Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Barclays Virtual Health Care Conference. This is Jack Meehan from the Life Science Tools and Diagnostics team here at Barclays. And pleased to be hosting now Exact Sciences, joined by Chairman and CEO, Kevin Conroy; CFO, Jeff Elliott; and Head of Investor Relations, Megan Jones. Thanks again for joining us in the new format. Kevin, would you like to kick it off with some introductory comments?

Yes. Thanks, Jack, and welcome, everybody. It's great to be on the call and in certainly interesting times. I'd like to first lay out a high level of strategic overview of where Exact Sciences plans to go to innovate and bring new cancer tests to patients. We're focusing across multiple different cancer types and the range of early cancer detection and diagnosis all the way through answering the questions about guiding treatment, the appropriate treatment, whether to go on chemotherapy, what's the right drug, and then ultimately into minimum residual disease and recurrence testing, and answering the question as to whether a therapy is working. These are large opportunities. If you look back 5 to 10 years ago, prospects for cancer diagnostic companies were much smaller in terms of market size than they are today. And what we've seen is an explosion of capabilities enabled by next-generation sequencing, and our products like Cologuard. Bringing together Exact Sciences and Genomic Health brings together the 2 best brands, we believe, in cancer diagnostics, Cologuard and Oncotype DX, and the 2 best and largest commercial organizations. So we have tremendous scientific capabilities, 250-person R&D team capable of developing tests across this diagnostic spectrum. And we have a range of functions that are best-in-class, giving us the largest, incredibly fast-growing and global cancer diagnostics company that is in a great position to have a real impact in how people are diagnosed with cancer, hopefully much earlier. That's a huge goal. And then giving patients who are diagnosed with cancer more treatment options. We're -- we have a team, now 2 big teams, the Exact team and the Genomic Health team, combined as 1, putting together plans to execute on our long-term strategic plan, and people are focused on that. So I'll pause there and happy to answer your questions, Jack. And Jeff and Megan here are available as well.

Great. And thanks for the introduction. So I wanted to start with the topic du jour, which is the coronavirus. Obviously, as a U.S.-based lab, there's not a lot of China exposure in itself. But as you sit here and kind of look out at the evolving situation, how do you think this is going to impact demand for either Cologuard or Oncotype DX?

We think that coronavirus is going to impact demand for Cologuard and other health care products. The question is, how much will it affect it? We won't know, and we are taking this pandemic very seriously. We are putting in plans in place to first of all protect our own employees and make sure that testing is available, especially in critical job functions. We are very much like a health system. So we need to make sure that our frontline employees have all the tools they need to be able to do their job effectively. And as -- from a management team perspective, we are very rapid to take action to limit travel to only necessary travel, cancel conference attendances until further notice, and all of the hygiene and disinfecting steps that are recommended by the CDC and then so. We are evaluating bringing up our own tests so that we can rapidly answer questions that are important, is somebody infected or are they not infected, so that we can really go beyond where this current CDC recommendations are. We're again taking this very seriously. And we also see this as an opportunity in that this is an opportunity for us to bring consumer-initiated testing to people who are going to be spending more time at home as they see our significant investment in television commercials to be able to go to our website, which has about 2 million unique visitors per month. And by next month, people will be able to order a Cologuard test by visiting our website if they're appropriate, talk to a physician and -- or input the sufficient amount of information to be able to order a test. We think there is also probably going to be an impact on in-office procedures, like colonoscopies, and that will also highlight the opportunity for a convenient, accurate at-home test, such as Cologuard. On the Oncotype DX side, probably less of an impact given the need for testing and the fact that the pathologist simply sends the tissue to the Exact Sciences lab that is then tested and the patient report is generated. And the critical nature and timely nature of that answer probably have less of an impact.

Great, great. So maybe setting that aside and thinking about the business opportunity beyond kind of the here and now. You've had a lot of success developing and penetrating the market with Cologuard. As you look out at 2020, just talk about maybe in the current backdrop, the investments you're putting in place to drive further adoption of the test.

We have made an enormous investment into a commercial engine to drive adoption by health care providers and by patients. And this is at all levels of the commercial strategy, starting with mark -- product awareness, DTC, television, digital, social, a very large commercial organization; our partnership with Pfizer, which has a robust field force and marketing capabilities. Some of the important growth drivers as you look at 2020 and beyond include the rep productivity enhancements with Veeva, new technologies that will -- enabled by Veeva to make it easier for physicians to order Cologuard, particularly for people who are due for their second Cologuard test. Cologuard label expansion down to age 45, so people in the 45 to 49-year-old category represent 19 million additional Americans, largely unscreened, increasing the unscreened or out-of-compliant population in this country by nearly 50%. There are about 400,000 patients that will be due for a rescreen this year that we will be focused on getting tested. A large health systems opportunity as they enable electronic ordering. People who order electronically order about 95% more frequently than those who don't order electronically, and we are seeing really strong growth there. We added 50,000 new health care providers last year. So that's another tailwind. And then there are a slew of coverage wins across the country, including Medicaid wins that have helped unlock new markets. So these are exciting tailwinds as we look out over 2020.

Great. I think in terms of new product development, one of the things you've been working on is the next-generation test with Cologuard 2.0. Just maybe give us an update how is the development going there and elaborate on some of the ways you're looking to improve the test quality and notably anything related to the polyp detection.

Sure. Cologuard 2.0 is aimed at improving the specificity of Cologuard, so reducing the false-positive rate. The cancer sensitivity in the current version of Cologuard is already quite high at 92% overall and 94% of Stage I and Stage II cancers. It is -- we're not expecting -- it will be nice if we do, but we're not expecting to significantly improve that level of sensitivity. We do expect to see some increase in the advanced adenoma or precancer detection rate, along with an improvement in specificity. That is driven by more specific markers that we discovered through our collaboration with Mayo Clinic, which is now going on 10 years -- actually going on 11 years of a partnership. And those more accurate markers coupled with an improved -- some other technical aspects of the test, we think set a new standard -- will set a new standard for colon cancer screening, putting us farther ahead of other potential entrants into this space.

Great. And in terms of -- can you just remind us the time lines for when you would transition that? And what the key data readouts we should be expecting?

Well, we think the study will take at least 2 years and then the FDA approval and Medicare coverage process would take another year beyond that. So it's about a 3-year program. We have -- it is probably about -- over $1 billion in NPV, given the decrease in the false-positive rate and the increase in overall volumes associated with Cologuard 2.0. And -- so we think the investment -- the return on investment profile of Cologuard 2.0 is very strong. And it further differentiates us again from other folks who are developing blood-based test with inferior -- much inferior early cancer sensitivity.

Great. And that's a good lead into what I wanted to discuss next is there's clearly been a lot of debate around the potential for these blood-based tests and early detection. How do you think they're going to compete with Cologuard? And give us an update on some of your own internal ambitions to develop a liquid biopsy-based test?

Yes. I think the first question is, can they compete with the FIT test? In other words, for a Stage I cancer, can a blood test detect those cancers, which represent about 40% of all cancers in a screening study? In the DeeP-C study, our pivotal study, 25% of the cancers were Stage I T1, which means those cancers haven't yet progressed beyond the submucosal layer into where the muscle and the blood supply in the colon are, which would be a Stage I T2. And the hard thing about developing a blood-based test is to be able to detect DNA in the blood before the tumor is embedded to where the blood is. And the thing that -- a lot of people developing tests kid themselves because they don't -- they're not testing any of those Stage I T1 cancers, because most of those get removed during a colonoscopy. And in a case-control setting, you just simply can't get that sample now that the cancer has been removed. So that artificially inflates sensitivity. And when you end up in a prospective study, the overall sensitivity will be lower. And the sensitivity for Stage I cancers will be -- it's why in prospective setting, too, it's been very difficult to get over 60% cancer detection. You have to do the prospective studies to collect those cancers. There's a limited number of them. And it remains to be seen whether people will be able to find DNA that isn't there. That's a real limitation of a blood-based test. There's also not been any significant evidence shown about a blood-based test's ability to detect precancer. And given that the FIT test detects about 2/3 of cancers and 25% of precancers, you have to -- we think you're going to have to beat that for early cancer detection to have a test that is at least comparable to a FIT test, which reimburses at $25. So a DNA sequencing approach, we question how that can be priced appropriately in order to see any significant adoption. We have our own approach with a modified PCR approach where we're seeing reasonable sensitivity and specificity still challenged in Stage I and precancer detection. And we are enrolling patients into a prospective study. So a blood-based test will have some role. It won't be able to compete with the performance of Cologuard or Cologuard 2.0, which is just a different level of sensitivity and specificity.

Got it. And just a follow-up. The test that you're developing, liquid biopsy-based approach, is that going to be pan-cancer or colorectal? And do you have a view on whether or not -- I feel like these blood-based test, they're trying to come to market, which one might be the better approach?

So those companies that are developing pan-cancer tests are not focused on replacing colon cancer screening or breast cancer screening or cervical cancer screening. What they're focused on is a pan-cancer approach. The reason a pan-cancer test is unlikely to displace individual cancer testing is because of the sensitivity, the performance just won't be there. And that's pretty widely acknowledged. So we see a tremendous value in a pan-cancer test. We have our own program. I think it's fair to say that GRAIL and Thrive and others -- those 2, in particular, are more focused there. And we hope somebody is successful because a pan-cancer test will be incredibly impactful on human health. We're certainly a strong company to help commercialize such a test. If we develop our own or -- and then in terms of colon cancer -- comparing that to a colon cancer blood-based test, we have an active program there. And we don't believe that, that will perform better than a stool-based DNA test. So we think both programs are important. The most important program, though, is our current Cologuard 1.0 and then Cologuard 2.0.

Great. Great. Maybe moving on next one to discuss Genomic Health. That was a big splashy acquisition last year entering precision oncology. Maybe just talk a little bit about the early experience owning the asset? And where you've seen synergies with the legacy business?

Yes. Genomic Health is a wonderful company with the most impactful breast cancer test that has changed how breast cancer is treated, early-stage breast cancer. It's 70% penetrated in the U.S., with about 90% of market share in that segment because the evidence for Oncotype DX is so strong and it answers a really important question for women faced with the decision about chemotherapy. Chemotherapy benefits only a small portion of women diagnosed -- patients diagnosed with breast cancer. And this Oncotype DX definitively answers that question. It has still a nice growth profile in the U.S. and a tremendous growth profile outside the U.S. where there's only about 1 in 5 people with early-stage breast cancer are being tested today. So there's a tremendous long-term growth opportunity. One of the things that we love about the Genomic Health team is their incredible oncology sales force and their urology sales force. The urology team principally promotes Oncotype DX GPS, which is a test that answers an important question in the prostate cancer for people with intermediate or low-grade prostate cancer, should they undergo surveillance or should they have surgery. So we are excited about what we can do with this platform, as evidenced by the acquisition of Paradigm, which has a next-generation sequencing, therapy selection tests using today tissue, and in the future, blood, to answer the question for people with late-stage cancer, do -- is there a targeted therapy that is appropriate for that patient? And that -- the Paradigm test will be carried by the Oncotype DX Breast sales team. That sales team is an amazing group with deep experience. And I think it's fair to say they're pretty excited about the opportunity to go out there and offer the Paradigm test to our customers who we have deep relationships with.

Great. Maybe just -- it was a bit of a change of strategy for Exact Sciences from being directly focused on Cologuard and now being more of a cancer diagnostic approach. So I wanted to test your pulse on capital deployment. As you think about deploying capital, do you want to do more sizable deals over time in the mold of a Genomic Health? And what are you looking for, develop tests or more science-type projects that could feed into the pipeline?

Yes. We have the largest and a fast-growing and global cancer diagnostics company that is able to do multiple things to advance the science. And so we are constantly talking with companies, with technologies and products that may -- we may license or acquire to bring into this 1,000-person commercial organization, and that have the right growth profile in large markets over the next 5 to 10 years and beyond. And with that, I would ask Jeff to weigh in with his thoughts.

So on capital equipment, the thought has always been to look at the ROI of any investment, whether it's a sales force investment or R&D or M&A. If the ROI is there, and importantly, the investment is consistent with our long-term strategy, and we are the rightful owner of the assets, I think it's something we would look at. Again, the ROI has to be there. When it comes to M&A, we take it very seriously. The focus now is on making sure we execute on the current products, so Oncotype, Cologuard, Paradigm, et cetera. At the same time, we're always looking out for opportunities that can help create additional value for shareholders.

Great, great. Maybe in terms of the development pipeline. One thing I also wanted to check in on was your view on FDA and potential regulation of lab-developed tests. You're obviously developing a lot of tests, which are even going down that pathway. What would -- if there were greater oversight of LDTs, what would that mean for you and the tests in the portfolio?

We're not impacted in a negative way and probably welcome that legislation. We're still digesting it, the VALID Act and assessing whether it is likely to be passed. As you know, Cologuard is a PMA, FDA-approved test with a significant investment we've made into a quality system and good manufacturing practices and design control, et cetera, with a pretty amazing manufacturing and quality team and regulatory team to go along with that. That gives us a real competitive advantage and speed to market in a regulated environment. The current version of the VALID Act is -- has a grandfather clause for tests that are in market at the time of enactment. And as you know, the Oncotype DX tests have been in market for years and years, and that we think we're in a very strong position there. So we always develop tests in a design control environment. We manufacture our products with a quality system. So we're in -- we believe we'll be in great shape and, in fact, able to lead because of the significant investment we have made into our quality system.

Great. Well, Kevin, Jeff, Megan, thank you again for joining us this afternoon, and appreciate you participating in a new virtual format.

Thanks, Jack.

Good afternoon. Bye.