Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Okay. Good morning, everybody. Welcome to the Stifel Life Science -- Healthcare Conference. I'm Dan Arias, life sciences and diagnostics analyst. This is our first life sciences session here with Exact Sciences. So welcome, Jeff, to our conference. I appreciate you taking the time to spend a bit of conversational time with us. It's certainly -- well, thanks for coming. Let's start there. I hope you're well. Hope you're safe and [indiscernible] by you.

Thanks for having us, Dan.

There's not a lot that -- there's a lot of good things to be said for Exact right now. There's certainly some -- plenty of interesting things going on. I thought what we could do, we have about 30 minutes, is to talk about Thrive. I'm sure that's gotten plenty of attention on your side. But I also think coming out of the call, 3Q and 4Q, Cologuard trends and just sort of the base business got less focus than it normally does. So I was kind of thinking maybe we could walk through some of the things that you saw in 3Q that you're hoping for in 4Q. And then by the time we're done with the 30 minutes, sort of a balanced base business versus what you're hoping for, for the future with Thrive, if that works?

Sounds good.

Okay. Maybe just to start with Cologuard in the third quarter. 3Q orders were up modestly, if I remember correctly. And so if we're taking that month by month, I think it was flattish in July if we just go back a little bit, and then August and September were up a bit. Is that a correct way to think about the monthly cadence there?

It is. And Dan, let's first take a step back and talk about where we've come from since the pandemic began. We're very pleased at the improvement that we've seen in Cologuard. When you look back at the month of April, Cologuard orders were down about 60% versus the prior year. We internally thought that they would stay down at that depressed level for an extended period of time. However, through the actions the team took and when you combine that with the convenient, accurate nature of Cologuard, we actually saw a return to growth in the month of June. When you look out through the whole third quarter, we saw growth. And what we talked about for the fourth quarter is that we saw continued improvement. When you look at the month of October versus the month of September, orders were up. So we've seen sequential monthly growth every month since April. We're very pleased by that recovery, and I think this really bodes well for the long term. When you look at the underlying trends in the business, we are gaining significant share in the market relative to colonoscopy. Colonoscopies are still down 20% to 30%. So we're very pleased by the pace of Cologuard's recovery. And we continue to believe that long term, the COVID pandemic will be viewed as a turning point, a turning point in the adoption of Cologuard and a turning point for getting more people screened in this country.

Yes. So I think the way that you put it a couple of quarters ago was that you've basically accelerated Cologuard momentum and awareness by a year or so. Can you just sort of touch on how that is resonating with the base of physicians? I mean, certainly, PCPs seem to be more aware of how it is that they can use this test. What is the message out of that pool of docs and just the way in which they might work through backlog and just how they're viewing the utility of this? Obviously, there's the clinical utility, but then there's their own workflow utility.

Yes. Cologuard's position has been meaningfully improved because of COVID. I'll give you a few examples of why we think that. One is an eternal survey we do. We survey primary care physicians and ask what do they think Cologuard's relative performance -- relative position is and the impact that COVID is having on the test. And the vast majority say that Cologuard is a more important test because of the COVID pandemic. It's accurate. It's noninvasive. It can be done at home. So it fits into the pandemic environment better than a colonoscopy. So again, surveys support that Cologuard's positioning is significantly enhanced because of COVID. We can also look at our own internal order trends. We look at doctors who occasionally ordered Cologuard, let's say, once a quarter. Well, that was before the pandemic. Well, now during the pandemic, those doctors are actually ordering much more frequently. They see that Cologuard fits into this world better now than a colonoscopy does. So doctors that maybe didn't believe before, hadn't fully bought in, are showing a much higher order rate. Where orders are still somewhat depressed is the doctors who had more fully adopted Cologuard. Those doctors, because their patient traffic is still down, at least 10% to 20%, they're ordering fewer tests. So what this means when we come out of the pandemic, we expect patient flow to improve at those doctors who have really bought into Cologuard and their order rates will improve. And then the doctors who had only sporadically ordered Cologuard before the pandemic, given their newfound appreciation for the test, we think we'll continue to have higher order rates amongst those doctors, which is another reason why we're more confident longer term that Cologuard adoption will improve because of COVID.

Okay. What about telemedicine-derived scripts there? I mean you've seen some data, and there's some conversation about just how we should think about the longevity of that trend, hopefully, if we come out on the other side next year. What are you seeing currently? And what is your expectation going forward there?

Well, we are seeing a significant impact from telemedicine broadly, and there's different varieties of that. You know that because primary care preventative visits are probably down 10% to 20%. These are the in-person visits, down at least 10% to 20%. And really, people are hesitant to go into the doctor's office during the COVID pandemic. Well, Cologuard orders are not down. In fact, Cologuard orders are up year-on-year. So we know on a relative basis, telemedicine is a big driver of Cologuard orders now. Back in the month of -- in the second quarter, our team acted quickly and launched our own telemedicine offering where consumers can go on to our test, request cologuard.com, and actually ask for a doctor to order the test for them. And we've seen some nice early traction with that portal, that consumer portal. Longer term, that portal serves as the foundation for many things we can do with payers, employers, health systems. So we're excited to have that portal out there. It is a nice contributor. But telemedicine has been a nice tailwind for us.

Okay. Okay. So if I just go back to 3Q and 4Q trends and we look at the, I guess, you could call it maybe a step back in momentum in October relative to August and September, was that similar to what you saw during the summer in terms of geographies in the areas where things started to trickle off? And then I guess the follow-on question for that is given what you're seeing now, if we look at 4Q, do you feel like it's possible if we kind of hang in the right direction -- or go in the right direction or hang in there, that 4Q volumes could actually be up for the first time since COVID hit?

Yes. So Dan, when you look at the month of October, orders grew both year-over-year and relative to September. So we're in a very different position than we were back in, say, April. And that comes even at a time when COVID cases are at -- are reaching record high on nearly a daily basis. So the business is in much different shape. What we had said on the call and I would say now is that the rise in COVID has dampened the improvement that we had been seeing. It's somewhat -- we're seeing somewhat less growth in the fourth quarter than we had seen historically, but that should be no surprise given the rise in COVID cases. But again, underlying trends of the business continue to improve when you look at the physician sentiment, when you look at the order trends of doctors who are -- historically only ordered sporadically. And we've got some really exciting catalysts coming up to run electronic ordering and getting our reps back out in the field more broadly. Again, this recovery has come even though face-to-face visits with physicians are still down meaningfully for our sales reps. So Cologuard has come back without the typical contribution you would get from a sales force. That said, our reps are getting back out there more fully now, and the Pfizer team is getting back out there. So that gives us something to look forward to because the reps are a meaningful driver of physician ordering.

Yes. Okay. So maybe just to go to that point on the rep activity. Can you kind of characterize what percent of your -- percentage of your rep base is back out and functional? Obviously, that's a function of what we're seeing now and just where things are getting a little tighter, but I'm curious how you're thinking about entering the end of the year or next year with your sales force productivity. And then on the Pfizer side, can you talk a little bit about the renegotiation there and what the incentive was for you guys to do -- to structure the deal that way? It seems like it's got both a trade-off on just paying the reps for every visit that they do, but also not having to hire new reps of your own. I mean that -- so that is, in my mind, the way that I see the trade-off there, but I'm curious how that's -- how you view it as well.

So first, on our sales force, we have -- we permit all of our reps to go back out into the field now when it's safe to do so. So we've taken steps. The reps all get tested every week. We've taken steps to keep them safe because that is a priority of ours. But where access is available, where they can actually get in and see a doctor, again, where it's safe for them to do so, all of our reps can go back out there. When you look at the amount of face-to-face activity with physicians, it's less than half of where it was pre-COVID. So while they're all able to get out there, because of COVID, they're not able to see a physician as often as they used to. On Pfizer, we're pleased to have that partnership continue. They have been a good partner now. We're over 2 years into that partnership. The reason why we had to update the agreement was really because of COVID. The prior partnership was based on a predetermined baseline of revenue. That baseline of revenue was set before the pandemic had even been heard of, right? It was set back in 2018. With COVID weighing on the revenue temporarily, the mechanism for Pfizer to get paid wasn't applicable. So what we did is we changed the structure of the contract. Instead of paying Pfizer a split of the gross profit above a baseline of revenue, we pay them for details they provide. We pay them for sales activity. So that's how we compensate Pfizer. That gives us flexibility to make sure they're incentivized in this environment, right, without knowing what the actual revenue will be. It also gives them flexibility to continue to stay incentivized and earning some dollars for their activity without knowing what the revenue will be. So it helps -- it's a win-win for both sides. And the fact that we have a much bigger team with Pfizer gives us flexibility during a pandemic, which is really important. So we're pleased to have that agreement to continue. For the individual rep, Dan, I think you asked a question on the rep, the individual rep is compensated through a portion of their incentive comp is allocated to Cologuard. And Cologuard is a primary thing they focus on. That -- their incentive comp is really independent of the way we compensate Pfizer in total. We compensate Pfizer and then Pfizer internally has to allocate that to the rep. So there's a [ stepper ] move. So the rep incentives aren't changed in reality because of this contract. It's just the way we pay Pfizer is different now.

Okay. Okay. Maybe just -- okay. So you enter 2021 with some sales force momentum. You're back in the field. The Pfizer guys have more incentive, it seems. I mean there are some changes in what's in their bag that I think would be meaningful. I'll let you comment on that if you want to. But the other sort -- the other part of the equation also seems to be just the number of folks that you have to target. And I think a big part of that involves this rescreening population, if I'm not mistaken. So there were 200,000 or so that were in the 2020 rescreening population pool, if I remember correctly. And the way that we were talking about it for 2021 is I believe there's another 600,000 that come into that pool for 2021. So for those of us that are kind of trying to get our heads around where volumes could go and what -- where you're ultimately pooling from with this test, it feels to me like you've got an incremental 800,000 patients that you can go out and potentially test next year minus whatever you do in the rescreening pool this year or whatever you have done thus far.

Yes. Rescreening is a huge opportunity for us, Dan. This year alone, over 370,000 patients became eligible for rescreening. Next year, the number is over 600,000. So this is a huge opportunity. Longer term, we expect over half our revenue to come from rescreening. It is already a material part of the business. It's a growing part of the business. This is one area we made significant progress on throughout the COVID pandemic. The progress is coming through a variety of efforts. I'm very excited about the IT tools we're putting in place to make it really easy, both for the doctor and for the patient, to make rescreening happen. For the doctor, we have new tools where when a doctor logs into our portal, they can see all the patients who are eligible for 3-year repeat testing. And once they've verified those patients are, by their view, in fact, eligible, through the click of one button, they can place an order for all those patients. So that's made it very easy for the doctor. For the patient, we're putting in enhanced alerts, text messages, phone calls, e-mails to make sure that patients know that they're due for rescreening. So this is an area of the business we've got significant momentum on. When you look ahead to next year when Epic goes live -- a new version of Epic goes live that will allow any doctor on that platform, the Epic platform, to order Cologuard electronically, that's also expected to be a nice boost for rescreening because about 45% of all primary care doctors are on the Epic platform. So once they go live with that, which will take -- that will take time. That will take over the course of probably 6 months of next year. But when they're on that platform then, we can add additional tools to make it just really easy for them not only to order Cologuard the first time, but to capture all those 3-year repeat tests.

Okay. How are you thinking about the right penetration rate for the rescreening population? I mean I -- when we were talking earlier this year, I think the thought was 50% is a decent ballpark way to think about it if you just say 70% penetration on the pool and then 70% compliance on that. Obviously, a lot has changed since then. So how would you recommend that we think about tackling that incremental group of potential patients?

Yes. I think that's the right way to look at it, Dan. About 50% would be a good number because in this age group, you just know that somewhere between 15% and 20% of all Cologuards are positive. So positive Cologuard, that patient [ reflexes ] to a colonoscopy and then they're lost to the Cologuard opportunity for at least 10 years. So you have to adjust for those patients. You have to adjust for patients that move or become high risk or somehow are no longer part of the target market. When you make those adjustments, that leaves you about 70% of the initial pool from 3 years ago. Of that remaining pool, we hope to get at least 70%. So we're seeing continued progress. We're capturing a much higher percent. In fact, I looked at the data on Friday. As of last week, we're at an all-time high for success at capturing that 3-year repeat customer. So that rate continues to go up. What's really exciting about this patient is that they comply at a higher rate. They comply at a much higher rate than the first-time patients do, and they comply more quickly because they know how to do the test. It's familiar to them. So it's a very exciting opportunity for us next year.