Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Hi. Welcome to the 40th Annual Canaccord Genuity Global Growth Conference. I'm Max Masucci, lead diagnostics analyst at Canaccord. And I'm pleased to be joined by Exact Sciences, one of the fastest-growing companies in my coverage universe over the past 5 years. And one of the biggest success stories in noninvasive screening for early-stage cancer due to its Cologuard test for colorectal cancer. So despite growing its Cologuard business from under $2 million in revenues in 2014 to over $810 million in 2020, Exact remains just 6% penetrated in its Cologuard opportunity with a stated goal of achieving 40% penetration over time. Beyond Cologuard, Exact has a Precision Oncology segment which it acquired in 2018 through its acquisition of Genomic Health. Exact is a market-leading R&D engine, which we expect to drive shareholder returns equally as spectacularly as what we have seen over the past 5 years. So I'm really pleased to welcome back Exact Sciences CFO, Jeff Elliott; and Megan Jones, Investor Relations. Thanks again for joining us this year.

Thanks, Max. Good to be back.

Great. So let's start with your Cologuard franchise. You've sized your total addressable market opportunity for early-stage colorectal cancer screening at over $18 billion. What percentage of the overall market do you think is converted to noninvasive early screening versus traditional screening methods and how has the pacing of adoption evolved since launching the test in 2014?

So Max, let's start with the size of this market. As you mentioned, it's an $18 billion U.S. market alone, and that's for the average risk screening opportunity. That equates to about 106 million people today. Of that, 46 million need to be screened. So this is a significant market. When you think about what that means, it's 1 in 3 Americans are in the addressable market. I'm not aware of a diagnostic market that's even close to this size. So it is a significant addressable market. It has grown over time. When you look back to last year, we got -- Cologuard got a label expansion that added the 45- to 49-year-old age group to this market. And that added almost 20 million people, most of whom are not yet screened. So this market is big. It is growing. When you look ahead, let's say, 10 years from now, the total number of people in this market will continue to grow with population growth and approach 120 million people. So this is a significant market already. Today, Cologuard has captured about a 5% share. So it is still very early adoption and we are -- as of yesterday, we're 6 years in from getting FDA approval. So it's a big market. Cologuard has a very good pace of adoption today. I mentioned in terms of volumes, we're at about a 5% share. On the physician side, about 50% of all primary care doctors have ordered at least 1 test. Again, our goal is to get to 40%. That equates to about $7 billion of revenue. That is a long-term ambitious goal. We are laying the foundation for us to achieve that. I think of typically in primary care, it takes 15 to 20 years for products to get fully adopted. Again, we're 7 years in. So our -- the time frame to get to that $7 billion number is still a ways off. But getting from here to there will drive a lot of growth and we think create a lot of value for shareholders.

Great. We'll move in to some more granular questions here. So you reported Q2 results recently. And despite COVID headwinds, you outperformed street expectations for Cologuard during the quarter, even given some outliers. And you showed resiliency in your test volumes despite the fact that the end user of Cologuard is usually an asymptomatic individual, which is different from, say, a more time-sensitive advanced cancer patient. What are some of the key initiatives that you took to be nimble and to continue to serve patients and clinicians during the peak periods of disruption? And just what are your thoughts about how those initiatives played into your solid Q2 trend?

Max, it really starts with Cologuard's nature, right? Cologuard was designed to be an accurate, convenient, at-home test. Up until Cologuard, patients and doctors considering a screening test often had to make a trade-off between convenience and accuracy. You could choose a colonoscopy, which is accurate, although it's not the most convenient, it requires at least a day, if not 2 days off of work and many people won't get a colonoscopy. You could also, on the other hand, choose a FIT test, which is relatively convenient in that it's an at-home test, however the accuracy is still relatively low, especially for early-stage cancers and precancers. Cologuard, you don't have to sacrifice. You get high levels of accuracy, again, over 90% sensitive for the early stage colon cancers. It can also detect precancer, and it's convenient and because it can be done in the convenience of your own home with no preparation required. So again, at its nature, Cologuard fits in well to any environment. I think those advantages are really amplified in the current environment with the pandemic. In response to the pandemic, which I don't think anybody in this country expected to happened, what we saw in the March time frame is, as the pandemic really came upon us, our team moved extremely quickly. We -- one example of what we did is we stood up a telehealth site. Now what the telehealth site does, it provides another option to help get patients screened. You could go to our site right now and for anybody listening, who has not been screened, one option that you could now choose is go into requestcologuard.com and requesting a Cologuard test. You just -- you have to answer a handful of questions about your personal health profile. And behind the scenes, a health care provider would review your answers and if you're so indicated, they would order you the test and we would take care of fulfillment on the back-end, just as we would any other test, any other order. So it's a very convenient way to help get more patients screened. And that's just the start. With that foundation element, that new website out there, we plan on expanding that into other channels, like the employer health channel. The large companies who want to get their patients screened easily can now do that, we could provide a link to this website, where they could distribute it to their employees and get more people screened. So that's one example. Another example of the response is through our conversion to a virtual sales call. Back in mid-March, to protect the health of our employees, we converted from a primary field-based selling effort to an inside or virtual sales call. The team did an excellent job at responding quickly to an adapting environment and still continuing to reach out to providers and lay the foundation for near-term and long-term growth of Cologuard. So a lot of efforts have been put underway to help keeping Cologuard and the company moving forward, even during a tough time. And because of that, we saw that Cologuard not only recovered quickly from the depths of what we saw in April, where orders were down over 60% year-on-year, to just in 2 short months to June, where orders grew year-on-year. So it's because of the actions the team took and the very nature of Cologuard that performs well in this environment and much better than we expected. We had expected Cologuard to be negatively impacted and stay at a depressed level for a period of time, Cologuard recovered much faster than expected. Even though today, much of our field-based sales activity is muted, access to physicians is still relatively limited, the business has recovered meaningfully and much faster than the colonoscopy, which, again, speaks to the at-home convenient nature of Cologuard.

Great. Yes, I do think that the telehealth offering may be an underappreciated aspect of the story. And it's early in launch, but signs are positive there. So we're looking forward for a -- to an update there. Moving on. So estimates have shown that in Q2 alone, backlog of up to 1 million missed colonoscopies may have built up. And it's logical to assume that GI doctors may look to Cologuard as an efficient and accurate tool for CRC screening as they prioritize diagnostic colonoscopies over routine screening colonoscopies during the backlog period. During our keynote session just a couple of hours ago, the former FDA commissioner, Dr. Scott Gottlieb specifically called out Exact Sciences and Cologuard as a valuable, noninvasive screening tool as the health care system works through standard-of-care procedure buildups and disruption. So COVID-19 may in fact be a major structural tailwind to drive increased Cologuard ordering, so what are your thoughts on this? And how should we think about the timing and the pacing of this major trend playing out?

I agree. While the pandemic has clearly been a setback for society, there are some silver linings and one of those you highlighted is for Cologuard, we think it accelerates the long-term adoption by at least a year or 2. And again, the long-term goal here is to achieve at least 40% market share. And I think that -- I'll give you a couple of examples of why. This pandemic has highlighted the need for better diagnostics, more accurate, convenient diagnostics. For the first time in my life, I know that on the nightly news and around the dinner table, people aren't talking about diagnostics. So a silver lining of COVID is that it has brought a heightened appreciation for diagnostics. And as the saying goes, cancer doesn't stop, yet during the pandemic, and especially in the early days of the pandemic, preventative care came to a screeching halt. And that just -- that can't continue. We are going to see, unfortunately, more -- many more cancer deaths because of COVID. In fact, in this country today, cancer touches far more lives in terms of mortality than COVID has so far. So we can't ignore that. We have to get more people screened. You're right that there's been over 1 million missed screening colonoscopies, and that was just during the second quarter alone, that backlog of patients continues to grow because in this environment, GIs have had, unfortunately, had to choose and they have prioritized the more urgent procedures like a diagnostic colonoscopy. So these are patients that have a symptom. Let's say they have an active rectal bleed or a blockage, those are patients that need to be treated right now. They need to be diagnosed right now. So they've been prioritized over screening colonoscopies. And so this backlog continues to grow. And again, this is in addition to the 46 million people that were unscreened at the start of the year. So this is a massive problem. And we think the best way for us to help clear this backlog and push screening rates higher is to offer patients a choice. Offer patients a choice because then patients and the providers can choose the test they are most likely to do. And we think Cologuard is an ideal test in this environment, again, because of the at-home accurate nature of it. So that is a silver lining. Another silver lining, I would say, is that how our team responded quickly to, I mentioned, standing up the telehealth site. There's also some actions we have taken to help drive patient compliance. These are actions that will help even when the pandemic abates. So this team has learned even more lessons on how to move quickly. And the actions we've taken, we think will pay off for years to come.

Great. And one more on Cologuard. Volumes returned to slight growth in June. I believe, pulled back maybe a bit in the flat year-over-year range in July just with the resurgence of COVID-19 cases in some of these regional hotspots, is there any just incremental commentary you can provide about some of the metrics you're seeing in early Q3 as it relates to same doc ordering, new doc adds and then even for the portion of patients that are becoming available for a 3-year rescreen with Cologuard?

Yes. We're very pleased to see that return to growth in the month of June. That came much faster than we expected. And again, it's because of the very nature of Cologuard, combined with the actions the team took to continue driving growth despite the pandemic. When you think of that, Cologuard, relative to a colonoscopy, that relative share gain has been significant. During the quarter, if you look relative to the prior year, Cologuard orders were down by about 1/3 during the second quarter, whereas colonoscopy was down by about 2/3. So from a relative standpoint, we've recovered far faster. And as of end of July when we reported second quarter results, Cologuard, we had mentioned, was about flat year-on-year in terms of orders, whereas colonoscopy was probably down 30% to 40%. And so we're still much better off. We haven't commented on August, Max, but keep in mind that the impact that COVID had is real. It did lead to a moderation of the recovery we had seen in June and July over relative to where things were at in March and April, then the country was still trying to adapt and figure out how to quarantine and stay at home and adapt to that, I think as a society we've done a much better job, of late, managing through a difficult situation. And I'm confident this team can continue managing through it. And longer term, we will, as I said before, I think be much better off having gone through the pandemic.

Great. And sticking with COVID-19, you've been processing COVID-19 test volumes in your Wisconsin lab, you earned FDA emergency-use authorization for your internally developed test in mid-April. So you generated $34.6 million in COVID-19 testing revenues in Q2, which is a nice surprise. And more importantly, you've stepped up to the plate for patients during a period when the supply of COVID-19 testing remains well below where it needs to be, simply put. So can you just briefly speak to the business-to-business type COVID testing services you're providing? Where your processing capacity currently stands? And just how you're viewing the magnitude and the duration of the COVID-19 testing opportunity?

So first, Max, I'd just say that we're very proud that the team could respond so quickly to help out during this pandemic, even though we're a relatively small player relative to some. Any help we can provide here, we're thankful we can do that. The priority here has been to help out our employees to stay safe. So back in March, when we started to stand up this test, the goal was to test our frontline workers to make sure that we're keeping them out of harm's way. All of our employees who come into the office are tested regularly to make sure that we're staying safe. So COVID testing has been -- it's been a big way we've kept our company moving forward and out of harm's way. We've also been able to contribute to the broader efforts, the broader fight against COVID. During the second quarter, our capacity was about at 50,000 tests per week range. We're fortunate that we have the people, the equipment, the facilities to help out. You'll recall, last year -- about a year ago, we opened up our new Cologuard lab. And we had built that lab ahead of anticipated growth. And in many ways, we're fortunate that we brought that lab on when we did because, call it, 9 months later, when the pandemic hit, we could move quickly because a lot of the same setup used for Cologuard testing could be deployed for COVID testing. And so we've been able to help out. And our goal is to keep expanding the capacity during the third -- during the month of July, we've talked about having achieved a cumulative number of tests of over 500,000, which implies roughly at least 150,000 tests during the month of July. So we've expanded capacity a bit from where we were at during the second quarter. Now going forward, we will try to keep expanding that capacity. I don't know how much higher we can get because there are some unknowns. One big unknown is where the demand will go. And clearly, right now, there's a lot of demand out there but that's going to depend on many things, such as the timing of a vaccine. Another unknown is the supply chain availability. There are products and inputs out there that we and others need to keep running tests and to the extent those are available, we will keep testing. However, there has been supply chain constraints well-publicized out there. So that could limit our ability to keep growing the test. And lastly, the pricing is a big unknown, as you mentioned, we do have some business-to-business type partners, and pricing, there's some unknowns there on. And when pricing and funding when and how long that will be available. So that could impact how far we grow this business and how long we have it running. Again, our goal here is to help with the fight and get back to where Cologuard and Oncotype are really a priority. But for now, we're happy we can play at least a small role.

Great. So I'm going to jump to your pipeline now. So following ASCO 2020 we came away with a greater appreciation for your pipeline test for early-stage liver cancer screening, that's slated for launch in 2021. Your ASCO data demonstrated a promising performance and so I guess the question is, what are some of the key insights that you gained during your -- the successful launch of Cologuard? And how do these translate to your liver launch? And then maybe what are some of the key differences that you expect or expectations for the launch?

Yes. So just, first, an overview of what the liver test is. This is for helping detect early stage liver cancer in an at-risk population. So imagine somebody with hepatitis or cirrhosis. That is where the majority of liver cancer happens. So that is where you need to test frequently. Our goal is to provide a convenient accurate test, which should sound familiar, that is what we did with Cologuard. The current guideline recommended test, which is a mixture of a protein test called AFP, which is a blood test and an ultrasound, the adoption rate there is low. Fewer than 1 out of 3 people are tested per recommendations. And when they are, those tests, given the lower accuracy, unfortunately, it misses many cancers. So again, our goal is to help improve the screening rates with a more accurate convenient test. So there's a lot of learnings on the product positioning. Cologuard as an accurate, convenient test has performed well, and that has helped inform the design and eventual launch of the liver test. Another big insight is that sale -- the importance of sales reps. We know that our field force is one of the biggest, if not the biggest, driver of adoption for Cologuard. Which is why for our liver test, we plan to launch that through our GI sales team. Recall last year, Max, we -- about a year ago, we launched a new 60-person GI team that initially was carrying the Cologuard product. Over next year, we'll start to carry the liver cancer test. So there's some key insights like that. Another big win that we'll have next year when we launch that test is that we'll bring together capabilities from the Genomic Health partnership along with the Exact Sciences legacy team. And a prime example of that is that we will launch the liver test through the Genomic Health, Redwood City lab -- Redwood City, California lab. And then we'll deploy, as I mentioned, the sales channel that came with legacy Exact Sciences. So we're bringing together these 2 companies in a way that will help drive faster revenue growth, which was part of the core reason behind the acquisition. So there's a lot of great insights that we've learned thus far that can help us drive forward liver and other tests in our pipeline.

Great. So I'm going to take one from the audience here. And so I mean, we've written that we think Exact will stand alone as the only FDA-approved noninvasive colon cancer screening company with a commercial presence for at least 4 more years or so at a minimum. Can you just remind us of your expectations for any time line to competition and the key aspects for investors to consider when evaluating how the competitive landscape will play out.

So keep in mind, this is a huge market. I mentioned 106 million people, and 46 million of those are unscreened. So this is a huge market. We think -- today, there are multiple test modalities. In the future, there will be multiple test modalities. For a test to succeed, we think it needs to be convenient and accurate. Cologuard provides best of both worlds with, again, over 90% early-stage cancer sensitivity. When you look ahead, it is a long and difficult path to market. You have to have a test that works, you have to have a test with an acceptable cost of goods, which -- that is a problem for many of the companies that I see wanting to enter this market. And then you also have to get through a whole series of barriers, let's call them, the gauntlet of barriers, that's just to enter the market. And even when you get through those things such as the key guidelines here, the United States Preventive Services Task Force, just getting to those guidelines is not sufficient. There is a test right now that is in those guidelines, that is very minimal adoption, less than 1% share. And it's been in those guidelines for years. Medicare coverage, also a difficult feat to get over. Medicare coverage, again, not sufficient for success, and neither is FDA approval. So you have to have all those pieces to get the product to market. And again, it has to be a really high-quality product to succeed. And so we think Cologuard has a very long runway ahead. When you look at 10 years from now, we're confident that Cologuard and colonoscopy will be the 2 leading players in this market. We expect both to have somewhere around 40% share, with the remainder of the market split between the FIT test, which is the fecal blood test and any of the blood-based tests that are out there. Given the blood-based tests, all are going to have much lower accuracy than a Cologuard or a colonoscopy.

Great. That's very helpful. I think we have about a minute here, 1 minute left. So I guess I'll have a quick one in. Just on the Pfizer partnership, the COVID disruptions caused sort of a disruption in the contractual minimums from the original co-promote? Just how are you thinking about any adjustments to that agreement for the final year of the deal? And how are you thinking about your strategy after the expiration of the contract, and I'll leave it there.

Pfizer has been a good partner. Now we're about 2 years into the partnership. Over that time period, we've significantly increased the number of people tested with Cologuard. Today, it's over 4 million. It was 1 million at the start of the partnership. At the same time, we've helped expand the reach of the sales team through the combined efforts. Today, over 200,000 providers have ordered Cologuard, which is up significantly. We've also significantly enhanced our marketing capabilities and our marketing reach. So they've been a good partner. And we're happy that we have them. We've also, in the meantime, expanded our sales force significantly, more than doubling that team in the past 2 years. We've upgraded our whole commercial leadership team in the past couple of years. And we have always been planning for the day -- as of right now, at the end of next year is when the current agreement with Pfizer ends. And so we've always been planning for the day in which we can stand alone and keep running with Cologuard, and we're confident that we'll be able to do that. In the meantime, because of COVID, we have been discussing with Pfizer ways to update the partnership for the new -- the pandemic environment. Not sure kind of when we'll have an update on that. But both sides enjoy working together, it has been a good partnership. We've accomplished many of the goals we had set ahead of time. So we'll update you when those discussions progress.

Great. And well, I think that's it for time. I really appreciate you joining us today, and we're looking forward to the flurry of updates to come. So we'll talk to you soon. Thanks again.

Thanks, Max.