Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

All right. In person, it's good to see everybody. It's been a while, and I'm seeing a lot of familiar faces. And hopefully, over the next couple of days, we can all spend time reacquainting in person. So thank you all for coming. My name is Brian Weinstein. I'm the Group Head of Life Sciences here at William Blair, and I'm responsible for coverage of Exact Sciences, who is now presenting. I think it's the 11th or maybe 12th, the year here, at the Growth Stock Conference. So we're thrilled to have you guys back again. I am required to inform you from my compliance officer, Mike Besenjak, who is celebrating a birthday today, if you see him I know how much he would really appreciate if you said happy birthday to him. He told me to say that for potential conflicts of interest, you go to williamblair.com. Logistically, format is a management presentation, followed by Q&A between me and the management team, and that will last about 30 minutes. Following this, we do have a 30-minute breakout session located in the Mar room, which I'm told is on the second floor. We have questions prepared for that, but that would be your time to engage with the management team with whatever questions you might have. So with that, let's jump on in today. We're fortunate to have Kevin Conroy, the company's Chairman and CEO with us; and Megan Jones in the back from Investor Relations, who is not celebrating a birth today, I'm told, but, had one recently. So happy birthday to you. All right.

Thank you, Brian, and thank you, William Blair for having us again for -- I believe it is the 12th. You did invite us that first year, Brian. I joined the company 13 years ago, and Brian, I've got to know quite well, traveling all over the world, telling the story of Exact Sciences. And during the pandemic, I was very concerned about Brian because I thought if we left Brian at home with his wonderful wife, Daniel, for 2 years, there -- Brian might not make it out alive. He did, so we're very, very happy. If we can put up the first slide, I will be making forward-looking statements here and we -- you can look at our disclosures on our website. One, the #1 cause of death -- likely cause of death of people in this room is cancer. People under age 85, it's the #1 cause of death. If you take a look at the #1 overall cause of death, heart disease, you have seen since 1970, a 70% decrease in heart disease mortality, that is death from heart attacks and stroke. And that's because there's been an amazing focus on early detection and prevention. Not the same has been -- has occurred with cancer. Cancer mortality is down by about 20%. As a company, our goal is to make routine the earlier detection of cancer. It makes all the difference in the world. There is no therapy. There is no drug. There is no surgery. There is no cancer treatment that is as powerful and as impactful as earlier detection. Today, there's a challenge. Only 30% of cancers that -- only 30% of cancers have a screening test that leads to a detection of that cancer, that's colon and breast and prostate and cervical cancer. All the other cancers, you find symptomatically. And one of the things that we're doing, and we'll get into this in our conversation, is developing a multi-cancer early detection test, a simple blood test that everybody in this room will use to be able to find cancers earlier. It is going to change everything about cancer and the field of oncology, and is going to create new companies and new opportunities for saving lives and preventing mortality from cancer. So let me go back to 13 years ago when I first joined Exact Sciences, it followed a meeting that I had at the Mayo Clinic with Dr. David Ahlquist, who had this crazy idea of detecting colon cancer very accurately from his patients' stool sample. And after that meeting, I decided to join Exact Sciences. We forged a partnership in about 2 months with the Mayo Clinic, and we started on this 5-year journey to bring Cologuard to patients. This is -- it was our sole and exclusive mission for about a decade. And Cologuard is a test that was aimed at screening people for cancer and not only cancer, importantly, the precancers that lead to colon cancer. Because if you can find and remove a precancerous polyp, you actually prevent the disease. Cologuard at the time, many, many people, I would exclude Brian from this, Brian was one of the true believers. Many people thought it just couldn't be done. Colonoscopy was the only way to go. Today, we know that we expect to approaching 3 million people this year to be screened with Cologuard. It is changing everything about colon cancer screening, but it's just the start. Where this leads to and this huge influx of genomic testing, hereditary cancer testing. Everybody in this room should go and get a hereditary cancer test. Know your own baseline risk of colon cancer, prostate cancer, breast cancer, et cetera. And if positive for any of those mutations, you can act on it. You can get more screen more frequently, in some cases you can get preventive surgery, ovarian cancer, breast cancer, et cetera, and eliminate that risk. And these tools are changing everything and Exact Sciences is leading the way. I'm going to advance forward. So in 2016, we were a $99 million company. And this year, we expect to achieve about $2 billion in revenue. The growth has been tremendous. Along the way, we've made a few acquisitions, including Oncotype DX. And this is an amazing test that uses the power of genomics to give women diagnosed with early-stage breast cancer and incredibly important 2 pieces of information. Number one, will they benefit from chemotherapy, 85% of the time, the answer to that is no. So why get chemotherapy, which can cause cancer? And it has become a standard of care. It's an amazing test, and it's a wonderful business. We have also done a number of acquisitions that will lead us and help accelerate the pace of growth as we continue to lead in this field. And I will take us to. This field is really focused on starting with your baseline hereditary risk of cancer. That can be done with a simple saliva sample. And you can get your results in a couple of weeks and talk with the genetic counselor and have a totally different perspective about what your risk of cancer is. Screening with noninvasive tools like Cologuard, with a blood-based screening test. They start to change everything. And then the ability, if diagnosed with cancer, to have a test, a prognostic test like Oncotype DX, which tells you not only the benefit from chemotherapy, but also the -- your risk of recurrence, a percent likelihood risk of recurrence, who wouldn't want to know that information? Your oncologist does, and now that's why Oncotype DX is 90% share and 70% class penetration. That means 70% of their -- roughly 100,000 women diagnosed with early-stage breast cancer over a year, get that test. And now we have amazing -- an amazing new test that is starting to be adopted in our industry. It's called the minimum residual disease test. A friend of mine was diagnosed in the fall with kidney cancer, Stage III. She -- it had spread just outside of her kidney to her pancreas. And the question now is, is that going to recur? After her initial surgery and treatment. She has multiple negative tests, blood tests looking for circulating tumor DNA. In the future, everybody diagnosed with cancer or most people diagnosed with cancer will get a minimum residual disease test after their initial treatment. Simple blood draw, because you can detect recurrence in the blood, we just had a study at ASCO come out, 4 months to 9 months to maybe a year before you can see it with a PET/CT, changes everything. That means you will start to retreat the patients before you can even see it on a scan. That's where our field is, and Exact Science is leading this field. We're the company with $2 billion of revenue, strong gross margins, great growth, the best commercial organization, a 1,000-plus person commercial organization, deep sophistication in our IT infrastructure. We have invested $700 million in our IT infrastructure. So we're playing in each of these spaces, colon cancer screening, multi-cancer screening, MRD, and we have the ability to lead in each of them. We are a pure-play cancer diagnostics company. That -- when we wake up in the morning, That's what we think about. That's what our R&D team thinks about. It's what our commercial team thinks about. It's what our finance team thinks about, our HR team. And so we're really excited to continue to invest in growth even in uncertain times. We have a clear path to profitability, and we can talk about all of these things and more. So I'm going to pause there and then sit down and Brian and I can chat.

Well, thank you for that. Yes, it was about 12 years ago, 13 years ago when I first heard about this. And initially, you think, well, is something like that even possible, right, to be able to detect colon cancer through a stool sample, but the company did the right work and did the science and showed that it clearly was. And the success has been evident. And it's interesting to see now how the company is transitioning from kind of that focus to a much broader focus on what we'll call Precision Oncology. So with that, I mean, you presented at the Personalized Medicine Conference, I think, just a couple of weeks ago, where you were talking about kind of the realities and the challenges and the opportunities with Precision Oncology. Can you just -- you kind of talked about it in the presentation but talk about it again in terms of what that opportunity really looks like, but also what are some of the challenges that have to be overcome, because it sounds great, but we want to make sure that people understand that there are still some hurdles that have to be kind of tackled in order to make that a reality.

So this field has been powered by investments in fundamental science over the last 25 years, which allow us to understand the human genome, DNA changes, alterations, how they affect cancer and also RNA changes and the confluence of technologies and new products and clinical studies allow us to detect cancer earlier and then also to understand what kind of cancer is there. So you can guide a particular cancer to impair it with a particular therapy. And just over the weekend, we saw a colon cancer study where every patient in the study, I think there were 16 patients in this study, responded. That's powered by the knowledge of the human genome. And now with immunotherapies, we believe that all of this knowledge will allow us to detect earlier, to guide the right drug to the right patient and, potentially someday, treat cancer as a -- hate to use that -- you'd love to use the C-word, the curable disease, that can only be done with earlier detection. Once you've detected a Stage IV cancer, you're battling diseases of multiple organs now. And what you'd really like to find is a Stage I localized tumor, surgically resect it. I mean, how many people -- I didn't know this, that most Stage I cancers get no chemotherapy. Stage I colon cancer, you have 1.5 feet of your colon removed. You have had a bad month, you don't have chemotherapy. You go on and live your life. Breast cancer now, early-stage breast cancer, 85% of patients don't undergo chemotherapy. So the idea is to bring all of these technologies together to give people and insight as to where they are on that cancer continuum. And it is paired with what is going on in the amazing world of new drugs that are being developed. So where does the space go? There is going to become a $100 million cancer diagnostic company, I am convinced of that. The question is who is that going to be? What I'm really proud of is that this team has invested in the required infrastructure and capabilities, R&D, IT, clinical testing lab in a commercial engine, coupled with the right culture and the right mindset to achieve growth over a long period of time. So I think that's the space, there's great things happening in the space right now. Today, it's been beaten down. I'm a big believer in a lot of companies within our space that continue to do unbelievably innovative things.

So that clearly spells out the opportunities. But are there some hurdles that still have to be overcome? And what would those be?

Yes, there are always hurdles, obviously, when you're going through change. One of the big ones in cancer screening is that surprisingly, the Medicare system was not built, it was not designed to pay for screening tests. So the only way to get a novel screening technology paid for by Medicare, which is really important, 75% of all cancers are in the Medicare population, is to have statutory authority to do that. And for a multi-cancer screening test, that means an active Congress. So that's an example of a barrier. The other thing is that there is a guideline group that controls most screening guidelines and guidelines control, whether commercial insurance companies pay for a new test. That group is called the United States Preventive Services Task Force, or USPSTF, and USPSTF meets every 5 years for a colon cancer guideline update. So there's a hurdle. You need to make it through USPSTF. You need a really good, big, huge study involving tens of thousands of people. You need peer-review publications. Typically, you need multiple publications. So you need great science, you need unbelievably robust clinical trials, you need sometimes an active Congress. But if you do all those things right, what you end up with is an incredible opportunity to impact human health and a very sound business as well, as you can see from Cologuard.

So maybe talk about your journey because as it did start out with the idea of Cologuard, as I tell people, when I first heart of it, it wasn't called Cologuard, it was -- I don't even know what it was originally called. It was called nothing. I don't remember a name. It was a concept, right? But the investments that you've made, the infrastructure that you've built, maybe you can talk a little bit about what that journey has been and how you can leverage some of those assets as you continue to expand into things like hereditary, into MRD, into multi-cancer.

It really started with a prior company I was at where we developed a cervical cancer screening test, and cervical cancer is -- people don't fully appreciate this, that if you go back into the 1960s, cervical cancer was the #1 cancer killer of women. It killed about 40,000 women a year. And today, it kills about 4,500. The Pap smear came along and the Pap smear actually was designed to detect not cervical cancer mainly, but the precursor to cervical cancer is these lesions, which can be ablated. And because the Pap smear has become standard of care, 90% of those lesions are found and removed before they become cancer. It's the only cancer eradication story that exists. And so now when you look -- we started with Exact, that was our kind of our North Star. We have to do for colon cancer, what the Pap smear did for cervical cancer, and it's not going to be done with colonoscopy. If I ask the question, I won't, but how many people in this room have had a colonoscopy. Half of the people will say, no. Yes, okay, I'm going to do it. How many people have had a colonoscopy?

We're eligible, let's say.

Who are -- yes. Okay. How many people have had a Cologuard test? Almost the same number, not quite, it's going to far exceed. So a lot of people won't get a colonoscopy. They just won't do it. About half of people today who are indicated for colon cancer screening have never had a colonoscopy. Their docs put in an order for them, they don't follow up and actually go. We all know it. So we started out with this idea that the science exists, Mayo Clinic had the data. I'll never forget that day where I saw that data and said we can develop a test and get it all the way through. I didn't realize how hard it would be. I didn't realize how expensive it would be, and we just as a team, came together and we designed a technology, a test, an automation platform, a 10,000-patient clinical study, engaged with the FDA with Medicare, with Capitol Hill, with health systems, and that was a 5-year journey. It was a journey, though, totally focused on achieving one big thing. And since that time, we've just seen adoption grow and grow and grow and grow. And now coming out of the pandemic, we have seen renewed significant growth. And we believe this can become a $7 billion, $8 billion product on its own. I think over time, the use of colonoscopy will be more for people who have a positive Cologuard test and for high-risk patients. So that journey was required immense partnership, collaboration and a culture that has been developed that we know now as we develop a blood-based colon cancer screening test we can drop that into our current commercial organization. A blood-based multi-cancer screening test. We dropped that into our current lab infrastructure commercial organization. We didn't have any of those competencies as we were developing Cologuard. We didn't know how to interact with commercial payers or we didn't have a team that did that. We have now contracts with virtually every payer in America. That means that every new test that comes into our platform, it's way easier for us to have the commercial partner of ours -- the insurance partner of ours to bring up that test, which is why we acquired hereditary cancer testing company, PreventionGenetics, because now starting next year, we will offer that right through the primary care physicians that we call on. And today, we have about 300,000 primary care physicians who have ordered Cologuard. There isn't anybody in cancer diagnostics, and there aren't very many primary care organizations left in the U.S. that are capable of bringing new products through that complex environment.

It's great. You mentioned ASCO, or you hinted at ASCO, over the weekend. Any takeaways that you have, you mentioned some of the data around MRD. But in general, it seems like ASCO is becoming more of a -- it's not diagnostics, come on. But I mean, diagnostics is clearly starting to get a little bit more traction at ASCO as more data is coming out. Is there any kind of key takeaways or things you'd want to highlight there?

So for the generalists in the audience, ASCO is American Society of Clinical Oncologists. 10 years ago, if you were a diagnostic company showing up with submitting an abstract to ASCO, it would usually get rejected. Like, why are you bringing a diagnostic company? We develop drugs that treat cancer broadly. Well, now where the world is developing and drug developers are developing medicines that are targeted to very specific types of cancers, subtypes of cancers, as defined by their genetics. And now what you're seeing is ASCO welcoming the cancer diagnostic communities, dozens and dozens of companies that are doing pretty remarkable things. And so we're at ASCO this week with 13 different abstracts as a company, we never would have imagined getting 13 abstracts at ASCO. One of them was for this -- our MRD test, which a simple blood draw was shown in colon cancer to detect colon cancer recurrence 4 months before you could see it on a scan. But given a 4-month head start to start treating that patient with maybe a different chemotherapy, it starts to change everything. We have an abstract that shows the differences in performance on a model basis between a stool-based colon cancer screening test and a blood-based test. And that abstract shows that a stool test performs better in terms of saving more lives and in terms of requiring fewer unnecessary colonoscopies. So -- but there are 12 other -- or 11 other abstracts as well in presentations. It's a great opportunity to sit down with customers. And today, when we first thought about bringing Cologuard to patients, the idea of going to a large health system and having them incorporate it deeply into their -- the way that they practice medicine was a challenging idea at the best. Today, now we have electronic feeds integrations with all probably approaching 200 health systems now so that their docs can order Cologuard electronically. So meeting with them at ASCO has been an important thing, too.

You brought up the concept of developing a blood-based test. And I'm hesitant to ask the question about thoughts on blood-based screening for colon cancer. The last time I asked the question, it resulted in -- the answer that was, I think, a very thorough answer. But for people who are in the audience who are not as familiar and have heard the concept of a blood-based colon cancer screening test and you offering today a stool-based test, maybe just educate for the more generalists in the room, how they should be thinking about the opportunity or threat that might be there as various companies come out with new technology?

So blood-based colon cancer screening is an opportunity for Exact Sciences. It's an opportunity to help eradicate this disease. Now let's go beneath that high level explanation. There are 110 million people in the colon cancer screening population, maybe north of that now, age 45 to age 85. 45 million people remain not up to date with colon cancer screening. That's despite colonoscopy, Cologuard, a stool test called the FIT test, which is not a very good test. Blood-based testing, we expect to eventually get approved by the FDA. We believe that it will never take over colon cancer screening because the performance just isn't there. Is it better than not getting screened at all? It's way better than not getting screened at all. Is it as good as colonoscopy? No. Is it as good as Cologuard? Not close. Will it someday screen millions of people? Absolutely. Will we lead in this space? We believe so because we have a great test, and we have the sales infrastructure, the IT infrastructure, the relationships with all the large health systems to lead in that space. There has been -- I think human nature thinks so a simple blood test, while everybody will switch to that. The challenge is it's -- these blood tests don't detect cancer as well as colonoscopy Cologuard. They also importantly, don't detect those precancerous polyps. In fact, they'll be really poor at detecting precancerous polyps. And the main goal of screening should be finding the precancerous polyp. So it can be removed and cancer can be avoided altogether. So that's the -- there's really not much of a debate like get Exact Sciences. We don't debate a blood test versus a stool test, let's eradicate the disease, we can lead in both. And if I looked at 10 years from now, will we be doing 3 million, 4 million blood-based colon cancers screening test a year, maybe more than that at $200 a test, yes, we will. Will that eat into Cologuard testing? No, I don't think so. I think there are 5 million to 6 million fecal immunochemical test, the stool tests that aren't very effective, 5 million or 6 million done every year in the U.S. Those will go away. But that -- even that will take time because those are $16 tests and the blood test won't be a $16 test. So I think there's going to be an opportunity for huge growth. I think that we will -- there will be other companies in that space, no doubt, we think that we will lead in that space because of the advantages we have.

We only have about a minute left before the breakout, but I did want to get this question in. Obviously, a lot of focus on cash burn capital structure and your path to profitability. Maybe you can talk a little bit about what your goals are there and what are required in order to hit those goals for profitability?

What we have guided to is profitability by 2024 without the need for additional dilutive capital raises. We will probably optimize our balance sheet with some financing -- the significant real estate that we have -- we have the ability with $2 billion of revenue and 70-plus percent gross margins to continue to grow the top line. This year, we should generate about $1.4 billion in gross profit. As a result of that core strength in our P&L statement and our balance sheet, we have the ability to be profitable full year 2024, most likely to be profitable in a quarter in 2023. And I think that becomes more clear as each quarter goes out. So we're in a great position.

Perfect. Well, 2 seconds, 1 second. We nailed it on time. Thank you, Kevin.

Thank you, Brian.

The breakout is in the Mar room. Thank you.