Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

All right folks. Good afternoon, we're going to go ahead and get started. Welcome to the Jefferies 2022 London Healthcare Conference. I'm Brandon Couillard. I cover the life science tools and diagnostics space here at the firm. It is my great pleasure to have Exact Sciences with us back at the conference this year. And joining us this time, on behalf of the company, CEO, Kevin Conroy; as well as Megan Jones, Head of IR. I will turn it over to Kevin for some prepared remarks, and then we'll jump into Q&A. Kevin?

Thank you, Brandon. It's great to be back at this conference, and gosh, it's incredible, the turnout. Exact Sciences is totally focused on the eradication of cancer and making the earlier detection of cancer a routine part of medical care. Cancer, among people in this room, if you're under age 85, it's the #1 killer. And unfortunately, cancer is usually detected 70% of the time because you have symptoms, and we know that by detecting cancer earlier outcomes improve. That's the mission of Exact Sciences, and we're making a ton of progress in advancing this mission and bringing new tests to patients that make a big difference in their lives. The safe harbor statement. We will be making forward-looking statements during the course of our conversation today. So we have a team of incredible scientists who are using the most advanced diagnostic tools, techniques, biomarker classes to move cancer detection earlier. And our company was based on great science and great collaboration with Mayo Clinic, Johns Hopkins and others that have helped inform our strategy as we bring new tests to physicians and patients who need them. One of the test, Cologuard, was developed because there is this huge unmet need in colon -- detecting colon cancer earlier. Colon cancer in the U.S. is the #2 cancer killer, killing 50,000 people a year. It's usually detected Stage 3, despite all of the screening that exists. Only about half of people will get -- will undergo colonoscopy in the U.S. And so there was this great need to screen the whole population with the test that is non-invasive. You can do it at home. It's highly accurate. And what Cologuard does is look for slight changes in cellular DNA that indicates that cells being left off inside the colon are from tumors or from precancerous polyps. And Cologuard broke through $1 billion last year. We expect to test almost 3 million people this year. It is becoming a standard of care. It has been in the guidelines now for 6 years, and it is 97% of people who get the test pay $0 out of pocket. It is just becoming a go-to way for people to get screened. And it's gratifying to see the progress, and we know it's having an impact in patients and moving detection earlier. Oncotype DX is another test that we're incredibly proud of. Oncotype DX is a test that is used for patients with certain types of early stage breast cancer. The majority of breast cancers that are Stage 1 and 2. And these cancers, the number 1 question that needs to be asked is, will a patient benefit from chemotherapy? 80% of the time patients have zero benefit from chemotherapy. And the question before Oncotype DX was which patients will benefit and which ones won't? With Oncotype DX answers that question definitively, and it has changed the standard of care. It is now level 1 evidence, massive randomized controlled studies that have shown that Oncotype accurately predicts chemotherapy benefit, and it also accurately predicts the risk of recurrence. Because 70% of patients in the U.S. use the Oncotype DX test, about 25% outside the U.S., there's still room for growth, especially as we look at our international opportunity. And we need to get all women who are diagnosed with this early-stage breast cancer tested. It also gives us the opportunity to get additional tests. We'll touch upon minimum residual disease testing, which informs the question after treatment, did you get all the cancer? Or the question, has that cancer recurred in ways that today are not being answered. There just is no answer today. And so we'll come back to this topic. Oncotype DX was developed by Genomic Health. Genomic Health became part of Exact Sciences 3 years ago. It's approaching about a $600 million business this year, and it has about a 40% operating margin. So when you take a look at Exact, I think it's been comprised of Cologuard, which is the #1 cancer diagnostic today, about just north of [ $1.3 billion ]. Oncotype DX, great reach into the oncology setting, [ $600 million ]. Each of them have over 70% gross margins, which is unique in cancer diagnostics. We expect the gross margin profile to continue to improve. We have a path to profitability here over the next several quarters. We guided to EBITDA-positive in Q3, adjusted EBITDA-positive in Q3 of next year. There's a clear path to that occurring, and we're looking forward to take this deep reach that we have with most major health systems in the U.S. use these 2 tests. We have amazing patient navigation, allowing us to engage with patients to make sure that they follow through with the test. We have the largest commercial reach, the reach to physicians and nurses into health systems and electronic ordering of any company in this space by far with about 1,300 people on our commercial team. And we have well over 300,000 ordering physicians. So there's a deep moat. And this will allow us to bring new tests to physicians and patients who need them, including next-generation colon cancer screening tests, both stool and blood. A multi-cancer early detection test, I think, one blood draw, most cancers and then a minimum residual disease test. Finally, hereditary cancer testing. We acquired PreventionGenetics about a year ago, and we are launching a hereditary cancer test into both the oncology channel presently and then next year into the primary care channel. We're excited about the future and driving this incredible science getting it into the clinic and having a change outcome so look forward to the conversation.

[indiscernible] the third quarter highlight was the fact that Cologuard grew 25% year-over-year, and sales and marketing was down 5% year-over-year. And so historically, every stage of sort of incremental growth we've seen with Cologuard has come with some level of incremental spending as well. Why is now -- why are we seeing the leverage in the model today? What's unique about this point in time in Cologuard's evolution that's enabling this leverage to finally, I guess, materialize?

Cologuard has been available to patients for 8 years, and for 8 years, we have been investing heavily in education around this new DNA-based way to screen for colon cancer. And investors have been incredibly patient, and we have said, we are going to reach as many physicians and the 100 million -- 110 million people who need to be screened. During this time, we have reached now a grand total of about 300,000 primary care -- health care providers. We have seen our customer satisfaction go from -- just in the last 2 years, NPS score of 20 to an NPS score of 42. The brand has become powerful. It's in all the key guidelines. It's fully reimbursed. And so now finally, in the third quarter, you saw the separation between the growth and the constant, the flat sales and marketing expense, and we expect that to continue. So if you look at next year, what you can expect is reasonably flat sales and marketing expense. So we don't expect any big additions to our sales force or any significant addition to our direct-to-consumer advertising. That separation is occurring. We have said, it's -- this is like a jumbo jet taking off, and it has been. But now is where you see the power of this because we're seeing recurring revenue. Cologuard is a test that's used every 3 years. Over time, that recurring revenue will become over 50% of the Cologuard revenue. So our path to becoming a $2 billion test and a $4 billion test is clear. And to put that in perspective, today, there are 60 million people in the U.S. who are not up to date with their colon cancer screening. We'll screen just under 3 million of those people this year. We have such a long runway to get to the people who need to be screened, and screening makes all the difference. We know the big study show that screening leads to earlier detection, earlier detection leads to better outcomes.

Just to clarify the point about '23. Is that on a -- compared to the full year '22? Or is that compared to like the 3Q run rate or the second half run rate for sales and marketing?

That compared to the full year.

Okay. Helpful. I think you made some headcount -- strategic headcount reductions in a few areas of the business. Should we expect those to impact revenue? Does any of those changes you've made in terms of resource allocation affect any revenue facing aspect of the business?

No. There were a couple of principal areas that we trimmed our headcount. In May, we -- when we combined with 450 sales force members from the Pfizer team, we had a partnership with Pfizer. We ended up with about 150 people who had overlapping territories. So there are about 150 people who exited the organization just because we didn't have the right role for them. And then more recently, about 225 people who're in data entry roles, we announced that they -- those positions will phase out at the end of this month. Now many of those people may end up coming back to work in our lab organizations. Some of them came from the lab organization. Those are the 2 principal areas over the course of the year, and that will not affect our topline growth.

So you pulled forward the target date for profitability 3Q next year. You do have several big spending plans in the pipeline. Some new products launching over the next few years. Is '23, '24 kind of an aberration and maybe we take a step back in '24 and '25? Or is this kind of the inflection point for sustained profitability even when you commercialize the pipeline and invest in those big trials?

Yes. So the big study that we have to do is a multi-cancer early detection test. So that's the single blood draw, most cancers. And that is likely an 80,000 to 100,000 patient prospective study, randomized and that's an expensive study. And that's a study that will run over an 18- to 24-month period of time where the significant costs are in that 18- to 24-month period of time. That depends on when that study starts. We obviously want to make sure that Congress passes the law to allow Medicare to pay for that test. I doubt we would start that study until we see Congress make a move. But by the time we start that study -- right now, we're planning in the second half of next year, we will -- that our revenue growth and our constant state of our sales and marketing and our G&A expenses will allow us to be profitable, despite starting that study. You have to remember the -- right now, we're running a large study to support Cologuard 2.0, the next generation Cologuard test and our colon cancer blood test. So that -- those expenses really start to come down after Q4 of this year, and so there's plenty of room in our R&D budget to do the studies that we intend. So there may be a step up and then a step down. The timing of that is dependent upon when we start the big what's called the SOAR study, S-O-A-R.

Fair enough. You've talked a lot about a couple of things, higher recurring revenue mix, higher electronic ordering. That would seem to take a lot of the selling intensity burden off of reps. You've also talked about targeting them in a more effective, more deliberate way toward highest-value call points. What's different about how you're directing them today? Is the data and insight you have into the those call points better or different today than it has been historically?

We have our own sales force today. So at the end of 2016, we announced a partner with Pfizer. At that time, we had 200 reps, and we finished 2016 with about $450 million in revenue. And we knew we have the ability to just drive awareness of Cologuard in the primary care setting, and Pfizer for 4 years helped us do that. It -- undoubtedly, that partnership drove awareness that also created some inefficiencies because we were -- Cologuard was mainly in a 2nd or a 3rd position in the Pfizer bag. When we ended the relationship with Pfizer and simultaneously brought hundreds of those Pfizer reps to Exact because Pfizer was letting them go. What we ended up with was a smaller sales force with Cologuard in the first position. We also ended up with the ability to direct our significant marketing budget. We had 100% control over where those ads get placed. We did not have that with Pfizer. This isn't to take anything away from that partnership with Pfizer. That partnership drove us from $450 million in revenue to over $1 billion last year. Now though, we have a team that is hungry and focused. And to your point, we have the data as to which physicians to target. As an example, we know in every primary care office in the U.S. down to the physician level, what the mix is of colonoscopy versus Cologuard versus the FIT test. So when our reps walk into that office with their iPad, it automatically reconfigures that presentation for that particular physician. If that physician is predisposed to colonoscopy, it's one presentation. If it's predisposed to the FIT test, it's another presentation. So we do have an incredibly sophisticated ability based on the data that we have to target. And this is going to be very important as we bring new tests like hereditary cancer testing and multi-cancer testing to the sales force. It differentiates us. Many times people ask about our competitors. Well, there is nobody that has built a primary care sales organization, the platform, electronic ordering capability that we have built. And it just takes years, and it takes a ton of capital to get to the point that we are now. And so I'm very pleased as a team where -- that we have the ability to do the things that we want to do to effectuate cancer care because of the investments we've made.

In terms of Cologuard, you mentioned the recurring revenue piece, the rescreening. You talked about north of $220 million. I think this year, a longer-term I think, $500 million plus. Is that still intact for 2024? And how will the size of that pool evolve next year?

Well, we expect that pool -- that revenue to be north of $500 million 3 years from now, and there's upside to that. If we get better at engaging with the patient and the physician to reorder the Cologuard test in advance of the 3-year due date, we are seeing steady increases in the percentage of people who complete their second Cologuard test, and we expect that to just become automated over time. We're not there yet, but we have cell phone numbers of most of our patients, e-mail addresses, and we have the ability to reach physicians. And so there is a surround sound educating physicians and patients about the need to get that second test. That over time becomes more than 50% of our revenue because all -- everybody who gets a Cologuard test, if you're between the ages of 45 and 85, you need to keep getting tested every 3 years. It's a powerful part of our story. It's one of the reasons that the tools that we have developed, this patient engagement engine will be very important as we bring new tests like a minimum residual disease test. You even diagnosed with cancer and you've been treated and now you want to look in a patient's blood to see if recurrence has happened. You need to engage with the patient to make sure that they come back in for that blood draw. It's the same engine, and that engine has taken us years to develop. We are, in many respects, an IT company at our core with amazing science and cancer diagnostics sitting on that platform.

You mentioned MRD. How will your tests and your approach be differentiated from the competition? How should we view Exact versus other players already in the market?

Well, I think if you take a step back and take a look at what the minimum residual disease testing market is, you have millions of people who have been diagnosed with cancer who aren't being followed up to see if they've recurred. And unfortunately, recurrence is detected. Say, you've been diagnosed and treated for breast cancer, what is the way today that you -- recurrence is detected? Is through symptoms. You don't go back for a PET scan once a year. You -- but a blood draw that we know through the studies that have been run detect breast cancer 9 months before a PET scan can. That's huge. Being able to detect it just fragments of cancer DNA in a patient's blood, then you can put the patient back on to aggressive treatment well in advance of that tumor mass growing and spreading. So if you look at this opportunity, it's a $15 billion opportunity in the U.S. alone. And Natera has done a really nice job here. Gartner has done a nice job here. We happen to serve 50% of all breast cancer patients in the U.S. and about 20% of breast cancer patients outside the U.S. in 90 countries. So we have the ability because we have access to the tissue to develop that bespoke test for that individual patient. Having that tissue is a powerful tool to rapidly getting that patient tested, and nobody else can do that. So that's one area. The other area is in colon cancer, and these are the first 2 indications. We know who the patients are, who are moving forward, who are positive for Cologuard and then go on to get scoped and then some -- a fraction of those get diagnosed with colon cancer. And we already have a relationship with their physician and with the patients. So we have some advantages in the field. It's not to take away anything. Natera, I think, has done an amazing job of building the space and doing the right studies over a number of years, and they're going to be a leader for a long time, I believe.

Yes. Brandon, you'll get a look at our data in tumor-naive for breast cancer later this year and then early next year in colon cancer comparing both our tumor-informed and tumor-naive approach. And MRD, we plan to offer both to patients.

That was my next question. If there's -- are there some targets that investors should keep in mind in terms of sensitivity specificity? What should we look for in those 2 upcoming data releases which would be key on? What would you like to see from those toplines?

Well, the first one is really more about markers selection and then the next study would be sensitivity and specificity.

So the ASCO GI data would be the sensitive [indiscernible] specificity.

Yes. Think of the data for breast cancer at SABCS is more of like a marker selection study discovery study.

Got it. CMS has changed the policy for the follow-up colonoscopies next year. Is that a catalyst for Cologuard? So they'll now be reimbursed for a follow-up instead of the screening. Or will it take some time, I guess, to educate the market?

It will take some time, but this is a big deal. Until 2022, until this year, patients who had a positive Cologuard test, many patients, not all, they went on to a follow-up colonoscopy. They had a co-pay associated with that colonoscopy that they wouldn't have had if they've just gotten a screening colonoscopy in the first place. The reason being is that colonoscopy got quoted as a diagnostic colonoscopy in Medicare patients then had a 20% co-pay. Many commercial insured patients had a certain co-pay. And so primary care physicians frequently would tell a patient who asked for a Cologuard test, you might as well just get a colonoscopy because if they find a polyp, you won't have a co-pay associated with it. So this has been a drag on Cologuard or a headwind for years. And the 2 different agencies, Department of Labor clarified the rules for commercial insurance plans. Don't ask me why it's the Department of Labor, but that's -- they oversee those regulations. And then Medicare, just a month ago, clarified this for Medicare patients. So now going into next year, patients who get a positive Cologuard test and a follow-up colonoscopy should have $0 co-pay. It's going to take time to educate 300,000 primary care physicians that these changes have been made. It's also going to take some time to make sure that you educate the GIs that the quoting gets done correctly. So I would look at this now as still a headwind, and over the course of '23, '24 and even '25, it takes a long time to educate primary care docs that it becomes a tailwind. And we're excited about that because the patient impact here was not a positive one.

Excellent. Well, unfortunately, we're out of time. That went fast. Thanks for being here, Kevin, Megan. Great to see you, all. Thanks, everyone, in the audience.

Thanks, Brandon.