Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

All right, everyone. Thank you so much for joining. I'm Catherine Schulte, I cover life sciences and diagnostics here at Baird. We're very excited to have Exact Sciences here with us today. And representing the company, we have Kevin Conroy, Chairman and CEO; and Jeff Elliott, CFO and COO. So before we begin, just a reminder to refer to Baird's website and our published research for important disclosures about what we'll be discussing today. We're just going to jump straight into Q&A. So if anyone from the audience has any questions, please submit them via the web portal, and we will work them into the conversation. So with that, Kevin, Jeff, thanks so much for joining today.

It's great to be here, Catherine. Thanks for having us.

I guess, first, I just want to touch on the news of the day, Pfizer reducing its sales force and you guys hiring 400 reps. I guess why this 400 the right number for you at this point? Were all of those former Pfizer reps? And how do you make the territory realignment a smooth process?

Yes. I think some context is really important, and that is -- by the way, can you see me? Or are you seeing Jeff? I'm seeing Jeff on the main screen who is younger, better looking and all of that. So that's okay. But as context, what we're trying to build here is an end-to-end solution for patients and physicians that provide the greatest amount of digital connectivity, physician health care provider education and of course, best portfolio of tests. And we believe that this is a step in -- maybe one of the most exciting steps in the directions of adding to that broad reach that will support the very ambitious goals that we're confident we can achieve in the near term and the long term. And it starts with the broad reach of Cologuard, which continues to be an incredibly strong brand and that continues to grow. Q2 was a strong quarter in Oncotype DX in the oncology space. And then when you think about the pipeline that goes into the bag of now a 900-plus person field force, we have the ability to bring multi-cancer screening coupled with Cologuard, coupled with a blood-based colon cancer screening test, eventually hereditary cancer screening, liver cancer in a smaller population of people who need to be screened more frequently and then eventually pancreatic cancer and esophageal cancer and others. So this is a -- what we're doing will change cancer forever. And the Pfizer team, on average, has around 15 years of experience, 3 years of carrying Cologuard, a deep hunger that they share with us coupled with our team that has been with us now for up to 6, approaching 7 years with Cologuard. It's a powerful force that we can continue to add new pieces that help patients and health physicians. So it's tremendously exciting. Pfizer has been a great partner. We can talk a little bit more about where that partnership we think goes and it's a positive step in the right direction.

It seems like a great opportunity to get experienced reps and those that already have Cologuard experience rather than starting from scratch. It seems like a great position to be going in forward. I guess how do you view kind of the net impact of bringing these reps in to be fully focused on Cologuard?

The net impact is we think, because they will become -- they are now Exact Sciences employees, we can have a prioritization and focus based first on earnings. So we have always had a partnership with Pfizer. However, of course, they have their own priorities. And we were typically in second position throughout the course. By second position, meaning these reps first promoted a Pfizer product and then promoted Cologuard. And this is an opportunity for us to focus our portfolio through this incredibly capable sales force. And I think it's important to note that because of the duration of their experience at Pfizer, the typical rep has been in a territory, frequently a territory that they grew up in, and they have deep relationships with offices. And it's critically important. When you're moving into genomics in primary care and the primary care doctors are the quarterback for cancer screening, helping patients navigate cancer, there's a tremendous amount of education that is going to be required over the next decade. The best way to do that is face-to-face. And then we're surrounding that with the digital experience that we bring, being a health care provider on the Epic platform. So it's multifaceted. And this group of experienced people are going to help the sales effort, but they're also going to be able to grow into other roles, marketing roles and other leadership roles within our company. So the talent here is awesome, and we're very appreciative of the relationship that we have with Pfizer.

And how do you envision that relationship evolving going forward? And as you transition to life after Pfizer, you need to hire more reps when you fully transition? Or how do you see that unfolding?

So life after Pfizer, I think the current relationship that we have with Pfizer is changing. And -- so now they have another team of people that have Cologuard in second or third position. Those people are primarily responsible for other products. And I think over time, that relationship probably changes. But they're a world-class partner to have. They may be the best at partnering that there is. And who knows what happens as we bring multi-cancer testing. So I'm sure we'll have that conversation over time because if there are 100 million people who are going to want to get tested with the multi-cancer test. So who knows where it goes long term. I think the key takeaway in the top level is this team becomes part of our team now going forward. And we think that will mean a bigger impact going forward. And as we move into next year, this will be more or less cost neutral. There's still a 1-year royalty that exists out there and -- but the costs come way down under our current structure. And we can talk about those details later. The good news is this is adding to our team in a pretty awesome way.

Yes. Okay. Great. For going over the news of the day, I just want to start on the big picture and then we can get into some Cologuard specific questions at the end. Kevin, you've been with the company since 2009, and you've taken it from essentially having no product to hyper growth, single product company to now a global diagnostics franchise that spans multiple touch points across the cancer care continuum with nearly $1.5 billion in revenue last year. So that's a pretty busy decade or so. So I just want to spend some time upfront talking about how you see the transformation of the company over the next decade? And thought maybe we could start with the screening side. So as you mentioned, you've built out a massive sales force in primary care, now with 850 reps, have labs that can process millions of tests, you're integrated with Epic. You have a compliance engine and a large customer service team. What do you do to leverage that infrastructure over the next decade?

Yes. So I think you have to take a look at it from a patient's perspective. First of all, we're really proud of the work that this team has done and watching the team grow and take that passion and turn it into learnings that advance the cost. And the cost ultimately is eradicating cancer, eradicating it through early detection when frequently curative surgery is the answer or even detecting it in the pre-cancer stage. But from a patient's perspective, we believe that cancer screening is going to change forever, and it's going to start with a baseline understanding of their germline risk of cancer. That based on that risk, there are going to be different avenues taken from a screening perspective. And that may mean, if you have an elevated personal risk of cancer, you're tested more frequently with a blood-based multi-cancer screening test. Cologuard will be a part of that. A blood-based colon cancer screening test may be offered at the same time as a multi-cancer screening test in a hereditary cancer test, in a colon cancer test. So somebody who's 45 years old who comes into an office is going to have an array of tests that starts a lifelong relationship with Exact Sciences. And then think about how the information flowing from those tests changes the way that they are screened in the future or maybe based on their -- the information they have, let's say, that they have an ovarian cancer, elevated ovarian cancer risk, maybe preventative surgery is the answer or breast cancer elevated risk with BRCA1 or BRCA2, maybe surgery is the risk or more screening is the answer. So we're the trusted source of that and also the digital and knowledge engine that layers on top of that, that can within Epic allows you to do things that have never really been thought about automating a complex screening world that leads to very personalized decisions about how people take care of their own health.

And you're talking about hereditary cancer. Is that something that you want to develop internally? Is that something we could see a co-promoting or a potential acquisition? How do you think about getting into that market?

We have looked at and continue to look at every one of those options. We have the ability to offer a hereditary cancer test because of the acquisition of Ashion. They are fantastic at whole genome sequence. And so then layering on the digital reporting capabilities and extending our relationships with payers to include that test and the compendium of tests and relationships that we presently have, that's all doable. We also have other options that we constantly evaluate. The key thing is to make sure that, that is 1 of the elements that exists in the services that we offer to patients.

Got it. Maybe before we go to multi-cancer, I have 2 questions come in via e-mail on the Pfizer agreement. One said, what does this do to your goals to bring this business to breakeven? So maybe comment on that first. I think you said cost neutral initially, but how do you do that going now?

I would take that question, but then Jeff might strangle me. So will let Jeff answer that question.

Catherine, this is a very positive move financially. As Kevin talked about, we bring these reps into the Exact fold. We do expect them to become more productive. They're part of our mission, we can coordinate more effectively. And from a Cologuard standpoint, that should help to accelerate the growth and accelerate the time to cash flow breakeven. Keep in mind, Cologuard is already in most quarters right around breakeven. So over time, this will help accelerate the productivity and the profitability of that business. As we layer in other products, they will layer into a broader sales team, deeper relationships, and they will carry a more attractive financial profile because of this. So we're thrilled by today's news.

And the second one was how you think about the ramp curve of the Pfizer sales force? Where is access for Exact's internal sales force and any access, getting into physician offices? And when will the Pfizer sales force be able to do in-person meetings at scale? Do you view this more as a benefit to 2022?

So access, as we've talked before, is somewhat choppy still, and that's really because of the COVID pandemic. It's probably down 50% from where it was. That is something we've been working through. The team with, despite that headwind, delivered 25% growth last quarter relative to the start of the pandemic. So we had a great quarter. The teams are working through it. The Pfizer team, as of today, now being, as you said, the Exact team, the new team members we welcomed, are back out in the field today. They're back out because we've taken steps to protect their health. They are all vaccinated. We make sure that they're safe. They can go out and help educate physicians on the opportunity ahead of us. And because these new teammates have been out there learning Cologuard, developing these relationships for up to 3 years, we expect them to be productive during very, very quickly.

Great. And moving on to multi-cancer. I guess, starting from a technology perspective, how do you feel you'll be positioned to compete? And why are you confident that you can be successful in that space?

Maybe one of the most exciting things over the last 12 months has been the power of bringing together 2 technology approaches, mutation coupled with protein, along with methylation on a sequencing platform and bringing in base genomics. It's -- the team says, we assure you we will have the best performance in the multi-cancer screening. Now that's bold, and we'll see what the team delivers, but it's a pretty amazing team. And we like the data that we're seeing internally. We look forward to sharing that data. We have shared some of it. And the data that we have shared is tremendously impressive. And that's -- the performance of the test is a component of having an effective launch and changing the way cancer is diagnosed. I think that test performance will evolve over time in the space. And frequently, I hear investors almost thinking there's going to be one or another winner here. I think that the winner is really going to be patients, and it's going to be a huge opportunity. So with 100 million people getting older, that's a lot of people to get screened. And there are 350,000 primary care docs out there. There are going to be a lot of people who choose different approaches. What we think we bring a value is this electronic value -- electronics platform that we've invested approximately probably north now of $500 million into in building, and you can't do that overnight. Our relationship with Epic and our connectivity with docs, it's -- that's pretty powerful. So I think test performing, we're very confident in. We're also confident with all those other elements that's required to be successful. You can't just drop a test into a health system and walk away and say, "Great. There's your test." So evidence development is key. And maybe the thing that gets me the most excited, I think about launch of Cologuard. We were effectively competing against colonoscopy and the big test and the momentum to do no screening. Here, you're screening a whole person and there is no test to screen a whole person with a simple blood draw. And with 100 million people out there, the thing that we'll plan for is upon FDA approval and Medicare coverage and all of those prerequisites for a full launch is volume. This is going to be we believe, like no other diagnostic test launch even compared to Cologuard, which we're awfully proud of. You could see 10 million people getting screened pretty quickly in a relatively short period of time because why wouldn't you want to get this test.

Yes. Makes sense. I think you've commented that you might launch the test as an LDT even ahead of FDA approval and not a full launch, but make it available as an LDT. And that could happen as early as next year. Is that still the plan? And have you started talking to your health system and primary care customers about how they would view a multi-cancer early detection test?

Yes. It's highly likely that we will make a lab-developed test available. And historically, that hasn't been our approach. It's a screening test. It should go through FDA and the Medicare processes. We still believe that that's the best way to do it. Making claims about a test without a prospective study is, I think, the first and foremost thing that you need to do is do the right thing for patients, which is not to make claims without that evidence. So I think there is a way for us to do that while we're gathering more evidence creating a registry, so we can track those patients, we can track them in Epic. And it will provide additional data to submit to FDA in additional papers, and we have spoken with many of our health system partners. They're excited about this because they see this as an opportunity to help our patients earlier. It doesn't take away from any of -- it's not competitive, for example, with their colonoscopy or their GI team. This is additive to what they do and it may even bring more patients into systems who are the first adopter. So we think there is going to be competition among health systems who don't want to be left behind. We're already seeing that. So we're in a great position because of the depth of our relationships with 300 of the largest health systems across the U.S. That gives us the ability to accelerate clinical studies and the cost of those studies down and then also layering new tests that we're working on.

Got it. Before we move on to the Precision Oncology side, I wanted to talk a little bit about blood tests for colorectal cancer screening. And you've talked at length about the technological challenges. So I won't make you rehash those. You've also said you think blood test may end up with somewhere between 10% and 15% of market share long term. You now have 850 reps who can now immediately sell your blood test when it becomes available. Competitors are going to have to largely build that from scratch, maybe they go the promo path. But how much of an advantage does that give you? How difficult will it be for other companies to make a profit in the space, if there's only 10% to 15% market share to go around? And do you think the fact that you already have that infrastructure is underappreciated?

I don't think it's underappreciated. We have something here that we're proud of that we've built. But they are aspiring new entrants into this field. And our mission says our goal is to eradicate cancer, inclusive of colon cancer. And if there are other people who are going to help do that, it's -- there are 110 million people who need to be screened. If a blood-based test can help effectuate that, fantastic. We're going to grow, and there is -- this is not a one or the other proposition. Today, there are 45 million people who aren't screened for colon cancer. That's a lot of people, which means there's a lot of room for others who aspire to be in the space. We have some real advantages. We want to bring the best test to patients, and we think we're going to be able to do that. But we're also aware that this market is going to expand and that there will be other entrants. We relish that competition. And honestly, it's made us better.

Okay. Moving to Precision Oncology, with the Genomic Health acquisition, you acquired a global infrastructure and one of the leading oncology diagnostic sales forces. With some of the other acquisitions, you've added technologies that will allow you to enter treatment selection and MRD and monitoring. What's the path forward for that Precision Oncology franchise?

In addition to getting probably the best brand in oncology, a brand that continues to grow year after year with the test that changes lives, Oncotype DX. Just recently, a friend of mine was diagnosed with early-stage breast cancer. She got out an Oncotype DX test. As a matter, of course, it came back at -- below at 26. She was able to avoid chemotherapy. The relief that she experienced was amazing. People around the world don't all -- women around the world don't have that relief because it's still only about 10% or 15% penetrated. So there's a tremendous amount of growth and the team there is amazing. Not only are they amazing in oncology, they helped us on the screening side. So I'll tell you a quick story about Cologuard 2.0, the biostatisticians in Redwood City, that came from Genomic Health said, look, some of the machine learning tools that we have, we think we can make Cologuard 2.0 better. And in fact, now, we believe that because of the work that they did and continue to do will move the adenoma detection rate significantly higher than we thought was previously possible with the same markers and the same assays. And so we think that Cologuard 2.0 is going to improve. So look, you get unbelievable talent when you combine these 2 organizations. And when you think about our MRD test and the fact that about half of breast cancer patient samples flow through our lab, that presents an opportunity in minimum residual disease that is a real opportunity because of our franchise in colon cancer, coupled with that great call point and the amazing sales force that's a plus. The urology team, we'll be able to layer additional tests. So for example, in urology, hereditary cancer testing is indicated for people with prostate cancer or with certain family relationships or even if you have kind of a wobbly PSA test. That changes the way they're treated. So these individual teams that come together as one, that's powerful.

And MRD and monitoring, I think you're taking the bespoke tumor-informed approach. How do you think you'll be able to differentiate versus other bespoke players out there?

First of all, we have tremendous respect for what others are doing. And I think that there are going to be multiple companies that succeed in this field, and they need to because just recently, I have seen somebody close to me who was impacted by not having an MRD test post-surgery. And having multiple options is going to be critical. I think we will do well because this tremendous reach that we have into health systems, individual offices, our commercial platform, the power of our Epic platform and beyond. So we're excited. It's also going to be a really large market. So the vast majority of patients today are not being tested who should be tested. In terms of the tumor-informed approach, I think there are going to be multiple approaches. Certainly, our multi-cancer early detection test we'll have the opportunity to study that as well in the same setting to see what the relative performance is. So if you can't get access to tissue will a version of our multi-cancer early detection test be utilized, it's something that we will explore in those studies.

Okay. Very helpful. We have a few minutes left, and maybe you talk a little bit about Cologuard? I guess how have patient volumes trended in the last couple of months. If I look at IQ data suggests that primary care visits have been pretty stable despite the rising COVID cases. And is this consistent with what you guys have been seeing?

We don't provide inter-quarter guidance, but I would say contextually, and I'll ask Jeff to weigh in here is that, there has been choppiness in terms of physician office access, especially in Southeast parts of the U.S. and Texas because of the delta variant, areas where typically the offices have been pretty open. But we continue to work through that. There have been changes in -- differences in the way that we and Pfizer approach a field force, that -- when you net all of that out, we're in a really strong position going forward. Because of our reach, and our coverage within territories, we're able to give reps the flexibility to shift who we -- which offices we expect them to call on. So even with maybe 50% of the access that we had pre-COVID over time, we think that will normalize, and we'll be able to call in on other offices that are open. But Jeff, I need you to weigh in as well.

Catherine, as we showed on our last earnings call, a survey we had done said that 55% of primary care doctors weren't allowing reps in to educate them on the products. Since then, as everybody noticed, the COVID cases have really spiked because of the highly contagious delta variant. Our teams are very good at working through that, and we will keep finding creative ways to grow this business. Last quarter, we grew 25% relative to the last quarter before the pandemic. So this is a big market. It seems to accretive and delivering good growth.

And you've previously talked about thinking that COVID could actually accelerate Cologuard adoption by 1 to 2 years at least. Do you still think that's the case? And at what point do you think we start seeing that inflection?

Well, I'll weigh in and then Jeff, please do. What we have seen is kind of the bottom half of our customers in terms of the frequency of ordering. Their ordering patterns had jumped approximately 40%, and Jeff, correct me if I'm wrong, this is approximate math, which tells you, look, hey, these docs are being influenced because of COVID. And we think there will be some persistence to that when we come out of COVID which we're confident we will come out of COVID. The world has changed, but it's -- there's going to be a normalization, no doubt. And so as we move more towards normalization, those top customers who we've seen a decrease in their ordering frequency as we're able to interact with them more, we expect that to grow. And that's when that dynamic kicks in. What has happened is there's been a broader base of people who are physicians and nurses who are comfortable ordering Cologuard and the more you become comfortable more you order.

Great. I think we have 1 minute left. I guess to leave us, what do you think is the most underappreciated aspect of the Exact story today?

I probably think it's the will power and tenacity of a now 6,000-person organization that acts like an entrepreneurial smaller company, and is constantly pushing ourselves to get better at everything that we do. With a huge amount of confidence that if we just keep moving forward and keep moving forward and being better at what we do, will be great. And that's not something that's easy for outsiders to measure. I think a data point, though, is when we offered the Pfizer team jobs, the vast majority of them joined us, and they know our organization. There's a great amount of enthusiasm. And our employee engagement scores and our -- that were named as one of the great places to work across a number of different categories. That's our greatest asset. It will be 10 years from now. It will be 20 years from now. Also this field, we're still in the second inning of this new era in molecular medicine. And I think we're poised to have the greatest impact of anybody out there.

Okay. Great. Great. To end it on, Kevin, Jeff, thanks so much for your time, and thanks, everyone, for tuning in.