Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Eleni, and I am on Tycho's life science team. It is my pleasure today to introduce our next company, Exact Sciences. We have CEO, Kevin Conroy, joining us today. As a reminder, you can submit questions through the Ask a Question feature on the event [ debut ] on the website, and we will get to them in the Q&A at the end of the presentation. And with that, I'll hand it over to Kevin.

Thank you, and thanks to all of you for joining us and to JPMorgan for having us back. Against the backdrop of a challenging year caused by COVID-19, our team's execution puts us in a position to help even more patients now and in the future. This comes at a time when there's a new recognition and an appreciation for the power of cancer diagnostics. The focus is clearly shifting in oncology to earlier detection and smarter answers through tests that help guide optimal treatments. And our team is helping to lead the way forward. We'll talk today about how Exact Sciences is uniquely positioned to lead this fundamental shift. And we'll also provide details on an important new addition to our cancer testing capabilities that we announced just moments ago. Next, Slide 2, our safe harbor. We'll be making forward-looking statements, and you can see the full statement on our company's website. Slide 3. We, as a company, our mission is to eradicate cancer and the suffering that it causes through advanced tests that help prevent cancer, detect it earlier and also help to guide treatment. Exact Sciences is the early detection company. And the value that we start -- that we create starts right here. Slide 4. Exact Sciences is a leader in cancer diagnostics because of our people and because of our science and our amazing brands, Cologuard and Oncotype DX. Cologuard in screening, Oncotype DX in helping to guide therapy. And we intend to extend this leadership throughout the cancer continuum and bring to patients additional tests that are needed to help them in their cancer journey. We're positioned to do this because of this incredible foundation that we have built over a decade and because of the end-to-end testing capabilities that we're delivering to oncologists, primary care physicians and the patients that they care for. And we are addressing the largest opportunities to impact patient care, colon cancer screening, multi-cancer screening and minimum residual disease testing. Next slide, Slide 5. We have the right team to do this. And in order to achieve your goals, you need the right team and you need the right culture. It all starts with great science and great scientists. And to build a great culture, you need a bold mission and we believe you need an unwavering bias towards action. And finally, maybe most importantly, you need to be obsessed with taking care of your customers, your patients and the health care providers that take care of them. And we're really proud of the many external recognitions of the strong culture at Exact. Our culture is going to help us lead in the future of cancer diagnostics. Slide 6. Our foundation is strong. In 2017, when we presented at JPMorgan, we promised tremendous growth. And hopefully, you believe we've delivered on that in a really challenging year where a lot of people suffered. This team pulled together and delivered a very strong end to the year. And while we did that and fought our way through this challenging environment, the team also helped to test over 2 million people for COVID. We're really proud of the whole team effort that it took to bring those tests to patients in all 50 states in the U.S. Our team is ready to make a big difference in the future and to continue to deliver impressive results. Slide 7. Our foundation. Our foundation is something that we've built over a 10-year period of time, and it started with an incredible R&D team and amazing science. And then we built the largest commercial organization in diagnostics. And then on top of that, you have a clinical trial capability second to none and regulatory experience and market access capabilities, 0.25 million square feet of lab space, the most advanced in the world, an IT infrastructure second to none with a wraparound customer service that is a differentiator. And an international team that is unique in cancer diagnostics and will serve as a platform for growth. Next slide, turning to Slide 8. We have unique capabilities reaching physicians, health care providers with over 1,000 people in our global commercial organization across primary care, gastroenterology, women's health, all the way to health systems. These will help us pull through new tests that will impact patient care and it's built on a relationship of trust, one that has been built over a long period of time. And physicians clearly want to work with one provider that ultimately can provide insights by aggregating data, genomic data with outcome data. Truly powerful. Turning to Slide 9. This slide shows the tumor burden of a patient as they progress through their cancer journey, starting with screening and diagnosis, therapy selection, minimum residual disease testing, which we'll talk about, recurrence monitoring and therapy selection. Our advanced cancer diagnostics capability is allowing us to change the way cancer is actually treated. 10 years ago, scientists, physicians only dreamed of the ability to use diagnostics the way they're being used to it. And this dream is now becoming very, very real, and we'll talk about each of these areas. Slide 10 shows something truly important. 3 huge areas to impact patient care, colon cancer screening, multi-cancer screening and minimum residual disease testing. These are 3 of the largest impact areas. And in the U.S. alone, this represents a very large opportunity for growth. We will fill out our menu, and we'll touch upon how we're doing that today. But first, let's move to Slide 11 and touch upon our core business today is screening and this is how we take care of people. Our current test and pipeline will transform cancer diagnostic, and it starts with screening, Slide 12. At the heart of early detection is screening people before they become symptomatic when cancer is the most treatable. We're at an advantage here because we have been doing this for years. And we today are helping in the primary care setting change the way that patients are screened for cancer. Next slide, we started with colon cancer. This is the #2 cancer killer in the U.S. It's a massive global problem. And we know one thing, that if you catch cancer early in the earliest stages, 9 out of 10 people survive. If you catch it in the latest stage, only 1 out of 10 people survive. A noninvasive at-home way of screening for cancer is a huge impact driver. And on the next slide, something that we're so proud of, the work that has been done to bring Cologuard to physicians and patients. And now 5 million people have used Cologuard. It's easy to use. There's no [ prior prep ]. You do it in the privacy of your own home. And it detects 94% of early-stage cancers. 5 million people so far. There are 46 million unscreened Americans. We have a long growth for growth. And there are 19 million Americans who just now are becoming screenable for the first time because the guidelines are lowering the age. And exclude 19 million people means that we can grow. And just yesterday, a peer-reviewed study was published called the Act Now study, which showed that the specificity of Cologuard in this age group is 95%, a tremendously low false positive rate. We're not resting, though with Cologuard. We're improving it. And on the next slide, Cologuard 2.0 is an improved version of Cologuard with better markers that we discovered with the Mayo Clinic. Our goal is to keep at least the same level of cancer sensitivity, increase the pre-cancer or advanced adenoma detection rate even higher and improve the specificity by about 30%. That's our goal. This also has added benefits from an efficiency and revenue standpoint, and we're excited about those. And we're also excited, as you can see on Slide 16, about our colon cancer blood test. This is a test that we believe will deliver very strong performance and will help address those 46 million Americans who are unscreened. And we'll be able to pull this test through our current platform. Next Slide 17. Just like our transformative DeeP-C study, which supported the approval of Cologuard, our BLUE-C study is a transformative screening study. And it will support the submission for approval for 2 products, Cologuard 2.0 and our blood test. This is powerful, and the BLUE-C study is the study we're working to complete by year's end or the latest in the first quarter of next year and can transform again the way that we lead in colon cancer testing. As excited as we are about growth in colon cancer testing, we're equally, if not more excited, about the ability to do multi-cancer testing. And it's something that the company has been focused on for years. On Slide 18, we show the combination of Exact Sciences and Thrive, which we announced on October 27. We're so proud to have the Thrive team and the Exact Sciences scientific team's joint efforts. There are 130 leading scientists and business leaders who want to make a difference at Thrive who have joined the Exact Sciences effort. And for most cancers, 9 out of 10, when diagnosed early, patients survive versus when diagnosed in the latest stages, when most cancers are diagnosed today, only 1 in 10 survival. Next slide. This problem is a large global problem, and we're addressing it squarely with a multi-cancer test. Cancer is the #1 killer in the U.S. if you're under age 85. And 3% of people over the age of 50 have cancer, and they don't know it. Just imagine a world where you can do a simple blood draw and find the cancer earlier and the impact that, that would have. That is our goal. Next slide shows the power of bringing together the Thrive mutation approach and the Exact Sciences methylation approach. Our scientific teams are already working together in a very collaborative way to improve the performance of the CancerSEEK test that was demonstrated to be strong in a prospective study. Slide 21 shows the results of -- the high-level results of that study called the DETECT-A study, in which 10,000 people were enrolled in a screening study. And all of them had a blood draw and have the CancerSEEK test performed. What that study showed was that you doubled the number of cancers found compared to standard of care. And of those cancer sponsor, 10 different types of cancers found, 7 of them have no screening test today and 2/3 of them were early stage cancers. Moving to Slide 22, my favorite slide in this deck is the story of Rosemary. One of the patients who participated in the DETECT-A study. She did this because she thought she was contributing to science. Lo and behold, Rosemary had Stage 1 ovarian cancer and CancerSEEK detected that. There was a minute trace of ovarian cancer DNA in her blood that CancerSEEK detected. What she said is she had no side effects from surgery, and she's back to doing everything she did before. And her story speaks to why we get up and come to work every day because you can change the outcome. We all know what that outcome would have been if she had been diagnosed as a Stage 3 or 4 ovarian cancer patients. And we can't wait to bring CancerSEEK to patients all over the U.S. and all over the world. Slide 23, our precision oncology team. Next slide, 24. The Precision Oncology team is formed from the heart of the Genomic Health acquisition from 2019. And we're really proud of the work this team has done, and we're proud to be associated with the unbelievable Oncotype DX test for breast cancer and also for prostate cancer. The breast cancer test is powerful and it helps guide a patient to making sure that they get treated the right way. This platform of 100 oncology salespeople, field people and also a 50-person urology team is a huge differentiator. And it will serve as a basis for us to bring new tests like minimum residual disease testing and recurrence monitoring to oncologists, 98% of oncologists ordered tests from Genomic Health. And that's important. Slide 25. This prognosis and therapy selection is something that's important. And Oncotype has been a leader in this field for 20 years. Next slide. The reason that the Oncotype DX Breast Recurrence Score is so powerful is there are 300 publications that support it, including 2 ground -- large groundbreaking study supported by NIH. The TAILORx study demonstrates definitively the benefit of Oncotype DX, answering the question is 2 important questions. Will a patient benefit from chemotherapy? And also, what is the risk of breast cancer recurrence? The RxPONDER study is also a long-term prospective study that read out last month. And that looked at patients with slightly more advanced breast cancer, 1 to 3 positive nodes of involvement. And again, Oncotype DX is able to help answer the question, will a patient benefit or not from chemotherapy, reducing the impact of that cost of cancer treatment for 80% of patients. And also, this is -- this power of this data marks us as the company that goes out there and does it the right way. Genomic Health always did that, and as we have with Cologuard. The overall opportunity is significant. And on the next slide, you can see the part of our strategy of adding new tests to this incredible team. Oncotype MAP comes from our Paradigm acquisition, which is a tissue therapy selection test, helping make sure that cancer patients who are -- have advanced disease get the right treatment. And it's a perfect example of plugging new tests into this existing Precision Oncology infrastructure. It positions us well in tissue therapy selection and provides an opportunity and an entry point for liquid therapy selection in the last stage of the cancer continuum. Next, Slide 28, minimum residual disease. After getting an Oncotype DX test, an important question for a patient to have answer is after their treatment is, did you get all of the cancer? And a minimum residual disease test measures even minute traces of cancer DNA in blood after treatment, helping to inform what the next step should be. And then it also provides -- that same test provides the ability to monitor for recurrence of cancer. These are really important studies show that you can detect recurrence 9 months sooner in the blood before you can even with a PET/CT scan. And that's powerful in changing how cancer is treated. Next slide, 29. Our news today. Exact Sciences acquired the TARDIS minimum residual disease test and the technology that will help us expand into this important area. This technology comes from TGen, which is the Translational Genomics Research Institute, which is a part of City of Hope, a comprehensive cancer care center and leading researcher in the world. This study shows the ability to detect and improve upon the current ability to do this by a hundredfold, down to 0.001% fraction of tumor DNA to normal DNA in the blood. That's remarkable. And we can leverage this foundation through the foundation we built for Oncotype. It's a perfectly complementary test, and we can't wait to bring it to patients and to physicians. There are more than 1.5 million patients in the U.S. alone today that would likely benefit from MRD testing. And with repeat test, that represents about 10 million tests per year. That's a large opportunity. Next slide. You can see that we have been very assertive in making sure that we are plugging the right technologies into this foundation. And I want to highlight the Base Genomics technology. They are experts in innovative methylation detection chemistries. We acquired this team and their incredible chemistry in late October. And this chemistry helps improve the detection of methylated DNA, something that is very important for the early detection of cancer and also guiding treatment throughout the continuum. We will build this -- what's called the TAPS technology into multiple of our products, including our screening test and our test that detect minimum residual disease. By incorporating this technology, it will help us make our test even more sensitive and specific, and that allows us to benefit patients. Next slide. Therapy selection is incredibly important. And our ability to deliver a tissue-based therapy selection and a liquid-based selection then provides an end-to-end solution so that oncologists that work with us have the ability to order every test that they want to benefit patients from one source. What does that provide? It provides the ability to aggregate data in such a way as to help physicians better inform treatments. And it also provides the ability potentially in the future to be able to see a signal that occurs with a multi-cancer screening test that you aggregate on a patient basis over time to see all of that data and how that starts to change before cancer occurs. Powerful. Next slide, Slide 32. We talked today about our current tests, our future tests and how we can deliver end-to-end testing capabilities that bring life-changing results to cancer patients. And this comes at a time when we're shifting towards earlier detection. We believe there's a huge shift that is occurring and this impact is going to be multiplied when you bring all of these tests together under one provider, tracking patients and experience and data at every step along the way. Let's now move to our last slide. Back to our mission. We are the company that is focused on eradicating this disease through an array of cancer -- advanced cancer diagnostics. We believe we have the foundation to do this, this end-to-end testing capability and we're addressing these huge areas of impact, colon cancer screening, multi-cancer screening, minimum residual disease testing. In the past year, we have transformed our company, and we're positioned now to fulfill this mission of eradicating cancer and the suffering that it causes. We want to bring hope to patients throughout their cancer journey. That's our mission. We're totally dedicated to it. We look forward to answering your questions.

Great. Thanks, Kevin. We will now move on to the Q&A, which will last about 20 minutes. As a reminder, you can submit questions through the Ask a Question feature on the event [ debut ] on the website, and we'll get to them. To start off, Kevin, 2020 was a pretty eventful year for you. You announced the acquisition of Thrive among a handful of others. And earlier this week, you preannounced robust 4Q results and an overall strong close to the year, notwithstanding COVID. Taking a step back, given all the transformational deals in recent years and sort of the development of the portfolio, can you spend a minute talking about the big picture and where you see the company in 5 years?

Thanks. I think that's what we've really tried to present today is that 5 years from now, we will be able to work with physicians, health care providers, health systems to answer truly important cancer answers all the way through a journey. And so 5 years from now, imagine we have -- we're the leader in colon cancer testing with Cologuard 2.0 Cologuard blood multi-cancer testing. And then being able to answer questions with therapy selection with liquid with tissue and minimum residual disease testing and therapy monitoring. And then if you look at that point in time, 5 years from now, we'll be a data company, being able to partner with physicians, oncologists. Oncology companies are looking at developing better therapies and to run more informative clinical trials. The world is going to change, and we want to be part of that change.

Great. And on that note, during the presentation, you talked about plans to develop additional tests in cancer diagnostics, specifically in markets like MRD and recurrence monitoring. How are you positioned in those markets compared to other companies already in the space, such as, for instance, Natera? And while you've also got other companies such as Grail, Illumina and Guardant Health having also announced plans to enter the market. Just wondering how you're thinking about that.

There are so many great companies doing important work in this field, and it is good for this field. What sets us apart is, number one, our science and our R&D capability. It's unmatched. Secondly is our clinical trial capability. We're a company that does big, large studies. We do them well. We do them the right way. And ultimately, that builds the evidence that you need for success. And finally, our commercial organization is second to none, with 100 people calling on oncologists and deep relationship with oncologists, coupled with our IT infrastructure that allows oncologists to order our tests electronically and to get results electronically. So these investments that we have made differentiate us, and we intend to continue to focus on taking care of our patients. And if we do that, I think we'll be tremendously successful.

Great. So Exact recently announced it closed the acquisition of Thrive. What sets you and Thrive apart from other potential players in the multi-cancer screening space?

I think this is another area where the fact that there are multiple companies doing work improves the field. And again, what sets us apart there is, number one, our technology. If you bring together mutation and methylation chemistries, you're able to get a broader coverage of cancer and at -- with our technology very sensitive, able to detect even minute traces of cancer. Coupled with the ability to run the large clinical trials and work with the regulators for approval and reimbursement, that's really key. And then finally, what separates us is this large commercial capability. We have 650 people focused just calling on primary care physicians in their offices, 40 people calling on large health systems. If you are going to change a paradigm, you need that kind of commercial organization and the relationships that are built. That's why we're so excited about adding the Thrive capability to the Exact Sciences foundation.

Great. And while the Thrive acquisition generated most of the headlines, Exact also announced the Base Genomics acquisition on the same day and you've alluded to some of that technology. Can you tell us a bit more about that asset and where it fits in the company and your sort of medium-term agenda?

Yes. I'll get a little scientific here. Methylated DNA is just molecules that attach to genes and turn the gene off. And methylation is a really important part of our Cologuard test, 3 methylated markers that help drive the sensitivity there. The challenge with detecting methylated DNA is the current approach is a very caustic approach, which degrades the DNA. Up to 80% of the DNA disappears before you even start the testing process. With the Base Genomics chemistry, it preserves 99% of the DNA and it also importantly allows you to test for mutations and methylation in the same sample. Today, we have to separate the sample or divide it in 2, reducing the amount of DNA in either well by 50%. This chemistry is transformative. It will be built into Cologuard 2.0, our colon cancer blood test, our multi-cancer test, and potentially, our minimum residual disease testing capabilities. It's unique, and we're excited about bringing that technology and showing to the world how important that is.

Great. I'd love to hit on some Cologuard questions. So Cologuard recovered from the pandemic more quickly than colonoscopies throughout 2020. How do you think this changes the positioning and growth outlook going forward?

Jeff, would you take that question?

Sure. I would. On Cologuard, we're very pleased with the results that Cologuard delivered in the fourth quarter. We delivered 9% year-on-year revenue growth. When you look back to early days of the pandemic, Cologuard orders were down 65%. Since then, the team has really rallied to drive this business forward. Our creative sales and marketing team put forth new efforts like a consumer-initiated testing portal that really helped drive the business. On top of that, Cologuard is a convenient at-home test that really resonates in this market. When you look at the backdrop, colonoscopies are still under pressure. They're down at least 20% to 30%. So I think when you flash forward, say, 5 years, and you look back at the pandemic, this will be viewed as the time that really inflected the growth forward for Cologuard. All told, I think the pandemic helps us get to our long-term market share goals at least a year or 2 faster than we would have otherwise.

Great. And then sort of taking a step back, how do you see sort of the colon cancer screening landscape unfolding with Cologuard 2.0 and several blood tests potentially coming to market in the next few years?

Jeff, why don't you take that as well?

Sure. Cologuard is the only noninvasive test that can achieve at least 90% sensitivity on early stage cancer. Patients and physicians want that accuracy. So longer term, we think the way this plays out is that Cologuard will achieve at least 40% share. Colonoscopy will achieve somewhere in the neighborhood of 30% to 40% share. Colonoscopy is not going away. It's been with us a long time. We think the remaining portion of the market will be split between the other noninvasive tests like FIT or FOBT and the blood test. Now, look, this is a huge market. There's over 106 million Americans in this market right now, many of whom have never been screened. So blood test is an important new offering to get more people screened. We are pursuing that same form of testing. However, we think Cologuard will be the leading noninvasive test because of that accuracy.

Makes sense. And then the recent USPSTF draft guideline included ages 45 to 49 for colorectal screening. Can you talk about the opportunity this presents for Cologuard and your plans to further penetrate that market? And along those lines, could you also hit on how we should think of this in the context of new data that was published in Cancer Prevention Research just earlier this week showing an extremely strong specificity of upwards of 95% in that age group.

Cancer leaders have been calling for years to lower the screening age. And the American Cancer Society did incredible work a couple of years ago to highlight the impact of screening people 45 to 49. You actually save more total life years by screening that group than screening people over aged 70. And that's important. And the real human impact of that story was highlighted this year when actor Chadwick Boseman passed away from colon cancer. It is screening people starting at age 45 can have a huge impact. And it requires a different marketing approach. It requires a tremendous amount of education among physicians. And we have brand-new marketing plans that are focused, TV and digital, social, to really focus the attention and educate people in this group. One of those things that we're doing is work with Stand Up To Cancer, a partnership that we formed and announced late last year. So we're excited. As this develops, we hope to see USPSTF final guidelines about the middle of this year that will help get insurance coverage for most of those people as mandated under the Affordable Care Act and a big push on our part to educate the 200,000 primary care physicians that we work with today. And broadly, those 19 million Americans. So we can't wait to get started.

Great. So another question we've gotten is now that Cologuard is offered on the Epic platform, what are your expectations around electronic ordering this year? And how does that opportunity impact the growth outlook?

Jeff, would you take that question?

Electronic ordering is one of the most exciting parts of our business today. Last year was a big year. We went from having 30% of our orders submitted electronically a year ago to about 40% today. So the pandemic did not slow down our efforts there. Going forward, over the next 2 to 3 quarters, we expect more significant gains. Because as you mentioned, Epic, which is our EHR platform, our electronic health record platform came out with a new version of their software late last year. This new version will allow any physician on that platform to order Cologuard electronically to the click of a button. This is so exciting because when a doctor orders electronically, they order over 50% more Cologuard. It's just easier. Today, there's still too many doctors order through a fax. So the more we convert to electronic ordering, the better offer will be. A year from now, we hope to have at least 50% of our orders come in electronically, and this is one of the big growth drivers for the business.

Shifting gears a little bit. In March, you developed a COVID test that ended up generating over $230 million for the year. Can you sort of talk to your rationale behind launching that test? And how long you will continue to offer testing?

That testing capability started with the call on March 14 with the leadership of the state of Wisconsin that wanted some help in thinking about how to bring up COVID testing. And one of the proudest moments of my time as a leader at Exact was watching the team come together, the R&D team, the operations team, the supply chain team, the team that worked with the state and the National Guard to roll out that testing and we did that without any understanding of whether we'd get paid at all for the work that we were doing. At one point, we had 30% of our hundreds of IT professionals focused only on helping create the pipes and the connectivity so that those tests could be ordered and delivered the results electronically. So we're really proud of that. The impact is that we now have the ability to rapidly, and the whole organization knows, is the ability to deliver new tests through this foundation, and we know how quickly we can do it. We did that without a single PowerPoint presentation. It just got done. And we hope that testing goes to 0 as fast as humanly possible, so we can get back to our core focus of cancer diagnostic and we want to play a role in making sure that this pandemic goes away.

Great. And sort of on a different topic, how do you think of our RxPONDER and how it will impact Oncotype breast adoption in the node-positive breast cancer market?

I can't overstate the importance of RxPONDER, a decade-long study, studying 5,000 patients with early-stage breast cancer that had 1 to 3 nodes of involvement. And it showed which patients will benefit from chemotherapy and the risk of recurrence. So it expands the opportunity in the U.S., and we've seen a number of payers quickly come on board to cover Oncotype DX breast in that node-positive setting. And it's also very important external because -- or outside of the U.S., where there's only 15% class penetration here. We have about 75% share outside the U.S. And so the RxPONDER study gives us the ability to help educate that women with early-stage breast cancer, including up to 3 nodes positive, what the right patients in that category should get tested. They shouldn't go without an Oncotype DX test.

And just in closing, one last question in the last few minutes here on the financial model. In the third quarter of 2020, Exact was profitable and generated positive free cash flow. How should we think about the outlook for cash and profitability in 2021?

Our priority is driving shareholder value. Long term, we think that means creating a solid foundation from which we can grow and investing in the most promising growth drivers. This team has done a great job being good stewards of capital. And the third quarter shows the profit potential of this business model. Long term, we're confident that both Cologuard and Oncotype DX can reach at least 80% gross margin and at least 40% operating margin. That will allow us to generate significant cash flows over time.

This has been extremely helpful. This -- thanks so much, Kevin and Jeff, for your time and for a very informative session. And thank you, everyone, for joining us and for your questions. And have a great rest of the conference.

Thank you, Eleni.

Thank you.