obstacle course races and is the two-time champion and all-time record holder in the 50+ age group at the 24-hour World’s Toughest Mudder, having completed 75 miles and nearly 300 obstacles in 2016. Mr. Tilson spent much of his childhood in Tanzania and Nicaragua (his parents are both educators, were among the first couples to meet and marry in the Peace Corps, and have retired in Kenya). Consequently, Mr. Tilson is involved with a number of charities focused on education reform and Africa. For his philanthropic work, he received the 2008 John C. Whitehead Social Enterprise Award from the Harvard Business School Club of Greater New York. He was a member (and, for two years, served as Chairman) of the Manhattan chapter of the Young Presidents’ Organization. Mr. Tilson lives in Manhattan with his wife of 26 years and their three daughters.

Disclosure: I am/we are short EXAS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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