Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Good morning, everyone. This is Derik De Bruin, the Bank of America Life Sciences and Diagnostic Tools Analyst. Welcome to our Virtual Vegas Health Care Conference. We appreciate everyone being here today. Our next speaker today is -- presentation today is Exact Sciences. Here, we have Kevin Conroy for the company, CEO of the company, here with us to sort of update us on what's going on at Exact and the exciting world of colon cancer screening and now COVID testing. Kevin, welcome.

Thank you, Derik. Great to be here.

Remember everybody, you can chat me questions. If you're dialed into Veracast line, please feel happy to do it.

But I guess, just to start. Kevin, obviously, tremendous amount of disruption in your business, the overall medical establishment. Can you just give us a rundown on sort of how you saw Q1 unfold, volume impacts and sort of give us an update of what's happened in both the Exact business, the Genomic Health business and some of the latest trends that you're seeing?

Yes. Well, like for a lot of people, Q1 was an interesting quarter. It's -- as we started out the year, we experienced the second biggest flu A, flu B season in the last decade, that has an impact. Despite that, we had reasonably strong January and February. And then in March, you could start to see the impact of COVID. Moving forward, what we saw from the start of April was a decrease and then a greater decrease and then a significant rebound. Jeff will give some of the details around that. We quickly addressed what we saw was a changing environment from a cost standpoint, and we took a whole series of steps to make sure that we come out of this year exceedingly strong. We shifted the company's priorities to really tighten them and to do more with less. One of the things that we did incrementally was to bring up COVID testing capacity, which we are now ramping up quite quickly. And the goal there is simply to play a role in having a positive impact on this disease, and we're seeing that. And that also allows us to bring people back to work that we had to reduce their hours or furlough, and that's really important. So maybe, Jeff, if you would describe the quantitative impact of COVID on our business.

Yes. So this is Jeff. It's important to keep in mind how the business has changed over the past year. A year ago, our primary source of revenue was Cologuard. Today, now we have a diverse set of revenue streams, and each one of these has behaved a bit differently. So in Q1, as Kevin said, the business started off quite strong, and things were really on track, consistent with guidance through the end of February. Over the course of March, on the Cologuard side of the business, we did see some softening trends, we talked about on our earnings call. Cologuard order volumes were down 36% in the back half of March. And this is really directly due to COVID, COVID and the resulting actions such as stay-at-home measures and the cancellation of physician office visits. That's really what led to the decline. The underlying trends of the business are actually healthy. When you look into April, that decline accelerated in the first 20 days or so of April. Year-over-year declines were 63%. And as Kevin said, things started to pick back up. And why this is so exciting is that our reps are out of the field. And for the most part, most physician office visits are not happening today. In the back 10 days of April, our Cologuard order volumes were improving, down just over 45% in the back 10 days. We've had positive trends in May and those continue up through today. In fact, if you look at last week in total, relative to the low week of April, our order volumes on the Cologuard side are up over 60%. And again, this is without our reps back in the field. So this is in part due to people starting to realize, look, we've got to move on here with our lives. Cancer doesn't stop. It's also in part due to the quick actions our team has taken such as setting up with a telehealth site that has helped us start to drive the business to a better spot. I think this is where the business has really transformed. And longer term, we'll be better off for it. On the Precision Oncology side of our business, recall this is the former Genomic Health business, this business has hung in quite well. If you look, in fact, for the first quarter in total, revenue came in $4 million above the high end of our guidance. In large part, this is due to the strength of the breast franchise, which had a very, very strong Q1. That business, in fact, showed good trends, good growth trends through the end of April, although in the coming months, we do expect that to decline due to the lagged impact of a decline in screening mammograms, really a result of COVID, although that business, I think, is very durable, will be more resilient than most during COVID. The prostate side of the business did show some declines in April. Again, this is due to a decline in wellness visits, although that business, I think, has underlying healthy trends and will recover quickly.

Yes. And Jeff, just clarify because I got like 3 bings at the same time. You're saying up 60% from the low point in April, your volume, right?

Correct.

Right. Some people said, year -- I got a couple of people ask me if that was year-over-year. And so I just want to clarify that. That's up from the low point in April. So can you talk a little bit more about the telehealth initiative? And I'm sort of curious is like what's your experience? And are you adding new docs via the telehealth platform? And the -- and underscore, if you have any sense, on the percentage of conversion of people that go to the telehealth system and actually go on to order? Or is it still too early?

It's still too early to see the broad impact of offering the ability to get a Cologuard test without your own doctor calling in. So what you do is you go to cologuardtest.com, and you answer a series of questions and provide your health insurance information and pay $30. And that information is assessed by an independent physician, and that physician determines whether Cologuard is right for you based on the 5 questions, which really get to the point that, are you at average risk for colon cancer and have you been screened in the relevant time period? And that's step 1 in a multistep strategy to ultimately make it really easy for people to get screened for colon cancer in the privacy of their own home. The other elements of that strategy include telemedicine and even in-office visits where it's just really easy to order Cologuard electronically, get results electronically. Next year, Epic -- beginning of next year, Epic will make available the ability to order Cologuard electronically for all of the physicians that are on Epic as an EMR system. And that's a big deal because that's about half of doctors in the U.S. That makes ordering Cologuard really easy for those physicians and getting the result, which is a big difference from today. So there are multiple steps to our strategy of electronic engagement. Jeff may have more to add here.

Yes. So the team really responded quickly to bring up our telehealth site, and we are seeing some nice early traction with that. The important thing here is what it enables going forward. It does help us better leverage all the consumer marketing we do. So each month, we have almost 1 million unique visitors to our site. So now when the visitors go there, we can track them and find out how many go through the process of ordering. Again, it is early, but we're seeing some nice momentum there. It also opens up markets in the employer health channel as well as with the payer channel. Large employers, self-insured employers, want to make sure they get their employees screened. There was a recent article, a piece of data from IMS Health that talked about every 3 months in this country, there's about 80,000 missed cancer diagnoses because of COVID. So cancer is not stopping. Employers understand this. It's a lot less expensive to find a cancer early and help a person treat it that way than it is to find it late. So Cologuard is part of the solution here. And there's a large backlog of people waiting to get screened. So this telehealth site can really help this broader problem across consumer, employer and payer channels.

So that leads to some interesting conversations on your cost-save initiatives that you're doing. I mean, you announced $400 million in cost savings. It seems to me like you're probably redirecting some of your prior advertising campaigns down to be more telehealth reach. I'm just, sort of -- can you sort of walk us through the $400 million in terms of where that's coming from? Are you pulling back on G&A? Are you pulling back on sales and marketing? And then just R&D. Just clarify what's going on there.

So the idea behind the $400 million was to help us respond to the impact we were seeing and expected to see from COVID and make sure that our balance sheet stayed strong, so we could stay nimble and respond to whatever COVID had in store. Relative to the time that we implemented the $400 million worth of reductions, the business has recovered much quicker than expected. I gave some of the stats around that. So I don't expect us to achieve the full $400 million. The $400 million is really the reduction relative to our 2020 budget. And it spans all categories of spending. The largest area of adjustments were in operating expense. Second biggest would be in cost of goods and capital expenditures were only modestly reduced. And all the adjustments were meant to be very flexible such that we could unwind them quickly if and when the business has responded and which we've started to unwind some of them because the business has recovered far -- we expected orders to be down and really stay down because of COVID. In fact, they are recovering quickly. So one example here is clinical study spend. In this environment, with the reduction in screening colonoscopies, effectively, they are not happening right now. So large studies we had enrolling such as our BLUE-C study, at this point are largely paused because you need to have that steady stream of people going through a screening colonoscopy to then enroll in that study. So that helps lead to a deduction in spending. However, we're poised to turn that spending back on as soon as wellness visits and screening colonoscopies pick back up. Those same sort of adjustments we put in place broadly. However, the team is poised to reimplement those spending and the investments as soon as it makes sense to do so.

Great. And once again, just somebody wanted to clarify, the 60% is off the low point, the down 60%, right? Because once again, I got a couple more questions on this.

Sure. If you look at the low week of April and the order trends in Cologuard last week, last week grew over 60% relative to the low week of Cologuard orders in April.

There you go. I just wanted to do that since I got a couple more clarifying points on it. So you mentioned some of the pipeline stuff that's there. I guess, can you sort of talk about Cologuard 45 and just sort of how you're sort of looking at that rolling out? Any delays in that process? I mean, are you hearing anything in terms of just overall changes with the USPSTF and some of those in terms of any delays in that?

Regarding USPSTF, they have stayed on schedule with other guidance documents. So we expect later this year for them to issue a draft guidance and then final towards the end of this year, beginning of next year. That has not changed. In terms of Cologuard 45, that is just a tremendous development for the whole field of screening and ultimately for moving colon cancer off of the #2 cancer killer and into oblivion. If you can start to screen people at age 45, you can have an enormous impact on this disease. Cologuard is obviously very well suited for screening that very busy age group. And there are roughly 20 million people at average risk in that age group. It's -- we believe that Cologuard fits perfectly within the lifestyles of those folks. So it's hard to take 1.5 days off of work for screening colonoscopy. The backlogs with screening colonoscopy now are going to be very significant. So we think that physicians are -- and we're already seeing this. Maybe that's tying back to what Jeff said about this somewhat unexpected quick increase in the use of Cologuard despite our field force not being in the field over the last month. We think -- and part of it is the physicians just recognize the value of an accurate in-home screening test. This is particularly applicable to these 20 million Americans. And let me remind you, Derik, that this market is only 5% penetrated. The growth prospects for Cologuard as a result over the next 5 and 10 years are dramatic. And as an every 3-year test, as we deeply embed the ability to electronically order a result, engage with the patient, deliver results to a physician, deliver results to a patient, remind the physician and patient when a now 48-year-old is due for their second screening, you can just kind of automate this whole colon cancer screening process like no other cancer screening. And that's where we believe the world is headed. We also believe that some of our COVID testing, some of the learnings there are going to help us in the consumer side of things long-term with Cologuard. So as difficult as the current situation is there, we are striving to find positives and lessons to be learned from all of this.

Great. So I think that this is a good segue into a lot of questions and certainly, both on the line here and then also from just our general conversations. Just sort of thinking about the -- I think everyone agrees, there's great value in the convenience of Cologuard, but the argument is that a blood-based test would be even more convenient. So can you sort of talk about sort of your thoughts as we've seen some new data come out from some of the other companies that are looking at liquid biopsies, either for pan-cancer screening or specifically for colorectal cancer screening. Just your thoughts. And this is also a segue into you talking about the pipeline and sort of what you're working on. I mean, you're obviously working on this as well. So just sort of your thoughts on the liquid biopsy space and where the competitive environment is right now, given some of the news flow over the last couple of months.

Sure. Let's take a look at that piece by piece first with colorectal cancer screening and then pan-cancer. So there is an embedded assumption that a blood draw is more convenient than an at-home test. And the data don't really back that up, and our experience doesn't back that up. About 1/3 of people who are prescribed a blood draw today for just typical blood work, don't do it. And that is because many people find it difficult to get in to an office, someplace where they can have their blood drawn, and other people are averse to needles. So an at-home test that is painless and easy and takes minutes is something that is exceedingly convenient and it's convenient for people in all reaches of the country where getting in to get a blood draw isn't necessarily the easiest. Obviously, though, getting a blood draw is another good approach relative to colonoscopy. That's why we have invested in our own blood CRC program. The challenge here is that all of the data that has been seen to date is that a blood-based colon cancer screening test is much less sensitive for the very cancers that you want to find in screening, stage 1 and 2 cancers, particularly stage 1 cancers. And that -- there appears to be some biological limitation to binding the DNA in blood that is indicative of cancer. The data that we have seen is at least as good or better than -- internally than has been published externally. And that data that has been published externally is all case-control data that is not likely to hold up in a long-term clinical trial. We think that this whole field is probably at least 6 years off from guideline inclusion. And even then the performance, the worst performance in early-stage cancers is going to be a real impediment to adoption unless something changes. From a pan-cancer perspective, the data that Thrive published recently is interesting data. And it showed increased signal in the ability to find cancers that otherwise weren't found in a 10,000 patient prospective setting. So we find that to be very positive. The work that Grail is doing is also impactful work. And we hope that there is a test that comes to market. We continue to work on our own program with markers across that spectrum because they're probably -- when you consider all the potential diagnostic tests that could have an impact on human health, a pan-cancer screening test could have a massive impact. The question is the sensitivity and specificity trade-off and the cost. There are still some real challenges to making all of this work, but I suspect that 5 years down the road, you probably will see some form of a pan-cancer screening test starting to get adoption.

I mean, you're -- you've obviously had more experience in dealing with the regulatory environment, getting this new screening test out there, than a lot of people. What do you think needs to be shown to the regulators and to the payers in order to get something cleared and through the market, getting essentially onto the market and then getting that reimbursed? What are sort of the data sets people need?

There's a ton of considerations. There's recently convened a -- it was about a 60 person pan-cancer screening global summit, the Mayo Clinic hosted it. Industry was there, academia was there, payers were there, global health folks were there. And some of the themes that arose there was what are you screening for? Are you screening for cancers that are currently being screened for; breast cancer, colon cancer, cervical cancer? And if you include those in a blood-based test, are you going to see a drop-off in people going to get a screening mammogram or a Cologuard test or a colonoscopy? They don't -- there was a strong opinion there. They don't want to see that type of fall off, particularly because a blood-based approach is not going to be nearly as sensitive as, for example, screening mammography. So there are some challenges there. The payers are really going to want to see significant prospective outcome, even if it's not an outcome in terms of the ultimate survival or mortality rate, but at least an impact on disease burden. And these things take time. Getting the payers on board is probably the most challenging aspect of this. And I think it remains to be seen exactly how you get there and how do you get there at a price point that makes sense. If sequencing is a piece of this, the cost of sequencing really needs to be addressed to be able to make the economics work.

So can we get an update on your liver cancer project and the competitive landscape there? Also, you've done some tuck-in acquisitions recently. Can you give us a little bit color there, more color on Panorama and some of the other ones that you've done, some of the other deals that you've done and just give us a sense on where you're going? And this sort of goes into a capital deployment question and sort of thinking about M&A criteria as well. Just sort of a general update on pipeline, new products you've added, and just your thoughts on capital deployment.

So starting with liver cancer, although we have intentionally delayed that because of the current COVID situation until early next year. We pushed that out a little bit. Clinical trials are a little bit harder to enroll, as you can imagine, right now. The current paradigm for liver cancer testing in a high-risk population is that the AFP, which is a protein test, and ultrasound combined are only about 63% sensitive. And we believe a simple blood-based test would be more sensitive than that, easier to administer than that kind of combined approach of blood and ultrasound. And so that's why we're investing in that program. Many of those people with liver disease are seen by primary care physicians. That's one of our tremendous strategic strength, is our incredible primary care team that -- and we will almost certainly offer other blood-based or other sample tests for that primary care setting to complement our impact with Cologuard. In terms of the Paradigm acquisition, which has a test called PCDx, which is a test similar to Foundation Medicine's, tissue therapy selection test, that is incredibly impactful because it requires only about 10 nanograms or even less of input DNA versus what is typically used in the industry, 50 nanograms. So the quantity, not sufficient rate or the failure rate of the Paradigm test is in the low single digits compared to 20-plus percent for other approaches. And also, the turnaround time is 3 to 4 days versus 10 days. And so there's a significant opportunity for us to go to our current customer base in the Oncotype DX setting for Oncotype DX, the breast test and add another really valuable test. Also in our urology setting, we believe there's applicability there. And then the ability to turn that into a blood-based liquid biopsy therapy selection test allows us to address a large and growing market with a customer base where 98% of oncologists have -- in the U.S. have ordered Oncotype DX tests. We have the customers that deeply believe in the value that we provide and our Precision Oncology business is really excited about that acquisition. It will also, long term, allow us to provide minimum residual disease testing and recurrence testing, which we think will become standard of care in the future.

Got it. So can we talk a little bit about your own COVID testing program and sort of what do you see sort of contributions from that? And I'm just curious in terms of how you're going to use testing at Exact to guide your employees and your decisions on how you return to work?

Well, Derik, the reason that we brought up COVID testing, the first place was exactly for that, to guide how we bring people back to work safely. One of our just tenets as soon as this hit us is how do we keep each other safe. And given that we had the ability to bring up COVID testing, we acted on that. We brought it up at scale so that we could also, in addition to taking care of our employees, we could play a role in helping people in our state and now our region and beyond. The way that we're bringing people back to work is that people will be tested weekly. And they will get their result quickly. Right now our turnaround time is averaging 17 hours, although we advertise 48 hours. And that allows us to give an answer to an employee quickly. How are we thinking about that in terms of expanding? We have today the ability to do about 60,000 tests per week and with some changes to the workflow within that current footprint of instrumentation and the physical layout of the spaces that we're using, we could see that increase by 50% to 90,000 tests per week. And then if we devote more of our equipment to -- and people to this effort, you could increase that north of 120,000 pretty easily. So that gives us the ability to continue to support the state of Wisconsin, which we have talked about publicly and some other states, which we have not talked about publicly. And our goal is to be supportive here, but also to get out of this business. We want to see an end to this crisis and move back to being a global cancer company, the best at what we do. We will get learnings from this. And it will importantly keep many of our people fully engaged working, which is something that's just really important to us.

So final question as we come to the end here. I mean, what do you think will be some of the long-term implications from the COVID-19 crisis? I mean, how are you going to change your business? And how do you think your patients and customers are going to change going forward? Basically, what's transitory? And what do you think is going to persist going forward?

Health care at home is going to become very, very important and connectivity with consumers is really important. And we are the cancer diagnostic company with the at-home capability and the consumer engagement capability. We think the world is going to change in that direction now permanently. Although telemedicine was kind of eking along, it has exploded in terms of volumes and receptivity, and embedding Cologuard and other tests into that telemedicine encounter is something that we are -- we will do in a thoughtful and aggressive way. I'm excited that Jeff is taking over that whole part of the business as -- from a leadership perspective. And so the whole team here realizes now that the value of Cologuard has been really revealed. It will, we think, change the way that colon cancer screening occurs over the next year, over the next 5 years and over the next 10 years.

Great. And with that, we're out of time. Kevin, Jeff, Megan, thank you for being here. Thank you for doing the conference. And enjoy your one-on-one today. And thank you, everybody, for listening, and be safe. Thanks, everybody. Have a great day.

Thank you, Derik.

Thanks, Derik.