Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining us this afternoon. A pleasure to have with us Exact Sciences. We have CEO and Chairman, Kevin Conroy with us. Also, we have the Chief Commercial Officer, Everett Cunningham. And I think in the background, Megan from Investor Relations, should be around. With that, Kevin and Everett, thank you both for taking the time this afternoon.

Vijay, it's great to be here. Thank you.

Vijay, thank you so much.

Absolutely. And given that I have both of you, maybe I'll start with the commercial question here. Kevin, if I just look at the business and -- this pandemic has been -- it's been very interesting. How it's fold off in all of our predictions and how people would behave, like everything was that. I think I can say with a high degree of certainty and confidence that we were wrong. With your business the last 2 quarters, it's been trending in the right direction. The numbers are coming slightly better. So is this perhaps the finally we're seeing normalization in patterns and physician access improving or -- what's driven this recent trend?

Well, I think normalization is key. If you go back to the beginning of the pandemic, I -- remember in the very first earnings call that we had during the pandemic, we said, look, this may have the potential for bringing forward the adoption of Cologuard. And I'll say that anytime you bring a new screening test to patients, where there's already a clear -- well utilized standard of care, in this case, colonoscopy, it's a challenge. It's a real challenge to demonstrate the evidence that will give physicians the confidence to try something new. And for years, we worked at all of the hard things. And there are a lot of them to make a new screening test accessible. Well, now what you see fast forward to today is that the Net Promoter Scores for Cologuard are through the roof. They've doubled since the beginning of the pandemic. That we're seeing broader utilization and also deeper, meaning that the infrequent user is using more frequently than early adopters from years past. So what you're seeing is a broader base of ordering physicians, 150,000 in the last quarter alone, and they're ordering it more frequently. So when patients come in and ask for Cologuard today, they're saying, oh, yes, you'd like Cologuard? Great. And now they're also starting to offer it on their own. One of the reasons, in addition to the phenomenal performance characteristics of Cologuard sensitivity and specificity, is also that it's -- you can do it in the privacy of your own home. It's easier than any other way of screening. So these trends, we're happy to see. There's a ton of work left, and the team is fired up to keep driving forward.

Got you. No, that's helpful context. And that sort of segues into my next question. I think on the third quarter call, you mentioned there's been a 25% increase in orders from 1st week of August to the last week of October. I don't know what to make of that number, to be honest. Is that the predictor of future revenues? What does the increase in orders mean sequential? And have those trends sustained as we look at November trends?

Well, let's take a step back. If you take a look out over the course of a year, there are times during the year that people go to their doctor more frequently and consume more health care. And so early in the year -- late in the year and early in the year are light times for visiting a primary care physician. Middle of the year, from August until about Thanksgiving, there tends to be more activity and then it builds again in the spring. So there is seasonality in how people visit physician offices. And -- but what we have seen is a general strength. If you look throughout the year, that strength has continued to build. We think that, that bodes well for the future. As it relates to this quarter, we're not talking about how things are progressing this quarter. However, we are confident that we have done all of the right things and made these massive investments required to now put us in the position we are today.

Got you. Got you. And then I know that, historically, Jeff has mentioned about these seasonal patterns. And when I looked at -- Q4 revenues tend to be slightly higher. And I think that there's order versus revenue recognition lag effects, as some of third quarter orders flow into the fourth quarter. But when I look at the guide this year for fourth quarter, Kevin, I think sequentially, it's sort of implying flat to down. Why shouldn't we see this historical sequential growth in Q4 versus 3Q?

Well, as the use of Cologuard has gotten to be greater, the impact of Thanksgiving and Christmas grow a little bit larger. And that is that people don't go see their doc frequently leading up to Thanksgiving and then into Christmas, and then also there is some kit returns, aren't as big of a priority when you're out shopping for Christmas gifts, et cetera. But that's -- I think, again, you step back and say, there is a general strength in Cologuard. And part of it is driven by the efficiency of the sales force. Everett came in a year ago to lead our commercial organization. And maybe it would be good, Everett, if you could talk a little bit about the efficiency that we actually lowered our sales and marketing spend and saw a 25% year-over-year increase in utilization.

Yes. Thanks, Kevin. And Vijay, as Kevin said, I came in a year ago. And I came into a really good operating organization with all the investments that have been made. Couple of things that we've done to make it even more efficient is we've worked on the messaging of our field force. Kevin said that Cologuard is a first-line treatment. It's getting well adopted by physicians. Our messaging is, Cologuard should be used first line for those patients that are of average risk and 45 years or older. And that's really resonating out in the field and we have 1,000-plus people that go out every single day with data to know who to call on, who are the highest potential physicians and health systems to call in every single day to drive that growth. In addition to our sales organization that we call ourselves, commercial, because we have a marketing organization that is out there working on campaigns for 45 and older, rescreen opportunities. And we're not just relying on face-to-face physician visits but that digital surround sound that we have in marketing. And what I love is our prioritization. We've been really disciplined to not proliferate on our priorities but we're focused on those top priorities, rescreen, 45 to 49, health system, electronic ordering. We've been -- we signed up more health systems this year than we signed up in previous years to making sure that they can electronically order Cologuard. And when they do that, orders and revenue pick up. So that focused prioritization, that efficiency that we're driving is driving growth in the past couple of quarters.

That's extremely helpful, Everett. And maybe on the same topic, but I think, Kevin, you did mention this in a couple of changes on the reimbursement side or the language, if you will, there was a Department of Labor and a Medicare change. I mean it seemed like this could be a big deal? Help us what this -- what the change was? And how does that flow through from a commercial standpoint?

Right. And let me first give credit to the teams that worked so hard to address what had been a real challenge, and that is that patients -- some patients, depending on the health plan that they were on, after they got a positive Cologuard test would go and get a colonoscopy and they would have a 20% co-pay. Because their colonoscopy went from a screening colonoscopy, which was coded 1 way, $0 co-pay to a diagnostic colonoscopy, which was coded a different way, and as a result, there was co-pay associated with it. Well, now all Medicare patients and all commercial payments, starting on January 1, their plans are obligated to pay for the colonoscopy that follows a positive stool test, whether it's a FIT test or Cologuard with a screening colonoscopy. So in other words, the screening isn't done from the time you start a Cologuard to a positive till the time you complete a colonoscopy. It only makes sense. But to make that happen, there was the AGA and the ACG and FIT colorectal cancer and ASGE and all the advocacy groups that are fighting for colon cancer patients got out together and lobbied congress and lobbied the administration. And the White House is this -- their fight on -- their war on cancer is a serious one, the Moonshot program, and this is part of that.

That's a helpful perspective. Do you know what percentage of patients were facing these kind of issues that were incurring a 20% co-pay?

Well, with Medicare, it was probably half of patients. All the Medicare Part B patients for sure, some of the Medicare Advantage plans. And in the commercial setting, it was probably a good 1/3. But what -- docs didn't know that. They just knew that some of their patients had a co-pay. And so if its sum, a meaningful number, then to them, it's all. And so here's one thing to note is that it's going to take time to educate 150,000 to 300,000 ordering health care providers, our customers. It's going to take time to convince them that there is no co-pay associated with it.

Yes. I'll just add one thing, Vijay. This gives our sales representatives something to talk about that's meaningful. And listen, we have Cologuard. So it's very meaningful to talk about colorectal cancer screening. In addition to that, now we can talk about this -- the thing that will take effect in 2023. And when we're in there talking about and making them aware of the follow-up colonoscopy change, we talk about Cologuard, and it just gives more good surround sound discussions that are happening in the offices. And we're doing that now. As Kevin said, there's 300,000 physicians that need to be aware of this. Our reps are out there now because this has taken effect next month or at the beginning of January.

Got you. And just related to that topic, Everett, you need physician access, right, to educate them on this change in rules. And what is the access right now? Has it improved? And what are you assuming for '23?

Yes. We're seeing modest improvement, Vijay, in physician access. It's not getting back to pre-COVID levels. But with that said, I look at this, and I talk to my commercial organization every day. We look at this as a challenge. We're out there not just selling widgets, but we're out there providing data, providing a service to these offices and making sure that they can get their patients screened for colorectal cancer. That's our mission, and we're out there every single day. In addition to that, we look at the total office call too. We're not just calling on the physician, which is critically important, but we're calling on the office manager. We're calling on the quality director. We have a virtual sales team that goes, and they make phone calls every single day to offices that might be a little bit harder to access. And then like I said before, not only we rely on our sales organization but that our marketing strategies are out there touching physicians and patients every single day.

Got you. And then Kevin, maybe a couple of other high-level fiscal '23 drivers. I think Jeff mentioned about -- the cohort of patients who will be eligible for rescreens will essentially be flat. So should rescreening revenues be flat for next year? And how sensitive is this business to economic cycles. I don't think it should be, given you have 0 co-pay, but talk about the economic cycles?

Well, anybody in health care that is relying on people being employed and having health insurance has a risk. But let's go back to the concept of being screened every 3 years. Cologuard is a test that's used every 3 years. That means that if you start screening somebody at age 45, you have a relationship with that patient now for the rest of their lives. And you may screen them another 10 times. And what we're seeing are patients come back. There are over 1 million patients that came due this year for their first rescreen test and another 1 million will come due next year. And there's -- then there's backlog of people who are due from prior years that haven't yet been rescreened. So we expect to do over $220 million of revenue in this rescreen cohort this year. And we've said over the next 3 years, we expect that to grow over to $500 million in revenue. And at some point in time, rescreening patients, there will be more people tested as a rescreen than for their first screen, as you would expect. And that recurring revenue -- but recurring touch with physicians and patients is something that only makes Exact Sciences and this incredible platform stronger for other tests because now that we have a relationship with the patient for colon cancer screening, we can extend that to multi-cancer screening to, God forbid, somebody is diagnosed with early-stage breast cancer to Oncotype testing to minimum residual disease testing. And this is the power of our network. It's the power of our platform. It's been building for a long time, and I think we're starting to see the power of it.

Understood. Understood. And so perhaps be a little -- given that 1 million patients that's static for next year, maybe that -- it has some impact, but the rescreen number should grow next year, but perhaps not at the same rate of growth as what we saw in '22. Would that be accurate?

That is correct and because of the pandemic year. There are still plenty of people out there to be tested. There are 16 million people who are not up to date with their screening, age 45 through age 85. So that rescreen dynamic may be has softened for next year, as you look at the years beyond that, that base of rescreened customers just continues to grow.

Got you. And then one on the margins, I know third quarter was really pleasing. It's -- OpEx being down, revenue is up. But I think to hit adjusted EBITDA positive by third quarter of next year. The assumption is OpEx is growing mid-singles, right, assuming revenues grow double digits. Do those assumptions seem reasonable, Kevin? Can that sustain a double-digit top line for the overall company with OpEx being up 5%?

Yes. Because we have made these significant investments in building a brand over a long period of time, investing in an incredible customer experience. And as a result of that, with both Oncotype and Cologuard, both very profitable tests, we are able to continue to make significant investments in research and developments for colon cancer, our blood-based test, our next-generation Cologuard test, our minimum residual disease test and our multi-cancer early detection test. The 3 biggest opportunities within cancer and opportunities to have an impact. So because we have seen top line growth, bottom line growth within each of the business units, next year, we think is going to be a special year and one that investors have patiently waited for and now they get to, I think, reap the rewards off long term.

Fantastic. And then because you brought up R&D, BLUE-C is topical. Your competitor has some data coming out at some point, I guess, over the next few weeks. What kind of discussion Exact had with the FDA on your own blood-based test, right? And what kind of guidance have you received from the FDA? Have they said anything on what the sensitivity, specificity [ are ] should be for blood-based test?

They have -- the FDA, we keep our conversations with them confidential. They -- at a high level, there's certainly an expectation for a minimal performance on the sensitivity of a test, its ability to detect cancer. The sensitivity of a test detecting precancerous polyps, and also the false-positive rate of a test. So those are the 3 main characteristics. And there's a lower bound of the confidence interval around each of those performance characteristics that you have to achieve in a prospective study. So our studies haven't read out yet, but the FDA has made clear where they expect performance to be in order to get a primary screening claim.

Got you. Got you. And I know I had a bunch of questions, but in the interest of time, maybe one last big picture, Kevin. As you look at the next few months, what kind of clinical data can we expect? When can we expect data from your BLUE-C trial? And what should we be looking for on your MCED test?

So Cologuard 2.0, our next-generation Cologuard test, we expect to complete the study here before the end of the year, and then that will read out about 5 to 6 months later. And then the blood-based test would follow that. So we haven't quite laid out what that time is for the blood-based test. And then multi-cancer early detection, we expect in the late in the first quarter to maybe early second quarter to present data from a very large case control study, which will be the final study we would expect before starting a prospective study. So there's a big data readout. Our last data readout was at the ESMO conference, a couple of months ago, and that showed 61% sensitivity at a 98% specificity. So we have a wonderful test. We're confident it will perform well in the real world.

Fantastic. I think with that, we're at the end of time. Kevin, Everett, thank you both for spending the time with us. And all the best for you guys. It's been a long journey. It's good to see the leverage of the model come through and you guys saw delivers. And all the best.

Thanks, Vijay.

Thanks, Vijay. Thank you. Take care.

Thanks, Kevin.