Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Hey, good morning. I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. Happy to have Jeff Elliott, the CFO of Exact Sciences, with us today to kind of keep the conference going. Jeff, thanks for being here. And I think maybe just to start, you guys obviously reported results just last week, a lot of moving pieces with kind of coming out of COVID and kind of getting into '21. So maybe I'll turn it over to you for just a quick lay of the land, how things trended in 4Q. And then we can dive into some questions.

Patrick, thanks for having us. Great to see you again. Hopefully, we could do this again in person sometime soon. For those of you who don't know us as well as Patrick, Exact Sciences is a company focused on the early detection and prevention of cancer. Our 2 flagship products are Cologuard, which is for colon cancer screening; and Oncotype DX, which is a prognostic test to help women and men determine whether they should go into chemo after a cancer diagnosis. Pleased to be here again. We just finished up a very strong Q4. Obviously, things early in the year were tough with the pandemic, but the team fought through. In total, we delivered $1.5 billion of revenue last year. Our team of 5,000 employees did a great job fighting through, and there's a lot of really exciting things in store for 2021. So I look forward to chatting with you about those, Patrick.

Yes, maybe we'll start there, Jeff. You obviously, last week, talked a little bit about the first quarter setup, the holidays, there's always some seasonality. Maybe just refresh us what the moving pieces are as we get into 1Q out of the strong 4Q.

So on Cologuard, I think, is where you're going. The dynamic I talked about last week, and I'm really glad you asked this question, is there is a primary care dynamic. This dynamic is not specific to Cologuard. What happens during -- in primary care offices is during Thanksgiving, Christmas, New Year's, really the holiday period and into early January, physicians close their offices. They're people too, right? They want to go spend time with their families. They close down. They take a break from work. At the same time, people -- patients are occupied. Even during a pandemic, they take time away from physicals from work. So during those periods, primary care use is much lower. That includes Cologuard. Cologuard is a primary care product meant for the prevention and detection of colon cancer. So during those periods, our orders are lower. That affects Q1 more so because there's a 30-day period from the time it takes to go from an order to a completed test. We recognize revenue on a completed test. So the dynamic I talked about is true every year. It's been true every year since Cologuard has been in the market. It will be true every year going forward. We expect Q4 revenue to be lower than -- or sorry, Q1 to be lower than Q4 because of that dynamic. This year, the recent spike in COVID, which hit late last year and early this year, will make that sequential step down a little bit worse, so slightly more of a step down this year. However, the good news here is that the case -- COVID cases are down significantly, down over 70% nationally. So we're headed in the right direction. What that means is the headwinds that we faced last year are starting to abate. Our field force, which today for Cologuard is over 500 people, has largely been out of the field during the pandemic. Your field force is typically the biggest driver of growth in a primary care product. So we're very pleased that in the fourth quarter, Cologuard delivered 9% year-on-year growth despite the field force being out of the field. Now the field force is getting back out there. We're still, in total, doing fewer than 50% of the face-to-face details that we had done before the COVID pandemic started, but they're getting back out there. So we're coming out of this pandemic headwind. We have many growth drivers in store later this year. One that I'm sure we'll talk about is Cologuard 45. We're pleased to be able to address that opportunity of 19 million people in the U.S. alone where Cologuard fits into their lifestyles very well.

Yes. And Jeff, you talked a little bit about COVID kind of picked up near the end of the year, and now it feels like it's hopefully subsiding a little bit. Can you just talk through, I guess, the impact it had on Cologuard as we went through kind of the end of last year into the beginning of this year and then the expectations going forward?

The impact was significant from COVID. The team fought through, as I mentioned. So when you look back to April when COVID really first hit, Cologuard orders were down over 60% year-on-year. At that point, primary care really came to a screeching halt relative to colonoscopy, which, as you know, Patrick, is an invasive procedure. Colonoscopy volumes were down 95% in the early days of the pandemic. So Cologuard performed relatively well compared to colonoscopy. Throughout the year last year, the team fought through. They came up with innovative marketing campaigns. The sales force adjusted to make sure they could get out there and reach physicians as much as possible. And Cologuard came through. And as I mentioned before, it delivered 9% year-on-year growth last year. So again, that's what it felt to have the field force really having 1 or 2 hands tied behind their back. Now the field force is getting out there. Pfizer too, Pfizer's our partner in all this. Pfizer had been more conservative last year in terms of getting their reps back out there. However, now their sales reps are starting to get back out into the field and delivering more face-to-face details to physicians.

Yes. And on the primary care visit side, I know you guys track it very closely. Kevin even mentioned on the call, maybe you're seeing some visits where it's very targeted, right? You're doing it for a very specific reason, not just the general screening. I guess where do you think we are right now? And again, have you seen trends improve a little bit here recently as COVID has maybe again come down a little bit at least?

Primary care use has improved in the fourth quarter when you look at our target patient group. Physicals were down about 40%. 40%, so significant impact because our target patient is somebody aged 45 and above. So think of somebody who's 70, they're even more fearful of COVID than you and I are, Patrick, because they're more at risk. So our target market was hit very hard. In the fourth quarter, that has really started to abate because of cases coming down, the vaccine is becoming more available. So we absolutely have turned the corner, which is one of the exciting things about our business. In terms of rep access, it had been down -- basically all of our reps were out of the field in the early days of the pandemic. Now we're approaching 50% of details are face to face. I still think that will be somewhat muted through the course of this year, because some physicians are going to be cautious and don't want reps back into their offices. Overall, we're headed in the right direction, and the team has done a very nice job of adapting to this environment.

Yes. And then maybe just on the visibility side, obviously it's limited certainly across the diagnostics world, no question. I guess what is your guys' visibility? Obviously, didn't give kind of full year guidance, presumably because again the transparency is just not there in terms of how this recovery is going to play out. But maybe just talk through, I guess, what you guys are able to see kind of going forward on the COVID impact. And again, obviously, a lot going on internally, the reps being unable to get into the office being one of them. How are you projecting areas like that?

In normal times, our business model is very predictable. On the Cologuard side, when you look at the drivers of growth, there's really kind of 2 main factors. One is the number of physicians that order. Well, we have over 200,000 health care providers in total who've ordered Cologuard. And in a normal quarter, again before the pandemic, we ended up with a pretty consistent number of new physicians. So that gave us very good predictability on the physician side. On the order side, which is the other major component, how many orders do those physicians place, we also have very good predictability. I can look back at physicians whether they first ordered Cologuard back in the early days of launch back in 2014 or in 2016, and they follow a fairly similar trajectory. They typically order more each quarter as they go as their reps find a way to get into the office and educate the -- both the doctor and the office staff on the product. As things like electronic ordering come on board, physicians follow a very predictable path in terms of their orders. So what that means is over time, our model is very predictable. The pandemic has challenges temporarily. The pandemic has. And that again, that's specific to primary care, not to Cologuard. Primary care wellness visits last quarter down 40%, as I mentioned. That makes it difficult to forecast what Cologuard is going to do in the short term. Again, longer term, very good visibility here. Things like 3-year repeat testing, Cologuard is recommended by the guidelines every 3 years. That means we have a big group of people coming back every 3 years and our goal is to keep them tested. This year alone, we expect over $100 million of revenue to be generated from those 3-year patients coming back. And over time, that will continue to grow and make this business model even more predictable.

Yes. No, it's a great overview. And definitely want to dive into some of the things like rescreening and 45. Maybe just quickly, I guess, during the pandemic, to your point, colonoscopy has really -- obviously fell quite out of favor. You don't really want to go into a hospital for an invasive screening procedure at the moment and certainly not 6 months ago. I guess how have you guys targeted marketing towards kind of converting that over? Obviously, it's -- there's always been a big greenfield opportunity of people who just don't get screened at all. But even on the colonoscopy side, it feels like, again, that has presented an opportunity here from COVID. How do you guys change the marketing approach? And what metrics do you look at to see kind of the success there?

This is a big opportunity, Patrick, as you said. Today, there's over 45 million people in the United States who need to be screened. And that has grown during the pandemic because colonoscopy volumes are down. In the fourth quarter, they were down 25%. So the backlog of patients who had intended to get a colonoscopy has grown to over 1 million people. So like you mentioned, this is a huge opportunity. We are rapidly working to convert people who either were unscreened to Cologuard or who had intended to get a colonoscopy over to Cologuard. How have we done that? Well, it's really all hands on deck because, again, such a big opportunity. From a marketing standpoint, we've really emphasized the at-home convenience of Cologuard. Cologuard is easy. So our TV ads have been adapted to play that up. We've spent more times with physicians, making sure they are aware and reminded of those features of Cologuard. We've also made it easier for patients to directly interact with us through a series of electronic tools. One primary example of this is online ordering. Any patient who's on our target market can go on to requestcologuard.com and request that Cologuard is ordered for them. All they have to do is answer 5 simple questions. Behind the scenes, a physician would verify they are in fact eligible for Cologuard and place that order. So it's easy. You can do it from the convenience of your own home. That is key here. In this environment, patients don't want to go into a physician, whether it's for a blood draw or for a colonoscopy. They'd rather stay at home. So we've really emphasized the at-home convenience of Cologuard.

Yes. Jeff, you were off a good point there on the online ordering. You guys launched it during COVID. Obviously, very timely in being able to get it out. I guess how -- yes, I assume it's still very small numbers in terms of percentage. But what have you said in terms of the numbers there? And maybe just talk about the traction you're seeing to date. Obviously, you still see a bunch on fax. So I think the more tech-heavy this gets, the easier it is for folks. Again, removing the in-person visit, obviously important during COVID. So where are we on kind of the online ordering? And then maybe we can kind of move into electronic ordering from there.

Yes, the electronic ordering in total across all means is over 40% today. Our goal is to get that to at least 50%. And that's so important because when we make Cologuard easy through electronic ordering, physicians order more. One way we've made it easy is directly targeting patients. So a way they can order Cologuard is by going to our site, requestcologuard.com as I mentioned. That is still relatively small in terms of the number of orders. The beauty of it, though, is it provides a foundation for us to branch out and target new portions of this market. So as an example, one that we're working on today is the employer market. I mentioned a world where Citi -- of all players, Citi's a large employer. Citi could provide a link to requestcologuard.com to all of its employees and to make sure they get screened whether it's during a pandemic or after the pandemic. It's a way to make colon cancer screening easy. It's a way to keep people at work. But a colonoscope typically 2 days off of work. All told when you think of the prep and the transportation time, that's unproductive hours. So the employer market is in part opened up because of this online ordering capability. So we'll continue to enhance that feature. It is growing. It is growing faster than our overall business. It is still relatively small. Electronic ordering in total, though, a huge part of the business. This year we expect to be perhaps our biggest year ever in terms of improving the electronic ordering rates for Cologuard. Last year was a big year, we went from 30% of Cologuard orders electronic to 40%. This year, we're turning to over 50% with a big push we have in converting hospitals to the latest version of Epic, which again the goal here is really to make it easy. You want that big red easy button. We have physicians be able to hit that to place that first Cologuard order for a patient and then to keep them screened over time.

Yes. And maybe to your point there on this year being a big one. Maybe you can just talk through, for people who are maybe a little less familiar, on the Epic side, kind of the integration there and why '21 should see a pretty nice inflection on the electronic side.

Yes. This all started over 2 years ago when Exact Sciences first moved towards installing Epic. So Epic, as you know, Patrick, is the biggest electronic health record platform out there. About 50% of all primary care doctors are on Epic. And the majority of all health care systems, the big hospital groups are on Epic. So I think it's a big deal. We -- Exact Sciences is a health care provider. We are on Epic now. We went live almost 2 years ago. And Epic is something that I never thought they'd be able to do. They came to us early on when we were installing the software. And they said, "Look, we think we found a way to make Cologuard easy for everybody else on Epic, to make Cologuard electronic ordering available everywhere." And when they launched that in their latest version of software in the fourth quarter of last year, I still don't think they could do it. I still -- I was very surprised, given my background in health care IT, I was surprised that they could do this. So I'm just -- I'm thrilled that they've put this new software out there. We installed the software late last year. And now as new hospitals upgrade to the new version, which we expect them to do over the next 2 to 3 quarters, as they upgrade, they will have access now embedded in Epic to order Cologuard electronically. So this is a big deal. Historically, for a physician to order Cologuard electronically through Epic, we had to have our IT team connect with the hospital's IT team and build this feature out, which they can do. We've done it dozens and dozens of times. But now it becomes automatic. So there are hundreds of hospital systems out there in the U.S. alone who are on Epic as they convert, which some of them already [ entered in to do ]. As they convert, Cologuard again will be embedded right there in the software. Imagine a world where you're sitting down for a physical with a doctor, if you can think back to your last one. What typically happens is the doctor is faced into the computer, taking notes, clicking drop-downs, ordering tests. Now when it comes to that colon cancer checkbox, they can either order a Cologuard for you hopefully or another option. So Cologuard will be there available just as a colonoscopy is or a FIT test is. Historically, what the doctor had to do was toggle over to another screen or go to a fax machine. So that extra step limited the number of tests they ordered. Now as hospitals convert, you see a pretty nice uptick in orders just because Cologuard becomes much easier to order.

Yes. No, makes sense. Very helpful. And then again, I want to talk through some of the opportunities you guys have this year, rescreening being one of them, and you called it out talking about 100 million for this year. I guess again, the numbers get bigger every year obviously. What have you seen to date in terms of people coming back? It's never going to be 3 years in a day, right? So where are we on that process? And again, I know it's been a big initiative for you guys to kind of target that population and try to pull that number, again, as close to 3 years as you can get. So maybe just talk about where we are now? And I guess what's baked into that 100 million in terms of folks coming back on the 3-year or whatever it might be?

The rescreen opportunity is huge. This year alone, there's over 1 million people who will be eligible by end of the year for a 3-year repeat testing. Look, I see this as a win for patients. I mean you know goal, Patrick. Our goal is to get people screening and keep them screened over their lives. For many of our patients, that means 30 to 40 years of testing. In Cologuard, given our really high customer satisfaction rates, given the high NPS scores, it's a win for patients. It's a great way to keep them screening for years at a time. The traction here has improved significantly. We are capturing more of those patients after 3 years and even at a closer time frame to that 3-year mark. 3 years is the earliest you could get screened. You get tested every 3 years. So you wouldn't capture somebody before. But after 3 years, the percent that we're capturing is growing. It's growing because our team, we've put a brand-new team in place. We've built a team, a cross-functional team, to make sure we've got the right tools, the right capabilities to reach out both to the physician and making sure the physician knows that a patient is eligible for 3-year retesting and write to the patient. Because we're a health care provider, we can reach right to the patients and make them know, make sure they're aware through a series of whether it's text messages, e-mails, alerts, make sure they know they're due and make it really easy for them to go back and get Cologuard again. This is a big mindset change from where things were. When you think of a colonoscopy, 10 years is a very long interval. After 10 years, people often forget, "When did I go?" Typically, you don't have somebody reaching back out to them to keep them screened. Cologuard, we can do that. 3 years, things are still more top of mind. After 3 years, Cologuard is still on their mind. So that interval can work to our advantage here. This year, we expect over 100 million of revenue from 3-year repeat testing, and that will grow meaningfully over time. Over time, we expect over half our revenue to come from patients available for repeat testing. So again, this makes it really easy. One big win we had last year was allowing a physician to log into our Epic portal and see a list of all the patients they have who were eligible in their practice for 3-year repeat testing. They can quickly see that list that -- verify that all the patients are in fact still eligible and click one button and order Cologuard for all those patients. So that's been a big win. We're seeing an uptick of 3-year repeat testing in part because of new features like that.

Yes. No, it should be bigger and bigger as we go obviously. And then Cologuard 45, to your point, that expansion is a big opportunity as we go through this year. Maybe again just kind of outline what happened, I guess, last year in terms of that expansion and how you guys are approaching it. And what's kind of expected as we go through this year and into '22 as it becomes an even bigger opportunity?

What happened, Patrick, was that over the past 20 years, we've seen a 50% increase in colon cancer in younger patients. So as a country, we need to screen earlier. The American Cancer Society recognized this. And now almost 3 years ago, they updated their guidelines. They updated their guidelines to recommend that screening start earlier. And that was a big change. For decades, screening had started at age 50. Going 5 years earlier, that's a big change. So there's a lot of education that needs to happen. Also what needs to happen is insurance companies and other guidelines need to update, need to update to, say, start at 45. The science is there. We've now gotten our Cologuard label updated to say start at 45. Previously had been 15 above, now it's 45 and above. We did that through [ literary evidence ]. We did work with the FDA, who has been a very good partner through all this, to make sure that Cologuard can be positioned in this market. The next big step, Patrick, is this midyear. We expect the United States Preventive Services Task Force to update its guidelines to, say, start at 45. That's so important because commercial payers typically follow USPSTF. And even perhaps more importantly after that, after the guidelines update, the quality measures, Stars and HEDIS, are also very important. Stars and HEDIS are really -- think of that as the carrot that is provided to encourage preventive care. Well, those carrots are tied both to USPSTF also. So we expect the guidelines to be updated this year. That's very important for the ultimate adoption of Cologuard. Before those guidelines are updated, we're pleased that multiple big payers have now started to cover Cologuard. Humana, most recently 3 weeks ago, and Aetna both covered Cologuard for 45 and above. We expect the other payers to come on board too. And again, this is a big win for patients because Cologuard has [ greater testers ] to this. So in the 50-and-above population, Cologuard very well received. You've seen in the adoption numbers, the satisfaction numbers. From a relative standpoint, the 45- to 49-year-old age group favors Cologuard even more than the 50-and-over age group. Because if you're 45 to 49, you're typically busy with work, kids. Cologuard fits in your lifestyle even better than somebody who may be 70 and retired. So we're optimistic here. There's 19 million people in this younger age group who need to be tested. And effectively, all of them are unscreened today. Our sales and marketing teams have a game plan ready as soon as the guidelines are updated. They're going to go out. We've got a whole new series of TV ads and marketing materials to really to make sure that physicians and patients are educated, that 45 is now a key time to start getting screened.

Yes. Jeff, on the USPSTF, obviously been very significant in Exact's history, but what are you thinking in terms of the expectations around timing for updates this year?

We would expect it midyear, Patrick, and that's based on the historical timing. If you look back to 15 when the last update was issued, the draft update came in October '15. The final update came in June of '16, so using that as a guide. This time, the draft update came at the end of October, so we're expecting somewhere midyear, perhaps June, for the final update to come. Again, if you use that last update as a precedent, in the 6 months leading up to that update, only 4 new plans started to cover Cologuard. And the 6 months after, 54 plans started to cover Cologuard. So we expect coverage to start to really pick up after again that update. The good news here is that once the coverage updates, we think the Cologuard will fit in very well because if somebody is 45, I mean if your alternatives are Cologuard, which is convenient, accurate, at home, or colonoscopy, we like our chances there. We like how we're positioned.