Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Welcome, everybody. I'm Matt Sykes, the life science tools and diagnostics analyst at Goldman Sachs. Thanks, everybody, for joining us today. I have the pleasure of welcoming Exact Sciences to the stage here. Kevin Conroy, the Chairman of the Board and Chief Executive Officer; and Everett Cunningham, Chief Commercial Officer. Kevin, Everett, thank you for joining us today.

Thanks, Matt.

Thanks, Matt. Appreciate being here.

Great. Maybe we'll just start off and let you set stage for a little bit and kind of talk about some of the recent highlights so far this year and kind of what investors should be focused on as we enter the second half of '22?

Well, we've never felt better about the business. I don't know that we've ever felt worse about the stock performance. But the business is strong, and that's the growth that we're seeing, the fundamentals coming out of COVID, Q1 was a very strong quarter across the entire business. And -- that puts us in a very good position to continue to achieve the long-term goal that we have, which is to focus on helping to eradicate cancer through earlier detection. And it's a powerful set of technologies and people and infrastructure that allow Exact Sciences to lead in this area with Cologuard, with the multi-cancer screening test that we're developing, with minimum residual disease test, which we expect to have data on at the end of this year. Our blood-based colon cancer screening program, it's just a tremendously exciting time at the company. So you had strong growth, strong gross margin capabilities, which allow us to invest in a way that we really want to invest to achieve our mission. And finally, we're in a position to achieve cash flow breakeven with the capital that we have on hand and doing some balance sheet activity, for example, to take our $300-plus million in real estate into a sales leaseback or take on a mortgage. So we're in a strong position financially to be able to continue to grow.

Great. And Everett, maybe -- since we have you, maybe can you discuss some of the changes you made to the commercial team at the start of the year. And I think we saw in the latest quarter, some of these improvements have actually already started to show up. And maybe kind of give us a view as to how you think those changes will actually flow through in terms of growth as we go through the year?

Yes. Thanks, Matt. And Kevin just mentioned it in terms of a strong growth and in Q1 with Exact Sciences. I'll just double-click on Cologuard, a really good quarter in Q1 for Cologuard. I would attribute to a few factors commercially. Number one, when I came into the organization back in October of 2021, just last year, the timing was perfect. We got 400 additional commercial sales colleagues with Pfizer, Pfizer acquisition. I've actually spent 21 out of my 31 years at Pfizer, so I knew them well, experienced sales colleagues on average, 16 years of tenure, really deep in the primary care call point. And the great thing about it was they had experience with Cologuard too. So bringing them over and really kind of like attaching them to our legacy, Exact Sciences commercial engine was -- the timing was perfect. At the beginning of this year, we went through a little bit of tweaking to our commercial organization. So taking that footprint, doing a couple of things, giving single points of accountability with their sales territories. So kind of just from a commercial culture, they're accountable for their individual targets for that specific territory, equipping them with data down to the territory level. So they know which growth areas to focus on by target and then making sure that we're measuring that performance on a daily basis, just that day-to-day sales discipline and execution with our new organization, not just at the rep level, but at the manager level. We designed our organization at the beginning of the year into markets. So we have 18 markets led by market leaders that are responsible for the entire screening business and strategy. So they fill that ownership at the market level, again, driving growth at that market level. And then the surround sound that we have, especially in the midst of COVID, we just don't rely on our commercial organization -- our selling organization to call on physicians and health systems face to face, but we have a surround sound remote selling team that every day they're picking up the phone and calling on their targets, making impact that way. And then our outstanding world-class marketing organization, we've really invested in terms of making sure that our marketing organization is digital -- social media, radio, TV, and I think that's what's really driven growth so far this year is that transformation that new commercial organization working together and every single day that we are in this organization, we get better.

Got it. Maybe in terms of COVID, surprising we're still talking about 2.5 years later, but we are. Maybe give us a mark-to-market on physician access and wellness visits. And how are you navigating and changing some of the things that you're doing from a strategic approach if we don't get back to pre-COVID levels of access?

Yes. I'll take it first, Kevin, I'll tee it up. So as we said in our last earnings call, we're about 50% accessed compared to pre-COVID levels. And we said in Q1 during the earnings call that we would get moderately better throughout the year. That's just the environment. We're obviously hoping for not another Omicron. I also think, too, the transformation I mentioned, we have to get better at understanding the environment. It's almost like the new normal and the way in which we're deploying our representatives, incenting our representatives to make sure that they call on the right targets that are driving Cologuard combined with just I said, that surround sound of giving them tools to equip them better, to make an impact. And then this is subtle, but important, we train our representatives every single day to making sure that their value proposition is appropriate to not just talk to that primary care physician, but the total office staff because the total office staff is responsible for the importance of screening, hitting screening metrics and making sure that Cologuard goes to the -- goes to the right people.

Yes. And to that point, Everett and team have done an amazing job of making sure that, that office staff, we're in a position to direct colorectal cancer screening are involved and a new program that or a new capability that we are offering now in the primary care setting is to allow a primary care physician nurse to order a rescreen Cologuard, a Cologuard that a patient that is due for their second Cologuard test, for that order to be placed any time up to 12 months before that patient is due. And then that test won't go out until that anniversary date -- a 3-year anniversary date after interacting with the patient, giving the patient an opportunity to opt out, for example. That capability is going to become even more powerful digitally for a doc to click a button and say, okay, I'm going to enter a rescreen for these 20 different patients. Well, that's a powerful new tool. It gives our reps something new to talk about to not only the physician -- the office staff. And so it's this coordinated effort. You don't get to achieve the kind of success that you do without making everything really easy. And our investment in IT there has been pretty powerful.

Maybe we can touch on the rescreen opportunity because I think that is 1 of the definite upsides for Cologuard moving forward? And you talked about the ability in terms of the ordering -- but just how do you see the rescreen opportunity evolving over the next 1 to 2 years?

Over the next 3 years, just rescreen patients alone are a $500 million opportunity. Last year, call it, around $100 million. So it is an enormous opportunity that continues to grow because there are 1 million people who are due today -- due as of today for a rescreen test. There are another 1 million people altogether coming due in 2022 for their second Cologuard test, right? In some cases, a third Cologuard test. So there is a huge opportunity long term to engage with that patient on Cologuard and also for a multi-cancer screening test and for the other tests that we offer, a hereditary cancer test. This is a lifelong deep relationship that we have with our customers. And if there's anything we do, we try to obsess about 2 things, taking care of our customers and taking care of our frontline workers. Because we have done this repeatedly over and over again, I think one of the things we're most proud of is that Exact Sciences, our team members say it's a great place to work. And we've just got to keep taking care of our customers, taking care of our frontline team members and good things will continue to happen.

And just in terms of a high level, I know -- just in here, but in terms of high-level impact on margins of rescreen opportunity, I have to imagine this is accretive as you move forward and those kind of start to build.

Yes, it's accretive because it's about -- there are about 15 percentage points higher of compliance for people who are due for their second Cologuard test, maybe up to 20% higher. And we expect over time that should go yet higher than that. As a result of that, the collection kits that just sit out there and don't get returned impact our gross margin because they're fewer of those and also because we just have consumed a greater amount of our capacity to absorb the overhead. We should -- Cologuard should eventually be an 80% gross margin test. We approached that at one point with COVID that came down for a number of reasons, but we expect that to expand again. So growing margins, growing top line, a real focus on the bottom line. And the recipe for success long term.

Got it. There's obviously been a lot of discussion on Cologuard to cancer on the screening side, blood and stool. You have, obviously, with Cologuard and developing a blood test. Maybe Kevin, if you just take a step back and help us frame sort of 3 to 5 years out, the big picture for the screening market. How do you see that market evolving? Will there be room for many different players?

There are going to be a lot of different players that aspire to get into this space. The entry price to get into this space means you need to make massive R&D investments and then huge clinical trial investment. So a prospective clinical trial is 100,000 patients. GRAIL, which is a great company, is doing the work in the right way and really helping to open up this whole field. Exact is there how many more companies are going to invest hundreds of millions required in R&D and clinical trial cost to access this market in the near term. I think that's a real question. And then importantly, what we have is the ability to drop that multi-cancer screening test into our current infrastructure. So I think you don't need to increase the number of salespeople that we have in a meaningful way. You don't have to, in a major way, make significant investments in IT. We have invested $700 million over time into our IT infrastructure. So we get to drop these new tests, whether it's Cologuard 2.0, a multi-cancer screening test or a blood-based colon cancer screening test, there isn't another company that has invested in primary care like we have. And when we first started doing this, a lot of people thought we were -- we had taken a lead of our census. This is going back 8 years ago. And we just kept investing and investing and investing and well, now we're at that point that, okay, we have 700 reps, give or take, calling in primary care, another over a 100 calling on health systems. We have reps calling on GIs and OB/GYNs. And then we have our oncology sales force from around 150 people altogether. So those investments allow us to bring some of these additional screening programs directly into the infrastructure and teams we presently have.

Yes. I mean given your infrastructure and your experience and your commercial focus over the last number of years, there's a lot of changes in terms of -- it's expected that a significant amount of GI physicians are going to retire over the next 5 years, and this dynamic will change. How are -- maybe for you -- how are you preparing the sales force for that? And how are you engaging to prepare for that type of turnover?

I link it to our footprint. The reach that we have across the country allows us to have the right discussions, whether it's with individual GI practices, health systems, you name it. And one of the things that we're seeing are the backlog of colonoscopies. And the GIs and health systems are coming to us, saying that, hey, because of the shortage of work staff, GIs, they need help. There's 45 million people of average risk. Right now, they are unscreened. And that number is getting challenged just due to what's happened over the past couple of years. So we've -- in the past half year, we've developed some really unique partnerships from health systems because of that GI shortage, colonoscopy backlog to say Exact Sciences, can you help -- can you help with this backlog? And we're training our reps to go and not only respond to that opportunity, but seek out those opportunities, have the data, know where health systems are backlogged, have the right value proposition, so we can go out there and get more people screened because that's our mission.

When you think about what this dynamic is, GI is retiring at an accelerating clip, a backlog of people who are due for a colonoscopy. Well, who are you going to prioritize? Somebody who has symptoms, somebody who has IBD, somebody who is due for surveillance colonoscopy because they've had polyps removed, family risk, et cetera. The average risk screening patient is going to be last in line. And there are at least 45 million. One study that just got published said that 50% of all people of that average risk, they looked at 14 million claims records, 7 million of those people were unscreened. So if you look at the bigger dynamic, the health system is just not set up to screen everybody with colonoscopy and it's getting harder. So now health systems, it's really the first time ever they're starting to come to us and say, we need to integrate electronically. Well, we know once a health system is integrated electronically with our ordering system, that means that they order at about a 50% to 80% higher clip. And we have about 200 health systems that we're integrated with. We probably have another 50 or more that we will integrate with just in the back half of this year, which sets us up for growth next year and beyond. That's -- it's -- the world is changing. We're helping to lead this evolution to noninvasive cancer screening.

Got it. Maybe talking a little bit about precision oncology. There's a lot of discussion on Cologuard and it takes up a lot of the air space, but you have a really good success story within Precision Oncology. Oncotype, a leading franchise in this space. Let me talk about some of the specific drivers that you're excited about within Precision Oncology and maybe the pipeline opportunity with MRD is?

Yes. So let's start with Oncotype DX, which is an amazing test. If you're a woman with Stage 1 or 2 early stage breast cancer, HR-positive, HER2-negative, so the vast majority of patients with early-stage breast cancer. Oncotype DX Breast Recurrence Score answer is a critically important question. A friend of mine who is in this category last summer was, I said, Gay, did you get the Oncotype test? No, I didn't. What is it? It says, well, it determines whether you need chemotherapy. If you're 26 or below, there's no benefit from chemotherapy. It's definitive. This is -- there is a benefit. And so she got a test and she had a score of 24. And she elected not to undergo chemotherapy. That's life changing. Well, Oncotype DX has been ordered by 98% of oncologists in the U.S. It's standard of care. It is level -- Tier 1 evidence in the NCCN guidelines. Because it's been in market for over 10 years. There's huge growth outside of the U.S. This team, our lab capability, our medical affairs capability, our reputation in this field is -- allows us to, we believe, take a position outside of Oncotype DX and into tissue therapy selection, blood-based therapy selection, minimum residual disease testing. So the world of taking care of cancer patients is changing, and it's changing to really specific information that is going to allow patients to be treated based upon their own -- what is going on in the DNA of their own tumor. And so we're excited about where this leads in the near term as we bring that we have rolled out tissue therapy selection. We expect to have liquid therapy selection, minimum residual disease testing. It's a huge growth opportunity in the U.S. and outside the U.S. Oncotype has a global reputation, it's one of the largest by revenue molecular diagnostics tests in cancer outside of the U.S. So we have about a 150-person footprint outside of the U.S., and that's a footprint that we can grow with other tests, including some of the multi-cancer screening opportunities that we have.

Great. Maybe just on multicancer, just talk about the progress that you're making there and what some of the time lines investors should be aware of as you kind of march through that?

It's exciting. I've been watching the data as it emerges through our R&D efforts. And what's coming next is a large study to bring together both the original Exact Sciences technology, DNA methylation and the mutation chemistry and technology that we acquired with Thrive. And so there will be a large case control study, middle of the year, coming up soon. It's actually some of the testing that's already underway and then a second larger study towards the end of the year, which will allow us to launch into a prospective FDA pivotal study we expect by first quarter of next year.

Got it. There's been a lot of debate and you've been very vocal about it on your earnings calls blood versus stool within CRC -- intervals, [indiscernible], the importance of that. Maybe kind of give your view as a kind of state now in terms of competitive advantage of stool over blood and...

I think to some extent, it's the wrong question I'm trying to -- I've been trying to clarify the debate. There are 45 million people who are out of date with their colorectal cancer screening. So there's an enormous need. We all know somebody who's been touched by colon cancer, and that means the more types of screening we have, the more likely we are to get people screened. And that's why we're doing that. Blood-based testing is going to have a different role than colonoscopy or Cologuard, we believe, because the performance is going to be closer to the FIT test, which is inferior to a Cologuard and it's inferior to colonoscopy. It's not going to be able to detect as many cancers. It's going to miss more cancers, and it's going to miss more -- vastly more precancerous polyps. So it's a screening test, is it an improvement? No. Is it an improvement, no, because it is a new and different way to screen. Yes. And that's why we are investing heavily in our own blood program and we will drop our colon cancer blood screening test directly into that commercial and IT infrastructure that we've talked about. So we believe we will lead in this space because there is nobody who has invested like we have in the capability to deliver it to 350,000 primary care physicians in the U.S. Will it ever displace or make an impact into colonoscopies or Cologuard? No. Will it make an impact into some patients who get the FIT test? Yes. And there are 5 million or 6 million people who get a FIT test every year. It's actually more than Cologuard. So there's a large opportunity. I think, though, you have to be realistic about all of the hurdles. It won't be until 2028 that -- 2026 until the guidelines come out, and then it typically takes a couple of years to get fully reimbursed and into the quality measures, which is critical. Docs don't like to order a new screening test that they don't get a quality credit for it. So my point in trying to lay this out is to say this -- none of these things are Nirvana, they take time and there are barriers.

Yes. And I think the important thing that we've written about before that we really appreciate about Exact is the investment in that infrastructure you have. And I think that could end up being the competitive advantage in the space moving forward relative to what maybe technology would have been.

And maybe ever has a long history in primary care, the how important it is to keep calling on offices over and over. It's not an overnight task to change habits coming from iconic organizations like Pfizer and GE and it just takes time. Sometimes they say it takes at least 6 to 10 calls that kind of first get that physician or health care provider to kind of change what they've been doing. And our current organization at Exact Sciences is set up tremendously well from a reach standpoint, the way in which we've designed our commercial organization, but also how we incentivize our organization for frequency. -- making sure that we have the right frequency with the right target at the right time at the right message is the game that we're in. And it takes time to build that because to get that -- to get the reach, it's simple, it's deployment. To get the frequency, it takes relationships. It takes the ability, it takes the training, the skill set to navigate into a health system or an office. And then you put the COVID environment on top of that, takes time. And we've built, like I said, at Exact Sciences very well for that in the future.

Got it. We're obviously in a very different macro environment right now, and you've got the balance sheet, you've mentioned some other flexibility you have with the sale leaseback. In terms of looking at the costs in the system and being able to take down some of the costs, I think Cologuard 2.0 could maybe drive down some of those COGS in the future. How are you thinking about taking costs out? And how conservative do you believe you've been in modeling your path to profitability by 2024?

We've been pretty conservative and guiding to profitability by -- and when I say profitability, adjusted EBITDA profitability by 2024. And it's a pretty straight line path. If you take a look at -- we've guided to right around $2 billion in revenue this year. That means there's just north of $1.4 billion in gross profit. But one of the things we're blessed with is we designed products with gross margin in mind because we know these investments were required. There's margin expansion over the next 24-plus months, so there's going to be increased cash generating. And then from there, we have the 2 biggest areas that there will be savings over time is in the R&D space, where we're rolling off on really large clinical trial, and then we start that's the BLUE-C study for colon cancer screening. And then the SOAR study is also a large one. If you peel that back, you have a profitable business and you have a profitable Oncotype DX business. So now what we can do is -- and we've already -- as of November, we took a whole bunch of actions to say, let's ratchet back on hiring really watch every incremental dollar that we would like to invest. And that has already achieved a significant savings. So Q1 was a high watermark quite a bit in terms of the quarterly cash utilization and that comes down. We have a balance sheet with $800 million in cash. We have $150 million line of credit, and we have the capability, as I mentioned earlier, to lever real estate. So when we talk about getting to cash flow breakeven, that's with a very nice cushion. And we're in a position that it's kind of unique in our space, I feel for fellow CEOs who don't -- they have wonderful businesses. They've invested like crazy. Do they have a cash flow profitability capability in the next 24 months without raising capital, no. So it's quite a challenging environment. And this field is so important to cancer. We've got to figure out -- we've got to have a couple of good things happening in this space so that some of these great companies can go back to their path of investing to do great things for patients.

Got it. [Operator Instructions] Kind of along those lines a little bit, I mean, the great thing about Exact is you have this platform, you can drop from the technologies into the infrastructure that you've built. But you're also in a position where you're looking at your cash, you're looking at your costs valuations have come down, but seller expectations might not be there. And so in terms of build versus buy, as you drop things into the infrastructure and platform, how are you thinking about that in terms of your own pipeline?

Well, a great example is prevention genetics -- that's a genetics company. I think a little mini in beta that has -- although they're their core focus is in pediatrics. They have all the capabilities with 5,000 different genetic tests that they offer, including hereditary cancer testing that they have provided as a service for others in the past. So it was a profitable company, $35 million in revenue, $5 million in bottom line when we acquired it. We love the capability to expand. Last year, my wife was -- actually it was 2 years ago, she was tested for the gene that causes ovarian cancer because she has a personal history in her family of ovarian cancer. And of the 7 daughters in the family, big family, 3 had a genetic mutation that conferred a 6x to 10x risk, increased risk of ovarian cancer. Well, knowing that was very powerful information because she had -- and she has said it's okay to tell the story, but she could have elective surgery and eliminate that risk. Well, there are genes known for prostate cancer and obviously, breast cancer with the BRCA genes and others, and colon cancer, lynch syndrome, most people in this room, I suspect, have never been tested. One thing, you get tested. Invitae is a great test. Sema4 is a great test in this space and just go through the customer experience and talk to a genetic counsel. It's so incredible to go through that experience. Everybody eventually will be tested, and that will be part of your medical record, it should be. So that is an example of a company that we can now -- we're honing the experience so that we can drop that directly into our primary care sales force, our health system, sales force, the oncology sales force. Only half of women diagnosed with breast cancer get the hereditary cancer test. Even if you don't have siblings that -- or children that you would want to help understand whether they're at risk, it changes your course of treatment. One of our board members, Shacey Petrovic, who also said it's okay to share the story -- had -- was diagnosed with early stage breast cancer, and she took a more aggressive treatment because she had a genetic mutation, which confirmed a high lifetime risk. So -- so she underwent a double mastectomy so that she didn't run the risk of having cancer develop again. And this is powerful information. You get to drop this into our infrastructure. And since there is nobody in our field with a large primary care selling organization, education organization, we can't wait to get started with educating the masses. It's like 10% of people have been tested, should be 100%. And we expect to lead there over time. So -- we have this long-term strategy and vision, and we're just not going to stop. And fortunately, we're going to be able to do that in a way that we can also grow profits because we are a growth company and that is the ultimate goal. And that's right around the corner. So we're excited.

Great. Maybe just talk a little bit about -- you've talked in the past about potential for new product launches. Maybe talk about sort of the future pipeline as you kind of see it what you're most excited about?

Three big, big bets we're making in colon cancer with 2 products, Cologuard 2.0, the goal is improved specificity, so a lower false positive rate of colon cancer blood test, 45 million unscreened people out there, multi-cancer screening. That's an enormous opportunity and then minimum residual disease testing. Multi-cancer screening is worth talking about just for a second here. It -- there are 70% people diagnosed in the U.S. with cancer -- have a cancer that doesn't have a screening test for it currently. And so if you take the cumulative prevalence of all those cancers and now deploy a blood-based screening test that can detect most of them, not all of them, but most of them, you have the ability to shift detection from late stage to early stage. And when diagnosed in earlier stage, treatment outcomes are better. I think we're very fortunate that both GRAIL and Exact are in this space. So you have a dynamic where the policy makers don't think that this is just kind of a 1-horse race. They do things the right way. They go out and get great evidence. So -- and it's an enormous opportunity in the U.S., probably 130 million people globally, countless people. It's going to take a long time for this to play out. I mean FDA approval is probably, I think 3 to 4 years from now. Medicare coverage would probably follow that guideline inclusion. It's going to take some time. There's going to be a lot of pressure both pushing from the top down and pull from patients that raise their hand and say, "I want this test. There was a woman named Rosemary in our clinical trial in Pennsylvania, a prospective study. She just volunteered for the study. Well, she had stage 1 ovarian cancer. They never find stage 1 ovarian cancer. It's asymptomatic. They removed her ovaries and she's no chemo, happy, healthy, it's fantastic.

Great. Maybe in a couple of seconds we have left, what do you think is misunderstood about Exact in terms of investor perception? What would you like to get across?

Growth, profitability, cancer eradication.

Nailed it. Thanks, Kevin. Thanks, Everett.

Thanks, Matt. Appreciate it. Thank you.