Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

All right. Good morning, everybody. My name is Doug Schenkel from the Cowen Life Science and Diagnostic Tools team. It's my pleasure to welcome you to the 41st Annual Cowen and Company Health Care Conference, and also to welcome you to this session specifically with Exact Sciences' Chairman and Chief Executive Officer, Kevin Conroy; and the company's Chief Financial Officer, Jeff Elliott. Thanks to the 2 of you for being with us today.

Hi, Doug. Thanks for having us.

So I wanted to start on the topic of strategic positioning and strategic evaluation. And I don't think any of us technically thought of Exact being a 1-product company for the last few years, but I think it was kind of viewed that way by many, for good or for bad. That's obviously changed a lot over the last couple of years. And now increasingly, I think you've gone from being viewed, fair or not, as a 1-product company to being a company with a key product in the form of Cologuard but having a diversifying menu of products. And strategically, the company is viewed as a key consolidator in cancer genetic testing. Via your acquisitions, Kevin or Jeff, how much have you expanded the TAM for the company?

Well, taking a step back, Doug, our goal here has been to be the complete solution provider to physicians, oncologists, primary care physicians, health systems, everybody who kind of surrounds a patient all the way through their journey. So we want a complete suite of tests that are able to answer questions, ultimately then with deep data capabilities that aggregate those data and ultimately help provide insights to treatment. And so in terms of our TAM, we're in a number of different areas that are -- will have a significant impact on patients: colon cancer screening, multi-cancer screening and then minimum residual disease and cancer recurrence testing. Altogether, those TAMs are north -- well north of $60 billion. And that's important. What's more important, though, is that we get this whole suite of testing done the way that we did Cologuard, which is a huge amount of evidence. You do it the right way, you engage with physicians. One thing that is clear, and you hear this over and over, we want to be able to go to 1 provider to get all of these tests. And we do want the insight so that it's easy for a community oncologist to treat a patient.

So as we sit here today, you've acquired Thrive, you acquired Base Genomics. That moved you more aggressively into screening and really complemented some of your organic efforts. You acquired Genomic Health to get into therapy selection. Through that, you acquired a specialty sales force and an international presence, in addition to some leading products in that category. And then blurring the lines of the construct, you have assets internally as well as now externally from like buying Thrive, buying Base, there may have been a primary focus on other indications, but these assets together with what you had ongoing internally have helped you in MRD monitoring and therapy selection. So all of a sudden, you got this full menu, at least that's what it looks like from the outside, Kevin. Are there opportunities or a need to do more? I guess I'm just trying to get at, where does the R&D go in terms of supporting organic ambitions? And do you need to go out and get additional technologies to improve your positioning in each of these categories that you're targeting?

Doug, we have the broadest reach in terms of R&D, 400 people and growing, and our commitment to internal development is significant. When you take a look at the opportunities here, the way that we always framed this is what supports this long-term vision, what supports creating value for shareholders, what creates value for patients. And so we will continue to look at things that we think can advance those. And there's a huge amount of innovation. One of the things we're probably most proud of is seeing -- being part of this incredible array of companies that are advancing cancer diagnostics. And a lot of that is going to occur outside our 4 walls.

As I think about the different categories of tests, and I may be oversimplifying and I'm about to do this on the screen, and I forget which way everybody is looking at me when they actually see me, but I'll just start from here then maybe going backwards. But there's screening then there's therapy selection and then there's monitoring. And then kind of overarching this continuum is the use of these tools in biopharma for patient ID and for clinical trial optimization. To me, it seems like even though you're in each of these categories, it does seem like you're maybe a little bit under-indexed relative to others when it comes to biopharma opportunities. Is -- do you think that's a fair characterization? And maybe more importantly, Kevin and Jeff, is that an important area of focus where you want to be more indexed?

I think where we're over-indexed and well ahead of others is building this incredible infrastructure. And it takes time, it takes years. The IT investment is -- we're north of $400 million. We have 650 primary care folks and over 1,000 people commercially. That takes time. There's no other way around it. It takes time. Biopharma relationships are -- it's a huge opportunity. And we have recently, with all of the activity, with Thrive, Base Genomics, others, there's been a tremendous outreach to us. Really, it started with Genomic Health to get involved more in biopharma clinical trials. And I think that will become an important strategic lever as we support the new therapies coming to market. And we know that biopharma companies like our vision, with the one thing they want is to be sure that they're working with a high-quality company that understands the regulatory processes. I don't think there's anybody better at that than we are and also the ability to reach customers. So I think you're going to see that change pretty rapidly over the next 18 months and we're excited about that.

Yes. I mean -- and you've kind of answered some of, at least partially, my last question in this kind of high-level strategic outlook section. But I'll ask it anyway. I think from the outside, a lot of folks look at this space. And on one hand, they're really excited about the opportunity to really improve clinical outcomes and really health care in general because of whether it's screening or better therapy selection, better drug design, there's huge opportunities. And the science is real and the need is unmet in a lot of these categories. On the other hand, increasingly, you get this question. I got the question probably 4 times just today on commoditization. What happens with 4 or 5 companies, maybe more, skating to the same place? What happens when the menus of these companies start to look a lot more similar? And how do individual companies differentiate? I think you've kind of answered this question, Kevin, but I want to ask you. I mean when we look at Exact and say, "Okay, Exact is going to be one of the winners here, if not the winner.", are the things we should be pointing to scale, regulatory and reimbursement prowess, which is exemplified by both [indiscernible] as well as the Genomic Health team? And then really commercial prowess. I mean nobody else has the PCP infrastructure coupled with the specialty infrastructure that you have. Are those the things you would point to? And beyond that, am I missing anything?

Yes. And take Genomic health for an example, 98% of oncologists in the U.S. have ordered an Oncotype DX test. And if you take the breast Oncotype DX test and you see what that test does is 2 things. Number one, it helps decide whether chemotherapy, whether the patient will benefit from chemotherapy. The other answer it provides is the risk of recurrence. So you know which patients are at the highest risk of recurrence, and you have the tissue. And it's an amazing capability that the Genomic Health team built. And having that tissue then is the starting point for measuring minimum residual disease. It's also the starting point then for recurrence testing. And if you -- imagine being a breast cancer patient and being treated, maybe without chemotherapy, surgery only, in the back of your mind, you're asking the question, am I going to recur? And you're going to wake up every day thinking about that. We are in a position to help those patients. And because Oncotype DX Breast is the standard of care globally, really, because of the amount of evidence behind that and the quality of that test. That's one example, Doug. Just this weekend, I was at the Cologuard Classic in Tucson. And I had a chance walking the tournament to meet somebody who was at the tournament last year. And he went to see his doctor, perfectly healthy 52 year old. This is actually a good story for a lot of people on this call. Vegetarian, nonsmoker, 100 miles a month runner. His doc said, "Time to get screened for colon cancer." He said, "I'm perfectly healthy. Can I wait until I'm 55?" And the doc said, "Why don't you get a Cologuard test?" Came back positive and he had a stage 1 tumor that was the size of a tennis ball. So fortunately, it had grown inside the colon, not outside the colon. They resected it. There's no evidence of cancer. But isn't the next question, "Well, maybe take that tissue, look inside the tissue and then look for that DNA in the blood?" That isn't being offered today. What company -- so the differentiator here is that with being the upfront tester for screening, whether it's colon cancer, whether it's multi-cancer testing, that's the start of a relationship and data that we have that will provide a differentiating capability in addition to those other things that you mentioned.

Yes. That's an interesting last point, Kevin. I mean it's also your positions as we think beyond 5 years, whether it's 5, 10, 15 years. Europe is positioned to serve different constituents in different parts of the screening and care journey. But beyond that, if there is a time where the wet lab becomes a lot less important and it becomes more about patient information and broadly define the dry lab, the back end, you can play a role there as well.

Yes, a huge role. We -- again, we've invested $400 million in our IT and data architecture. And I think you'll hear more about what our plans are in the future. It's one of the most exciting things, the ability to give maybe not a second opinion, but to provide data to the person who's making the first opinion about what to do next.

Let's talk about some of the specific assays and kind of using my air arrows in terms of the care continuum. Let's start on early detection. So as I think most folks on the call will appreciate, back in late October, you announced plans to acquire Thrive Earlier Detection. That deal has since closed. Can you talk a little bit about the rationale behind moving into early detection now? Keeping in mind, there still is a decent amount of work to do. And why Thrive versus maybe some of the alternatives out there?

The reason why we feel so important to be in multi-cancer screening is the same reason we felt it was important to be involved in colon cancer screening. The key is early detection. We know that changes everything. And I firmly believe, if you look out 15 years from now, you'll see a totally different approach to treating cancer. It's going to be more focused on early detection, treating, surgery, probably very targeted therapies. And why Thrive is, so we had our own internal program, and we focus mainly on DNA methylation markers. We shared some of that data in September at the Cowen conference. I don't have any data to share today, Doug, sorry.

I mean I get that every time.

Yes, I know. I can't make that promise. But that methylation data, coupled with mainly the mutation and protein approach that Thrive has taken, the amazing team at Thrive, and they have the guts to go out and run a prospective study. Nobody has done that. So CancerSEEK has actual data from a prospective study. And we think that we can improve the performance of the test, improve the sensitivity while holding specificity constant by bringing some of the scientific approaches that we have here. So -- and the teams are just having a blast working together, melding those 2 approaches. And I think that the Thrive team is excited because they know they have the ability to launch CancerSEEK through our incredible broad architecture people -- technology capabilities.

And it's part of -- this is maybe saying the same thing a different way, Kevin, but it's part of the reason that Thrive was the right asset was you looked at what they did in that prospective study with Geisinger, and you looked at some of the data, that looked good. But there were things that weren't great, right? Like the tumor, I'd argue, the tumor of origin data and the requirement to reflex the imaging, things like that could be further optimized. Thrive was going to work on that on their own. But when you looked at what you saw in the DETECT-A study, where you, on one hand, impressed with certain things; and on the other hand, where you saw things that needed to get optimized, did you view Exact as almost uniquely positioned to basically address some of the things that needed to get better based on what you were working on?

Yes. That is right. And there are things that can be optimized. Let's talk, though, about the reflex to a PE/CT. I initially wasn't a fan of that approach. When you look at the data, and you really look into the data that is out there using a molecular approach to pointing to a specific organ, it -- to us, it's -- we have been convinced that the best approach is to start with imaging. And the reason that we're convinced of that is health systems have that as a tool. They know how to use that, and it's a great starting point. Using something molecular as a tool, you are probably sending that patient on a bit of a diagnostic odyssey. And now you have to establish guidelines for what to do with each type of molecular signal. And that isn't what a primary care doc wants. A primary care doc wants, give me the answer, what do I do with a positive test? Sending it to PET/CT is something that is logical right within that system, that system can bring them in. And at first, understand with a high level of certainty where the cancer is.

So you use the -- so it is possible that ultimately your assay, even when optimized could reflex to imaging in part because that imaging is probably going to be done anyway, is kind of the point. It helps the performance, and that's sort of the care continuum anyway.

It is. And you want that consistent care continuum. So if you then see an upper GI cancer, you do an upper endoscope. Not having that answer -- and again, taking a look at the data, the data when you peer into it are not as impressive about the ability to predict which organ that tumor may be precedent.

But again, maybe a dumb finance guy making an observation. Exact is pretty good at methylation, methylation is pretty good in terms of helping with tumor of origin information. Again, I know it's more complicated than just marrying those 2 things, but I would assume some of the legacy expertise that resides at Exact and goes back to your collaborations over the years with the Mayo could play a role in further optimizing this asset.

Yes. And let me take a step back. I first walked into the Mayo Clinic in 2009. And after spending about an hour talking about colon cancer screening, Dave Ahlquist and I spent an hour talking about multi-cancer screening. And one of the things he talked about was pointing to the origin of the tumor with a methylation panel approach. And we immediately, towards the end of 2009, started doing DNA sequencing of different tumors, so that we could develop the intellectual property, the scientific capability, and we kept building on that long before anybody else really made a big effort into multi-cancer screening. So we have some assets and capabilities. Thrive convinced us that their approach is a really thoughtful approach.

Two more on Thrive real quick. First is a theme throughout our conversation has been essentially taking assets you built or assets you've acquired and being like basically use them for their primary purpose, but potentially be able to leverage them for other purposes. Does Thrive potentially help you in other areas, whether it's single cancer screening or maybe monitoring down the line? I guess that's the first question.

Well, 3 things. Number one, access to really talented people. Number two, access to deep capabilities around next-generation sequencing. And thirdly, access to know-how and capabilities around MRD. So those are 3 areas that we're excited about. There are others, too, but those are 3 big ones. And I'll give you an example. Matt Franklin, who is Chief Commercial Officer of Thrive, is now Head of our Precision Oncology business. He spent time at really building Foundation Medicine as Head of Marketing, Chief Commercial Officer of Archer and has incredible insights and leadership capabilities. So we're excited about the leadership that he brings to our precision oncology efforts.

And then just time in terms of time lines, what comes next, Kevin? I mean the -- just as I was about to ask a numbers question, I think we lost Jeff. But you are expecting to spend a lot more on R&D this year in terms of what that means for Thrive and CancerSEEK specifically, I think this is a year where you're doing more assay optimization and trying to lock down with the idea of moving into pivotal studies in 2022. Do I have that right?

You do have that right, Doug. And one of the consistent messages we have gotten from investors is invest for the long term. We believe in what you're doing here. We know that there's going to be a significant R&D expense. It's, to a large extent, a replay of what we did with Cologuard. If you remember those 5 years that we were developing Cologuard, it was a significant investment, especially for a tiny company at that time, but the payoff is huge. And the path is, we think, for multi-cancer going to be significantly higher than for colon cancer.

All right. So we spent a lot of time on the exciting pipeline and the vision and the capabilities. I don't think we should lose sight of the fact that Cologuard is still a great product that addresses a huge need that is still quite underpenetrated in terms of the number of people getting screened in and then specifically the folks that are using Cologuard. I mean I think it's only -- even after a year where you grew last year, I still think you're only at about 5% penetration of the addressable market. So there's still a lot of room to go and grow. So just to frame this, I mean, we expect Cologuard to be $1.1 billion revenue business this year. In 2020, Cologuard revenue and volume grew about 1%. That's followed a year where I think you grew close to 80%. Now obviously, in 2020, there was something going on that impacted demand for health care and things like Cologuard. You did start to rebound nicely in the second half of the year. I guess my lead-off question here would be, how would you characterize pent-up demand for Cologuard specifically as we come into 2021?

Yes. The pent-up demand is significant. We're seeing that. We're so pleased to see that case rates are decreasing. Infections are decreasing. Hospitalizations are decreasing. There are a lot of people that haven't been to see their primary care physician. That's probably presently off 25% on a daily basis. Access to those offices is up. People have other health issues and screening is an important conversation now because so many people miss their screening. There is -- the truth is, there isn't the colonoscopy capacity in this country to handle the 45 million Americans who are due for screening right now and are unscreened. That's -- so we're really bullish about what -- cautiously, but really bullish about what the rest of this year looks like. We're off to a good start, and we're confident about what the future holds. We provided guidance for first quarter. And remember, we have a pretty good idea where we're going to come in here. The rest of the year is we are tremendously bullish as we see our primary care sales force getting back into the offices. That's where it all happens. Having those conversations with health care providers to make sure that they're having the conversations with patients and prompting them. Like Scott, the guy that I met this weekend, this last weekend, who need to be screened.

Yes. I think over the last year, we all got more excited about things like cologuardtest.com and the ability for folks to order tests without necessarily going into see their PCP. And then we've seen the reorder rates, folks who got Cologuard done 3 years ago come back into the system and order again. And I think we've seen you guys get better at basically keeping those patients as Exact customers. At the same time, what you just touched on, Kevin jumps out at me. I mean there was that rule from a couple of years ago, that rule of thumb that you guys shared with us, which was -- let's see if I can not mess this up. But somebody, a doc, that gets detailed 6x in a period is 9 -- is going to order 9 to 10x as many tests as somebody who doesn't get detailed. So detailing, like even now where you guys have grown and awareness is built and there's these other ways of ordering and the reorder rates are going up, you would say getting into the doctor's office is still critical to driving volumes?

Yes. The average primary care doc has an average of 8 minutes per patient. That's a -- you have a lot to do with the patient in 8 minutes and colon cancer screening often doesn't make it at the top of the list. You would think and hope that colon cancer screening is just inevitable in this country, it isn't. And that's what our team helps make happen. And that's one of the reasons we've been able to get well over 5 million people screened with Cologuard, and that pace continues to grow. It's important that we get those folks back into the field. And let me touch on that electronic ordering rate. We have increased that. Jeff will tell me if we've disclosed it, but it had took a big jump in the last year, and we expect it to take another big jump this year. I am so proud of the work that the -- this entire IT team did and our health system sales force and the people who implement these interfaces to make ordering easy. It's a game changer. And it also sets us up for our multi-cancer test, being on the Epic platform and having relationships with other EMR providers is a big differentiator.

For the electronic ordering rate, it went from 30% exiting 2019 to over 40% exiting last year. And our goal for this year is to get to at least 50%. So we're expecting big things. This team can do it. There's a lot of great momentum. And the reason why that's so important is because when a doctor orders electronically, it's easier. It's a big win for the doctor, it's a big win for patients. And so an electronic ordering doctor orders more tests, over 50% more than when they order through a fax.

Before we run out of time, I want to make sure we talk about the advancement of blood-based tests for colorectal cancer screening. So you have initiatives pursuant to that as to companies like Guardant and Freenome. Some have asserted that CMS and FDA have essentially created a pathway that plausibly can allow these tests to get to market and to get reimbursed in a way that is a lot easier than we might have expected a year or 2 ago. And by extension, USPSTF has arguably become a little bit less of a barrier to the advancements of these tests from a commercial standpoint. Do you guys agree with that? Or do you think the rules are still the same, essentially, practically speaking?

USPSTF is still awfully critical. As you remember with Cologuard, we received Medicare coverage 30 days after we received FDA approval. Making a test available that only has Medicare coverage, as you remember, those first few years of launch is really hard. And if a test isn't in the guidelines, Cologuard was at least in the American Cancer Society guidelines right away. But if it was not in the USPSTF guidelines, it's tremendously difficult to get broad-scale adoption. So USPSTF is still incredibly important to both physicians ordering and reimbursement for commercial insurers. But let's come back to the data. The data that had been presented publicly so far are not terribly impressive, certainly nowhere near the performance of Cologuard or colonoscopy, and maybe slightly better than the FIT test. And the challenge that we, as colon cancer screening companies, will face is how in the world do you get a test reimbursed at a premium to a FIT test, which is a $25 test? So there are a number of barriers that we need to reach to. In the meantime, with Cologuard, we keep getting more physicians and more patients to use it. And the blood-based test, let's see what the prospective studies show. We're confident that our test is going to be a really good test. We don't believe that our test is -- we believe that it will expand the number of people getting screened and that Cologuard will continue to be the main noninvasive approach to screening for a very long time.

And taking it up a level, Kevin, building off of what you just described and kind of going back to something I pointed out earlier, you're only about 5% penetrated in the U.S. and unfortunately, only about 60% of people who should be getting screened are getting screened. So would you agree or would you assert that these blood-based tests, at least based on the data that we've seen thus far, should be viewed more as a complement and maybe as a way to get more people screened versus a threat to Cologuard?

I think that's definitely true. There are 110 million Americans in the screen -- average risk screening population and 45 million today are out of compliance with screening recommendations. There's an enormous opportunity for -- I mean, Cologuard isn't going to get all of those people screened. It's going to be a combination of tests. But we are going to see the colon cancer screening rate increase over the next decade. And that means expanding into people who haven't been tested. And we see that with Cologuard, half of the people who get a Cologuard test, fully half, have never been screened.

All right. Thank you, guys. We're actually overtime. We covered a lot, though. And as always, really, always learn a lot in talking to you and always appreciate the time.

Thanks, Doug.

Thanks, Doug.