Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

All right. Good afternoon. Thanks, everybody, for joining us on the second day of Jefferies 2020 Virtual London Healthcare Conference. I'm Brandon Couillard. I cover the tools and diagnostics space here. It is my great pleasure to have Exact Sciences with us at the conference again this year. And in the virtual format, very happy to have CEO, Kevin Conroy; as well as CFO, Jeff Elliott. Thank you both for being here. For those tuning into the webcast, please feel free to e-mail me any questions that you might have, and I'll do my best to work them in. Before we get started, Kevin, I'd be remiss to perhaps not acknowledge the recent passing of Dr. Ahlquist. I know he was a founding member of the team. I know he was a close friend of yours and everyone there at Exact and he will be missed. So our regards to him...

Thank you very much, Brandon. That's really decent of you, and we will miss Dave.

I'd like to start off with the recent acquisition of Thrive. You had Kevin provided some initial data on your own multi-cancer liquid biopsy screening test in September, a few weeks later acquired Thrive. Can you kind of just walk through, I guess, the rationale for the deal? And why is now the right time in that company and that platform, that test development cycle where you felt confident enough to combine forces, I guess, in terms of your R&D programs on that front?

Yes. It was actually -- goes back, Brandon, 10, 11 years ago when I first walked into Dave Ahlquist's office at the Mayo Clinic. And he was a gastroenterologist who focused on attacking cancer from early detection. And it was his fundamental research that powered Cologuard. And I remember in that very first meeting, Dave sat down, and after he was done talking about how do you rid the world of colon cancer, the second part of the meeting was, "Hey, look, there's a bigger opportunity here because cancer is the #1 killer in the U.S., people under the age 85, number one." The cumulative prevalence for people over the age of 50 is about 3%. People have cancer, and they don't know it. And he said, if you could only detect them earlier through a simple blood draw by looking for the DNA markers in the blood, you can really pull cancer from basically a late-stage disease to an early stage disease. And that's when he articulated, look, 90% of stage I cancer is, broadly speaking, not every cancer, but about 90% of people survive if diagnosed in the earliest stages versus stage IV cancers are only about 10% survived. So that was the genesis. And then for the last 7, 8 years in partnership with his research team and the Mayo Clinic, we've been able to identify in a painstaking way not only the genes that are methylated in the case of cancer, but also where in those genes the methylation occurs and where is the best place to probe to find that. So our technology is born of knowing exactly where to look. Thrive, who we invested in, we really admired from afar, looked at this from a DNA mutations perspective and protein. And if you combine those 2 technologies, we believe you can appreciably increase the overall sensitivity or the ability of a blood test to detect cancer. And it was the right time because Thrive had proven in a prospective 10,000 patient study, the power of its approach. It was clear from that study that the test could use improvement in terms of the overall sensitivity. The specificity was great. The overall sequencing technology performed really well. You could add these DNA methylation markers that we own the rights to and know so much about, and we think we have an incredible test. And then you couple that with the incredible commercial capabilities and lab infrastructure and reimbursement capabilities and consumer marketing and consumer and customer engagement capabilities, we think it's a very powerful story to go out there and to beat cancer in a bigger, bolder way than even Cologuard.

That's part of my next question. In terms of how would you combine sort of the best of your 2 programs? How much do you think you can improve the sensitivity of DETECT-A with the addition of DNA methylation markers?

Well, appreciably. We think this sensitivity increase will be significant. And you can see it from data that we shared in late September, where with only 6 DNA methylation markers we were able to detect 84% of cancers, 83% of cancers in a case control study. Now those were later-stage cancers. So those were large -- all 4 stages, but it was biased towards later stage. And that was driven mainly by DNA methylation and then a handful of proteins. So we think that if you take those, the best methylation markers, couple that with the mutation markers that are embedded within the Thrive test, the CancerSEEK test, there will be an appreciable step-up in cancer sensitivity.

What do you think is the bar you need to achieve on sensitivity? I assume a specificity, greater than 99%, which I think we can all agree is what you want to shoot for. But where do you think the bar is on sensitivity for it to be clinically relevant? And then part 2 is just in terms of justifying reimbursement, which is a separate question, but just clinically.

Yes. With the current version of CancerSEEK or the version of CancerSEEK that was used in the DETECT-A study. They -- the sensitivity was 27%, and that doubled the number of cancers detected over the current standard of care, mammography, cervical or Pap smears and colon cancer screen, it doubled it with a test only 27% sensitive. So I want that test study now every year. And so any improvement that you get over that is going to be meaningful in terms of detecting these cancers. And in that study, 2/3 of the cancer is detected, and there were 10 different types of cancers detected. 2/3 of them were early stage cancers. So anything, let's -- if you double it, you're most likely going to double the total number of cancers detected overall. And we'll share the information. We'll have a more informed position on this after we do the combination of our approach in the CancerSEEK approach.

When do you think we might see the first inkling of that data, way before you begin the large prospective study, but why we see some initial glimpses of what the addition of those markers might look like in terms of added performance?

Well, we will definitely see that data next year. And we will let you know ahead of time before when that date is. We probably won't spring it on you. I'm sure it will be presented at a scientific conference. So it's not going to be in the first quarter. We want to make sure that we get the test optimized, run the study. We have plenty of samples to use to do a training set and then to do a test set. So it will be next year, and we think it's going to be a fantastically performing test.

Jeff, to the extent that you're really enabled, how do we think about just the P&L impact from Thrive and the added R&D layering in that organization. Is there anything you can put any numbers around as far as thinking about the OpEx in kind of next year and the out years front?

Brandon, part of why the Thrive acquisition is so exciting is that a lot of the work has already been done. When you look at Cologuard and the foundation we've laid with Cologuard, in terms of the sales force. We've invested over $1.3 billion in our sales and marketing team. Our lab, we've invested over $300 million in our lab. The IT foundation, a $400 million investment. A lot of the investment we've made for Cologuard can be leveraged for a multi-cancer test. So that's really exciting for us. And look, we've done the math on the investment. This is a major market, at least $25 billion. So the return on that investment looks very attractive. Going forward, the biggest remaining investment to make is around the pivotal study, which will be a multiyear study. Yes. I'm not going to put forth a number on that one, but there will be a major investment north of $100 million, again, over multiple years. I do know the team at Exact and the team at Thrive are very good at running large prospective studies. So I'm confident we can do this in an efficient manner. As far as the P&L impact, look, it's too early to comment on that. We'll get into more details as time goes on.

This deal was announced the same day, but Base Genomics was perhaps the most overlooked $400 million deal, I can ever recall. It seems like a pretty unique asset on the service. Can you just tell us a little bit more about what their capabilities are around DNA methylation analysis and how it -- what it really brings to the Exact offering portfolio?

Well, the base technology is called Tests. And their technology allows you to detect DNA methylation in a way never before utilized. And what it does is allows, first of all, you to do DNA mutation and DNA methylation from the same sample. It also does not degrade DNA like the current bisulfite reagents do. So presently, even in Cologuard, you eliminate about 50% of the DNA when you treat the DNA to be able to detect the methylation, the pretreatment step actually destroys about half of the DNA. And because you can't detect mutations and methylation in the same well, because of that treatment process, you have divided that DNA now into, and then you reduce the DNA and the methylation well by 50%. You end up with only 25% of the DNA available at the starting point. And what that does is it reduces sensitivity. And so the Base Genomics taps technology, we believe is going to revolutionize DNA, the information that you get from studying and probing DNA methylation. There's a research tools opportunity here, and there's a huge clinical diagnostics opportunity here, making every test that we have with DNA methylation, which is all of our tests better.

Kevin, maybe stepping back a bit and pivoting back over to the Base Cologuard business. You've clearly seen a fair share of disruption in 2020 but as we look out kind of next year, what are the key growth drivers that you're most excited about in the core Cologuard business, it seems like a number of exciting things kind of coming together commercially. What are the things we should focus on next year, looking forward?

Yes. So we've screened over 4.5 million people with Cologuard. The awareness of Cologuard in the primary care and health care setting is really strong. It's in all the key guidelines. We're excited about 2021. As you just recently saw, we extended our partnership with Pfizer, one of the greatest primary care, health care sales forces in the world. That team will continue to carry Cologuard high in their bag. As you know, because of COVID, there is a big backlog of people who haven't been in for screening. And because Cologuard is an at-home test, we have the ability to get people screened. And so addressing that backlog in 2021, the growing backlog is a huge opportunity. There is also -- we have seen such tremendous progress in our work with health systems and the penetration rate with health systems. That's multiple dozens of health systems have integrated now with our lab so that electronically their docs can order Cologuard. And as a result, we're starting to see an uptick in overall electronic ordering rate. While starting in 2021, Epic, actually, late part of this year, Epic is building into their software the ability to order Cologuard. That will take about 6 months to roll through all of their customers. When that happens and, call it, in the back half of 2021, we would expect even more growth because any primary care doc who uses Epic will be able to order Cologuard and many of them will be able to reorder Cologuard for a 3-year restring patient, which leads us to that, which is next year, there are about 600,000 eligible people who are due for their second Cologuard test because it's their third year anniversary. So we're really excited about that. And then the news in the recent USPSTF draft guidance that they lowered the screening age from 50 to 45. And that's another 19 million Americans. And because they are updated in those guidelines, health insurance companies will now start to cover Cologuard at -- for people starting at age 45. And that's really a big opportunity for us in the short term and long term because so many of those people who are 45-years old, simply are too busy to go in and get screened for colonoscopy, and they're really reluctant to today. So 2021 will be a big year. We have a lot going on, which means there's a premium on focus and execution.