Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Hello. Thank you, everyone, for coming today. It's my pleasure to introduce Exact Sciences. Today, we'll be joined by Kevin Conroy, who's the Chairman and the CEO of the company, who will be providing the presentation. And then we will also be joined by Jeff Elliott, who is the CFO and COO; and Everett Cunningham, who's the CCO for Q&A. Handing it over. Thank you.

Thank you, Zach. Thanks JPMorgan for having us attend and present and to all those on the webcast and here, thanks for joining. We will be making forward-looking statements. This is our safe harbor statement. Remember these numbers, 1, 5, 7, 9, 14 and 10 million. In 2009, I had a meeting that changed everything. I got a call from the Exact Sciences Board. They were looking for a CEO to effectively restart the company and develop a non-invasive colon cancer screening test. And the only problem is they had no R&D team left after a decade of work and no real proof of concept. So they suggested that I go meet Dr. David Ahlquist, here on the left who -- a renowned gastroenterologist, researcher scientists at the Mayo Clinic, who is focused on the early detection and prevention of colon cancer. It was a 1-day meeting. And I left that meeting knowing that I would join the Exact Sciences team, we would partner with Mayo Clinic, and we would go about developing what became Cologuard. Well, the first thing that we did was hire Graham Lidgard, who you see here on the right, and he is a legendary molecular scientist who built the team of research and development scientists, biostatisticians, clinical affairs team, a lab team, automation team to develop Cologuard and bring it into a lab environment. It was an arduous process, highly difficult to detect colon cancer from a stool sample because you have to get that DNA out of that sample. And for five years, so five years from that 1-day meeting, it took to get FDA approval. It took seven years to get into the main guidelines. And it took nine years from that 1-day meeting to get full commercial insurance coverage. And here we are 14 years later, and Cologuard, that test that Graham and Dave and the team develop has now started to change the standard of care. And we're proud in November that we achieved our 10 millionth Cologuard test. So 14 years to 10 million. My friend, Dave, I promised I wouldn't do this, passed away from ALS two years ago. But he left us with this incredible mission, which was the focus on early detection and prevention to eradicate colon cancer and to expand that beyond colon cancer because as he said, look, if you're under age 85, the #1 cause of mortality is cancer. Most people in this room are under age 85. #1 thing you have to worry about is cancer. And the way -- I mean there are brilliant therapies being developed. Every year, you see more and more but the way to really impact this problem, it needs to be -- those therapies need to be coupled with earlier detection. University of Chicago just came out with a study that said only 14% of cancers are found through screening. If you find a cancer that's not through screening, it's typically symptomatic, which means it's typically later stage, which means it has spread, which means that you're dealing with a much more complex problem. On the strength of our Cologuard test and also our Oncotype test, our breast cancer test, we are able to invest heavily in making Dave's mission become reality. And when you look at where we are building a company around a full range of tests, this is where things get exciting. We know that this is so critical for us to innovate in a way that we help people determine what their predisposition to cancer is, their genetic risk, new screening test to help detect cancer earlier, new tests that help diagnose and prognosticate what the outcome of that cancer is going to be like the Oncotype test. And you have to deliver this in a frictionless environment and a technology that makes it really easy to identify a patient who is going to benefit from a test, to ordering a test electronically, to providing a surround sound, we call it our compliance engine that helps people complete a test, to a test result and the billing associated with the test. All of that takes an immense lift and deep technological capabilities because the goal is to make sure that physicians are able to spend more time with their patients and less time with the complexities of precision medicine. Let's talk about our screening team. The focus has been colon cancer to date. And it's a big problem. Colon cancer is the #2 cancer killer in the U.S., 150,000 new cases last year, 53,000 deaths. Unfortunately, about half of people who are in the screening age, age 45 to 85 are not up to date with screening. Please, if you're in that age group, make sure you get screened, either a colonoscopy or Cologuard, the most sensitive way to detect either cancer or precancer. And we know that earlier detection matters. So if you're diagnosed with Stage 1 or 2 cancer, 9 out of 10 people survive five years or more. If diagnosed with Stage 4 colon cancer, 1 out of 10 people survive. That's the difference. Early detection really matters. And so the goal here is to go and get these 60 million people screened and we're doing that. Cologuard it's a travesty that we're not getting more people screened. Cologuard is part of the solution, a big part of the solution. One of the most important features of Cologuard is it detects 94% of Stage 1 and 2 cancers. Not -- no other noninvasive test comes close. It also detects 42% of precancerous polyps, including the small ones, and it detects 70% of the largest, most advanced precancer. If you find and remove a precancerous polyp, you actually can prevent the disease. And so Cologuard being an at-home test that's easy to use, highly sensitive with 24/7 support is a test that is now really starting to take off and make a difference. And people who are reluctant to get screened are getting screened. This is one of our customers who happens to be a physician. Here's the story. [Presentation]

It's pretty cool. It's powerful. And we want to make sure that all people get access to Cologuard. Like Dr. Fenton, it's changing. In fact, it's life changing. And when you look at -- now the adoption of Cologuard, eight years after launch. We saw a little blip there during COVID and we have seen renewed strength. And this momentum amounts to 66% compounded growth since we launched in 2015. And we're more confident than ever that Cologuard is going to become part of the solution to go get those 60 million people screened. Cologuard is recommended to be used every three years, so there is a recurring element to Cologuard, which is a powerful one. Now let's talk about our breast cancer and our precision oncology team. In 2019, we acquired Genomic Health and they developed an amazing test called Oncotype-DX. And what Oncotype-DX does for an early-stage breast cancer patient is it examines the tissue and it looks at certain genes and how they're expressing the RNA. And from that, they can do a calculation that answers two really important questions. The first question is will the patient actually benefit from chemotherapy? 80% of patients early stage don't. 80% don't. Challenges, you didn't know who would benefit and who would for sure, until Oncotype came along. The second question that it answers is also an important one. What is your percent likelihood risk of recurrence? Those patients can be treated more aggressively. These two questions, because they've been answered with randomized controlled studies, multiple studies. It is now Tier 1 recommendation. There is no peer, and nobody has invested in those studies to generate that level of confidence. Well, here's an oncologist who really truly believes in Oncotype because at age 41, Dr. Halaharvi was diagnosed with early-stage breast cancer. And she knew that she was facing the same decision that our patients were facing, lumpectomy, mastectomy, chemotherapy, not. And she knew that she needed an Oncotype test. Her test score came back at 18. 25 or below, virtually no benefit from chemotherapy. So she could confidently make the decision to forego chemotherapy. Well, we know chemotherapy can cause other cancers. We know that it has lifelong implications. So she was able to avoid chemotherapy. And that's a powerful testament to what Oncotype has become. When you look at what this team has done when we first acquired Genomic Health, it was a $400 million business in 2018, with 20% EBITDA margins. Today, it's a $600 million business with 40% EBITDA margins. The investment is making a difference in people's lives. And this emanates from a culture that we have developed at Exact Sciences that starts with great people and through developing incredible tests and bringing them to patients and physicians who need them, ultimately driving profitable revenue that you can invest part back into the business. And it starts -- it truly does start with the people. We have a culture of Exact Sciences that starts with great science and great scientists. And we know that we're on this mission to deliver something that changes the lives of people. And when you look at how this culture heads through constant small -- solving complex problems one at a time over a period of 14 years, we've grown from a handful of people to 6,500 people who are focused on this mission and a special call out to our frontline team members who delivered last year coming out of the pandemic, and they -- our field team, our marketing team, our ops team, our lab team, our customer support team and the list goes on, our finance team. They delivered. It was the front line that delivered, and that's where the culture starts. And we've been certified as a Great Place to Work four years in a row. It's something that the team takes great pride in. So everybody has ownership. And that ownership then ends up helping us develop great tests through great science. And that's what our commitment is. Don't cut any corners. Do the hard work. Not everybody does it. You do the hard work on the science, and then you are able to address big problems, colon cancer. Our Cologuard 2.0 program. Our colon cancer blood program will have readouts this year. We're excited about that. Our multi-cancer program, the idea of one-blood draw, most cancers, and then this idea of minimum residual disease testing. If you've been diagnosed with cancer, today frequently, the answer is go home if you're not feeling well come back after your treatment. Now today, by doing a Bespoke test, you can do a blood draw and separate the world between people who are likely to recur and those not likely to recur. It's going to be game changing. Now here's the important part. You have a great test. Many innovators forget that the next most important part is to do the hard study. In the case of Cologuard, a 10,000-patient study comparing Cologuard to the current standards of care. Nobody thought that -- people thought that was insane when we did that. It ended up in the New England Journal of Medicine. Genomic Health before us randomized studies, five different New England Journal of Medicine publications, Tier 1 evidence. You've got to do the studies that -- if they don't turn out your way, you don't have a product. You've wasted a lot of time maybe. But you've got to do those studies regardless because that leads to commercial insurance coverage and the ability to change practice. And what you see here is an incredible field team at a national sales meeting, and they're able to convince physicians to change the way they've been practicing medicine for a long time because of the evidence that exists. So that's part of this flywheel that keeps rolling. And this is the best, most trained, most motivated, most experienced sales team that exists in diagnostics. There isn't anything close. Everett's going to -- we'll be happy to answer questions about this incredible team. And then this customer experience grounded in an IT infrastructure that we built is second to none based on the Epic EMR system. And the ability with all of the different tools to prompt a physician to order a test when a patient needs one. And then also makes the experience incredibly easy all the way from order to result into billing. This has taken an enormous investment but that's part of what you're seeing flow through in the operating results of the company. So when you see this -- each one of these stars represents a health system to which through our instance of our epic EMR is integrated. That means there are hundreds or even thousands of physicians can order a Cologuard test electronically. It's powerful. It's taken us eight years to get to about 300 systems. We have another 500 to go. You can't just replicate that overnight. That is something that is unique to Exact. It means we can drop additional tests into this ecosystem and deliver an incredible experience to physicians, to patients and automate things in the future, like prior authorizations. So we're really proud of our partnership with Epic and what that is doing for patients and outcomes. Now, we announced results yesterday, and Jeff is going to want to make sure that I read all of this accurately. So I'm not going to freelance. We're tremendously proud of what the frontline team members achieved in the fourth quarter and for the full year. It starts with growth. So you can see here that the total revenue, excluding COVID testing grew 28%. The screening team drove a 45% growth quarter -- over last year's quarter 2021. And the precision oncology team, they faced two things. Number one, we divested our prostate cancer test. And we also faced FX headwinds. We expect that the precision oncology team to grow Oncotype from $600 million to about $1 billion. So there's plenty of room to grow there. We added $119 million in revenue year-over-year in the fourth quarter, the largest dollar amount to date and $120 million in incremental profitability. So the flow-through was over 100%, it was tremendous. We believe that this growth and the momentum is sustainable for many years because of the strong base of leading diagnostics that we have and are bringing, so we're about $2 billion in revenue last year, a little bit more and about $1.5 billion in gross profit. For 2023, analyst consensus is [ $2.267 million ]. And we think that's the right way to think about this year. With the platform that we've built and the new tests that are coming, we believe that we can continue to see this momentum grow. And this big base of predictable revenue helps fuel the company. Now one of the things that we're proud of is a year ago, we said that we will become profitable full year 2024. And not only were we profitable on an adjusted EBITDA basis in the fourth quarter, we will be profitable on an adjusted EBITDA basis for the full year 2023. The team you've seen is making steady progress, and this was a team effort. This is a result of our IT systems, our lab infrastructure, our commercial channel, all working together to make sure that we sustain growth and are very disciplined around expenses. This preserves our balance sheet, which we expect to finish 2020 at about $630 million of cash on the balance sheet. This puts our team in a tremendous position to bring innovations to physicians and patients. And what started with 1-day meeting with Dave Ahlquist, turned into 10 million people screened. And now by 2027, so four years from now, we expect that to a total of 30 million people. We're on a trajectory, and we're doing all of the small right things to continue that trajectory to make earlier detection of cancer, a routine part of medical care. That takes more than a great test. It takes a team and it takes us this amazing surround zone. There's still a huge amount of work in front of us. But Dave used to say all the time, if we can, we must. I missed Dave. Thank you.

Thank you, Kevin, for that formal presentation. So I'm going to kick off one question, and then we're going to open up to the audience. So don't be shy. I think we have a mic running around. [ Tricia ] is going to be there. But Kevin, you kind of touched about this in the presentation a little bit, but can you just talk about the key drivers in Q4?

Well, there are -- let me start, and then I'll pass it to Everett and Jeff. Much of the strength in Q4 comes not from Q4, but investments that we have made over a long period of time. And the three things that come to mind is brand awareness, the quality of the test -- the performance of the test, the commercial team, this field team is really humming and then all of the small -- the prompts, the digital experience, the text, the reminders, those things led to -- are leading to growth. But let me pass it over to Everett.

Yes. I'll mention a couple of things. I spend a lot of time in the field with our internal team and with customers over the last couple of quarters. People are accepting Cologuard as a first-line treatment for colorectal cancer screening. It's no longer a novelty. People know about it. I would say that our surround sound has really taken hold, meaning our field is out there. We're better deployed. We have better tools. Jeff's team has equipped us not just with data nationally but data at the market level, so we know exactly which target to call on and win. Our marketing team, the marketing campaigns that we put in place throughout the entire year is really starting to take hold and we're really focused on campaigns for the 45 to 49 cohort and you -- as Kevin said, 9 out of 10 adults over the age of 45 are seeing a marketing campaign every single day, which is phenomenal. And then lastly, just that surrounds sound that we get help with IT making it easier to prescribe Cologuard every single day because we're electronically interfaced. The focus and help that we get from our operations team, making it easier for us to get to our targets. That's -- that momentum, that discipline in the commercial organization, we put in place at the beginning of the year, and you're just seeing it just gain momentum throughout the year.

What really excites me about this is the sustainability of the growth. Kevin talked about the size of these markets. There's a lot of people out there. It's 60 million right now who are unscreened. So there's years and years of growth ahead for Cologuard and then gets even more exciting. This platform we've developed gets even more exciting as we drop new products in. So we've built a power extension here that keeps getting better with the time. That flywheel Kevin showed. Sustainability of growth, that will be a hallmark of Exact for years to come.

Does anyone have any questions or?

I can restate.

[indiscernible]

So the question is around the multi-cancer test. What's the time line to launch? And also, what are the challenges around reimbursement. Let's first talk about what a multi-cancer test is and what the goal is. A blood-based multi-cancer test. Interestingly, in 2009, the second part of the day with Dave Ahlquist at the Mayo Clinic was he had this crazy notion that you would do a blood draw and look at methylation markers to detect all cancers. And I thought that was insanity. I mean I was so far out there. But GRAIL and other companies really started doing good work to evaluate whether it's achievable. And in fact, it is. You can detect most cancers through a blood draw. Now not all cancers but most types of cancers and maybe ultimately half of cancers through a blood draw. And what does that do? At a population level, if you want to take the #1 killer for people under age 85, start to screen them because 2% of them are walking around with cancer and don't know it. And if you can shift detection from Stage 3 to Stage 1, half the time or Stage 2, half the time, you all of a sudden change outcomes in a massive way and in a way that you can't do it with therapies alone. So what are the time lines? There's a lot unknown about what the time lines look like because you have to run large prospective studies. You have to secure FDA approval and ultimately, get Congress to allow Medicare to pay for a new test, which we think is achievable. And then also you need to get into guidelines. Well, the guideline groups have never looked at anything like this. So we're talking about a number of years before this market develops. We don't believe that a lab developed test without FDA approval and without reimbursement is the way that we'll probably think about making the test available. More like Cologuard do the years of work and the clinical work and ultimately, then payers will see, oh, if we can do stage shifting from Stage 3 where we're spending $300,000 on a patient to Stage 1 where we can do surgery with curative intent, changes everything. So more to come, hopefully, this year, Congress passes a law giving Medicare the authority. There is over half of Congress, Democrats and Republican equal number are co-sponsors. Let's see if we can get the bill passed.

I guess I have another question then as well. You mentioned great progress on reaching profitability ahead of schedule and everything. What do you think is driving that progress?

Well, Jeff, why don't you take this one?

Yes. So Kevin talked about the years of focus in building up the two big brands, the two biggest brands of all of diagnostics. And you're seeing that momentum continue. The growth we delivered in Q4 is sustainable. If you look at what's driving it, there's not just one thing. It's the sales force, it's Cologuard rescreens, as Kevin talked about, you repeat Cologuard every three years. It's an expanded population, this younger population, now indicated for screening the ages 45 to 49 and it's all those things plus combined with the platform we have. And by platform, it's this Epic foundation that's so powerful, allows us to engage with patients and do it efficiently. It's our sales force that Everett help build out. 1,000 people out in the field educating doctors, growing the business, that going forward doesn't really change much, right? You look at last year in '22, our sales and marketing expense was actually down versus '21. In '23 now, we expect it to be flat down again while we continue very robust top line growth. That foundation allows you to scale efficiently. Kevin talked about some numbers in Q4. Our Q4 incremental adjusted EBITDA margin was over 100%. Now we're not going to get that level every quarter. But you can see how this business was built to scale with an ultimate goal of generating sustainable top line growth, margin improvement and cash flow.