Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

All right. Good afternoon. It's our pleasure to welcome Jeff Elliott and Megan Jones from Exact Sciences to the 40th Annual Cowen Health Care Conference. Exact Sciences is our tough larger cap growth pick for 2020. The company's Cologuard test is targeting an annual revenue opportunity of $17 billion. There's a promising pipeline and the recent acquisition of Genomic Health, as not just the market-leading Oncotype test for predicting chemo benefit in breast cancer patients, but a platform for global growth and precision oncology, both organically and inorganically. So Jeff, thanks for being here. We have a pretty aggressive list of topics to cover over the next 29 minutes. So thanks for being here. And now we'll get into that.

I think that's it.

Yes, okay. So let's start with the -- let's talk about a couple of recent developments and some current events. So let's talk about the convert financing. So a week ago today, you did a $1 billion -- what turned out to be a $1 billion convert financing. If we look back to the day before the deal, obviously, the market -- it's been a tough week anyway. Exact's been down as much as 20%, maybe a little bit more than that, coming back to the day before the deal. The stock is now down for the year. So that's not something you like as our top larger cap growth, but that's not something we like either. As you previously indicated, you didn't need to finance after Genomic Health. So did something change?

Nothing changed. Our philosophy has been, all along, the best way to create value for all of you is to maintain a strong balance sheet, and to do that from a position of strength. So when I look back a few weeks ago, when we released our fourth quarter results, we've raised our guidance for the year, and we laid out a bunch of growth drivers that will help us drive growth through this year. And our thinking has always been, if you have a strong balance sheet, you can keep operating the business no matter what happens more broadly. So when I look out of the world right now, obviously, with coronavirus, you see that the stock market is starting to roll over. My personal thought is that we're overdue for a recession, and I look ahead and I see the election coming. So there's all sorts of uncertainty. I want to make sure that we can keep executing on our business plan no matter what happens. And that, that strategy has worked over time. It's allowed us to build a really strong business that create value. So this is the same playbook we've always followed, raise capital from a position of strength, right, when you don't necessarily need it. That way, you can stay in them all.

Makes sense. Use of proceeds?

Nothing specifically allocated. I would say more of the same. We know that investing in our sales force is a very good use of capital, invest into the pipeline, same thing. Possible M&A, although nothing specifically contemplated as far as M&A.

Okay. Probably a little bit redundant, but I'll ask it anyway. I mean, does this deal put you in a position to do something that you've been thinking of that you might not have been able to do 10 days ago?

Again, nothing specifically allocated for the capital, but, yes, having a bigger, stronger balance sheet does enable things that we couldn't have done otherwise.

Makes sense. Okay. All right. The other topical thing that's going on in the news, obviously, COVID-19. The timing of this conference affords us a good opportunity to talk to all of our companies about the potential impact. Clearly, this is spreading beyond China. That being said, in China itself core, Exact didn't have any exposure. Did Genomic Health have any exposure in China?

No material relative exposure or from a supply chain perspective.

Okay. So fine on the revenue side, at least in terms of China direct exposure. Fine from a supply chain standpoint. That being said, how do you think about the potential for impact on overall health care volumes in the past? In bad flu seasons, we've seen Cologuard volumes temporarily negatively impacted. How do you think about that historical dynamic in the context of what's going on right now with COVID-19?

Yes. So flu could be a good proxy. The COVID-19 is an upper respiratory disease, just like the flu. When you look back 2 years ago, flu, at that point, was the worst flu season in about 10 years. And the impact was meaningful in the business that quarter. However, the important thing was -- that was a temporary impact on the business. As soon as the flu subsided, the business actually accelerated out of that, then we had a really strong year. This year, on our fourth quarter call, we talked about the flu also having an impact on the business. Coronavirus, I think it's still very early, so it's something we're watching closely. To the extent that it does have an impact on the business, again, I would think it would be temporary like the flu.

Okay. Let's pivot to the 2020 outlook that you provided fairly recently. So just to set this up, management guided 2020 revenue. So $1.61 billion to $1.645 billion, slightly above the earlier target of $1.6 billion. To the extent that there was any disappointment in the minds of investors, based on our discussions, I think it's fair to say it was largely just a function of pacing more specifically how you guided Q1 relative to how some people were thinking you'd guide Q1. Now with that said, I think it shouldn't be lost on people that you're -- yes, you're still targeting Cologuard revenue growth of 40% plus for the year. We also think that it shouldn't be lost on people that you beat initial revenue guidance by $30 million and $90 million in the past 2 years. So I think there's a history of being purposefully or not a bit conservative at the beginning of the year. That being said, can you explain why, embedded in your guidance, you have this expectation that, and I think this is right, correct me if I'm wrong, that completed orders per doc wouldn't increase this quarter versus the fourth quarter?

So this year is a pretty typical year when it comes to revenue phasing. So keep in mind, with our Cologuard business, there's a 30-day lag between an order and a completed test. And that lag is because when we get the order, we have to send the kit out to the patient. They have to collect the sample. The sample comes back into our lab. We process the sample and then bill the insurance company. So that billable event, that's what we get paid for, so that, on average, it's about 30 days. So when you think about how the calendar works, right, Christmas, New Years, those weeks are very slow from a primary care behavior standpoint, right? Very few people that I know of go out and get physicals during that time period. That results in fewer completed tests and lower revenue in Q1 to start the year. However, as soon as you think of once you get past the holidays, people get back to work, come back from vacations, and you see that care seeking behavior start to tick back up. So you have typically a very strong ramp all the way through and into the summer. Over the summer, again, things are typically softer with holidays and vacations, but then mid-August time frame, things tick back up and stays strong all the way through Thanksgiving, and then things slow down again. So that's typically why. So when I look at -- internally, I look at orders per week or orders per physician. Typically, you have a very strong ramp through the first quarter. However, the impact from the holidays late in December leads to lower revenue or lower completed tests per doctor in Q1.

It just becomes more back-end loaded than an average quarter or at least relative to Q2?

It does. Yes.

Yes. Okay. Maybe just for the year, a similar question. I think mathematically, you guys are assuming, obviously, growth in completed orders per doc, but at a rate that's lower in terms of year-over-year growth than what we saw certainly in 2019. I mean, that metric matters a lot. I mean, by my math, one more completed order per year per doc adds about $150 million in revenue. And that matters right off of a base of $810 million in Cologuard revenue for 2019. So again, in 2019, that metric increased 34% year-over-year. I think your guidance assumes somewhere between 10% to 15% growth year-over-year. So it's a tough comp. But you've got Pfizer gaining momentum. You've got more salespeople. You've got 45-plus. We talked about the fact you're doing a little bit better, getting those folks who ordered Cologuard 3 years ago to come back and order. Is this just beginning-of-the-year conservatism? Or is there something we should think about in terms of why -- again, 15% growth is good, but why isn't this a little bit better?

The math you walked through really speaks to the size of this market, which, as you know, is 106 million people. At the same time, there's over -- there's well over 200,000 providers out there that we're targeting. Last year alone, we added 50,000 new order providers. This year, we expect maybe not quite that strong, but another very strong year for new providers. So when we bring on new providers, that puts some downward pressure on that test per doctor. Because typically, the typical new provider that orders the first Cologuard is marketing converted, meaning that a patient or consumer went into their doctor and asked for Cologuard. At that point, we'll certainly fill that order. But at that point, that doctor may not be convinced they're really sold on Cologuard. At that point, it comes down to the sales force going into the doctor and making sure they're educated on how to order the test, all the science behind it, making sure they understand the reimbursement and driving that order rate higher. But temporarily, new doctors put downward pressure on the orders-per-doctor number. So the way I look at it, I look at different cohorts of physicians. Doctors should say Q1 of '15 or Q1 of '16. I look at these quarterly cohorts. And the exciting thing for me is that all of those cohorts, whether you first ordered 5 years ago or 5 quarters ago, all those cohorts continue to show growth, year-on-year growth. And which typically, what you'd expect is after maybe a year or 2, the more mature cohorts start to flatten out. We're just not seeing that. We're seeing very robust growth even 5 years in after a doctor first orders the test. So I hear you on the math. That's just the way the math works. The good news is all these cohorts are growing. Same thing on the rep side. As we add more and more cohorts of reps, they keep getting more productive. So that tells you we've got very broad-based growth for years to come.

Now super helpful. And if I'm listening right, what I'm also hearing is a doc that orders for the first time today versus a doc who ordered for the first time, pick your year, 2 or 3 years ago, the doc that's ordering today is ordering more quickly than that doc 3 years ago. Is that fair?

Correct. The doctors that are ordering now for the first time are started at a higher order point than doctors, say, 3 years ago. And that trajectory is steep. The important thing is even 3 or 5 years into your -- into ordering, you keep ordering more. But the growth hasn't flattened out after a given period of time.

Okay. That's helpful. All right. Let's go through a few of the key growth drivers for the company heading into 2020. So just to name a few, you have medical guideline inclusion and FDA clearance for colorectal cancer screening in the 45-plus population. That's a tailwind. You have advancements that you're making with Veeva and Epic integration, which we'll talk about in a second. I mentioned before that in our discussions, and going back to the Q4 call, you guys seemed to sound pretty good about your ability to do a better job in capturing folks who ordered Cologuard 3 years ago. And then you sound actually pretty good on Pfizer and the potential for Pfizer being even more targeted and more focused this year. So starting with 45-plus, what's the status of where Exact is in terms of marketing and penetrating that market and getting reimbursement coverage for that population?

So 45 to 49 is a huge opportunity. In that age group, as you know, there's 19 million average-risk people, and almost all of them, by our math, are available to be screened right now. The typical 45 to 49 year olds is busy with kids, careers. At that point in your life, you're unlikely or you're less likely to want to take 2 days of work for colonoscopy. So we think the Cologuard fits into that lifestyle very well. In September of last year, we got FDA approval for the expanded label. So we're really excited about that. Since then, we've trained our sales force and the Pfizer sales force. So the reps are out there now educating providers on the label expansion. We've also updated our TV ads to include new wording around 45 to 49. And we're working with the payers on making sure that Cologuard is available without any friction, without any cost sharing. And what we're seeing today is over 70% of the users in that age group have coverage in full, meaning they pay 0 out of pocket. It's an important number. We want to make sure that, that number goes up over time. If you look across all ages today, about 95% of our customers pay 0, which is a really good number. But in the younger age group, the number is a bit lower still. The next big update that we're looking for is the remaining key clinical guidelines, USPSTF, we expect that update to come of the draft -- update to come at some point this year with a final update next year. That guideline is important because under the Affordable Care Act, whatever that guideline recommends, if it's an A or B rating, then the insurance companies have to cover that test without any cost share. So that will be the next big update for insurance. In the meantime, our reps are out there educating doctors and driving that business. We're still very early days. It's -- last year, it wasn't a material part of our revenue. However, this year, it will be a material part of the business. It is a big growth driver for us this year.

That's helpful. Just trying to think where should we go next. Well, let's talk about the importance of Epic. Maybe if you could just frame that and describe where you are in the process of moving Cologuard on to Epic more fully.

I think it's one of the leading electronic health care record systems out there. About 45% of primary care doctors in the U.S. use Epic. And typically, if you're in a large health system, I think it's, by far, the dominant provider there. So the reason why it's so important for us is that, last year, we installed Epic internally. So we are a health care provider. So now when we register users, really log orders, they get logged into the Epic platform. Over time, as we maintain that person's record, it's maintained in Epic. As we send results out and do medical billing, that will happen to Epic. So we have the world's leading electronic health care system installed internally. It also is important when we look ahead to the future. Because, today, 70% of our orders come in via fax, which means we're talking 50,000 faxes per week, right? So over time, Epic is going to release a new version of their software in the fourth quarter of this year. That will enable electronic ordering for all of their customers. Really think of this as a 2021 event. All of Epic's customers will be available to order Cologuard electronically right in their native system. When doctors order electronically, they order over 60% more than when they order via fax. It also cost us less money to process electronic order than a fax order. Faxes are messy. There's often information missing or we can't read it. Electronic orders come in, we have all the information we need. It's very easy to process. So electronic order there's big, better orders, a better margin profile and overall better user experience.

Does it allow you to attract people better down the line and find patients down the line 3 years after they order an initial Cologuard?

It will. And that's part of the beauty of this platform is that having 1 universal platform for order entry, all of our customer service. That information can also feed, to your point, 3-year retesting. So a big opportunity for us is that when you look out at today from patients 3 years ago, there's over 370,000 patients who become eligible for 3-year retesting this year. But because they're built-in growth driver for us, longer term, if you model this out, I think over half of our revenue will come from 3 year retesting. So this is an area we have to get it right. We've put in a tool recently that will allow our sales force through the Veeva platform to pull up a list of all the patients due for 3-year retesting. And they can share that right there on the spot with the provider. That way the doctor knows who is eligible for reorder right now to make sure they get that patient tested. And that's part of the way we're seeing a better capture rate on that 3-year retesting.

Can you just briefly talk about Veeva? That's something that I had to do a little bit of work on to get caught up. Because it sounds like it's important and something that you guys are pretty enthused about.

Yes. So Veeva is the leading health care customer relationship management software. It's really built on the Salesforce.com platform. And almost all of the top 20 pharma companies use it. And those are the reasons why it's a very slick CRM platform. So we went live with our sales force on Veeva in December. So what that enables is that if you're a rep, today, all of the presentations you make, all of the information you shared with the provider is done through the Veeva platform. So they have an iPad they use. They can run through all of our clinical studies on the iPad. They can also go about planning their day all through the Veeva platform. So Veeva will actually suggest a list of doctors that are due for a visit. Look, here's all the doctors you should see. And not only -- it also tells you the correct way to route your car through that path, through the territory that day to make sure you hit all those doctors in the same manner based on real-time traffic information. Over time, this platform will create information sharing with both Pfizer and the providers. Because Pfizer's on the same Veeva platform that we are, our reps can sure notes back and forth. That way, Doug, if you and I are working together, you can leave a note saying, "Jeff, make sure you talk about clinical performance." And I can respond back through Veeva. Doctors, if you want to share e-mails or information with doctors, we can do all that through Veeva. So Veeva is a top-notch platform. Our reps are really excited to have that.

Is this something you became more aware of in terms of the benefits through the Pfizer collaboration?

Yes. So we had not been using Veeva. We are aware of Veeva, of course, to see what Pfizer can do with it, really opened our eyes to the benefits of it.

All right. So probably a not-so-awkward segue to Pfizer. What -- Pfizer throughout last year was exceeding contractual minimums in terms of the number of details. Yes, I think the belief was that there were some distractions within that sales force because of things that were going on separate from the Exact my words, not yours. As we look further into 2020, you seem pretty confident that Pfizer is going to be as focused, if not more focused, than ever even compared to what was a pretty good 2019. What gives you that confidence?

Yes. Pfizer has been a great partner. If you think back to August of 2018, when we first announced the Pfizer partnership, consensus revenue for last year was $610 million. We ended up doing $810 million. So we outperformed our expectations in the Pfizer because of the alliance expectations. Part of why we're more excited about Pfizer this year is that the reps, they'll have 5 quarters of experience selling Cologuard. So any rep that has got 5 quarters of experience is going to be more productive than a rep who's branded to a product. So better experience with the product is one. Another thing is that, today, Pfizer has, I'll say, put more attention on Cologuard. Because LYRICA went off-patent in the middle of last year. That's one less product for the Pfizer team to sell. So Pfizer is more focused on Cologuard than ever before. Another big benefit is that now that Cologuard has been part of their sales pick for over a year, Pfizer's enhanced some of their targets. Some of the doctors they call on did refine that list based on their experience with Cologuard. So we expect that to help them be more productive this year. And on top of that, the Veeva platform will allow Pfizer and us to work better together. So we're very excited about the Pfizer contribution this year.

Talking a little bit about pipeline. Cologuard 2.0 It's a product you have in development. The intent is to increase specificity for maybe 7% on current Cologuard to over 90% and also drive a COGS benefit. What comes next in terms of the BLUE-C study in terms of moving forward with Cologuard 2.0.

Yes. So as you mentioned, Cologuard 2.0, the goal of that is to improve upon what is already a very good test and further improve the false positive rate. We shared some data in October showing that through a case control study, we see a path forward to completing that to making sure the performance does improve. Based on that, we kicked off BLUE-C, which is a 10,000-person study. The intent of that is to bring Cologuard 2.0 through the FDA. So enrollment on that study should conclude at some point next year, probably in the middle of next year. And then we'll test the samples and use that as a foundation for the FDA submission.

Enrollment should complete middle of...

At some point in next year.

In 2021 or 20...

By '21, yes. A typical time frame on these is it takes over a year or to enroll. And that's based on the experience we had with both DeeP-C, which was for the pivotal study for Cologuard 1 and a recent study we've been working on called Act Bold, as you've read about. Act Bold is a prospective study of 7,500 people, where we're collecting stool and blood. So the experience with that helps inform the design and operations of BLUE-C.

Does Act Bold put you in a position to potentially expedite the typical time lines with BLUE-C?

It could because a lot of these sites that have been enrolling for Act Bold have converted over to BLUE-C, but that should...

Right. Right. And why down to age 40 for BLUE-C?

The idea is to help future-proof Cologuard 2.0. What we noticed for Cologuard 1 is that our DeeP-C study had enrolled patients ages 50 to 84. So over time, the reason we did this because, historically, colon cancer screening always start at age 50. Now with increasing evidence showing that colon cancer is starting earlier, which is -- that's what triggered the ACS, so the DeeP-C screening should start at age 45, you've seen over a 50% increase in incidents in the past 20 years in that younger issue, ages 45 to 49. So with that in mind, our thought is, let's gather the evidence, start at age 40. That way down the road, if ACS or other guideline bodies lower their screening age, we'll have the evidence to use to support a possible expanded label.

Got it. What about the decision to include blood collection in both BLUE-C as well as Act Bold? And maybe to take a step back, I mean, liquid biopsy, development is a clear area of excitement for Wall Street and Main Street alike for Exact. I think it's viewed as an opportunity as well as a potential area of concern, given how much competitive focus there is on developing a blood-based colorectal cancer screening test. So how are you addressing the opportunity as well as the threat through what you're doing with or what you've done with Act Bold and what you're planning to do with BLUE-C?

We've been working on a blood-based test for over 5 years. If you think back to about 11 years ago, when our CEO came and really start -- restarted Exact Sciences, his initial thought was developing a blood-based colon cancer screening assay. And the science at that point, and still today, suggests that accuracy in early-stage cancer and pre-cancer is going to be much lower through a blood-based test than a stool-based test. And that continues to hold. Early stage colon cancer starts on the interval of your colon. The interval of your colon does not have a blood supply, meaning that the tissue, the biomarkers that are exfoliated off those early stage polyps doesn't get -- routinely get into the blood supply. Early stage colon cancer is so important to find because 75% of all the cancers you would find in a screening setting are early stage. Cologuard can find 94% of them, as proven in DeeP-C. Blood-based tests typically peak out 60%, maybe 70%. If you can't find the majority -- the vast majority of early-stage cancers, you don't have a screening test. So our goal is to enhance Cologuard. It's a Cologuard 2.0. At the same time, we think that, possibly, there's room to have a blood-based test on the market that can fill a niche. There's some patients out there who won't do anything else, right? We think it's a smaller part of the market. Maybe it's that last 10%, 15% of the market, that all they'll do is a blood-based test, even if it means lower accuracy. So our goal is, let's collect blood along with stool. That way, if the technology advances to a point where we can get the accuracy up enough, we will bring that product to market, too. So we're collecting stool and blood, both in Act Bold for R&D and BLUE-C, which is the pivotal registrational study.

You talked about where a test like this could have a role on the market. And I think you're describing largely the U.S. Is there an opportunity for blood-based tests outside the U.S. to have more of a role, given testing adherence is a lot lower or the percentage of folks who we would think should be tested is a lot lower?

Yes. In the U.S., part of why we think it's more of a niche test is that if you look at the kind of the life-years-gained benefit from screening, even if you had a blood test that's 100% accurate, it can find hard sort of cancers and pre-cancers. It's -- the light years gained from screening is far less than the FIT test unless you can find pre-cancer. And so far, nobody has shown the ability to find pre-cancer. So even if it tested even at 100% accuracy, it's going to have a hard time getting to market and be as successful without pre-cancer. So that's a big part of why we think it's more of a niche test.

In the U.S.?

In the U.S. In Europe, screen rates are lower. The issue with Europe is that the reimbursement pathway is very challenging. Most of Europe uses the FOBT test, which is about a $5 test. Most of Europe has not converted to the FIT test because it's $15 instead of $5. So if you can bring a test to market with high specificity and very low cost that I think it could meet the needs of the European market, that is a very high bar, though. Part of why -- that's part of why Europe has a far higher incidence rate than the U.S. for a similar-sized population, much lower screening.

Right. Just thinking about the pipeline beyond Cologuard. I think it's fair to say your next major product in development, at least time line-wise, is Liverguard. And liver is the -- for those who don't know it, the sixth largest cause of cancer death in the U.S. I think you guys have talked about -- again, correct me if I'm wrong, as always, but I think you guys have talked about an annual revenue opportunity that, that could approximate $500 million?

Per year.

So in terms of what comes next there, what should we be looking for this year? And is it still possible that you could generate some revenue on Liverguard by year-end?

Yes. The goal is to make the liver test available this year. Again, the target market here in the U.S. is 3 million people with advanced liver disease. So these are typically people with hepatitis B or cirrhosis. The reason why you test there is because that's where over 90% of liver cancer happens. It happens within that high-risk pool. It's different than color cancer. Most colon cancer happens in the average-risk pool liver. You test the high-risk market. If you test it and you find that liver cancer early, you can improve outcomes. So typically, somebody who's in the screening pool for liver disease, you can double the 3-year survival rate, it's still bleak. You take it from 1 out of the 3 people making it 3 years to 2 out of 3, but you still improve outcomes. So the goal here is to get more people tested. Today, fewer than 1 out of 3 people, who are indicated for liver cancer testing, are tested for the recommendation. So the goal here is to get more people tested. The reason why we're so excited, consider this the first proof point. We have product coming out of our pipeline and being run through the combined company. The test -- the plan is to run their tests through the Genomic Health lab using the Exact Science's GI sales force and a lot of the IT infrastructure we developed for Cologuard. So it will prove that we can develop and bring a new test to market through this combined company.

And that answers, I think, one of my questions that the plan is to launch this as a lab-developed test in California through the Genomic Health lab, but is there the possibility that you would seek FDA approval for this down the line?

Yes. The test did earn a few breakthrough device designation. So we're working with the FDA on what that path forward would look like. We plan to make it available as an LDT later this year.

Okay. We only have about a minute left. Maybe just to close on financial targets, of course, we can cover more in the breakout. On the Q4 call, you announced a couple of acquisitions, Paradigm and Viomics. Obviously, it's a lot smaller than Genomic Health. I guess the question is, what's the appetite for more M&A this year?

Yes. The focus on the business today is making sure that Cologuard and Oncotype continue to having the strong momentum that they've had. To the extent that we find an interesting technology that would help advance our pipeline or accelerate growth, that's something we'd look at. But the focus is on running what we have.

Okay. And then last one on EBITDA breakeven. I think you actually got there in the fourth quarter. Is the thinking that, on a normalized basis, you can be at EBITDA breakeven by the end of 2020?

I think that's fair. I mean, the goal is always -- has been to do the right thing for the long term, which our view is I meant grow the top line and build a really strong infrastructure. With the growth we have in Cologuard and the strong margins in Oncotype, then, yes, expect us to be EBITDA positive very soon.

Okay. All right. We will cover more in the breakout. That was really great. Thank you for taking the time.

Thanks, Doug.