Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

[Audio Gap] [ A few things ].

Yes. Thanks, Bran. And like Jeff said, we're happy to be here. I joined Exact in the fall of 2021. I always tell people that I'm not new to health care. I've been in health care for 31 years. I spent my first 21 years at Pfizer Pharmaceutical in various roles, sales, marketing. I actually spent a couple of years in human resources, actually, at Pfizer, then went on to work at Quest Diagnostics in the Chief Commercial Officer role, spent 7 years at Quest Diagnostics. And then just my last 2 years before Exact has been at GE Healthcare, running their U.S. and Canada business. The reason I came to Exact is just because of the mission, of eradicating cancer. When you think of cancer, the impact that it has in individuals, families, friends, there couldn't be, in my opinion, be a more important place to be in health care. And then what Exact is doing, I'm sure you'll hear over the next -- over this session, what they're doing in this space -- what we're doing in this space, we're leading the way, and not just from a product standpoint, but from a cancer continuum standpoint. And where Exact was back last year in terms of having to integrate a lot of new colleagues in the commercial organization and innovate their commercial organization, I thought was a really good match for my experiences. And then, I'll say, prior to health care and corporate America, I actually spent 5 years playing professional baseball for the Texas Rangers. So baseball and health care is all I have.

Well, [indiscernible] your background [ in GE ] [indiscernible] the U.S. health care business, so I have to ask you, who's the better CEO, Larry Culp or Kevin?

And that is a very loaded question, so I will say Kevin Conroy is a much better CEO -- both -- I've learned -- no seriously, I've learned a lot from Larry, his focus on lean and continuous improvement, what he brought from Danaher, I've learned a lot. I just can't tell you how much I've learned from Kevin and Jeff and the other senior executives at Exact. I've been just lucky to have the experiences over the last 30 years of people I have worked with. So...

I mean you started in the fall and came on board at an important time, a heavy lift with the onboarding of the Pfizer reps. Give us an update about how that integration is going.

Yes. I came on right when we were acquiring the 400-plus Pfizer representatives. One of the things that I pride myself on is the fact that I know those Pfizer reps very, very well. I worked with a lot of them. I worked with a lot of their managers. So I knew them really, really well. I think a couple of things that Pfizer has added to our commercial plan, the 400 reps that we acquired from Pfizer, they have, on average, 16 years of experience in the health care, kind of primary care space. So they were ready to hit the ground running with their experiences. They have also sold Cologuard for the past 2 years. So they know the product, they know the space really, really well. And combining that with their tenure, with their relationships, deep relationships that they have in their respective geographies, it was a really good addition to our commercial footprint. Just to give you a time line from when they came aboard to now, we made a purposeful decision to make sure that we brought them on board, with the least disruption as possible, so we didn't want to really change their territories, who they were calling on. And then as we got to know them a little bit better, they got to know Exact a little bit better. At the beginning of this year, 2022, we went through a transformation, and we created single points of accountability territories. So when we brought them over in the fall, in some geographies, depending on where they came over from, we had reps stacked up on top of each other. And so what we did, through the transformation, created a single point of accountability, created a culture of they're accountable for that respective geography, physicians. We added improved data and analytics to who they're calling on, so just much improved targeting. And then if I go a level above the reps, what we created was a management structure that is geography-based. So before the transformation, they were more siloed like they were a gastrointestinal manager or they were a primary care manager or they are a women's health manager. Now they are a pick-your-geography. They are a Houston Exact Sciences manager, managing that Houston geography and combining that single point of accountability in that aligned leadership. We feel that we're going to get and have gotten, in the first half of the year, added productivity and efficiencies.

In terms of the targeting effort, is that something Exact wasn't doing before or not doing effectively? Is it something that kind of you brought in? And how has that kind of impacted productivity?

Yes. And I'll have Jeff speak to this. I think Exact was doing it before, I just think it's evolved. Now what we get is we get data and analytics at the territory level. It's not just generic to Cologuard or generic nationally. Now, talking about that Houston manager, that Houston manager gets specific data around important, efficient targets to hit, important growth initiatives that we're focused on, like our rescreen effort or our 45-to-49 effort. And it's not just generic. It's specific to that geography, that allows them not just to get the data, but it gets the insights down to the territory ZIP code level. So just they can execute better. And then what we've added is we've added discipline. So we just don't give that data to the reps, but we actually daily manage those reps to hit certain metrics. And if they're not hitting those metrics, is we're not using it as a blunt tool, but we're using that as what other resources do you need to execute on those metrics. And that's the discipline that we've instilled.

I mean if this wasn't obvious, Everett has certainly raised the IQ of the [ executive team ] at Exact, so he's been a great addition. We've always done targeting, but he brings this to a whole new level, that in the analytics team we have now, has really upped its game. We could tell you down to the doc level how many colon cancer screen tests they order and of what type, how many fit tests, how many colonoscopies, how many Cologuard they order, which just allows us to get a lot smarter about targeting than we have ever could before.

All the targeting tools in the world may not be that effective if docs aren't letting you into their office. So what's the situation with access right now relative to pre-COVID levels? And will it ever go back to pre-COVID access?

Yes, I'll talk to that. So a couple of things. We're not at pre-COVID levels. I don't think we'll ever be to pre-COVID levels. We're about at 50% of where we were before COVID started. One of the things that we're doing better as an organization is we're not self-inflicting bad access, meaning I think we were piled up on top of each other. I think that, that created a barrier to access. Another thing that we're doing is we're learning to navigate in this new world. We're learning how to use really unique selling techniques to get into the office. We're learning how to, what I would say, sell to the total office, so not just depend on seeing that primary care provider, but how can we use the office manager to gain access, how can we use lunches compliantly and innovatively to get into, to see not only the physician but the office staff. And then the last thing I'll add is we're not just depending on that face-to-face visit to grow Cologuard. At Exact Sciences, we have kind of a multichannel strategy to gain access to that position. So we have our virtual team that we've evolved, to where we have people making phone calls to physicians, to either sell Cologuard or to create access for that face-to-face rep to get in. And then our marketing. Our marketing is very multifaceted in terms of we launched our Katie Couric campaign, "need to screen," back in March. We're going through social media. We're going through radio. We're going through digital. And that multichannel impact is, I think, is opening up access as we go forward.

What's the 1 metric that you're most focused on, 1 or 2, Everett? I mean is it ultimately utilization per doc? Is it new doc adds? Like what's your KPI that you're most focused on?

I look at individual reps that generate how many Cologuard scripts can they generate per [ doc. We look ] at many things that -- and kind of above that. We look at, are they reaching the right tiered position? We have all of our customers tiered, from Tier 1 to Tier 5. Our Tier 1 physicians, to us, our most opportunistic productive physician. They are a high colorectal cancer opportunity, and they're used to Cologuard, they're writing a lot of Cologuard. We want to make sure that we are efficient and productive at seeing those top-tier positions. Another metric I look at is how well our reps are using their materials to sell to physicians. We spend a lot of time and effort in creating those unique materials. We want our reps to use those materials to tell the message how important getting screened early for colorectal cancer is.

In terms of doc adds, do you still think you can keep adding, let's say, 8,000 to 9,000 docs a quarter? And do you think we'll -- now that you have an integrated team, better targeting and you're working together with Pfizer and the Exact reps, realigned territories, that like perhaps we do see a utilization inflection, which has just been very modest kind of last several years. I mean the average doc is only doing 2 to 3 tests a quarter right now. Like do we see that ramp meaningfully higher, you think?

Yes, Brandon. [ This is Jeff ]. You said, on the first question, like can we keep adding docs at that pace. In the near term, yes. I think, for the year, we would probably add somewhere between 35,000 and 40,000 new ordering health care providers this year. And that's primarily thanks to our marketing campaign. The marketing efforts we have, have been fantastic. If I look before the pandemic started, over 90% of the new providers that ordered their first tests, we had never called on. The reps are primarily focused on increasing that order rate, number of orders per doc, getting that number up. And over time, the primary source of growth is going to be the order rate. We'll take all the new ordering doctors we can get. That's great. But in a given quarter, new doctors add less than 5% to revenue. It's primarily the order rate. On the order rate, if you look how many orders we're getting per physician today, we're only between 5% and 10% penetrated into the average doctor's practice. So there's a significant runway ahead. Getting to our longer-term goal of at least 40% market share is primarily a function of how many orders can Everett's team get out of each doctor, and this team now is set up to where we can keep driving that rate higher. What gets me really excited, Brandon, when I look at the different cohorts of doctors, of reps that we've added over time, I look back to the reps that first joined back before Cologuard was launched, back in 2014, and that rep, those reps continue to get more productive over time. And as we have expanded that team, you can see that every class of new doctors that we add, every cluster of new reps we bring on, keep getting more productive. Now the pandemic threw a bit of wrench in that for a while. But as we come out of the pandemic now, those historical trends are resuming, and that leads to great things as far as growth for many years to come.

Maybe shifting gears a little bit, Jeff. If we just think about the leverage in the P&L, it seemed pretty good on the sales and marketing line in the first quarter, did a noise with some of the Pfizer accounting stuff. But I think it was about flat sequentially when you strip that out and core revenues ex COVID were up $30 million, I think, sequentially. Just at a high level, can you just talk to us about the confidence that you can drive leverage on that line now going forward?

I feel very good about our ability to drive leverage, not only sales and marketing, but also G&A. If you look at sales and marketing, in the first quarter, when you sit through all that noise that you referenced, it was actually down sequentially in terms of gross sales and marketing dollars. If you look at total revenue, it did grow by over $20 million. So good leverage to start with. What we've implied in guidance for the year is sales and marketing to stay below that Q4 run rate from last year, to stay below for the full year. And now, with the restructuring done in the sales team, a national team built out, I think we've got very good leverage coming for many years. Today, we primarily sell Cologuard through our primary care team. Over time, we'll add other products to that, whether it's hereditary cancer, our multi-cancer product or colon blood or Cologuard 2, we'll have -- we have the foundation in-house already. So as we add products to it, that just improves the leverage on that team. From a G&A perspective, this is where we're investing heavily now. We've actually accelerated investment to deliver even better margins starting next year and beyond. I'll give you one example there. As we've grown, as we've acquired, we're still operating multiple, redundant IT systems, redundant systems, from the legacy genomic health company or different assets we've acquired. Well, we're going through a massive effort now to integrate all those acquired entities, such that about a year from now, we'll be on one unified Exact Sciences IT foundation. That will help us pull out tens of millions of dollars of redundant IT spend. That's just one example. There's many more like that. So I'm very confident we can leverage G&A, in addition to sales and marketing. What that gets you is a full year of profitability on an EBITDA basis in '24, if not sooner. I would love to pull that in. We are actively pursuing efforts to pull that as much as possible. Because, look, we've heard you, we see what's happening in the markets. Companies that are still in loss-making mode, their stocks are down, they're being punished. Companies that have a strong foundation, that can generate sustainable growth in revenue and EBIT and cash flow, those are the companies that are performing better. So we are actively looking at ways to pull in profitability even more.

I just want to back up on the comments you made about sales and marketing. So we should expect the balance of the year to be down from the first quarter level in terms of dollars...

Down from Q4, below Q4. If you look at our run rate, the Q4 run rate, we have implied the year at a lower run rate than Q4.

Than 4Q '21...

Yes, yes.

Okay.

Yes.

Okay. Got you. In terms of that adjusted EBITDA profitability goal, what does that kind of contemplate in terms of top line? And are there levers that you're willing and able to pull in OpEx to get there? And I was thinking about how much is dependent upon things in the pipeline other than Cologuard...

Yes. Great question. So I mean, as you know, I think many of you know, I'm a conservative CFO. So when it comes to making longer-term assumptions, I bake in caution here. So I have not assumed anything from new products. So while I fully expect revenue from hereditary cancer, for example, I have not assumed that would come in '24 in order to hit our adjusted EBITDA profitability target. So how do we get there? It does start with growth. It starts with growth, and no pressure, Everett, but I'm kind of onto you. It starts with growth in Cologuard and Oncotype, so primarily the core products we have in-house now. We've got good line of sight into growth. And maybe we can spend more time on those. But looking at Cologuard, there's a ton of momentum behind Cologuard rescreens, for example. In Cologuard 45, they're driving significant amounts of growth, and there's years of runway ahead in those. So it starts with growth. That growth will get us leverage at the cost of goods line. And also, there's initiatives we have underway to further automate our labs. So our biggest cost of goods is our lab processing. So as we automate our labs more fully, that will help us improve our gross margin. We've talked a bit about sales and marketing and G&A. I think we see good leverage on both of those as well. And then R&D. R&D, the way we securitize R&D is really on a project-by-project basis. So most of R&D, about 75%, is on our 3 main pipeline programs, multi-cancer, our colon cancer franchise and MRD. Everything in there has to meet a certain ROI hurdle. Otherwise, look, it doesn't make sense for you or for us. So as we go through this, there's an ongoing process to scrutinize all those programs. We made the decision recently to postpone certain multi-cancer investments because it was going to be too many things next year to successfully execute on. And the ROI next year didn't look as good. So we're postponing some. We're being thoughtful. Doesn't affect growth, doesn't affect our time to launching our multi-cancer program, but we are scrutinizing everything to make sure we get a good return and meet our longer-term objectives as far as growth and profitability.

On the rescreens, you talked about those being higher margin. Are we talking about a drop-through of 80%, which is kind of your longer-term gross margin target, i.e., like those revenues come with really no kind of sales load? Is that the right way to think about it?

Yes. So rescreens, again, the guidelines recommend Cologuard every 3 years. So when we talk about rescreens, we're talking about patients who have been tested 3 or more years ago. The guidelines say, come back, you're due for screening again. What's the nice thing about our model is that we track those patients. We know when they're due. We know what doctor they go to. We know what insurance they're on. So when they come time for screening again, we can reach out right to them. We're health care providers, so we can reach out right to the physician and the patient and make sure they know when they are due and get them screened again. The reason why rescreens are higher gross margin revenue primarily is because the patient compliance rate is higher on a repeat test than it is on a first-time test. I've done Cologuard 4 times. I can tell you that it's an easy test to do. Every time you do it, it becomes easier. Maybe you spend less time thinking about how do I read these instructions or how do I return the kit through UPS. So it becomes easier and the compliance rate goes up. A higher compliance rate means there's less wastage of the kits. A collection kit that we ship out that doesn't come back directly hurts our gross margin. So the higher percent that come back, better gross margin. What's even more exciting is the operating margin impact, reengaging a 3-year rescreen customer requires fewer resources. We can send out a text message for, say, pennies, rather than having Everett [ seem to go on ] and directly engage the reps, which is what you do for first-time users. So better gross margin and much better operating margin. I've said before, over the next few years, I think rescreens becomes a $500 million business for us. When that happens, that will have at least a full point improvement in overall margins for the company, gross margins for the company. And longer-term, rescreens become half or more of a revenue. So from my perspective, as CFO, I love rescreens. It's recurring revenue. It's higher margin revenue. It requires less of Everett's resources to reengage those customers. It allows them to then focus on other things, like bringing multi-cancer and other products to market. So rescreens are something, it's a huge driver now, it's an even bigger driver going forward.

Will the pipeline require additional sales force investments? Or when you have a large base of rescreening revenues, can you take these reps that are currently calling on primary care, put them into the oncology channel or somewhere else, to push MRD?

Yes. I don't see our commercial footprint changing that much. Right now, we have a very well-established primary care organization. We have an established oncology organization also. And right now, we are going to train our primary care organization to sell portfolio. So we are well established to not just sell our current products, but products that come into -- and ready for commercialization. We'll have the capabilities. We already have the footprint to sell a portfolio, and we're well established in our important call points right now.

I think you had 13 abstracts at ASCO this past week, more than I can remember historically. Any key takeaways or do you know, focus points coming out of that meeting?

You're right. It was 13 abstracts there. If you go back a few years ago, ASCO wasn't a big priority for Exact. We were primarily focused on DDW, which was the -- is the big GI conference, but as the companies evolve to where we serve the broader continuum, everything from hereditary cancer screening, prognosis, MRD, recurrence in late-stage cancer, therapy selection, ASCO is a much bigger conference now and will continue to grow over time. So to your point, we do have 13 abstracts there. For me, what the exciting part is that those abstracts span that continuum. They span screening, prognosis, therapy selection. And perhaps if I had to pick one, which I think you're probably going to make me pick one, if I had to take one abstract that stood up for me, it's for now, for the second time, we've shared data on our MRD product. The set in here was the recurrence dataset in colon cancer. This comes from our partnership with the Mayo Clinics. We've shared 2 sets of data, MRD, really recurrence in colon cancer. We have another big set of data coming later this year. I'm very excited about MRD. It's one of our 3 big pipeline programs. So it's good to get that data out there. And what that data showed is that we can find recurrence at least 4 months sooner than you could through standard-of-care imaging. So good news for patients and a good news for Exact.

Just on the MRD, like what's different about your strategy? And like what is Exact's right to win in that category?

Well, let's start with the position of the company. What Everett and team had built out is a commercial organization that spans, again, primary care, GI, women's health, oncologists, kind of the full spectrum. And we've got a large presence there. Cologuard is the largest diagnostics on the planet right now. Oncotype is the second largest. And those -- that gives us 2 kind of beachheads in colon cancer and breast cancer, which are arguably the 2 biggest markets for MRD. Let's take breast cancer as an example. Okay, so you think about the flow that a woman would go through diagnosed with breast cancer through mammography. One of the first questions she'll ask is, okay, well, how aggressive is this, is this going to come back, do I need the chemo. Okay, well, Exact could answer that. We are in the best position to answer that. We're the only company with longitudinal data to show that we can safely spare women from chemo or direct her towards chemo if she needs it. So we can answer that question. Now we believe, with the same block of tissue that we get, which, today, that's about 50% of all women diagnosed with breast cancer, we get the tissue, with that same block of tissue, we can then answer the next question. So after chemo, she's going to ask, doctor, I just went through hell, did we get it all, did chemo get it all. And we can say, okay, well, with this block of tissue now, we can use a tumor-informed test to say, yes, for this woman, thankfully, we got it all. There's no more residual disease in your body, and we can now test you then for recurrence over time, again using the DNA from that initial block of tissue. So from a positioning standpoint, we're in a very good spot to be the leader in MRD. Now [ great, there's ] companies out there that have done a very nice job kind of blazing the trail, but we're still on the top of the first inning. This market is probably less than 1% penetrated. And I think, over time, with the foundation we have, both in terms of the commercial organization and the science that we're starting to generate, I mentioned the 2 different MRD studies in colon cancer, there's more data coming out in breast and others, and over time, I think we'll be the leader there.

Unfortunately, we're out of time. But just lastly, stock's off a lot this year. Everett or Jeff, like what do you think investors are missing or underappreciating or undervaluing in the business right now, be it pipeline or channels...

Yes. Of course, you asked that when we're out of time. But I think, what I would say, we feel very good about the core business, both Cologuard and Oncotype. It's an exciting year for those programs. The foundation we've laid for those 2 products, sales force, lab, IT, all of that, we've shown the power of that with COVID testing. In a matter of weeks, we stood up a COVID test and we've generated results for over 4 million people there. That is complicated, and we've done that. As we layer our pipeline test into that foundation, I think you see very good leverage, very good cash flow. And we are firmly committed to being profitable in '24, if not sooner. So I think there's a lot of exciting things at Exact. Now that's how we recruited Everett, and that's why we're excited every day coming to work.

And I'll just say, the more that we evolve our commercial transformation, the better we're going to get. So I'm confident.

Very good. We'll have to leave it there. Thanks, everyone, for being here. Everett, Jeff, great to see you. Thank you for coming.

Thanks, Brandon.