Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Welcome to the 2022 Bank of America Healthcare Conference, coming to you live from Las Vegas. I'm Derik De Bruin, the senior life sciences and diagnostics tools analyst. And it's our pleasure to welcome our next company, Exact Sciences. And with us today is Kevin Conroy, Chairman and CEO; and Brian Baranick. And I didn't get your title since you're a sub for Jeff.

Senior Vice President of Strategy and Business Development.

All right, there we go. All good. So sort of boring in your space, nothing really going on. So I don't know what we're going to spend 30 minutes talking about because it's just no controversy, nothing going on, just boring, boring, boring. And with that, any opening marks, Kevin? Or you just want to sort of like jump into it?

Why don't we just start to reframe who Exact Sciences is? We've changed a lot over the last 2 or 3 years. It goes back to 2009 when I first joined Exact Sciences. I first met at the Mayo Clinic with Dr. David Ahlquist, who was doing research into 2 areas: colon cancer screening and what he called, at the time, pan-cancer screening. He had this vision, you could eradicate colon cancer with a noninvasive stool DNA test that he had great data on. And then his next big dream was developing a blood-based test for screening people for all cancers. The first idea was a little bit outlandish at the time, and the second idea was pie in the sky. Well, we are now looking at the opportunity to be the leader in both areas. And there is no -- there really is no therapy that is as effective as earlier detection. We have shown the impact that you can have with Cologuard because you get more people screened than previously what gets screened, and you find cancers much earlier. And we can get into that. Moving into multi-cancer screening is incredibly exciting. We have built a company that is perfect for bringing a multi-cancer screening test to the physicians and patients who need it. It's a company with deep scientific capabilities that we're very proud of, and incredible commercial and IT capabilities to reach the physicians and patients who need to be reminded that earlier detection is a really powerful tool in a fight against cancer. So we are now 7,000 people strong. We continue to grow nicely, and we're committed to this cause for the long haul.

That's a great intro. So one of the questions I frequently get asked from investors goes something like this. So Cologuard is a great test. It doesn't cost patients anything -- for most patients, anything out of pocket. It's more convenient than colonoscopy, but it's still relatively low penetration, right? And the sense is like, I think, 6% to 7% of the market, despite a big sales and marketing push. So the question is like why has uptake of Cologuard been slower than many people have expected?

So the first year we launched Cologuard, 2014, we generated 4,000 test results. Today, we do that in a few hours. We've had 65% CAGR since 2015, the first year of launch. And we will -- we're the first over $1 billion diagnostic. And last quarter, we grew 21%. So it has been a wonderful journey. We're still in the early stages. There are 110 million Americans who are in the average risk screening population. About half of them haven't been screened. We screen 9 million people. We have so far to go. And the biggest barrier to getting people screened is complacency. People who know they're at high risk for cancer generally are pretty good at getting screened. People who are at average risk think it's not going to happen to me. And that's the beautiful thing about Cologuard is we largely have been growing the number of people being screened because half of the people who have been screened with Cologuard have never been screened previously. We do survey after -- we've been doing it for 8 years. And it's been very consistent. Half of -- fully half of people who get a Cologuard test have never been screened. And this keeps growing and growing and growing. So I would actually not agree with the premise of the question. This has been an incredible new technology introduction, and we had a lot of room to grow. I think, ultimately, this is a $5 billion to $8 billion opportunity and the brand keeps getting deeper and stronger. And health systems are buying into it. A lot of GIs, instead of getting a colonoscopy, are getting a Cologuard test, and they tell us that. It's really an incredible story.

You get that initial wave of people doing it, but then obviously, there's the rescreening opportunity which -- it falls off over time. So what can you do to sort of get the compliance rate higher? And -- Yes, that's the...

So the main guideline group in the U.S. and Medicare both decided on a 3-year screening interval for Cologuard. And we have, by the end of this year, about 2 million people who will be due for at least their second Cologuard test. Some, a third. And the biggest challenge in getting people rescreened is reaching out to them, reaching out to their physician, timing up the time when they are in their physician's office for a health visit with the time for them to get rescreened. All of that has to align. And so today, we're just under 50% of success in getting those people rescreened. And the sales team came up with a solution recently that they said, "Hey, look, our biggest impediment is that we can't enter -- our customer, a physician, can't enter in a rescreen order until the patient is due." And so now, starting next week, physicians will be able to enter an order for a patient if they're due anytime in the next 12 months. So under the current rules, a prescription is good for 1 year, a test order is good for 1 year. And our reps will be able to go into an office with their Veeva tablet, send an e-mail to a physician. Here's a list of the patients that are due for a rescreen, let's say it's 20. That physician then can enter 20 test orders that will spring into life when that patient is due, which may be 3 months, 6 months, 9 months down the road. Right now, they can do that in Epic for colonoscopy. They just put in an order, it gets sent to the GI. It's really easy. And now we're making it that easy for the second Cologuard screen. This will also get us back in front of the physician because it's something new to talk about. So we're really excited about this opportunity. And I think ultimately, we get to 70% to 80% compliance on that rescreen. And that is a recurring revenue, and it's a growth driver for Exact for years to come.

And when you think about physician ordering trends and -- a couple of points. Number one, obviously, you're still seeing some COVID headwinds in getting people back into the -- getting your sales force back out there. Also, I mean, just from my conversations with every -- there's still some physician resistance on Cologuard, right? And just -- and part of that is obviously, if you're at a big health system, they do colonoscopies, so there's some incentive there. But also, it just seems to be just in general. Even if you're not there, there seems to be just pushback. So is it simply more than just getting more feet on the street, face time with docs, ease of ordering, shipment with Epic? Or is it going to be better performance? For example, this is a Cologuard, no question. And does that get physicians over the hump as some of that data is more compelling?

So screening colonoscopy was first adopted widely when Medicare covered it in 1998. And so Cologuard was approved and launched in 2014, so there is a 16-year head start there with screening colonoscopy. And getting physicians to change that habit is no doubt a challenge, because many primary care physicians were just trained, do colonoscopy first. They think optical, optical is great. We don't really sell against colonoscopy because we want people -- our mission is to get people screened not to only have them get a Cologuard test. What our data show is that when we are in a physician's office, every other week during a quarter, at the end of that quarter, they order 6 to 8x more frequently than a customer that we don't visit at all during that quarter. So -- and you'd ask yourself the question, why is it so important to visit a physician? I mean, you should just set them up, and they should just keep ordering that test. Well, the challenge it applies, a primary care physician has about 10 minutes with a patient. And they're working on things like diabetes and high blood pressure and obesity and smoking, and the list goes on and on, various ailment. And so colon cancer screening, unfortunately, is really deep in the list of things they want to talk about. And our sales force does an amazing job of getting in front of those health care providers and holding them to account to make sure that they do the easy thing, which is to mention Cologuard. And we keep seeing progress here. And the use of Cologuard keeps getting broader. So it's 700 or 800 new ordering physicians every week, up to 1,000 every single week. And then the depth of ordering, coming out of COVID, we have seen that the frequency of ordering continues to go up. So COVID, no doubt was hard because you didn't have the patients there. Our sales force wasn't out in the field. Now they are, patients are coming back, and we're seeing robust growth. So I think the next 5 years are going to be better than the last 5 years. And it is also going to set us up for some great things with new product introductions that will be impactful.

So two questions there. One, just wanted to circle back on, can we talk about Cologuard 2.0? And I think I asked you this on one of our follow-up calls, but it's like you seem to be a lot more excited about that data than the sell side was than some of the buy-side clients. And I just -- could you sort of explain that? Because it's -- there was a subtle difference in terms of the detection rates. And I think, you made a -- as you said, you highlighted it made a much bigger difference than we have sort of appreciated.

Well, first of all, colon cancer screening performance data is very nuanced. It all gets fed into these models. But if you break it down to something really simple, what do primary care physicians today wish were better about Cologuard? And if you pull them, they will say, "We wish the false positive rate were a little bit lower." So the #1 goal with what we call the next-generation Cologuard, or Cologuard 2.0, the name hasn't been announced yet, is that -- the #1 goal was to reduce the false positive rate by 30%. Why is that important? Because docs don't want their patients to go unnecessarily to a colonoscopy. So a little ironic in that they're used to sending their patients to colonoscopy, but they really don't want their patients to go unnecessarily to a colonoscopy. And if you reduce that by 30%, what happens there -- in the model. And the model looks at 2 things, life years gained from screening. That's pretty obvious. You screen, you detect early, you prevent cancer, you get life years gained. The second thing is cost, which a proxy for cost is unnecessary colonoscopies. This improves that by 30%. Cologuard already has the best ratio of life years gained to unnecessary colonoscopies of any of the screening tests, including colonoscopy, which uses the most colonoscopies, but most costly. So that's why we're excited about Cologuard 2.0 is it removes one of the biggest barriers that primary care docs have. Because we think that the specificity will be higher, the false positive rate lower.

Got it. I suggest Cologuardier. And feel free to use that and royalty free, by the way.

You get what you pay for.

Exactly, exactly. So an update on sort of like the -- you've added a bunch of people from Pfizer on the sales force side. How is their productivity? How are they pushing?

We started with a really amazing team of sales professionals that came to Exact Science with this passion to eradicate cancer with earlier detection. We built that team to about 400. And then about 400 people from Pfizer joined us. We have been a partner of Pfizer's for 3 years previously. Altogether, almost 4 years, previously. And this was their A team. And we made, I think, 550 job offers, and about 450 people accepted and joined us. And that's because Pfizer was downsizing this group. They joined Exact Sciences. Some of them retired, and they have been incredible. The first quarter growth, when we were still -- Omicron was in the quarter, we still were changing the territories that people were in and still, the team really delivered. So I'm deeply appreciative that, that team joined us. That's going to set us up nicely for our liquid biopsy programs in colon cancer and our multi-cancer because you're going to be able to drop those tests directly into this amazing commercial team, infrastructure, IT, which is why I think -- we, at Exact Sciences, this is what we do. This is what we're really good at. We're not good at everything. We're really good at this, and those products are awfully exciting, too.

So you may not have noticed this, but there's been some news recently on the blood-based screening side, so it -- and just sort of a question on that one is like -- just a general question is like Cologuard is a great product. And it's got clear advantages. A question we get from investors is like, you do though sound a little bit more bearish on the blood-based opportunity. So I guess the question becomes is, like if you're so bullish on Cologuard then why are you doing a blood-based assay?

So I'm bullish on screening, back to there are 45 million Americans not up to date with their screening that are recommended for screening. And there are people dying of colon cancer that won't get a colonoscopy and won't get a Cologuard test and are diagnosed with Stage III or IV colon cancer. And it is a tragedy. Getting people tested by whatever means possible will improve those outcomes. We have a blood-based program, which we are tremendously excited about. Now how do you think about blood-based testing? First of all, as a PMA product in the screening setting, first, you have to go through the FDA. And the FDA looks at the performance of a test. Unfortunately, a blood test is not a panacea. The performance of a blood test for biological reasons is inferior to Cologuard and inferior to colonoscopy. And so the first group you need to go to, to start a long chain of things you need to do that we have been through with Cologuard, so we're experienced here, is go to the FDA. And the way that the FDA looks at creating new approvals, when there's inferior performance in a category of PMAs, the claim language is usually limited. So there is already a blood-based colon cancer screening test that's been approved by the FDA. It's called Septin 9. And the claim language is this test is used in patients who refuse all the other guideline-recommended tests. So starting with -- you're going to have limited claim language, which is going to impact the way that we can promote this. It's going to be harder to promote it on television like we do with Cologuard. That's okay, there's still going to be an important role. Secondly, you must go through the guideline process, which is incredibly rigorous. We nearly died on that hill as a company in 2015. It was one of those heart-stopping moments. Our stock went from $30 to $5 when the guideline group said, "No, you didn't make the cut". And we didn't make the cut initially because we were 12% below colonoscopy in terms of life year gained and they have an arbitrary cutoff at 10%. Now they changed their mind because of some other factors. And then took us through the rest of the paces and included us as a recommended test. But a blood-based test is going to have to go through that process. And that process also models out how frequently that test is offered. Ideally, you have a test that's offered once every 10 years, colonoscopy. Cologuard is recommended every 3 years because that's what the modeling suggests. A blood-based test with inferior performance is probably going to need to be -- is going to be recommended every single year, which has a reimbursement implication, and it has a compliance implication. That's okay, there's still going to be a role for it. It will affect pricing. Now we have designed a test for the cost of goods make-up that we believe will allow us to be very profitable. And so you go through all this process, Medicare will assign a price, and then you need to pitch it to primary care physicians and patients. And this is -- an inferior performing test is not going to be just widely adopted. You're going to have to make the case. And we have the ability because we're in all of those offices. We know who the patients are. We know who the patients are that refuse Cologuard. About 1 in 3 patients get a Cologuard kit and don't return it. About the same percentage of people get scheduled for a colonoscopy and don't show up or cancel. Blood-based tests, about 1/3 of people don't go to the blood draw center. And so there is going to be a niche for this. I think, ultimately, it's probably 10% to 15% market share. And this is the important part, Exact Sciences. I think if you look 2 years after launch of a class of blood-based tests and you had to bet who is going to win? Exact Sciences, I believe, will have greater market share than all of the other tests combined because our test will perform really well and our commercial capabilities in the primary care setting are second to none. And it's really going to be hard for others to invest. Cologuard justifies our investment. Our infrastructure is built around Cologuard. And then this drops into that current existing infrastructure. So we're unique in our ability to deliver this through an IT -- we've invested $800 million into our IT system to enable electronic ordering and resulting with physicians. You can't just do that overnight and get to every primary care physician in the U.S. That takes years. So I wouldn't say I'm bearish. I'm realistic, and that realism is borne by the last 13 years of bringing Cologuard all the way through that same process.

So if you just -- because I suck at math. If you sort of do the question of, this is the population, 10% to 15% of it, $500, 3-year interval, what's the market opportunity?

I think it would be a 1-year interval. There's no way to model this out. So if you model it out as a 3-year interval, it is 35% fewer life years gained as Cologuard. And there is no way that makes it through the USPSTF on a 1-year interval. That's just the reality of it. We have access to the modeling capabilities. And -- but if you bring it back to the FIT test, the FIT test performance is similar to a blood test performance. The adenoma detection of a FIT test is actually better, I think, than a blood test. And adenoma detection drives better life years gained. I'm going kind of deep, but the takeaway is that you end up at 1 year, and then you probably end up at between $150 and $200 a test. And that has implications for DNA sequencing entrants because their cost of goods will be $200. Our technology is built based on the precise knowledge of where DNA methylation occurs in colon cancer cells, in those genes. And our PCR test, the total cost of goods is, let's say, $75. Maybe lower at higher scale. So we have the ability, we think, ultimately, to lead for those reasons.

And so the argument that a blood test is going to be used more frequently and compliance is going to be better, and so -- and there is that. The AA data, doesn't matter as much. You clearly don't -- you definitely disagree with that.

Well, the assumption there is that more people will do a blood test than an at-home stool test is just -- that isn't accurate. Most people -- 80% of primary care docs in the U.S. don't have a phlebotomist in their office. So if you get a blood draw, you have to go to a sequestered -- typically, in the U.S., sequester or Labcorp blood draw center. And that takes an extra trip in the car. Whereas with Cologuard, you get this nice Cologuard test delivered to your home. We're running a perfect study on this right now, where 'we're sending patients to get a blood draw, to get a Cologuard test and to get a colonoscopy. And the data are really amazing. About 3%, 4% of people will get a blood draw but won't get a Cologuard test. 20% of people in this study -- and they're now approaching 20,000 people in the study. 20% of them will get a Cologuard test, but not get a blood test. By the way, they only get their patient fee for participating in the study if they do both tests. So -- and that is actually why our blood test readout will be after our Cologuard 2.0 readout is because patients are refusing to get a blood draw. And there are 2 things there. One, a lot of people don't like getting a needle inserted into their arm. And then the second reason is the added step of having to get into a car and drive some place. I know that is the case with me. When I go to a primary care visit, sometimes I have the time to go get my blood work done, sometimes I don't. Because for me, I have to drive to a different part of town to make that happen.

Opening questions from the audience? So let's move on and just -- I mean, there's a lot of other things to talk about. I just want to hit a couple of things. You were very adamant on the last call on reaching adjusted EBITDA profitability by 2024, no dilutive financing, no converts, along those lines. I mean can you sort of -- how do you get there given the cash burn?

If you look at the growth of Cologuard and Oncotype, which, on a combined gross margin basis is in excess of 70%, and will continue to grow over time. We start with a strong gross margin profile. And we start with a commercial infrastructure today that is -- we're fully invested in. That shouldn't grow in any meaningful way over the next several years. And there's a possibility for that to decrease because of the reach that we have with health systems, et cetera. So then if you take a look at where we have been investing, we've been investing heavily with IT. Some of those investments can start to come down over time. And we just have the ability to eke out a tremendous amount of efficiencies, in part because we have been focused so much on growth and supporting this growth from $99 million in revenue in 2017 to -- we've guided to $2 billion in revenue this year. That growth realistically has come at the cost of some inefficiencies. And now the team is heavily focused on creating more efficiencies with every dollar we spend.

And can we talk a little bit about multi-cancer detection and Thrive right now and sort of like time lines there? And I think the biggest question we get asked is like how does sort of like the Thrive approach compare and differ to what GRAIL and some of the other companies that are sort of in the multi-cancer space doing?

Brian would like me to stop talking.

I only got 2 minutes, so we're good.

No problem. Happy to take that one, Kevin. So our -- we're planning to release data on the multi-cancer early detection front later this year. What makes our test different is, we're taking a multiomic approach. So we're bringing in proteins, mutations, fragmentomics as well as methylation to the test. The other thing that we like about the product is the workflow. So others are out there talking about tissue of origin and trying to map the tumor back to the origin and location with varying degrees of predictability. We like the 1-step, immediately drive towards whole body PET CT because it gives a definitive sort of next step to primary care, right? You're not going to have to memorize this algorithm and say, "In here, this is the imaging modality. Here's the referral. If it's here, this is the imaging modality and this is the referral". And then that doesn't even bring up the false positive stuff, where you send people on -- if you have a false positive and you send them for 1 imaging modality, then they move on to the second imaging modality, et cetera. So we think the definitive reflex to -- when positive reflex, the whole body PET CT is a more clear and definitive and direct way to go at it. So it's a combination of biomarkers and workflow.

Got it. Final minute, Kevin, you know my usual closing question. Biggest misconceptions about Exact Sciences, what is misunderstood? And we only have a minute, so...

I think, science. I think the power of what our 13-year partnership with Mayo Clinic top researchers and our last 2 years with Bert Vogelstein and the Johns Hopkins team. We have the best of specific targeted methylation on a per cancer basis, individual cancers. And then our sequencing and multiomic approach is incredible. And that will fuel product after product after product launch, all focused on this core mission. We're a cancer -- early cancer detection company, and we'll continue to win in these spaces.

And with that, we're right on time. Thank you, Kevin. Thank you, Brian, for being here. Thank you, everybody, for listening. Thank you for your support. BofA appreciates it. Be safe, everybody. Have a great rest of the conference. Thank you.

Thank you very much.