Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Good afternoon and welcome to the virtual fireside chat with Exact Sciences' Chairman and CEO, Kevin Conroy; CFO, Jeff Elliott; and Director of Investor Relations and someone who celebrated the birthday last week, Megan Jones. We will be singing at the end to her. Well, no, we won't be singing at the end. But I know Andrew would like to. My name is Brian Weinstein, and I am the analyst here at William Blair covering Exact Sciences and certain areas within diagnostics, life science tools and medical technology for our firm. Joining me, as I mentioned, is my associate, the team's COO, Andrew Brackmann. A reminder that Team Weinstein is hosting some events along with the conference. We did a Peloton ride this morning, admittedly, not my best performance, but we'll be much better tomorrow, and I reiterate a vow to never have the team's COO beat me again when we do another group ride tomorrow at 7 a.m. Central. Expect to see Mr. Conroy joining us on that ride, hopefully. We have another one Thursday at 4 p.m. Central. For instructions on how to access, take a look at last weekend's Backstreets or email us. In addition, Team Weinstein is also hosting a nightly recap dial-in that we are calling the [ Redo Lounge ], named after the [ Redo Shuffle ], the official song of Team Weinstein. And that takes place tonight at 5:45 p.m. Dial-in for that is in Backstreets or you can e-mail us as well. We know there have been some technical issues with the one-on-one dial-ins this morning. We apologize for that. Those should have been solved at this point. But if you have any lingering problems, please reach out to your sales rep. Finally, before jumping into the call, the best compliance officer in the business and a man who thinks the White Sox are better than the Cubs has told me that I am required to inform you for a complete list of disclosures or conflicts, please visit our website at williamblair.com. With all that nonsense aside, welcome Team Exact Sciences. Thank you for doing this. I really appreciate it.

Well, it's good to be here, Brian, and it's even better to see you finally having found a razor. So congratulations.

A wise man told me to shave. So I took his advice. So thank you for that.

Kevin, starting out kind of at a high level here. I get asked a lot about kind of the evolution of the strategic vision of the company and how that has evolved over time. Can you go into kind of what you saw when you joined over 10 years ago and how that's changed? And what that vision looks like as we move forward? What is the vision for Exact Sciences today?

Thanks, Brian. 11 years ago, when we restarted Exact Sciences, we took learnings that we had from a prior company and being in the molecular diagnostic space and at the time being in -- getting into cervical cancer screening at the prior company and took those lessons and said, this really -- there's a way to make noninvasive colon cancer screening work and to make it tremendously impactful with the power of science and great scientific teams. And that's where it all started in our collaboration with the Mayo Clinic, focus on the science, do the right clinical studies, and you can move heaven and earth. As you now look -- fast forward 11 years and we look out into the next decade, what has happened is just this amazing explosion of number of companies that have been successful at launching new impactful cancer diagnostics. And so I look at the next decade as being a golden era in cancer diagnostics and see Exact Sciences as leading the way in the U.S. and globally. And it's based upon scientific leadership and the strong scientists that we have at Exact Sciences and with the team that joined us from Genomic Health and with the team from Paradigm and the team that we have in Europe. So there is a capability moving forward to address the really important questions for people who might have cancer to people who have metastatic cancer, everywhere from hereditary risk of cancer, all the way to therapy monitoring and every question imaginable in between. We have 1,000-person commercial organization and have the ability to invest in a major way in launching new tests through that organization. Coupled with that scientific capability, it's pretty powerful. And so that's what gets us up every day. We know that we can make a difference in the lives of people diagnosed with cancer and hopefully, to find cancer earlier when you can have a much bigger impact on it than any treatment or surgery or therapy.

Great. We started out pretty wide with that question. Let's get narrow here for a second, and then we'll build back out. You had provided some good color on recent trends on your call. But is there any update that you're willing to provide on trends throughout May and into June on the state of both sides of your business?

Yes. Brian, this is Jeff. I'll take that one. So we're very excited at the state of the business today. When you look back to early March, mid-March when COVID really started to come on, at that point, we expected to see a pretty negative impact on the business, especially on the Cologuard side, as people put off preventive care and colon cancer screenings were really postponed. And I think we did a good job of estimating the severity of the decline. However, we thought things would stay depressed for an extended period of time. However, what we've seen since then is almost immediate recovery from the depths of April, which was in early April. As of early to mid-May, we talked about seeing over a 60% improvement in the Cologuard order rate versus the lows of April. Throughout the month of April, we continue to see strength in Cologuard, and that strength has continued into June. So we're pleased about the early momentum here. I would always say, look, Cologuard still has an uphill battle to climb. There's still uncertainty out there because of COVID. So there's some work to be done. But we're excited about the momentum we're seeing, even though our sales reps are not yet back in the field. So there's some early good signs. When you look at the Oncotype side of the business, that has stayed very resilient through April. However, we did talk about expecting to see some declines in that business, some softness in that business as we get into May, given the delays in the breast cancer screening and prostate cancer screening. So that business has seen some softness in May. However, we do expect this business to recover over the course of this year.

That's a great update. And if I can just follow up on that. As you talk about the Cologuard business, are you able to discriminate between the orders that are coming back that are part of normal patient flow versus maybe being able to pick up some opportunity from people who are potentially going to get colonoscopies? Have you been able to parse it that thin yet?

No, not -- at this point, you can't parse it in that way. In other words, there's a Cologuard test is being ordered, replacing what otherwise would have been a colonoscopy. We know that is going on, and that's difficult to quantify. And what is occurring is that the fundamental value of Cologuard is being revealed here and that you're seeing a 90% reduction in screening colonoscopies. And you're not seeing that with Cologuard. You saw an initial big downtick and then significant growth ever since, again, without the sales force being in the field, which tells you that all of those investments that we made in marketing and our commercial organization broadly have paid off and that there's tremendous awareness of the value of Cologuard. Now the opportunity is for us to go and get the 1 out of 3 people who are unscreened in the U.S. screened. And we want to make screening inevitable with Cologuard. We think now and maybe it's a silver lining during these challenging times is that we are in a position to do that. People, physicians, health systems, payers see the value of an at-home cancer screening test.

Yes. And we'll dig into that here in a minute. I just want to ask one more question about trends. Have you seen clinical trials that might have been halted? Have you started to see any re-enrollment on that side yet?

Yes, our BLUE-C study is starting to enroll again. Again, the screening colonoscopies are way down. That's one of the steps in the BLUE-C study that the patient goes through is to get a colonoscopy in addition to a stool test and a blood test from Exact. And we're starting to see that occur again. It's still slow going, but the sites are engaged, and we're seeing tremendous progress.

Okay. Good. As we think about kind of a post COVID-19 world that we hope that we're all entering here, you kind of addressed this a minute ago, but can you be a little bit more specific on thoughts on how you see broader health care changing in that world? And then specifically, how Exact plays into this and some of the investments that you may want to make to make sure that you guys are capitalizing on that opportunity to the full extent that you can?

I think the decision by Medicare and many payers to cover a telemedicine visit, including just a telephone visit, will change health care forever. And it also changes, we think, colon cancer screening. If that primary care visit can be taken care of virtually, certainly, colon cancer screening test can be, too. And that's where Cologuard fits into the equation. Being able to order that test electronically is critical, as you know, that we're taking significant steps in our strategic positioning with Epic Systems' EMR, it will help us grow Cologuard even faster once that becomes embedded in every Epic user, which is about half of primary care docs. And then also cologuardtest.com, the ability for you to go get screened today or within the next few days by going to cologuardtest.com and entering a very limited amount of information answering some questions, you can get screened. And those developments, we think, will change at least cancer screening forever, and we think we're going to see other changes, too. The at-home nature of Cologuard benefits the whole ecosystem. And as you think about trying to get to minority populations that are less likely to actively visit primary care physicians, you have the ability to reach people in the U.S. that otherwise might not get screened. And that's another important value of Cologuard that is being revealed right now.

No, that's great. Absolutely. Have you seen an increase in sort of people going to cologuardtest.com? And how do you specifically drive that? What type of investments do you think you need to make in sales and marketing and just growing awareness for people that this option is out there? You obviously have a very well-known TV campaign. You've got some social media stuff. How do you amend that message in order to kind of really take advantage of this?

Yes. It's a portion of all -- that messaging is a portion of our entire digital and TV strategy around marketing. So it's embedded in a portion of our digital ads and also our television ads. And you'll see that on TV. You'll see it if you follow Cologuard on social media. That, over time, is going to grow from a small base today to, we believe, a much larger base in the future as more people become aware that you don't necessarily have to go through your own primary care physician and get screened. For people who are really busy, going to a doctor's office is hard. We deliver a Cologuard kit directly to your home, and that makes all the difference in the world.

Yes, absolutely. Okay. So just changing gears here for a second. I'm always surprised when I'm doing calls with investors that people seem to minimize the likelihood of success for Exact Sciences when it comes to a broad-based colorectal cancer screening option. I'm curious kind of your thoughts as to why you think that is, why it's wrong? And how do you, in fact, intend on moving forward there? I think that, that's an area that people probably need a bit of a reeducation on.

How long have you covered us, Brian?

10 years plus probably?

Yes. Well, people have been minimizing the likelihood of our success for 10 years. You weren't with us for the first year. It was even worse before you started to cover us. So we kind of like being the underdog. We have the scientific capability to develop and bring to patients and customers the very best blood-based tests. We have no doubt about that. We understand the product development process better than anybody. We'll stand behind that and how to run the right clinical trials. We're still surprised at some of the mistakes that people make and not only the way they run these trials, but then how they publish the data in such a way that makes it less than credible, which is important in our space that we do things in a credible way. So we have a really top team that understands DNA methylation. They understand DNA extraction. They know how to develop things at scale and how to optimize it from cost. And we will be able to then -- the product that we bring to market, we think, will be not only well positioned with great evidence, but also we'll be able to make it work from a cost of goods perspective and pricing perspective.

I've heard you talk previously about something I can't remember, you said $150 to $250 or $150 to $200, but something in that range. Is that still kind of the way that you think about pricing for a product like this?

Yes. Because we're using an alternative version of PCR technology, the cost of goods is -- for the chemistry is low. Because we have a massive laboratory infrastructure and IT capability, we have the ability to price it at that price point and still make a reasonable profit. And that puts us in a position that those who are approaching this with DNA sequencing, they just can't compete against.

You mentioned that you think that your test will be the best. What does that mean? I mean, where do you think numbers have to be for early detection for advanced adenomas? Any idea what kind of best-in-class would look like for something like that?

So the key things that you look for with a blood-based test is can you detect 90% of Stage II, III and IV cancers? That's an absolute must. And then Stage I cancer, you should be better at detecting cancer than the FIT test, which is 66% sensitive for Stage I cancer. And the FIT test detects 24% of precancerous polyps. If a blood test detects less than that and so far, nobody has published data showing the ability to detect -- the credible data, showing the ability to detect greater than the FIT test in those 2, in Stage I and precancerous polyps, work needs to be done. And that is the -- do you want to bring a test that is not superior to the FIT test to market? Why invest hundreds of millions of dollars to bring something that is only at parity with the FIT test? We aspire to be better than that, and there's a scientific challenge there.

When might we see some data from you or some other thoughts on commercialization strategy to move forward here?

We just have -- because of the power of the other businesses we have, we -- and for competitive reasons, we haven't wanted to reveal the data that we have. We don't feel pressured to do it. Kind of back to being the underappreciated here in terms of what the capabilities are. We're very comfortable in that role and expect to be able to put that data out when we want to rather than we feel like we have to appease any particular group.

That makes sense. Okay. I apologize for any background noise. A monsoon just hit the William Blair Highland Park office, it sounds like. So if you guys are hearing that, I apologize for that. Thank you for that answer though, Kevin. On another topic, the Pfizer relationship. It's been important for you, and I know you do have a tremendous relationship there. But when you look at the contract, we see that they won't make a whole lot this year on this, and the sales call numbers that were discussed won't be met. So I'm curious how you think about -- how does this relationship evolve from here? And how do you think about the strategic importance of that relationship today?

Pfizer has been an amazing partner. They have helped expand the awareness of Cologuard, the understanding of the evidence of Cologuard. They have deep relationships with 100,000 primary care physicians and beyond in the U.S., and they've helped bring Cologuard to physicians that we didn't call on. They've helped us with our marketing campaigns, just amazing marketing. Digital direct-to-consumer marketing is something that they are world-class at. So that partnership has been really important. We would expect that, that partnership would continue through 2021. Obviously, we need to figure out how to make the economics work, given that the structure that we had probably isn't great for Pfizer in this post-COVID world, but we've always been able to work through things together. Long term, it is important to note that we -- since we announced the Pfizer partnership, we've doubled the size of our own primary care sales force from 250 reps to 500 reps now. We went from no GI reps to 60 reps. We went from 20 health system reps to over 40 health system reps, from 120,000 ordering health care providers to 206,000 ordering health care providers, from 1 million people screened to 4 million people screened. It's a different company now than previously. And at some point, you want those profits to be able to flow through. With that said, there may always be a role for some degree of our co-promotion efforts. And we'll figure that out over the course of the next year. It's -- we deeply appreciate the progress that we have made together in the flight to make colon cancer screening inevitable.

Yes. That makes sense. Okay. We look forward to the update from that. You mentioned a couple of areas of investment. You talked about your GI reps and your health system reps. Can you talk a little bit -- just a follow-up on your comment there. Can you talk a little bit about how those reps are performing and the efficiency that you're seeing out of those 2 areas?

We have to go back to the pre-COVID period because all of those reps for their own safety and the safety of patients aren't in the field. What you have seen is very consistent performance gains across each cohort of primary care reps that we have hired over time. And we've hired multiple classes of reps as we have grown from no reps to 500 reps. And the longer a rep calls on a primary care physician, the more productive they are and efficient they are. That is true with our GI reps and our health system reps as well. It takes about a year for them to -- for the return to be there. And we will continue to invest as it makes sense to grow our primary care reps, our GI reps and health system reps and especially the primary care reps.

Yes. Yes, and that makes sense. But one of the areas that I think people have expected some help from Pfizer on has been that health system side. And you guys have increased your reps there, and certainly, Pfizer has capabilities. Would you say that, that's one of kind of the remaining basis to be touched here is you're sort of rounding the diamond with Pfizer in order to kind of really complete the hope of what that relationship is meant to bring?

Yes. If there are any of those reps who are listening in on this conversation to both teams, that is our challenge to you is over the next 18 months, we can move heaven and earth by getting every health system to be aware of the ability to order Cologuard electronically and the steps that you need to take to effectuate that within a health system and to implement top-down colon cancer screening, broad-based colon cancer screening programs, of which Cologuard is one important element, the need for those health systems to create awareness. And it's especially true now with colon cancer screening by colonoscopy coming almost to a screeching halt over the last couple of months. And with this massive backlog of people, now almost 1 million people who were due for colonoscopies not getting them, well, actually, it's over 1 million now and growing by about 400,000 people per month, it is -- that's the challenge to those reps is to engage with the health system, get them to have a big cancer screening push, especially colon cancer screening. And I think that you'll see a difference over the next 18 months.

Yes. Okay. I'm excited to see that. That's been an area that we've been hopeful to see some serious progress on. And it sounds like you guys are going to put a big effort on that, which is great. Maybe talking a little bit about the pipeline here, updates kind of following recent scientific conferences. Anything that you guys want to highlight in terms of progress that you are making on the pipeline, but if you could also address the liver cancer product. Jeff, I think you noted on the last earnings call that, that would be delayed into 2021. Can you just kind of confirm that, talk a little bit more about the timing, but then just broadly, things that had you excited about your pipeline?

Yes. Brian, this is Jeff. There's a lot to be excited about in the pipeline. And one is the number of shots on goal that we have. You mentioned liver. We did delay that program about 6 months really because of COVID. But as a reminder, that test is geared towards the people at high risk of liver disease. So the typical market you think about in the U.S. is 3 million people. Those are people with cirrhosis and hepatitis. The reason why you test there is because that's where about 90% of liver cancer happens. So the goal is to launch a test that will help improve upon the current guideline recommended tests, which are an AFP protein test combined with an ultrasound. So now we've run multiple case-control studies showing that, in fact, we can generate improved performance versus the current blood test. Our goal is to launch that test in the first half of next year. Why it's so exciting for us is you'll start to see some of the synergies with other assets that we have out there. So for example, we will launch that test through our GI sales team. That GI team has been out there for almost a year now promoting Cologuard, laying the foundation for liver. We'll launch that test through the lab in Redwood City that we acquired with Genomic Health last year. So you started to see all these pieces come together. When you look out beyond that in the pipeline, we've got test across the top 15 cancers that we've been working on with the Mayo Clinic. Next in line, we have test for bladder cancer, esophageal cancer, pancreatic cancer. In addition to that, it tests for what we're calling Cologuard 2.0, which is a similar test to Cologuard 1 with an improved specificity. And obviously, we talked before about our colon blood product. So there's a lot in the pipeline. The exciting thing again is that it leverages a lot of the assets we have from a commercial standpoint, IT and the sales force. So we're really excited about the products we have coming.

Okay. And then in the last couple of minutes, you guys had done some recent M&A. It's been -- on the smaller side, I'm not referring to Genomic Health. I'm referring to the 2 smaller deals that were announced just several months ago. Anything that you'd like to kind of go through on those businesses and what you think that they can bring to the company? I know you were particularly excited about Paradigm. Is there anything that The Street probably doesn't appreciate about the opportunity there?

We haven't really touted the value that Paradigm brings. It's an amazing scientific team. They have been able to develop a therapy selection test with a turnaround time and a DNA input quantity much better than the industry leader. And as a result, we'll be able to launch that test or make the test that is currently available, make it available through our 90-plus person oncology sales team. By doing that, we think we can expand the overall opportunity of testing more people with metastatic disease to see if there is a targeted therapy that is right for their particular type of cancer. And from that platform, combining it with the commercial organization and deep customer relationships through Genomic Health, we will be able to launch a blood-based version of a therapy selection test and also a minimum residual disease and cancer recurrence test. So that's just kind of a small sneak preview of what we plan to do through that Paradigm organization, which will be part of our -- is part of our precision oncology team.

Great. Thanks for that answer. And I'm always amazed on how quickly these 30 minutes fly by when you're doing these kinds of things because we could go on asking questions for quite some time. But I think we're going to have to leave it there. Kevin, we hope to see you on the Peloton ride either tomorrow morning or on Thursday. Jeff, Megan, if you guys are able to join, we'd love to see you on there as well. And thanks for doing this. I really appreciate you guys taking the time.

Thanks, Brian.

Thank you.

Thank you, guys.