Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Okay. Great. Welcome, everyone, back to SVB Leerink Healthcare Conference. It's my pleasure to be hosting Exact Sciences. And joining us from Exact is Jeff Elliott, CFO, most know him and the investors know him on the call; and Matt Franklin, who is the General Manager of Precision Oncology, also joining us today. Just for a brief introduction, I'll turn it over to Jeff and Matt first. And Matt, if you could talk a little bit about yourself, and then we can get a jump into our Q&A session.

Terrific. Thank you, Puneet. Wonderful to be here. Yes. I'm Matt Franklin, I lead the Precision Oncology business unit. I've been with Exact for a little over a year. I joined the company via acquisition of Thrive, where I was the Chief Commercial Officer. Prior to that, I was Chief Business Officer at ArcherDX. And prior to that, I was with Foundation Medicine. I led Global Marketing and Product Strategy. So it's a pleasure to be with you here today.

Excellent, excellent. And just a quick housekeeping item for folks who are listening in, if you want to submit your questions through the website and I'll do my best to cover during the conversation. So with that, Jeff, I just wanted to see if you had any prepared remarks, or we can jump into Q&A.

No. Puneet, thanks for having us. Great to be here. Let's go right to Q&A.

Okay. Excellent. For folks who are dialing in, I think most folks are familiar with Exact Sciences. I just want to point out from my -- when I look at Exact Sciences, this has been a company that has really done a remarkable job over the last decade. I think Kevin Conroy, Jeff can correct me, but I think he joined back in 2009 and has really take -- spearheaded taking a test and bringing it to -- a screening test, most importantly, and bringing it to market, that's not an easy task, and did that over -- with large-scale clinical trials that were with an FDA-approved product, CMS, USPSTF, all those hurdles. Passed all those hurdles and seeing wonderful adoption for their product Cologuard in the market. And then the company also acquired another leading product, Oncotype DX, and Genomic Health with that, and that's been phenomenal, too. So a lot to talk about there, and the company has been doing a number of tuck-ins over the last year or so. So quite a bit to cover here. Maybe first, Jeff, lots happening at Exact Sciences. Maybe tell us a little bit about the profitability target that you provided for 2024. Could you maybe paint a picture for us for what the long-term operating profile look at Exact from the CFO seat? Maybe 5 years out or so, Oncotype is profitable. Cologuard stand-alone maybe is nearing profitability too and -- or profitable already. So maybe if you could talk about the operating profile and how we ought to think about the long term here.

Yes. Pretty happy to. So we're fortunate to have a very strong balance sheet. We ended last year with over $1 billion of cash on hand. We also recently put in place a credit facility of up to $150 million. So a hallmark of Exact has always been a strong balance sheet. That will continue for years to come. The difference now is that we have a clear line of sight to profitability in 2024. So for the full year, we expect to be EBITDA positive, adjusted EBITDA positive, which, in this environment, I think really helps set -- sets us apart, right? In this environment, you see funding challenges. You see companies -- you see the stock market volatility. So the fact that we have a big revenue base, we guided to this year about $2 billion of revenue, a strong balance sheet and a clear path to profitability is unique. How do we get there? To your point, this year, we expect strong profitability out of our Precision Oncology business. We also expect profitability out of Cologuard. Now Cologuard in many quarters has been profitable. And what I mean there is, on an adjusted EBITDA basis, Cologuard has been profitable. The investments we're making now are primarily in new products, new sources of growth, and I'm sure we'll talk about those today, such as multi-cancer, MRD, Cologuard 2. Our core business today is profitable. So over the next few years, we expect very strong leverage, right, strong leverage across the whole P&L, right? So it really does start with revenue growth, which I think that's been a hallmark of the company. But going forward, we expect strong gross margin improvement. On the Precision Oncology side, their gross margins are already north of 80%. So there, it's more about stability. Cologuard, historically, had approached 80% pre-pandemic. Things did take a step back there as volumes were somewhat depressed with the pandemic. However, I expect the improvement to continue over time, and there, I think we have a clear path to get to 80% or better gross margin with Cologuard. Walking down the P&L. Our sales and marketing team is really fully built out. We've got an end-to-end team covering all the way from primary care. When you look across the specialties, we've got GI coverage, OB-GYN coverage, urology. We've got a deep and experienced team that Matt can talk more about in oncology, but we also have a very strong team covering health systems. So we expect with that team largely in place now, I expect very strong leverage out of the sales and marketing line. Longer term, that probably settles at around 20% of revenue. When you look at R&D, the big investments in R&D, again, are on new product growth. We're currently running our BLUE-C study, which is for Cologuard 2.0 in our colon blood program. That's about a $100 million study. Over time, that study will roll off. New studies will come on. Longer term, I think R&D will probably settle down in the 8% to 10% of revenue range. It can vary from year-to-year depending on how the larger prospective studies are running, but it will settle down over time. And then lastly, when you look at G&A, G&A today, it is a bit elevated. It's elevated because we're making significant investments in our foundation. My goal isn't just to get to profitability and stay there. My goal is to get to profitability and punch on through and generate improving margins, improving cash flow every year from there. And you can only do that with a strong foundation. So we're investing in IT. Over time, we've invested over $600 million in our IT foundation. That provides a very scalable foundation from which we can grow. We're also investing heavily in our customer care, our broader digital experience. Not only does that help keep patients happy, it also helps us grow the business even faster. So those foundational investments are being made now. Over the next few years, you will see significant leverage as some of those investments come to bear. So longer term, G&A will probably settle in the 10% to 12% of revenue range, and that lays a very attractive EBITDA margin profile now.

That's super. Excellent. Thanks for covering that, Jeff. Coming back to the quarter, in the fourth quarter, you hired 450 Pfizer sales reps, boosting your sales reps for Cologuard for screening, I think, more than [ about ] thousands at this point. Maybe just talk to us, how is the rep access? Any color you can provide there throughout the fourth quarter and sort of the lingering effects of that into January? Because I think rep access is a major question we get from investors.

Yes, it's a good question for you to focus on. So we're thrilled to have that new team. We welcomed that team in September. That's a high-quality team we've worked with for over 3 years at Pfizer. So we're excited to have them on board. They did help drive a very strong end to last year. We talked previously about that strong momentum continuing forward into this year. From an access standpoint, I think access had generally gotten better in Q4 relative to Q3. Q3 had largely been hit by the Delta wave of the pandemic. As you know, around the holidays, access comes down. And at that point, very few people go to the doctor for preventative care. Typically, you only go to the doctor if you're really sick around the holidays. Hopefully, then, if you get sick, but that's typically why you would go around the holidays. Coming out of the year, what we saw with Omicron, we saw more physicians calling in sick, more nurses calling in sick. But the good news here is most of those are people calling in sick for a few days, then they come back to work. We did not see a change in policies around access. And earlier waves of the pandemic, we've seen doctors and hospitals say, from a policy standpoint, reps aren't allowed. We're not seeing that now. In fact, over the course of this year, I'm confident that access will improve. The pandemic is always hard to call. But I think we're headed down a good path where access will gradually improve over the course of this year. And then the good news here is the Omicron wave looks like things have really calmed down there. And so we're seeing fewer physicians now calling in sick.

Got it. There are 3 drivers that you frequently talk about, I mean repeat and returns after 3 years of Cologuard and the 45-year-olds, which was more recent -- 45-year-plus inclusion in -- for Cologuard and then electronic ordering. So maybe -- you've obviously made great progress on all those fronts. So how do you see them, all these 3 things today? And sort of what do you think is most meaningful at this point? And what's something -- what is more meaningful to watch out over the next few years?

Puneet, that's the beauty of this business model. So there's multiple growth drivers, and they all actually work together. For example, the more connected we can get to our physician customers, the more that helps things like rescreens and Cologuard 45. So it's really hard to parse them all out. From a revenue standpoint, though, we have previously talked about rescreens contributing $220 million of revenue this year. That's up from about $100 million last year. So obviously, that's a huge driver this year. And when you look out a few years, look, this very quickly becomes over a $500 million business. And longer term, I said before, longer term, this is over half of our revenue. And that's important because that's a recurring source of revenue. We know where these patients are. We can easily reengage them. It's also a much higher margin source of revenue. So it's a win-win for patients and for us. Cologuard 45, last year, the target had been $40 million of revenue. We exceeded that. This year, we put out a target of $100 million. Things are off to a good start there. So I feel good about both those targets. Longer term, again, that 45 population, 45 to 49, is 19 million people, 19 million people who are essentially all unscreened. They're all typically busy with work and their lives and don't have time to take off 2 days to go in for a colonoscopy. So we're seeing very, very strong early uptake in that younger age group. The fact that the uptick there is nicely surpassing the pace of uptick we saw back when we first launched Cologuard in the 50-and-over age group. So we're excited about that one. And then electronic ordering, huge driver, again, this helps us broadly across all avenues of the business. Over the past 2 years, we went from 30% of orders of electronic to then 40% and now -- and recently hit 50%. So that's a huge driver. Again, that connection is important because when you connect electronically with the physician, you make it easier for them to order. The alternative is a fax. And to send in a fax, who wants to do that in this day and age? So if you can press a button and click an order, right, and send the order in that way, the doctors order far more tests. So that's a big driver. It's also really important for the future. As Matt and the rest of the team launch new pipeline products, the world that they'll launch that into is a world full of electronic ordering. So down the road, we launch colon blood multi-cancer. We won't launch that into a fax environment. We'll launch that into an electronic ordering environment, which is -- I really can't begin to stress enough how important it is for the business. It makes it far easier for the patient, for the physician and for us when things are connected electronically.

Yes. That's a very important point you made in leveraging once that electronic ordering infrastructure is in place. Jeff, just a few more questions before I switch over to Matt, and I want his input on a number of things in Precision Oncology. But on Cologuard, there's obviously colonoscopy in the marketplace. There's Cologuard 2.0 emerging. And maybe if you could just talk about sort of the next set of things that ought to happen on Cologuard 2.0 or what you were expecting. I mean after trial readout, do we need to go through CMS and USPSTF and the traditional approach? If you could maybe just talk about that. And then sort of how do we -- how should we think about Cologuard penetration longer term? Because, obviously, the questions being raised in the market are, there's colonoscopy that's always been there, there's liquid that's potentially emerging, so given 2.0 data that you recently showed that was very promising, how do you see the penetration of Cologuard long term?

Okay. A lot there. I'll see what I can do here, Puneet. So the next step's with Cologuard 2.0. Obviously, we released the data recently at ASCO GI. Reminder, the primary goal of 2.0 is twofold: one, to improve the specificity by at least 3 points; and also secondly, to improve the precancer detection rate. The data we share, which I think we can spend more time talking about, the data we shared shows that we've accomplished both those goals. So we feel good about that program, that path forward there. We continue to enroll in that prospective pivotal study, which we call BLUE-C. Enrollment is going very well. We expect the enrollment to finish up later this year. Hopefully, we get that top line data out this year. FDA submission, we'd expect to share -- to submit in the first half of next year. Typically, it's about a 6-month review, at least that's what the FDA kind of has as their statutory time frame. It may take longer. So I really don't know how long until the FDA approval comes, but potentially late next year, maybe early '24. From there, obviously, we have to make sure we've got Medicare coverage and guideline inclusion. What we expect is that because Cologuard 1 already went through that process, Cologuard 1 has an NCD, Cologuard 1 is in USPSTF and all the key guidelines; Cologuard 2 is an enhanced version of Cologuard 1, right? So we think there'll be a very smooth transition from Cologuard 1 to Cologuard 2, which will allow us to roll over from 1 to 2 without missing a beat. So we're confident in that. I think you then talked about colon blood -- our colon blood program. Recall that colon blood is another option to get people screened, and that's a good thing here. When you offer more choices, more people say yes. More people get screened. And then it's our mission. Our mission is to fight cancer and help eradicate all the suffering that it causes. So more option here is a good thing. The whole reason we entered this market to begin with is because screening rates are too low. Screening rates for colon cancer today are about 55% when you include that younger age group. You compare that to breast and cervical, which are probably closer to 80%. So there's a long ways to go in this country. Cologuard has been documented by the government to have lifted overall screening rates, but we're not there yet. We're not all the way to 80%, so we do need more options. I think a blood option will help get more people screened. It will help expand the pie, if you will, and bring more people into the screening pool. So that's a good thing. Why we're excited about colon blood is that a blood product fits right into the foundation we've laid. I talked about electronic ordering. We launch our blood product after FDA approval. That blood product will launch right into electronic ordering, which is a huge advantage. We have had over 250,000 providers order Cologuard. But the time blood comes to market, that will be far higher. They'll be able to order Cologuard with a click of a button. It also deploys right to the same sales force that we have today. It's a broad sales force covering primary care, GIs, OB-GYNs. Well, that sales team today really just carries one product. Over time, we'll add in colon blood. We'll switch to Cologuard 2 [ wider ] multi-cancer. That will give those reps more things to talk about, which makes them an even more attractive conversation to have for the physician. So we're optimistic here. From a spend standpoint, Cologuard -- colon blood is very efficient. Colon blood, when you think relative to the amount of investment it takes, it's billions of dollars to bring Cologuard to market. Colon blood, highly efficient. So that's why we're excited about it. Where it fits in this market is probably somewhere around the FIT test. And I say that because of the likely performance characteristics of the colon blood test will likely look something like the FIT test. Now that's a good thing here. There's -- the FIT test is running at about 10 million times per year, which relative to most markets within diagnostics, that's a huge market. Remember, there's over 100 million people in colon cancer screening. So even a 10% share of a huge market is still an attractive business to be in. We recently made a survey and we asked doctors on precancer, what is the minimum amount of precancer detection rate that you want to see before you order a blood test? 86% said it had to be at least 40% sensitive for them to order. And that aligns very well with where the FIT test lines up. The FIT test serves 10% to 15% of the market and that's where we think the blood test will end up. So we're optimistic here, Puneet, that we can bring a blood test to market and layer that right into the foundation we created for Cologuard.

Excellent. And thanks for being so comprehensive. I think you touched on all of the audience questions that I was getting subsequently as you were talking. So excellent. So just one clarification on BLUE-C enrollment update. And I do want input from you on the ASCO GI data as well. But BLUE-C enrollment, is the timing still first half sort of 2023 for us to see this data? How should we think about that?

For colon blood, yes, plan in the first half of '23. Yes, for Cologuard 2, hoping to have it this year. The timing of these is always -- for Cologuard 2, it's always dependent on enrollment timing, which in the middle of the pandemic can be harder. But we're aiming for this year still, no change there, to have the Cologuard 2 top line data out.

Okay. Excellent. ASCO GI, you had a very meaningful advanced adenoma CRC -- sorry, advanced adenoma sensitivity data there. Maybe tell us the sort of checks and balances you employed in this study versus the studies and case-controlled studies that you have done before?

Yes. I was really proud of what our R&D team did. They created what I thought was a very well-designed study. What we did is for Cologuard 2, the data you're mentioning, we used the samples from DeeP-C, which is the pivotal study for Cologuard 1. We used all the -- we used precancer samples and controls from that study. That means that while we call this a case-control study, in reality, it was very much a prospective study. Again, all the precancers and controls were prospectively collected and part of DeeP-C. So that gives us a lot of confidence as we move forward into BLUE-C that to the extent we have any performance degradation, it would be minimized because, again, a well-designed study with prospective samples. Beyond that, we looked at the weighting of cases. Now the cases were case collected, right? So the cancer cases in the study were case-controlled study. On those cases, we've matched stage according to what you'd see in the real world. And this is important because that's really hard to do. In a real-world study, you'd expect to find about 75% of your cancers are Stage 1 and 2. It typically splits about 45% Stage 1, 30% Stage 2, and then Stage 3 and 4 are the remainder. It's important to match the stage because, as you know, Puneet, detecting Stage 1 colon cancer is very difficult. So we match the stage of the samples to be real world like. And we also matched the size. We matched the size of samples in the study to be very consistent with the size that we saw in the real world in DeeP-C. Beyond that, we actually use patients only from the U.S. and Canada, which is important. Once you go outside the U.S. and Canada, typically, the cancers you find there are far more advanced, especially if you go in countries where they use FIT as screening, which is typically done outside the U.S. So that removes a significant bias. We also looked at the statistical foundation method that we applied. And this is really important here. You look at the -- we used a cross-fold foundation model where the average of that was very close to the point estimate. What that means is that we did not overfit the data. Overfitting data is actually common in case-control studies. So they deployed a very advanced statistical validation technique to limit or really avoid overfitting, and so we're confident. Now while we do expect there's always some changes when you go from a study like this to the real world, we're confident in the quality of the study that will end up with a very good performance in BLUE-C.

Okay. Excellent. I want to switch to Matt and give you a bit of a breather, Jeff. Oncotype franchise, obviously, Precision Oncology franchise that you have has done well. This has been a great acquisition for you. Maybe tell us what's in store for Oncotype core franchise going ahead, given the current penetration levels where you're already at and it's considered already standard of care in the breast market. I fondly recall the time when this data was presented at ASCO and made a pretty huge impact then, and it's been making it since then. So maybe just talk to us, what are your priorities for that core franchise?

Yes. Thank you. Yes, it's an incredible team and really a wonderful platform for growth. And as much success as we've enjoyed, there's still room to grow. Two areas that we're focused on, in particular, in the near term are driving penetration in the node-positive patient population, so leveraging that RxPONDER New England Journal of Medicine publication, the fifth publication in New England Journal of Medicine supporting Oncotype. So the team is out driving awareness and expansion into that. And then international is the second area where we're focused. Two markets, in particular, are area of emphasis for us, and that's Italy, where we received reimbursement last year, and Japan.

Okay. And I want to touch briefly on the prostate side of the business, too. Where does the -- can you give me a sense of where the prostate penetration stands today? We don't get to talk about that franchise as much because it's just -- there's quite a few other exciting things to talk about in Exact. With the 2 other competitors in the marketplace, how do you see sort of the share shift happening and your position in the marketplace?

Yes, I think we don't talk as much about that. It's a relatively small contributor to Precision Oncology revenue and, in the context of Exact Sciences, very small contributor of revenue. As you mentioned, it's a competitive space. We tend to focus in the lower risk category. That's where our focus has traditionally been. To your point, we don't have the same amount of differentiated data there. So we won't -- we don't expect to achieve the same status that we have in breast cancer. But with that said, it's an opportunity for us to expand our impact into urology and now to cross-sell some of our growing product portfolio, hereditary cancer, the therapy selection suite of products. So it's a small but strategically important driver for us.

Got it. Let me ask you about Oncotype MAP. That's a market that you are very -- obviously very familiar with given your background at Foundation Medicine Roche. They are present in this market, Guardant on the liquid side. You have a few other private companies and others that are entering this market of therapy management. So how do you drive penetration in this, what appears to be a competitive market at this point in time of the market?

Yes. So yes, we have seen nice consistent growth with Oncotype MAP. I think that product is really built to meet an unserved need, and it's really speed. So what is unique about that product is that it can return results very rapidly, 3 to 5 business days in most cases. So really, yes, we've seen some uptake in the community. Our approach here is to supplement that uptake we've had in the community with the second product. So we will be rebranding and relaunching a product called GEM ExTra. They came to us via the Ashion acquisition, which is the other end of the market, right? Whole exome, whole transcriptome matched germline normal, so really the epitome of personalized medicine. We'll be launching that next year into the biopharma academic segment, and we just signed an exclusive license arrangement with OncXerna to incorporate their Xerna score, which gives us a play, unique differentiated play in immuno-oncology. So our approach here is really slow but steady and bring that portfolio to meet the customers where they are today.

Excellent. I want to come back to PreventionGenetics, which was your recent acquisition. But maybe just on Oncotype sales force, where do you stand today in that -- the size of that sales force? And what are some of the priorities in terms of increasing either the sales reps or adding more sort of products to their bag?

Yes. So we've got 150 people in the field in oncology broad reach. I think we estimate that we've seen now 98% of the medical oncologist surgeons have ordered one of our products from us. So in addition to continuing to offer the core Oncotype breast and prostate assays, we've started to expand that impact. As much impact as we've had in breast cancer, our goal is to address the needs of all nearly 2 million people who are diagnosed with cancer. So therapy selection with Oncotype MAP, the oncomap ExTra or that GEM ExTra product will be a focus. And then we're excited to be able to offer MRD in the not-too-distant future, and hereditary cancer.

Yes. So if I could touch briefly on MRD there before we get into more hereditary parts of the business. But when can we expect initial sort of clinical validation data here? What sort of -- what's your -- sort of what differentiates the TARDIS technology. Obviously, MRD, I feel it's very early race, that's a 100-mile long race, maybe we're not even half a mile into it. But we're asking all these questions and a number of companies coming to this market. So I have to ask you, what's the differentiation on the sort of technology? And what is ultimately, I think, what's going to matter most to the clinicians, as you know? What is -- what sort of data sets do you have in mind that can drive that clinical adoption and reimbursement?

Yes. So from the TARDIS technology, in particular, we do believe that there are some advantages in terms of sensitivity. So there is a unique molecular capture technology. And also the paired bioinformatics, we believe, will give us a sensitivity advantage with that technology. But the second advantage we have in this space is our established presence in early-stage cancer. If you're thinking about all the other companies that are coming into this minimal residual disease space are kind of coming in from outside, we've got 2 decades of experience with surgeons and with medical oncologists in handling tissue and being able to service and support this market. So I think the service component will be an important differentiator for us over time as well. The team has completed the technology transfer of that working on the validation data, and we hope to share that by the end of this year. And we will expect to offer an LDT test next year, focusing initially on colorectal cancer, taking advantage of the established reimbursement there. But quickly, this technology applies to all tumor types, quickly moving into breast, prostate, lung cancer, those sort of near adjacencies for us.

Okay. Excellent. And then maybe a question for both of you. PreventionGenetics, what drove your interest in hereditary? Obviously, a very well-established market. And is this more about adding more tests to the bag? Or is it -- how do you incorporate this into that channel? I do hear you that you're reaching -- if you've already reached 98% of the docs have heard about the Oncotype, that helps your offering and other products that you're offering. But maybe just talk to us sort of what drove interest in hereditary and Prevention Genetics.

Yes, I can take the first crack, Jeff, and jump in here if you'd like. But I was extremely excited to see that come to fruition. One, we believe that everybody should understand the germline risk. And we have the sales force in both oncology and primary care to make that happen. But more importantly, it really is the piece that connects the 2 halves of our business. So if you think about this today, it's a perfect complement, guideline indicated in breast cancer and other cancer types for not only the patient but for their family members. So take the hypothetical situation of a newly diagnosed breast cancer patient. They receive their Oncotype score. They get a reminder that they should also undergo hereditary cancer testing, as should their family. Let's say, one of their family members is identified as being high risk, they then would be a perfect candidate for a blood-based multi-cancer early detection test. Let's say they go on, and in course of their routine testing, they get diagnosed, right, with ovarian cancer or some other cancer type, they then become a candidate for minimal residual disease. So it really connects the 2 halves of the business, and you see this kind of almost virtuous circle, right, between the 2, the screening business and the oncology business, all for the benefit of that patient. So really excited to have that PreventionGenetics now part of the team.

Jeff, add to that?

Yes, I'd add to that, that Prevention, really high-quality company here. And look, we thought the price was fair, $36 million of revenue last year, it was profitable. It provides a really strong foundation for us to grow. Importantly here that Prevention has established relationships with hundreds of different health systems. As we look to expand broadly our whole portfolio, having more deep relationships with health systems, incredibly important. And we got a really high-quality team here of 200 people all based just outside of Northern Wisconsin, so about 2 hours from where we're at here in Madison. It's an easy commute up there. And so there's some close relationships being formed between the 2 companies. Over time, this is going to be a really exciting part. Stay tuned for the launch of HCT before too long.

Great. With that, we're over the time, and it seems like Wisconsin is becoming more of a diagnostics hub. So it's interesting to see. All right. Great, guys. Wonderful to host you at our conference, and thanks again for joining.

Thanks, Puneet.

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