Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Good morning. My name is Brian Weinstein, and I'm the group head of life sciences here at William Blair & Company, and I'm responsible for coverage of Exact Sciences. Before we really get started, I am required to inform you that for a complete list of research disclosures or potential conflicts, to visit our website at williamblair.com. Logistically, the format is a fireside chat between me and management that will last for about 30 minutes. We have a set of questions prepared, which we will get through. But if you have a question, you can try and submit it by typing it into the question box that I think is provided. We will do our best to keep an eye out for it, but I can't guarantee that we'll be able to get to it in the time allotted. With that, let's jump in. We're fortunate to have a couple of very big Chicago Bear fans with us this morning, the company's CEO, President and Chairman, Kevin Conroy; as well as the company's Executive Vice President, CFO, and now COO, Jeff Elliott as well. We have Brian Baranick joining us, company's SVP for Strategy and Business Development on the line as well. I don't know his NFL affiliation though, so I can't mock him there. Thanks for taking time to join us, guys. I appreciate it.

Brian, it's great to be here. I wish we could be with you in Chicago. And you are wrong, I am a Detroit Lions fan having grown up in Michigan. I have yet to see a Super Bowl title, but I assure you that we will. I think there's a chance we could get Aaron Rogers. We're looking forward to that date.

Very good. I appreciate that. Well, I thought we could start with -- just having to give an overview of the company really, how it's evolved over the last many years, but really also what the vision is today for where the business is going. So again, maybe a 5- to 10-minute overview for people who just aren't as familiar or who have not really kept up with all the news flow of the company over the last couple of years.

Brian, a lot of people think of us as the Cologuard company, and we are that, and we're that and a lot more. As you know, we acquired Genomic Health, which has Oncotype DXpress standard of care for early -- certain early-stage breast cancers. And it is -- that was the first step in building a broad capability to be the complete solution for advanced cancer diagnostics. And when you think about what we have built and what we are building, it is all focused on making sure that we're the 1 company that physicians broadly think about when they think about addressing oncology from a diagnostic perspective, all the way from screening, eventually hereditary cancer testing, all the way to therapy selection, minimum residual disease testing. So the full suite of tests built upon an incredible IT infrastructure -- we're based on the Epic platform -- that gives us the ability to connect with physicians across the U.S. and then ultimately, utilize that data to provide incredible insights. So testing is an important part of this, but the story goes well beyond that. And the foundation that we have built is best-in-class research and development, science, clinical, regulatory, sales and marketing, over 1,000 people in that organization. The ability to provide unbelievable customer service, an international team of over 100 people and a highly -- a team that services people in 99 countries around the world. Again, Genomic Health was the turning point for this expansion. 98% of oncologists have ordered at least 1 Genomic Health test. And all of the learnings that we have applied or that we have gained from bringing Cologuard to market, we will use in what may be the biggest opportunity to diminish and potentially some day eradicate the negative impacts of cancer is through the Thrive acquisition and the multi-cancer test coupled with the work that we have done with Mayo Clinic. And so multi-cancer testing is critically important to changing cancer outcomes. By doing a simple blood draw and moving cancer detection earlier before symptoms, we have the ability, potentially, to lead to better outcomes than any therapy that's under development today. And that's important, and it's also an important building block of this overall ecosystem that we're building. Know that if you're under 85 years old, the #1 cause of death is cancer in the U.S. And by screening a broad population of over 100 million people, let's say, age 50 and older; potentially 45 and older for cancer broadly, we have the ability then to stage shift to earlier stage. And typically, about 9 in 10 people diagnosed Stage 1 survive versus about 1 in 10 diagnosed late stage. Frequently, with early detection, surgery alone is curative versus late stage when we know there's multiple surgeries and multiple chemotherapies and targeted therapies, et cetera. That's where we're going as a company. We think we're uniquely in the position to show this leadership and actually pull it through and have the outcomes that we want to see. And so that's our mission, it's about cancer eradication, and we've stayed true to that mission for a very long time.

That's great. And we're definitely going to dig into a lot of the different programs and projects that you have in a few moments here, but thanks for that overview. We are asking each of the companies attending kind of a set of questions around various topics, including recent trends, key catalysts and some things on ESG as well. So let's just try and knock those down, and then we'll get back into kind of the the broader topics that you were talking about.

So starting with recent trends, as we sit here in early June, and it's hard to believe it is early June already in the year, but maybe you can provide some sort of an update on how things are recovering across your business lines and maybe some thoughts on expectations for how you would expect things to trend throughout the year. Jeff, maybe that's 1 for you, I don't know.

Brian, in Q1, we had very, very strong results. Overall, revenue grew 16%. That's despite the pandemic in a very challenging backdrop. In the Cologuard business, revenue grew 10%. When you think of what's happened over the past year, colon cancer screening down significantly because of the pandemic. In Q1, colon cancer -- colonoscopy is down 10% to 20%. Wellness visit's down under 10% to 20%. Salesforce access down at least 50%. So despite that backdrop to grow 10%, that shows just those the underlying momentum that Cologuard has. Then when you look ahead to the balance of the year, things are still a little choppy out there. The pandemic is still here, wellness tests is still depressed. Our reps are now getting back out there more fully and making sure they educate physicians on how Cologuard fits in. So we're pleased with the momentum we have. What this really sets up is for even better, longer-term growth. We think we'll get to our longer-term target of at least 40% market share even sooner because of the pandemic. Because the pandemic has led us to take actions to go out and accelerate adoption, things like electronic ordering have improved significantly over the past year, in part, because of the pandemic. So pleased by how the team has performed despite a very challenging backdrop.

Got it. And your comment there, your teams are getting -- your sales reps are getting into the field in an increasing amount in terms of how often they're able to see clinicians. Is that -- can you just talk about historically the amount of correlation between sales calls and Cologuard ordering? As we think about a post-pandemic world, is that relationship still as tight? And is the sales force getting back into the field in a higher degree? What type of leading indicator is that? How strong of a leading indicator do you think that is, Jeff?

Well, the teams out in the field are historically one of the most important ways to launch new product and educate physicians on its key attributes. Over the past year, our reps have really been out of the field most of the time. And our partner, Pfizer, has been out of the field entirely up until last week. So again, to deliver year-on-year growth despite that, I'm very proud of. The correlation here is very, very strong. Historically, before the pandemic, we would talk about the number of sales calls in a quarter. If a rep talk to a provider at least 6x in a quarter, you would see a 9x increase in orders for that provider relative to the doctor that we didn't talk to. So there's a very strong correlation. The beauty of this product is the market is so incredibly large. There's over 100 million people in the colon cancer screening market, so having a rep talk to a physician out in the field is a very important way to help get more people screened. As far as leading indicators, yes, getting reps out there is an important leading indicator. It's not going to happen overnight, it takes time to go and have repeat conversations with the physician. And still, a significant number of physicians have limited access. So it's going to take some time. I think things will continue to normalize over the course of this year. As far as getting back to normal, I don't think that happens until at least next year, because, look, the pandemic is still here. There's still over 10,000 people being diagnosed every day in this country.

Got it. Okay. Just switching gears for a second here. I wanted to ask you about supply chain. It seems like every week, we hear about some issues somewhere in the world with supply chain. Most recently, I think chlorine tablets for pools are now -- you can't get those. So I just wanted to check with you guys about your supply chain and if you've seen any issues emerging for your business or anything that you're keeping your eye on in the coronary there as pricing pressure, right? Are you seeing any kind of pricing pressure on your inputs? And as you think about your potential inflationary environment, how does that affect the way that you guys go about managing your business?

Well, Brian, this is something we watch very, very closely. Obviously, as a health care company, we have to put the patient first, and we do. So the teams have noticed over the past year, there are certain things that have become more limited, things like PPE equipment, rubber gloves and gowns. There's been times when those have been more limited. Over as of today, the team has done a nice job. We've got sufficient safety stock or supply availability such that our supply chain is very robust at the moment. As the pandemic has started to abate, you've seen availability improve. From an inflation standpoint, inflation is always there. The team is doing a nice job managing it. A lot of our key suppliers have no inflation hedges built in, so we've done a good job of managing those costs. When you look at Cologuard over time, I expect us to work down that cost per test. My longer-term goal is to get that down to at least $100 or better on a cost per test basis, and the team we have in place is doing a very nice job of managing to that.

Got it. And I know there's a lot of drivers there that are going to help you get to that $100 or better, and I'm hopeful that we'll have time to kind of dig into those here in a moment. I want to pivot real quickly to ESG for a second if we could. I know it's not an area that the industry has really talked about broadly at this point, but I know that you guys are a forward-thinking company and leaning into a lot of initiatives like this, so I was hoping that you could provide update for people who are really focused on that. And we know that there's an increasing number of investors who are increasingly focused on that. So any thoughts that you have on where you guys sit on ESG at this point?

Brian, ESG is core to who we are. It's in our DNA. I mean we are a health care company serving patients. Take Cologuard, for example. Cologuard is helping solve the problem of colon cancer. Colon cancer is known as the most preventable, but least prevented cancer. We've helped screen over 6 million people for this deadly disease. So again, it's core to who we are. When you look at all of our new facilities that we've brought online to manage this robust expansion of growth, all of our new facilities that have come online are LEED-certified. That includes our lab processing, which is a significant investment. The lab we have today for Cologuard can process over 7 million tests per year, and growing. So we take this very seriously. From a governance standpoint, integrity is core to governance. Integrity is one of our core values at Exact, and it's something we take very seriously from the Board on down. So ESG is core to who we are.

Thank you for that. I think people will certainly appreciate the answer. If we can move to catalysts now and things that you think investors should be focused on over the next 6 to 12 months, I mean, what would you point to as really the set of catalysts across your business? And how would you characterize kind of the magnitude of the catalysts as you see them in terms of importance?

Well, Brian, on the Cologuard business, returning that product to a more normal environment is key. With the reps now returning to the field in a bigger way, that will help growth over time. Also on the pipeline, Kevin talked about, this is -- we're entering what I think is probably the most robust period in company history as far as bringing new products to patients. So just this year alone, we brought our liver test out. We made that available for the first time. We'll have a more full launch over the next couple of years. Later this year, we expect significant data out of our pipeline. Starting with our colon blood test, we expect to release data either later this year or perhaps early next year. As you know, Brian, we're also running our study for Cologuard 2.0, which is an enhanced version of an already very good test. That same study will serve as a registrational study for our colon blood test. We expect enrollment to complete later this year, with the data readout at some point next year. Multi-cancer, huge new opportunity for Exact Sciences and for patients. We are running multiple case-control studies this year to refine that assay. Later this year, we'll run our final validation case control study and publish that data again later this year or next year. When you look ahead to next year then, we plan to publish -- we plan to launch the prospective pivotal study for our multi-cancer test. So this is a very robust period of catalyst for both the core business in Cologuard and Oncotype as well as bringing new products to market.

Perfect. Thank you for that. Digging into some of those topics that you just brought up, maybe we can just talk about your product in colon cancer using blood as the sample type. There's a lot going on in that space right now, and I thought maybe you wanted to spend a couple of minutes just on how you think that landscape evolves and what your expectations are for your product in terms of performance, but more broadly, what you think about performance that you'll see across the space. And I know I'm throwing a lot at you here on this topic, but then I also want to kind of get your viewpoint on how you think a product like that fits into the broader screening paradigm. Investors have said to us that they are concerned about does that cannibalize Cologuard, either existing Cologuard users or the opportunity to bring people from colonoscopy, FIT or unscreened, into the mix? So a lot there, but maybe just spend a few minutes talking broadly about that space.

Thanks, Brian. This -- the blood-based screening has the potential to have a positive impact on the mission of eradicating colon cancer. Your starting point is 1 out of 3 people in the screening population over the age of 50 aren't screened at all, and almost nobody aged 45 to 49 is screened unless they have a family history. So there is the need for more screening. Colonoscopy is a great screening approach, but it is -- it has limitations, and part of the limitation is just capacity. So there are about 45 million Americans in the screening population that aren't screened today. It's clear that a multitude of approaches is going to be the right answer. We believe that Cologuard is going to continue to have better -- much better performance than a blood-based test. And because of that, we believe that Cologuard will continue to grow; and B, the true alternative to colonoscopy. One of the great advantages of Cologuard is that you only need to do it every 3 years. A blood-based test, the way the modeling works, is likely to be an annual test. And so as an annual test, you need to keep that false positive really low because that compounds over time. And with the data that we've seen out there, that's a concern. When you go into a prospective study, it tends to put downward pressure on the specificity of the test, and trying to keep that at a 95-ish percent specificity is probably where it needs to be, to be effective. Because the blood-based tests, there's no reliable data showing the ability to pick up precancerous polyps, which the precancerous polyp find rate is very critical to saving lives over the long term because you're finding to remove the polyp -- advance adenoma before it becomes cancer. And so that will be a limitation of a blood-based test. With that said, blood-based testing is going to have a role. The question is how significant of a role? One data point is in our large prospective study, significantly more people are willing to do Cologuard, about 25% more, than are willing to get a blood draw. And that is because stool-based testing is pretty darn easy. You do it in the privacy of your own home. With blood-based testing, you have to go schedule an appointment to get your blood drawn, and you have to get poked with the needle. And a lot of people don't want to do either of those 2 things. So we believe it's going to be an important part. It's going to probably, I think, mature at 10% to 15% of all colon cancer screenings versus, we think, the rest will be split between Cologuard and colonoscopy over the long haul.