Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Okay. Great. Welcome, everyone. I'm Puneet Souda, SVB Leerink tools and diagnostic analyst here. And it's my pleasure to be hosting Exact Sciences. Jeff Elliott, CFO from Exact Sciences, is joining us today. Jeff, welcome. Really wonderful to have you here.

Puneet, thanks for having us. Great to see you again.

Okay. Great. So before we get -- jump into Q&A, I just wanted to sort of give a view about what -- how I'm seeing Exact Sciences, having covered the stock for the last few years. And Exact has done a phenomenal job here in establishing a leading position in diagnostics. I mean that is something that Kevin Conroy, CEO, had alluded to us a few years ago, and the company is well on its way to doing that. There are 2 leading tests, the first being colorectal cancer screening with Cologuard where the company has a leadership position, and also Oncotype DX, which is a leader in breast cancer market and is considered the standard of care there. The company has now set its sights on multi-cancer screening with this acquisition of Thrive and also is acquiring a number of technologies, which is building its diagnostic base of test and menu expansion. So a lot to talk about, Jeff, and it's quite exciting to see the position here for Exact Sciences.

So maybe just to start with, Jeff, the first question that I don't think it will be a surprise to you, is essentially the 4% sequential decline comment that you had on the call, most number of questions around that. As I said, look, I have covered you guys for a few years, and I don't recall seasonality being a major topic of discussion right around these quarters, the holiday quarters. But obviously, it's a bigger business now. But -- so just maybe help us understand why should seasonality should be brought into consideration especially even at a point in time where you are still highly underpenetrated in the market.

Thanks, Puneet. I'm glad you asked. So in primary care -- and Cologuard is a primary care product. In primary care, seasonality is always a factor. And it's because around the holidays, Thanksgiving, Christmas, New Year's, even around early January, primary care physicians often close their offices, right? They're people, too. They want a break. So whether there's a pandemic or not, they close down. People, patients often go on vacation or at least take time off of work. And during those periods, they're not out seeking preventative care. So they get over the holidays. You go to the doctor if you're sick, if you have something really bad happen. You generally don't go for wellness visits. Now that affects Cologuard in the first quarter because it typically takes 30 days from the time a physician orders the test to the time we get revenue. That 30-day period is when we ship the [ can out ], the patient collects a sample, sends it back, we process the sample at our lab and then report the results. So 30 days after the holidays, in Q4, that impacts revenue in Q1. So you may think of the first quarter as having a week or 2 fewer days compared to the fourth quarter. So seasonality is always going to be there. In some years, the growth has been steep enough for us to overcome that. But it's always a factor. Going forward, you should always expect Q1 revenue to be slightly lower than Q4. This year, the step-down sequential that we expect is slightly larger because of COVID. The impact from COVID, again, was felt primarily late last year and early this year. That made the dynamic around seasonality slightly worse. However, the good news here is that now we're through the holidays, COVID cases are down meaningfully, and so this headwind that's been there for much of the past year is going away. The fact is we returned to year-on-year growth, 9% year-on-year growth in Cologuard in the fourth quarter despite having our reps largely out of the field. So our field force, which is the primary driver of growth in primary care, has been limited in what they can do for much of the past year. They're just now getting back up there. But despite that, we grew in the fourth quarter and also when you look at our target patient population. Our typical customer is 65 years old. That age group is even more cautious than the typical person because of COVID. So in the fourth quarter, wellness visits for that group were down about 40%. So for us to grow year-on-year, to me, I was very pleased with those results. And now wellness visits coming back, COVID cases going down and we've got major new growth drivers coming as we look ahead to the rest of 2021.

Got it. Okay. And on that point that you mentioned about the sales reps being virtual, I know you have put a ton of effort into Epic and ease of ordering around electronic. I think you pointed to that there's an increase of at least 50% if -- when the ordering is electronic. So as we -- as you look at the number of reps that are providing services through the online versus the ones that are seeing in person, so as they go out and do a face-to-face detail in person, with the backdrop of electronic ordering, where you are today, should we expect a significant sort of a bolus sometime in the year as we emerge out of the pandemic?

Well, clearly, getting the reps back out there in electronic ordering, both major, major drivers. We've talked before about the impact of having a rep calling a physician repeatedly over the years. And again, it is probably the biggest driver of growth over time. It does take time, though. Just having the reps get back out there, it's not like day 1 after the first sales call that orders go back to normal. It will take time. It will also take time for patients to start going back to their doctors and doing the routine wellness checks because those volumes will take time to recover. I think that through the course of this year, we'll see most of those -- well, if it has come back. But we're not going to get back to normal until next year as far as their wellness activity. From an electronic ordering standpoint, last year was a big year. We went from about 30% of our orders to come in electronic -- via fax -- I'm sorry, electronically to today over 40%. So last year, it was a big year. This year could be even bigger. And this really comes down to Epic. Epic is the EHR system that Exact Sciences uses. And Epic is the largest EHR system in health care. In the United States, about half of all primary care doctors are in Epic. So as -- Epic in the fourth quarter of last year came out with a new version of their software. That new version has a big red easy button. A doctor just has to hit that button to order Cologuard now. So for the first time, Epic has embedded Cologuard electronic ordering in their software. So over the first 2 to 3 quarters of this year, we would expect most hospitals to upgrade to this new version. And again, that new version finally allows that easy button. They can hit that button. The order gets routed right to our lab. We take care of all that patient testing and then the result gets routed back to the hospital. That makes it easy for the hospital. That makes it easy for us. And most importantly, it's easy for the patients. So we're looking forward to that. It will take time for hospitals all to upgrade to this new version. That doesn't happen overnight. It's typically 2 to 3 quarters for the majority to upgrade. Once they've upgraded, they have the ability to order through that easy button. However, they may not all switch overnight. Some may be stuck on fax ordering, however they ordered before. Then, it's upon us and our sales force -- for those reps listening now, it's up to you to make sure that we're pulling through those orders electronically because, look, it's -- there's a lot of things that a doctor does when they sit down with a patient. They could be talking about cholesterol and diabetes and different things. We need to make sure that colon cancer is top of mind and that they're aware that Cologuard can be ordered electronically. When that happens, to your point, Puneet, physicians typically order over 50% more when they order electronically compared to when they order via fax. So if you've ever sent a fax in the past year, you think how cumbersome that is. Do -- you can click a button on your computer to accomplish something. That's easier than going over to a fax machine and trying to figure out, "Do I dial 9 or do I dial 1? What -- how do I do it?"

Yes. I haven't sent a fax in 10 years. So another point I want to -- you didn't provide the guide for the full year. But just in light of you have 500 or so reps right now, you are adding GI -- 50 GI reps and I believe 50, correct me if I'm wrong, 50 women's health reps. So that should get you near 600 or so. And as those return back through the year, is there any reason why sort of the recovery in the second half of the year or maybe even starting sort of midyear here in the second quarter as vaccinations ramp up? Is there any other barriers that you see in ramping up growth through the sort of latter part of the year?

Well, we think with -- when we talk 5 years from now, Puneet, hopefully, we're both still here, still healthy and out of harm's way, 5 years from now, I think we'll look back as COVID is the turning point for Cologuard adoption. We think COVID will really help accelerate the adoption curve because of some major structural changes that have happened. I can look at this different ways, whether I look at the NPS scores, the customer satisfaction scores for Cologuard, which in the fourth quarter hit what I believe is an all-time high, or I can look at electronic ordering rates or order trends amongst various subgroups of doctors. All those signs point to accelerating adoption of Cologuard. So throughout the year, with all these structural changes that have happened with wellness visits coming back, physician offices opening back up to sales reps, I expect growth to improve through the year. But that's not going to happen overnight. It will take time for patients to come back. One of the colonoscopy volumes, for example, they're still down probably 25%, and they're not going to normalize this year because patients are still going to be scared, especially in this target market. Again, 65-year-old is our average customer. They'll still take time. When you think of sales rep productivity, it improves over time. If I think back to before the pandemic hit, our reps, even reps that we had hired back in 2014, continued to get more productive over time. It takes repeat sales calls to really get the most of that doctor-patient relationship, that doctor-rep relationship. And it's going to take time for us to regain that lost momentum because our reps have largely been out in the field since last March. It will take repeat sales activity to get back to where they were, which I'm optimistic again. We got to 9% year-on-year growth in the fourth quarter despite having all these headwinds. So now that these headwinds are declining and the new tailwinds coming on, I'm excited about what this year has in store for Cologuard.

That's great. 2 other points in terms of recovery, one being 45- to 49-year-old and the second being the rescreening opportunity. Maybe just on the 45- to 49-year-old, specifically, what are you doing in terms of targeting that group? And maybe can you give us a state of where the commercial payer reimbursement stands there?

So this is a huge one for patients, Puneet, 45- to 49-year-olds. The reason why we needed to start screening them earlier is because there's been a massive rise in incidents over the past 20 years, over a 50% increase in colon cancer in a younger population. So we need to screen earlier in this country, and we believe Cologuard fits very well into their lifestyles. The typical 45-year-old is busy. They often have kids. They don't want to take 2 days off of work for a colonoscopy. Cologuard can be done in the convenience of your own home. No prep work required. You do your business as you normally would. So we're optimistic here. For this market to really come to fruition, different things needed to happen. It started with the ACS guidelines. The American Cancer Society updated its guidelines going back a few years ago recommending we screen at age 45. Then we need an FDA approval. So we have since expanded the label for Cologuard to include the 45- to 49-year-old population. The next big step we're expecting is the United States Preventive Services Task Force to update its guidelines this summer. We got a draft, looked at the guidelines last year. They did recommend starting at 45. We're expecting that to be finalized this summer. That's a key trigger for commercial reimbursement. Today, when I look at the coverage policies of the big payers, we're probably around the 15% to 20% range. 15% to 20% of patients in this age group are covered. However, when I look at the actual reimbursement, so when we submit a claim for some in this age group, over 80% of the time, that claim is paid in full. So what the task force guidance will mean is more patients will have their coverage policies updated within the next year or 2 after the guidelines were updated, and that's key. From a commercial standpoint, our sales force is ready. They are out there talking to physicians about the data that we have on the 45-year-old age group. They're talking there about how Cologuard is a great solution for that age group. Going forward, we've got a very thorough marketing campaign set to really raise awareness, awareness on two different things. One, to make sure that physicians and patients know that we need to start screening earlier to help save lives and keep people screened for the next 30 to 40 years. Also, we need to make sure they're educated that Cologuard, we believe, is an ideal option for somebody to get screened in that age group.

That's great. And on the rescreening opportunity, obviously, these are patients that know Cologuard well. And that's 3 years later, they're returning back. Maybe just give us a sense of how much of that are you capturing today and where that capture rate can potentially go to?

Rescreen is absolutely -- it's a huge one for patients to keep patients screened for many years. It's also a huge one for Exact. This year, we expect rescreening to generate over $100 million of revenue for Cologuard. So it's a big win. In total, there's about 1 million people who are due for rescreening this year. So if you look at that math, I mean that's -- it's a big opportunity, and we're capturing a big share of it. Over time, what we've seen is our capture rate, so the percent of patients that we successfully have rescreened, has improved. Over the past 9 months, we've seen the biggest improvement we've ever had, thanks to a brand-new team we created. It's an internal team that combines IT resources, analytics, sales, our marketing teams dedicated to capturing a 3-year repeat customer. That team has been very successful. What's really excited about this is all the new -- the things like Epic, all the new IT tools we've talked about, enhance our ability to capture a 3-year repeat customer going forward. When I look at into next year, 1.1 million more patients become eligible for 3-year repeat testing next year. So this is a huge opportunity. Longer term, I expect over half of our revenue to come from 3-year repeat testing.

Okay. That's -- that puts it in perspective. That's really helpful. And if I could switch over to more of the pipeline questions, more of longer-term questions, one of the questions that we frequently get is Cologuard 2.0 trial is progressing. BLUE-C trial is progressing. And maybe just longer term, how do you see the penetration for Cologuard in the market in light of Cologuard 2.0 coming on the horizon? And a number of companies are doing liquid biopsy trials. You obviously have FIT in the market, but that's lower performance and colonoscopy is still the standard of care. So give us a view as to where Cologuard would -- how do you see it positioned longer term?

So Puneet, this is a huge market. There are over 100 million people who need to be tested for colon cancer, and it's not one-size-fits-all. As you mentioned, we've got different options today. Longer term, we think Cologuard will have at least 40% of the market. And that's based on thorough survey work and interviews we've done. It's also based on patient behavior. Patients have shown, through their own behavior, they want an accurate test. They want a test that can find over 90% of curable-stage cancers. And today, there's really 2 options that gets you that. Cologuard can find 94% of curable-stage cancers, and colonoscopy thought to be about in the same range. That's why those are the 2 leading tests. Again, we think Cologuard will take at least 40% of this market. We think between 30% and 40% of all patients would choose a colonoscopy. And the remainder will be the patients who opt not to get screened or choose a FIT test or a blood test. So we think all these are nice opportunities to give more people screened, and that is really the goal, to get more people tested for this deadly disease. A blood test is likely going to have lower accuracy. So that will really target the patients who want convenience more than anything. And you can see today in that -- in the market, the way it shakes out, that's about 10% of the market. 10% of patients choose a FIT test, which is mainly about convenience, less about accuracy. The majority of people today, 50% of patients in this population choose a colonoscopy because of that accuracy. So over time, the 2 most accurate tests will take most of this market. A FIT test, a blood test will have relatively smaller portions.

Within that context then, just help us understand what's the rationale behind the liquid arm in BLUE-C then?