Why Exact Sciences Corporation Stock Rocketed Higher in August

What happened

Exact Sciences (NASDAQ: EXAS), a mid-cap cancer diagnostic company, saw its shares gain a healthy 26.7% last month, according to data from S&P Global Market Intelligence. The spark?

Exact Sciences’ shares powered higher in response to a co-marketing deal with pharma heavyweight Pfizer (NYSE: PFE) for its DNA colon cancer screening test Cologuard. As part of this deal, Pfizer will commit some of its highly experienced sales representatives to Cologuard’s marketing effort starting in the fourth quarter of this year. The two companies will also spend an additional $138 million on the test’s promotion through 2021.

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So what

While Exact Sciences has done an admirable job of marketing Cologuard on its alone — evinced by the test’s lightning-fast adoption rate since its approval in 2014, this deal is undoubtedly a positive development for the company. Pfizer, after all, has a far more extensive network with various health systems than Exact Sciences. That should significantly boost Cologuard’s penetration rate moving forward.

Now what

That’s the good news. The bad news is that Exact Sciences’ stock may have pushed too high, too fast. The company’s shares are now trading at a monstrous price-to-sales ratio of 26, after all. The long and short of it is that the market is clearly banking on Exact Sciences being able to bring additional cancer screening tests to market soon.

Alternatively, investors could be speculating that this deal with Pfizer might be a prelude to a buyout. Pfizer does need to bring in additional growth drivers with its top-selling pain medication Lyrica going off patent, and the drugmaker has been building out its oncology portfolio of late.

Regardless, Exact Sciences’ stock may struggle to push higher in the short term. Pfizer is likely to let this marketing deal play out for a while before making a formal offer — assuming that a deal is even in the cards. And Exact Sciences’ annual sales alone aren’t expected to ramp up fast enough to justify the company’s rather rich valuation anytime soon. As a result, investors may want to tread lightly with this red-hot biotech stock for the time being.

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George Budwell owns shares of Pfizer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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