Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Great. Welcome, Cowen's 42nd Annual Healthcare Conference. I'm Dan Brennan, 1 of the 3 tools diagnostics analysts who replaced Doug. Really thrilled to be here. And with us to kind of kick off the second presentation of the morning is senior management from Exact Sciences. We have Kevin Conroy, President, CEO and Chairman; and we have Jeff Elliott, CFO and COO. So gentlemen, thanks for joining the conference. Welcome.

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

You got it. Good. So well, I thought we'd kick it off with some high-level questions, and feel free, for folks listening in or watching in, to send some questions through the webcast link. And I will certainly try to address them, if I can, though a half hour doesn't leave us too much time. So Kevin and Jeff, in the next few years will be quite exciting for the company. You've got a host of pipeline readouts, new product launches. You've got further traction with Cologuard growth drivers, and then you've also got competitive data to deal with. So what's the right way to think about the investment thesis for Exact today given the setup for '22 and the cumulative impact of all these factors?

Well, thanks, Dan. This is a tremendously exciting time for Exact Sciences. We are at a time that many of the investments from prior years are at the precipice of paying off in a major way. And we have more data readouts across a number of incredibly exciting programs over the next 18 months than we ever have in our history. Let's come back to the foundation of Exact Sciences. We have the 2 best brands in cancer diagnostics in Cologuard and Oncotype DX. These are growth drivers. They are -- they have strong margin profiles. They're meeting important patient needs. And both products have -- both cancer tests have long runways in terms of gaining broader adoption in the U.S. and globally. So just with our core business, we can continue to grow and grow and grow. The science that fuels Exact Sciences is a science born of deep research over the last decade in partnership with the Mayo Clinic, in partnership with Johns Hopkins, now City of Hope, and that gives us a broad array of tests that we will bring to patients and physicians, that all fit together, and they fit together on a platform of technology that we have built in a very methodical way over the last 10 years and will continue to bring value to patients. And the most important thing that we keep focused on is that this is all about the patient. So bringing new innovative ways to screen, to diagnose cancer and then to help guide treatment. Because this is the mission. The mission is eradication. And you do that with tests that help prevent cancer, help detect it earlier. Nothing is more powerful than that. And that helped guide treatment. And so we're in the position to be able to do this with the largest commercial organization in cancer diagnostics bar none; and the ability to keep bringing new tests through the scientific and commercial platform to patients and physicians. So we're really excited about this. And importantly, and I want to highlight this. We are in a position because of our financial strength with the balance sheet, of $1 billion on the balance sheet, to be able to achieve profitability without any further dilution in terms of issuing new equity or doing a convert or anything like that. We have the ability, come hell or high water, to deliver profitability. And we've said we will do that by 2024. We expect to be cash flow positive before 2024, and then for full year 2024 to generate cash. So we're in a strong position scientifically, commercially and financially to deliver on our goals. We think that's a wonderful investment thesis, and we expect this to improve more over time.

Maybe kind of sticking on a high-level question to kind of continue this early discussion. So what role does M&A play in the strategic plan for Exact? I mean you've got this pipeline. You've done -- obviously, you did the Thrive deal. You've done a bunch of smaller deals that kind of add to the technology prowess. You've done the transaction with Pfizer. So what types of transactions make sense? And are you willing to consider more substantial deals at this time?

Well, I think that we look for smart deals across a range of different opportunities. So I'll go back to Biomatrica. We acquired Biomatrica 3.5, 4 years ago. They have a blood tube. They have blood preservation chemistry. And what we have been able to show internally is that our tube is able to preserve twice as much plasma as a Streck tube, which is the industry standard. This is our tube. This will improve the performance of our blood-based tests. We will keep looking for opportunities like this that advance our science and then also that advance our commercial capabilities like Thrive. Thrive advanced both our science capabilities and the ability to bring a blood-based multi-cancer screening test to patients and physicians sooner than we would have been able to bring on our own. In doing so, in bringing that through our incredible commercial organization, over time, we're going to create tremendous value for investors and, most importantly, for patients. So we will continue to have the same philosophy. As we said at the beginning of this year, we have a lot on our plate right now, and our focus is in growing Cologuard, growing Oncotype DX and delivering on the pipeline promises that we've made. And we take that very seriously, and we'll continue to look at opportunities that continue to impact patients in a positive way.

So maybe just one quick follow-up there and then we'll jump into Cologuard. So the idea of no dilutive issuance, getting to free cash flow positive by '24. So if the right deal came along that created value and -- like would that preclude you from doing that deal because you don't want to issue equity? Or there'll be special exceptions for the right M&A?

Well, that's a hypothetical. That -- it isn't in front of us right now. What's in front of us is creating a lot of value with things that we've already brought into the Exact Sciences family. And we have never said never. What we're saying is that there is an incredible focus on getting to cash flow breakeven. And that's critically important during times like this. That's just -- I think the best management teams will always start by managing their own balance sheet. And I think the history of business shows that the deployment of capital is critically important to value creation. And there's a team here that is personally incentivized and focused on ensuring that we do the right thing for investors, and we do the right thing for investors over the long haul. And I think that we're striking the right balance.

Great. So maybe jumping into Cologuard. I kind of ran some math. Your guidance for this year is $1.3 billion to $1.325 billion. And when we plug in the rescreen and the 45 to 49, just shy of $1 billion for the majority of the Cologuard business for, say, [ 15 ] over average risk. And when we do our math, it comes out to around 7.5 tests per doctor in 2022, which is roughly flat year-over-year and back to the levels back in 2018. So obviously, COVID has been a big headwind, but it's moderating. You got the Pfizer reps ramping. I guess when we do that math, like we would think that there's likely going to be some upside to that number given some of the factors that we just described. Like, is that math incorrect? Or just how do we think about that utilization per doctor and what's implied in '22 guidance?

Yes. And what we guided to is 24% growth for Cologuard off of a $1 billion-plus base. So it's an exciting year. We expect exciting growth out of not only our core business, which will continue to grow for many years to come, also our 45 to 49 business. That business is pacing faster than Cologuard did back when we first launched back in 2014. So things are off to a great start there. Rescreens, we expect another really big year. And within 3 or 4 years, that's a $500 billion -- $500 million-plus business. So there's a lot to be excited about. That core business has been affected by COVID. And I think it's important that, here we are early in the year, to stay a bit silver given where rep access is at today. Rep access, broadly in primary care, is only at about 50% to 60% of pre-COVID levels. I think that will improve over the course of the year, somewhat back-end loaded. Until I see that, we've got to stay sober on that part of the business.

Yes. And I wasn't implying it's not a good guide, I was just trying to do the math and try to determine the level of potential conservatism. That's what I was trying to figure out. So maybe one more related to that aspect of kind of this COVID headwind. The impact in '21, I believe, could have been as big as 20% to COVID revenues from COVID. Any way, from a high level, to think about how much of that implicitly like you're assuming comes back? I understand the guidance, you just kind of walked through the mechanics of it, Jeff or Kevin, but have you baked in much of that coming back? Or if we exit the year in a much different spot, could there be upside to this guide?

Well, clearly, Dan, the big opportunity here is the 46 million people who are unscreened. The pandemic has worsened that issue we face in this country. We've got to get more people screened. We do expect some of that to come back. We haven't implicitly said how many people we expect to come back, who put off colonoscopies. It is huge, though. Over 1 million people put off or delayed colon cancer screening because of the pandemic. That's part of the beauty of Cologuard. We can get more people screened. We can screen them in the safety and comfort of their own home, whether there's a pandemic or not. So when you look at the growth we've generated, over 30% since the start of the pandemic, in large part is because of the at-home convenience and accuracy of Cologuard.

Great. And then maybe on the rescreen in the 45 to 49. So obviously, the guidance this year is solid, and you've been very constructive on the trajectory and the kind of the traction there. So beyond '22, as we look out further, what's kind of the right way to think about the kind of the capture rate, the compliance rate on that rescreen category? And then as you think about the 45 to 49, is it kind of fair to look at the early traction and assume like that kind of linear pace in terms of penetration continues? Or did you have a lot of early success and then maybe it's a little more -- kind of a little more tapered but still growing?

Well, Dan, on the rescreens, part of why this is so exciting is the pool of patients who are eligible for rescreens today is already 1 million people. Over the course of this year, another 1.2 million people entered that pool. Over time, that continues to grow. Our success rate at getting them more screened is also growing. You know our long-term goal is to recapture, retest at least 70% of those patients, and we're over halfway there. Our success rate continues to grow. This has been a highlight throughout the pandemic. This has been a highlight because of the actions this team took to make it even easier to rescreen those patients. It continues to grow. Longer term, this becomes over half our revenue. That has major implications for our business model. Not only is there a good thing for patients to keep them screened over a long period of time, it's also a source of recurring revenue. It's high margin revenue, too. This alone will drive over 1 point -- a full point improvement in Cologuard gross margins and over a 5-point improvement in overall patient compliance. Again, this is a great thing for the business and for patients. On 45 to 49, I mentioned before the pacing of adoption there is tracking above the initial pacing for Cologuard back in 2014 when we first launched. I think that pacing will continue because the key components are in place. We have the approval for this expanded indication. We've got the core guidelines updated, and our insurance coverage today for the age group is over 80%. So 80% or more patients pay 0 in this younger age group. So the key pieces are in place for exciting growth there. And that pool is also huge. There's 19 million people now who need to be screened right now in that 45- to 49-year-old age group, and we're just getting started.

Yes. And on top of that, 45- to 49-year-olds aren't rushing off to get a screening colonoscopy. First of all, we don't have the capacity in this country to screen 19 million people, 45 to 49 years old and people over 50. We just don't have that capacity. Also, what we have seen during the pandemic is that people are very comfortable and, in fact, would prefer at-home tests. We see this in our own BLUE-C, our pivotal study for Cologuard 2.0. And in that study, we see that 20% more people will do an at-home stool test than will do a blood draw. And these are people that don't get paid to participate in the study unless they complete both. So the ease and convenience of people who are 45 to 49 years old, typically very busy, to have a test done in the privacy of their own home, it's immense. And so we expect this to be an important driver of adoption of screening in this earlier age group. And here's why it's important. People in this age group, the cancer risk for colon cancer has increased 50% over the last decade, and it continues to increase. So Cologuard meets a critically important need, and we expect that need to be greater 10 years from now than it is now. And we expect to win in this age group.

Great. Kevin and Jeff. So maybe on 2.0, the data earlier this year was impressive, and you talked about the rigor of the case control population and how solid it was. Just wondering, how do we think about, again, this level of degradation that we should expect in the full performance of the pivotal data set across the different metrics that you presented? And then I'd be interested to kind of get your sense on you've talked at length about reducing the false positive rate, how meaningful that is for your business. Just maybe then could you talk about how we think about the kind of the trajectory of Cologuard sales? How impactful is this?

Well, our Cologuard 2.0 product, we're really proud of. It's born of the work that we have done with Mayo Clinic over the last decade, discovering even better markers than exist in Cologuard 1.0, our current version of Cologuard. By the way, the name of Cologuard is not going to be Cologuard 2.0. That's the way we use to describe it with investors and internally. So this improved version of Cologuard is -- we expect the data that we showed at ASCO GI to be fairly representative of the data that we will see in a prospective study. And here's why. The vast majority of the patients in that study were enrolled prospectively. So all of the normals and all of the patients with precancerous polyps, advanced adenomas. It was only the patients that were diagnosed with cancer that were in that study, so a much more limited number were enrolled after they were already diagnosed with cancer. And the way that we controlled for that in a rigorous way was to make sure that the sizing was similar. So that the -- the size and stage of the tumor were biased towards earlier stage. I believe it was close to 75% to 80% of all of those cancers were earlier stage. And that's what you expect to see in a prospective study. 75% of all the cancers in the DeeP-C study, for example, were stage 1 or 2. So we think we have controlled in a very rigorous way the performance and don't expect to see much of a degradation. We also use statistical techniques that helped us -- these cross-validation techniques to help us make sure that the point estimate was -- that came out of that study was solid and in fact, it mapped directly to, and the data was the same as the cross-validation data. So that's all a great sign. In terms of how Cologuard 2.0 is going to change things, it's going to set yet another bar. I mean think about it this way, colonoscopy is known to detect about 95% of cancers. Cologuard already detects 94%. And what we saw with the Cologuard 2.0 data is that the precancerous polyp detection went from 42% to 57%. And that's a big deal. That's a big improvement. And that is born of the science that we've done. So it sets a whole new bar. And we expect, over time, that's going to lead to greater adoptions because physicians care so much about the performance, as do patients.

Great. And in terms of the timing, is this fourth quarter? Is it early next year? Is it -- I forget exactly what you said, but how do we think about the final readout?

The study enrollment continues to progress nicely, and we expect that enrollment will be completed this year. The goal is to also generate the pivotal data this year. That could be in the first quarter of next year, but that's the time frame that we're looking at. Most of that depends upon enrollment in the clinical trial and then just having all of the lots of reagents manufactured under a PMA environment, quality system, et cetera. So it's exciting. The good thing is that we have Cologuard 1.0, that continues to grow, and then it will take some time for us to switch over from our current version of Cologuard to the newer, better version of Cologuard.

Great. So Guardant is going to have their data coming up at some point midyear. Freenome, I'm not quite sure when, if it's this year or next year, a topic you've talked long about. If I throw 2 scenarios at you in terms of the performance of, let's say, [ Guardant's test ]. I'm just wondering how you think your business or the Cologuard usage is impacted or not kind of impacted. So Guardant's data, let's say, it's mid-80s. Let's say, it's like 86%, 87% sensitivity, overall at 90% specificity. And let's say, it's low 80s, 81% or something, in that ZIP code for sensitivity at 90% specificity. Figure precancers [indiscernible] detection is more like FIT, somewhere in like mid-20s, maybe even as high as 30%. How does Cologuard usage get impacted? Obviously, we're not likely to get USPSTF unless there's a special meeting convened for several years, so that will limit the commercial insurance uptake, which will be important. So maybe if you could segregate out like just the impact. And obviously, insurance will have an impact, but ultimately, when there is full insurance, what does the competitive landscape look like between that test and Cologuard?

So let's first start with the data that you just laid out. It's kind of -- one of the points I believe I heard you make was that assuming that the advanced adenoma detection is the same as a FIT test. So far, we haven't seen reliable data to -- from other aspiring entrants that they can get to the same level of precancer detection for advanced adenomas as the FIT test. And remember the FIT test is a $16 test, and it is most widely used in populations, poor populations in this country and populations without significant access to colonoscopy. And as a $16 test, that's the basic rationale for using a FIT test in America. To have a test that is priced at 10 or 20x a FIT test with performance equal to, or maybe worse because precancer detection from blood is not easy. There are challenges. But let's take a step back. There is a need for additional types of testing because some people won't get a colonoscopy and some people don't get a Cologuard test. In fact, there are 46 million of those people in the U.S. To get a new screening test all the way to the starting line, first, you need FDA approval, and there's likely to be a panel discussion. And one of the questions in that panel discussion is why approve a test that is inferior to Cologuard? Our own council says there's no guarantee that your blood test will get approved because the performance may not be as strong as Cologuard. Next, you need to go to CMS and get coverage. So does it meet that CMS bar? And does that CMS bar change? There are already those who are publishing papers calling for a change there. Next you need to get CMS pricing, and the CMS pricing is going to be made with the FIT test in mind. So there is that question. Then USPSTF needs to weigh in, and that's a bit of a black box. We know, going back to 2015 and 2016, even with the incredible performance in 2 prospective studies, it was not easy for Cologuard to get into those guidelines. Without being in USPSTF, blood tests will be challenged to get any commercial insurance coverage. Cologuard had one national payer cover it before USPSTF. And then it's usually a year to 2 years before you're into the quality measures. So this could be 6 or 7 years before a blood test is at the starting line. And during the next 6 to 7 years, Cologuard is going to continue to improve in terms of the performance, and with our growth rate, we -- I believe we'll continue to be a juggernaut in terms of we may even move to the leading position relative to colonoscopy. So this question is asked a lot, and it's important to understand that overall dynamic of bringing a new screening test to the masses. That's how we look at it, and that's why our blood test performance, we have optimized for not only cancer detection, but we're also optimizing for pre-cancer detection. And we believe that at the end of the day, our test will be the best test. We just don't know how all of these tests may get through that gauntlet.

Interesting. Okay. Maybe just one follow-up there. So assume that it does get FDA approved but that USPSTF is years out, presumably with Medicare coverage. Maybe walk through the experience of Cologuard when it only had Medicare without USPSTF. A blood test is on the market. and the performance is below Cologuard, but it's somewhere in the 80s. Is it taking modest share of the group that folks that don't want to do a stool-based test or colonoscopy? Or just again, back to that idea of is it relegated to a very small part of the market? Or do you think we could be surprised just given the potential convenience factor that there's a bigger uptake?

So if you go back to -- Cologuard was first approved by FDA in 2014. It was the first test or device ever to receive Medicare coverage and national coverage decision at the same time we received FDA approval. And then it was in September of 2015 that USPSTF completed their multiyear review of colon cancer screening. Despite a 10,000-patient prospective data showing 94% early-stage cancer detection and better than FIT, its superiority over FIT in a head-to-head study, the initial draft guidance did not include Cologuard as an ARB-rated test with that incredible performance. They wanted more studies and they needed to look at more data. And ultimately, they flipped their decision, included Cologuard, in part because of a second prospective study [indiscernible] for Cologuard, that read out in that intervening 6 months. During that time, adoption was impacted significantly because only Medicare patients were covered, one. Two, docs didn't want to screen with a test that they didn't get a HEDIS credit for. It was a huge disincentive for docs to order a Cologuard test because it was like that patient wasn't screened at all. But a test -- screening tests don't make it into the HEDIS guidelines until and unless they make it into the USPSTF guidelines. So it was a tough time in our history, and we fought through that. We got into the guidelines. We got broad-based insurance coverage and ultimately have been able to be successful. And there's a huge runway to go. All of it -- much of it goes back to that USPSTF guideline inclusion. And then it took several years after that, again, to get into HEDIS and to really see tremendous upside.

Got it. So maybe we have a few minutes left. So Thrive, really exciting. Galleri's launch out of the gate has been small, but it's certainly been impressive in terms of the numbers that Illumina has laid out. Just maybe one question wrapped together. You've talked about material performance enhancements. We're going to see some data this year. How should we be thinking about that, a? And then b, in terms of enrollment, I guess, you're planning to start this year? Just kind of when do we think ultimately about this test reaching market?

Well, let's start with how powerful multi-cancer screening testing will be. Today, about 15%, maybe 20% of all cancers are diagnosed through screening. The cancers that are diagnosed through screening are the patients who have the best outcomes. There is no better therapy than earlier detection. But it's actually rare in America that cancers are found in -- through screening, 1 in 5 or 1 in 6. The goal should be 50% to 70% of all cancers found through screening. And that's what we moved to over a period of time. And why we're so excited about the test that we're developing is we believe that the performance of that test and the cost structure of that test will allow us to get as many people tested in the U.S. and globally as possible, and it will change everything in oncology. I think what you'll see is over the next 10 years, 20 years, a shift from late-stage, metastatic drug development to earlier-stage diagnosis and different treatments that are focused on Stage I and Stage II cancers with curative surgery frequently being an outcome. So this is all going to take some time because for a new screening test to be adopted, it's that same pathway that I just laid out. You need FDA approval. You need USPSTF guideline inclusion. What Galleri is doing is, we think, very additive because they're a team of highly capable people who are approaching this in the right way, thinking through all of those things that need to be done to create this new ecosystem. Companies that aspire to get into the space, they're working together with the American Cancer Society and Congress and others to help make sure that there's new benefit category in Medicare. So there's a ton of work that needs to be done. We happen to believe that our differentiators are our science, the capabilities that we have as a commercial organization with over 1,000 people on our commercial team, deep experience with payers, incredible lab operations, quality, manufacturing, all of these things. I've been with Exact Sciences for 13 years, and I know that we're still making the investments necessary to be successful globally, but those investments we've made are going to really deliver on multi-cancer.

Great. I think with that, we're out of time. Kevin and Jeff, as always, thank you for being with us. Everyone on the phone, thanks as well, the video. And have a great conference.

Thanks, Dan. Take care.

Got it. Bye-bye.