Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

All right. Thank you, everyone, for joining us. Thank you, Kevin. I'm here with Kevin Conroy, Exact Sciences' CEO. I'm just going to jump right into the Q&A.

So Q3, you're firing on all cylinders. Honestly, I could say that was the most cleanest quarter of all of my cover -- 20 covered companies. Cologuard worked, Oncotype worked, cost reductions are on track. What exactly was -- happened in the quarter that all things just kind of came together at once? And was it just some kind of motivation? Was there any competitive motivation considering there is a talked about event that's coming up?

No, it had nothing to do with any competitive dynamic. What -- it had everything to do with the investments that we've been making over 8 years. So that quarter -- as I said, going into that quarter, to the team, I'm as proud of this earnings report as I've ever been, and it's because it was really 13 years in the making, from developing Cologuard, to launching Cologuard, to saying we are going to make the investment required to reach primary care docs for Cologuard and then in the future, other tests. And it's that sales force, it's the lab infrastructure, it's the IT capability that allows electronic ordering, billing all of those elements that took a long time and then the direct-to-consumer marketing. It has built to the point, and buried within that quarter is that if you look out over the last 6 quarters, our Net Promoter Score, a direct measure of how much people who use your product like it and recommend it to others has gone from 20 to 40. So it's world-class. And that means that the word of mouth around Cologuard has built around over these 8 years. So you can't point to any one thing, it's many things that have been working together to get more people screened. And let me just say one more thing. There are 16 million people in the U.S. who are not up to date with your colorectal cancer screening. If anybody in this audience is not one of them, it's the easiest thing in the world to do, get screened.

So you gave a lot of commentary about continued growth without major investment. And it begs the question, why now? Why -- is it we've reached the critical mass? Or is it market condition-related -- and that?

Well, it's not that we're not making investments, we're spending over $800 million in our commercial endeavors for Cologuard and Oncotype and our other tests across the year. It's that we didn't need to ratchet up growth in order to gain more physicians or to get more patients to ask their physicians to get tested. In other words, the investments that we've made up into this point. Is it fortuitous that we are now -- Cologuard is actually on its own stand-alone basis profitable. Is it fortuitous given the economic backdrop? Yes, it is fortuitous, but it has been the result of 8 years of work, not 1 quarter.

Got you. I'm going to try to stay away from every question you get asked at every quarter, which is, can your competitor land at 85% sensitivity because it's just been beaten to death in my opinion, and I don't know how many more different ways we can ask that question. So I want to move to the next step, which is, do you have the right focus in your sales and marketing expense needs to face a competitive launch assuming that kind of readout or somewhere around there?

So I think the right question is, as we take our blood-based colon cancer screening test into what will certainly be -- there will be other tests that come to market. What is that dynamic going to look like? Well, we know there are about 110 million people who need to be screened. 60 million of them aren't screened that -- these are people between the ages of 45 and 85. So there is a huge opportunity for us to do better as a society in the U.S. to get more people screened for colon cancer. How is that going to play out? Colonoscopy is the leading form of colon cancer screening. We all know that. Cologuard, on an adjusted market share basis, that if you adjust for the different intervals of each test, is second and the FIT test is third. And that is -- the FIT test performance is inferior to Cologuard. So it depends. Is the blood test going to be inferior to a FIT test? A FIT test costs $16. So a lot of physicians, a lot of payers, a lot of health systems use it, if patients won't get a Cologuard test or colonoscopy. These blood test, the challenge that they have, is going to be around performance and pricing and guideline inclusion and Medicare and commercial reimbursement levels. And are you in the quality measures? It's a complex launch, and then commercial reach. And this is where we built a team over a long period of time. We have over 700 reps in primary care, who are calling on physicians. We have a team calling on health systems, that's second to none, I think, in our field. Team calling on payers. We have deep, deep relationships, 250 health systems who have taken the time and effort to connect to our IT capability so that their physicians can order electronically. These are pretty significant advantages.

Okay. Got it. So can you be -- are you feeling comfortable that in the face of these kind of competitive launches that this isn't going to be a race to the bottom in terms of operating spend or any kind of pricing dynamics or anything like that?

I think Exact has a major advantage not fully appreciated, is that our technology, which is kind of an advanced modification, more accurate, more specific, sensitive version of PCR, that is proprietary. That is powered Cologuard. We think it'd be really hard to develop a lower COGS version of a blood test than the one we're developing. That means that we can price a blood-based test in an appropriate way that allows us -- there's no race to the bottom. We drop a blood test right into this large commercial IT infrastructure that we have, and it makes it very difficult for anybody else, especially with the next-generation sequencing test and the cost that come along with that to effectively launch when those hopeful aspiring entrants need to build a large commercial infrastructure, need to make an IT investment. I mean, it's less than $1 billion to go into primary care. I don't see how it is. Cologuard has been far more than that. So I think we're in a great position because we get to drop our blood-based test into our current infrastructure.

Very helpful. One concern I have had with -- let me basically give a compliment before -- given the more difficult question here. One concern I would have with Cologuard is you've been great at market education. You got a clear reimbursement path. There's a clear go-to-market strategy, and the execution has been outstanding. Now saying that, I mean, it does make CRC a very attractive market to go after. So for these folks, these investor folks that are concern that do we have downside catalyst -- after downside catalyst with, is it Guardant, next it's Freenome, next it's -- GRAIL switches to CRC, Natera is even thinking about using some of their data? Do you think that they need to be concerned about the constant news flow of new entrants into CRC, just given the fact that you've had such a clear path to this $1 billion with this infrastructure in place?

Yes, I'd go back to your first question. The strength of what is going on with Cologuard right now in the moat that we have built -- that we've invested in to reach these people who are not up to date with their screening is a significant advantage. And -- it's -- we've made a huge investment in innovation, in commercial and the reach to the physicians. That's going to be very difficult for others to keep up with, especially in an environment that we're in today, where cash is very expensive, these types of investments. And we keep plowing ahead. There are so many tech investments that we're making that it makes it easier for the physician to order a test and for a patient to use the test. So -- and they only come back to the need. There are still 50,000 people a year that die from colon cancer in this country. It's the second leading cause of cancer death. And -- so is more innovation coming? Yes. Is a blood-based screening test the solution? There are multiple challenges there, and the #1 is just performance. Blood-based tests that don't detect pre-cancers, and it's very difficult to find a precancerous polyp in your blood supply. They don't seem to shed DNA back into the blood supply. So there seems to be a biological barrier to that, and nobody has put up convincing evidence that is findable. Well, if you're not finding pre-cancers, that is really the target of colorectal cancer screening. Cologuard finds 42% of pre-cancers and 70% to 80% of the large high-grade dysplasia, the one step before cancer. Over time, if you take our test every 3 years, that models out that you find most of those precancers. So who cares about that? The main guideline group really cares about that because what they look at is total life years gained. 81% of the life years gain come from finding and removing pre-cancer. So blood-based tests that don't do that have a problem. The other problem with blood-based test is they're not very good at detecting stage 1 cancers. To date, the data shows that they're inferior to a FIT test, which isn't very good. And so what does that mean? If somebody in this room has stage 1 cancer and they get a Cologuard test, we find that 9 out of 10 times. Colonoscopy is probably somewhere in that same range. Maybe it's 95% of the time they've never actually run that study, so it's hard to know. But a FIT test detects it 64% of the time. What -- if you have stage 1 cancer, do you want a FIT test or do you want a Cologuard test? With the blood test, it might be less than that. It might be between 50% and 60%. But those are the cancers that you simply can't miss in screening. So this is where the guideline groups aren't going to have an easy time just because it's a blood draw. And you have to -- the path to go from a screening test and at Exact, we've lived through this, the FDA approval and you want a primary screening claim. I think a blood test is not going to get a primary screening claim, ours or anybody else's, because of that precancer detection issue. Two, you need to get through CMS and pay on a frequency basis that matches up with the guidelines. Three, USPSTF, that's the main guideline group. They meet once every 5 years. They do modeling. And their answer is -- yes or no. You're either in or not. And I think there's a 50-50 chance that these blood tests don't get recommended. They're pretty unbiased about these things. Commercial insurers follow USPSTF guideline recommendations. And then there is these really important quality measures, which follow USPSTF as well. So there's a big need, and the question is, is the performance yet good enough to meet that need? We will see by 2026 USPSTF rule, but I can tell you between now and 2026, Cologuard will screen a lot more people than it does today. This -- we are approaching 10 million people or 10 million Cologuard tests. And that number, we expect over the next 5 years to increase to 30 million.

Got you. With that I think maybe you can talk about your own blood program in PCR. Can you talk about the trade-offs you made in terms of cost sensitivity and specificity? And assuming we do see 2020, we have a couple of different readouts in CRC, how fast can you get a trial readout, FDA approval, CMS coverage, the U.S. Preventive Services Task Force, and I mean, obviously, that's 2026? But I'm not talking about competitors, I'm talking about your own assay.

Yes. Well, so the first thing when you're thinking about developing a new screening test or any diagnostic test is start with your COGS list. What are all of the components of cost? And when we developed a blood-based test, that was the first piece of paper we started with, was, okay, what are each of the elements? Because ultimately, pricing for a test that gets is probably is an annual test like the FIT test. You need to get it to be about 1/3 of the cost of Cologuard. So you have to start with a technology that allows you to get there. Our technology, which we call TELQAS, it's proprietary. It has a PCR component to it and the DNA methylation markers that are specific for colon cancer. We know these are colon cancer markers, and a handful of them allow us to get to the sensitivity and specificity performance we believe that is next-generation sequencing like, except at a fraction of the cost. Whereas next-generation sequencing at scale may be hundreds of dollars, a couple of hundred to $400. The reagents for our test would be $20. That gives us a significant advantage to go and reach the patients who need to be reached with some form of screening if they won't get a colonoscopy or a Cologuard test.

And then in terms of the time line, how fast you can you get that to market?

That will -- we expect our study to read out next year, probably in the second half of next year. I assume that there will be an FDA panel meeting for all of these competitors. So I think we all end up in market at a similar time frame.

Got it. Okay. Let's talk about actually Cologuard 2.0. I don't think it gets talked enough. What can that do from a market penetration perspective, a market defense perspective? And why do you think investors don't bring up Cologuard 2.0 as much as maybe they should?

I'm kind of happy that they don't. I think they don't bring it up because Cologuard is doing really well and how sexy it is and an improvement to Cologuard. To us, it's really exciting. And we actually pulled part of Cologuard 2.0 already forward. We call it Cologuard 1.5, and that was an improvement to a part of the test that makes the kit rejection rate when we get that lower. And we have already seen a 1% to 2% overall increase because of that -- of kits tested because of the improvement that we made to an aspect of the test. I won't go into the details. The main goal of our next-generation Cologuard test is to lower the false-positive rate by 30%. We think this is achievable. While we, at least, maintain sensitivity for cancer and pre-cancers, we think this is achievable. That study will read out, we expect in the second quarter next year. And it will have the net effect, we believe, of increasing revenue by 5% to 10%, incorporating Cologuard 1.5 and reducing cost by 5% to 10%. And we think payers will be willing to pay more for it because fewer people will go to an unnecessary colonoscopy.

Got you. Okay. We've talked a lot about Cologuard. So let me talk about the Oncotype franchise. It's -- what exactly drives the long-term durability of the Oncotype franchise? I mean it's been around forever. It's been continually underestimated. It's mature, but you are set to see double-digit growth. So what is -- why is it still getting double-digit growth in it's...

Well, it's an amazing...

15th year to 17th year, something like that?

Yes. It's an amazing test. This summer, Katie Couric was diagnosed with breast cancer. It was stage 1a breast cancer, and she got an Oncotype test. And because her Oncotype DX score was below 26, she didn't have to undergo chemotherapy. So she didn't announce that she had breast cancer until while after she had surgery and announced that she didn't have to undergo chemo. Well, that's a big deal to a patient. And not only do you know whether you're going to benefit from chemo and you know that these studies are randomized studies that have proven that the Oncotype score tells you whether you will benefit from chemo or not. It also tells you your percent likelihood risk of recurrence. So 2 different things. And it's really important to know your risk of recurrence, so that you can do follow-on monitoring or someday, minimum residual disease testing. So it's an amazing test. It is the only test of its type, and there are competitors there that is -- has level 1 evidence. And it's very difficult to go and do a 10,000-patient 12-year randomized study to prove what was proven with Oncotype. So there's about 90% share in the U.S. and about 75% share outside the U.S. Now outside the U.S., the TAM is only 25% penetrated. So the majority of women outside the U.S. who are diagnosed with early-stage breast cancer do not get the Oncotype test and there is a significant amount of growth. We have a strong team of about 100 people outside the U.S. Next year, that business will be in the range of about $150 million. It's profitable. When we acquired Genomic Health, it was a great company with $400 million of revenue, kind of around breakeven. Today, we expect it to be about a $600 million business with 40% operating margin. It shows you the path forward for how advanced cancer tests, number one, change care. Number two, can be profitable for the companies who invest a lot to bring them to the patients who need them. So now you put Oncotype and Cologuard together. These are the 2 most well-known, best brands in cancer care. With this, we reach 98% of oncologists, 90% of primary care physicians, and we have the ability now through the same commercial organization and have to bring new tests. So it's the foundation of the company that we're trying to build to transform cancer care into detecting cancer earlier and giving much smarter answers to the patients and the physicians, oncologists who need them to guide the right therapy.

I want to talk about Exact's leverage with the breast indication here. You are planning on launching an MRD asset. Is breast -- do you think you're going to have a major competitive advantage in breast? And how do you see market share shifting up in that? Or do you see your asset as being really dominate all of your areas of MRD in the future?

I think that -- so MRD, the minimum residual disease test, is actually a -- or multiple tests. A test that you get right after your initial treatment to determine whether you had any remaining circulating tumor DNA, so still presence of a tumor after a surgery, after initial chemo. You would also potentially use this test to detect recurring DNA in a patient's blood so that you could differentially change treatment. And -- it's so important for breast cancer patients and other cancer patients to determine whether they have circulating tumor DNA in their blood because you see that 9 months typically before you would see it on a PET scan. And with our Oncotype reach, we're reaching 50% of all breast cancer patients in the U.S., and we have their tissue and their tissue is the start of testing for minimum residual disease. So it's fundamentally important that we help serve the patients that were already taken care of with the Oncotype test to reach them with our MRD test. That gives us an advantage and it allows us to reach all of the patients that we want to reach. And it also gives us a significant jump start ex U.S. Now there is there are great companies that are doing terrific work in this space already. So we have a lot of work to do to catch up.

Got you. I think you're looking at both tumor informed and tumor-agnostic assays. Why are you leaning more heavily, I think, into the tumor-informed approach? And what are your views in terms of the differences between the 2?

So tumor informed is when you have that tissue to begin with, you can sequence the tissue and look for mutations, curate those mutations and then have a bespoke test that you look for, an approach that Natera has really innovated around and brought to patients. And then there is another approach where you can reach patients without knowing what mutations exist in the tumor. You can use DNA methylation, other markers. We believe that both have advantages and disadvantages. And with the technology that we have, DNA sequencing technology and our DNA methylation chemistry that we can offer patients choice.

We -- I'm going to ask you just the Dave Westenberg special here. Looking back 5 years from now, you and I were sitting together at the Piper Sandler Healthcare Conference. What are you going to go back and say, what are you going to be the most proud of that you accomplished over the last 5 years?

Well, it's a number of things. Screening people for colon cancer. Five years from now, we expect that to be 30 million. And that's -- that's a lot of people. That would represent about 1 million people with precancerous polyps that we have helped identify so they could have them removed. This last weekend at the -- at a Turkey Trot in -- and I was running -- I just finished a road race and a woman came up to me and said, oh you, Kevin? Yes. And she said, I had a Cologuard test 7 years ago, and it came back positive and I had stage 2 cancer. And she said, I've been cancer-free for 7 years. I thought those are great way to start Thanksgiving. I mean it was so powerful. Now multiply that with a 0.6% incidence rate, times 30 million people, that's 180,000 people, 150,000 people with early-stage cancer. That's really powerful. But then this platform that we have built, you can bring a multi-cancer -- I can -- but multi-cancer testing is going to change everything. And is that going to be 3 years from now? Is it going to be 6 years from now? I don't know, but I think that next 5 years is bringing this multi-cancer test to patients who need it. Tomorrow, I'm spending the day in Washington, D.C. to make sure that this legislation gets passed, that gives CMS the authority to pay for a multi-cancer test. If you can screen a whole population with a test that detects only 40% of cancers, but most cancers. You can screen 50 people to find one cancer. Well, you have to screen well over 100 people to find 1 breast cancer, well over -- almost 200 people to find 1 colon cancer. So with a blood-based cancer test, you're going to see the field of oncology change because you're going to be treating many more people with Stage I or II cancer. And what does that mean? A Stage I colon cancer, they resect a foot of your colon and no chemotherapy and you have had a really bad couple of months. But with -- and if you could do that at scale across most cancers, now that's not true with every cancer because they're -- Stage I pancreatic cancer is still awfully hard to contend with. But most cancers are treatable with surgery, and maybe chemotherapy, that early. So I think that that's what we're going to be proud of. Oncotype is going to be used all over the world for every breast cancer patient who needs it. I think over the next 5 years, you're going to start to approach that, and minimum residual disease testing, and I think we're going to be a leader in that space, helping people detect recurrent cancer much earlier.

Great. Thank you so much, Kevin. Thank you, everybody, for the first [indiscernible].

Thank you. Thank you very much.