Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

So great. Thank you. Thanks for being here. Dan Brennan. Day 1 of the TD Cowen Healthcare Conference. Pleased to be joined with me on stage here, senior management team of Exact Sciences. We have Kevin Conroy on my left, CEO and Chairman. To his left, we have Jake Orville, who's the General Manager of Screening; and then to his left, we have Megan Jones, who is the VP, Vice President of Investor Relations.

So obviously, thank you all for being here. Kevin, last 18 months, a lot has happened. You had the competitive ECLIPSE data come out, exact pull-forward profitability by a year. The Pfizer relationship was terminated and you took on 500 or so sales reps, the pipeline is progressing, new opportunities. So stock has reacted. It's 1 of the best performance recently. It's almost doubled, I think. If you go back to the third quarter of last year. So maybe for those investors looking at the stock price and that really big move up that we've seen over the last, call it, 6 months or so, maybe feel that they missed it, kind of how would you articulate maybe the message here about what the investment thesis going forward?

Well, let me take it -- first of all, Dan, thank you for having us here. I've really appreciated our relationship over the years and getting to know you, thanks to Cowen for inviting us to present. And I really look forward to the conversation. Hopefully, we get a chance to answer questions from the [ group ] here. So let's take a step back. Our mission at Exact Sciences is to eradicate cancer through tests that helped prevent it, detected earlier and to guide treatment. We are at the start of what we think is a golden era of advanced diagnostics in Oncology. And it starts with risk assessment and then screening and then guiding therapy and detecting recurrence earlier. And last -- over the weekend, we had the Cologuard Classic, which is a senior tour event and at the [ Pro-Am ] on Thursday, I had a chance to play golf with 3 survivors, while 2 of them are Stage 4 and 1 of them are colon cancer, and 1 of them was diagnosed through Cologuard early stage and then was successfully treated. The other 2 patients are in for a very, very difficult future, and they know it. They were detected symptomatically in their 40s. And the fact that early detection for this woman, Megan led to a very different outcome and hope for the future, is indicative of what we are trying to do. We believe that there is no therapy that is effective as early. The 2 later-stage patients are on multiple different rounds of therapies and recurrence. Each of them had -- 1 had 3 children, 1 has children. Therapy is as effective as they may be are nearly as effective as screening and early detection, where with Stage 1 colon cancer, it's typically treated with surgery and no chemotherapy? Can you hear me in the back of the room clearly? You can. Okay. Thank you. So that's our mission is to do this, not only for colon cancer to do it broadly for cancer with multi-cancer early detection. And we believe that because of the work that we've done over the last 14 years of building a platform company with 2 incredible brands, Cologuard and Oncotype DX. Cologuard in a primary care setting in some specialties and then Oncotype DX, which is standard of care among oncologists in the U.S. We have the ability to bring every new test to the broad array of healthcare providers that need these tests for their patients. And it puts us in a unique position as a profitable company as a company that will see continued growth in a stable, consistent way for a long period of time. We're just -- we're excited for the future where we can have a positive impact on outcomes.

Maybe hitting on Cologuard, and we'll spend a fair amount of time there, and then we'll get to the pipeline and kind of the profitability. But when you think about the fourth quarter was a really strong 1 for Cologuard, and we'll discuss rescreening 45 to 49 in a moment. But just when we think high level, just give us a sense of how much of the strength that you've seen is maybe from a continued catch-up as we come out of COVID and you've had these backlogs, how much of it is due to maybe some of the success that you've had on some initiatives that have been ongoing in the background for years, electronic ordering, [ IDN ], maybe unpack a little bit about what we're seeing on some of these factors that could be driving growth for Cologuard.

I think the big thing with Cologuard is as a broad screening test in a primary care setting, it takes a long time to be considered standard of care. And what you're seeing is that Cologuard now is considered a frontline screening test. And more doctors are recommending Cologuard, either Cologuard or colonoscopy to their patients, and it's come down to that in most offices, either colonoscopy or Cologuard. That's a great thing. It's because we have broad insurance coverage because we're in the American Cancer Society guidelines that the pivotal or the gold standard guidelines, the United States Preventive Services Task force, it's because we have enabled electronic order that growth is because now we've seen 20 million more Americans come into the screening population with the lowering of the screening age. Now we have 110 million Americans in the screening population, 60 million on screen. Guess what? Colonoscopy is not going to get the job done alone. The [ capacity ] for colonoscopy so is about 6 million average risk screening colonoscopies a year. There are 60 million people who need to be screened. We're fairly scratching the surface. So this is a 1 quarter or 2 quarters or 3 quarters since 8.5 years of being available FDA-approved Medicare-covered covered by virtually every payer. So we think that if you look out at the next 5 or even 10 years, we're going to see a lot of growth, and that we are going to get to 40% of all people getting tested with Cologuard on a regular basis We believe we're going to see that. We believe the competitive environment favors Exact. And we are the lead innovator. So I look at -- I've been with Exact for 14 years. I look at the next 5 to 10 years as exciting as the last 14 years of that. The next 5 to 10 years is going to be even more exciting. And if I leave anything out, Jake, or Megan will jump in.

Yes. So Jake, maybe as a general manager of Screening, again, there's a lot of things that you've been executing on for a while. There's opportunities ahead. Kind of maybe what excites you the most, particularly as we look at maybe the opportunity in '23 and '24?

Sure, Dan. Our growth accelerants are really kicking in now at a high degree. So Kevin mentioned the addition of 19 million new people that are used for Screening in that 45 to 49 category, that's really exciting for us. One, I believe that's a perfect patient for Cologuard. They're busy. Many of them don't have a doctor. If they are seeing a doctor, they want to do tests at home that are convenient and also highly accurate. So that's a perfect Cologuard patient. The other reason 45 to 49 is great for us is now we have the lifetime value of that patient. We know that if a patient does Cologuard the first time, they're much more likely to do it again. And so then we can continue to screen them. But that brings us to our partnerships with Health Systems with 19 million more people do for screening. On top of the 40 million that we already do for screening, now the health systems are calling us proactively and saying, help. We can't get through this backlog of colonoscopy if we tried. We now need you more than ever. Your product is great for younger population. We know that a positive Cologuard patient, we can then capture their colonoscopy. That's probably where we want to spend our resources. And then we know that you'll do a great job with our compliance engine. Remember, we also work hard behind the scenes, not just to reach out to also make sure that this patient follows up, completes their Cologuard and then goes on to complete the colonoscopy. So the health system partnerships that we now have are marvelous. We've doubled the electronic connection rate before the pandemic to now. We started at about 30% electronic connectivity. We're now at 60%. We expect that to go up maybe another 5 points this year. And the reason that's great is because as we're working with health systems, we can now work with them to optimize their IT systems to identify people that are due for screening. We have a health system recently that called us and through our collaboration, we identified 5,000 patients that were due for screening just to 1 click of the button. We were able to go then reach out to them. The great thing about that is about 80% of those patients have never been screened before. And so we're able to do our job, but also help the health systems do their job as well.

Maybe just staying on the health system for a moment. I know it's 1 of the things of many in terms of these drivers, but it seems like the traction is really starting to pick up. Is it possible, again, to give us a sense of kind of the size of that opportunity? Like how many patients are in that IDN opportunity? Like what's been captured today? Just how do we think about the benefit that you've had and what the opportunity is going forward?

60% to 70% of all primary care physicians, nurse practitioner work -- are employed by a health system. So that's been a transformation, as you know, in healthcare over the last decade or so. That trend continues and that trend is 1 that's very favorable for us because those health systems are incented to make sure that their colorectal cancer screening rates are high. They're incented by Medicare Advantage, which pays out bonuses to the health plans to then share part of that bonus with the health systems. And so they're driving screening. And as Jake mentioned, they're coming to us. There's been a change just in the last 12 to 18 months. Now they're calling up and saying, help us with our screen. That allows us to have a conversation with them about Oncotype DX about our tumor profile test OncoExtra about our multi-cancer test, which is in development and will start clinical trial. So it allows us to have the broader conversation about our platform. And those conversations weren't happening in a systematic way 2 years ago. They are now in their [indiscernible].

Got it. Okay. So the 45 to 49, you brought up a few times, terrific growth in '22, beat your kind of initial guidance. I think you've annualized an 8% penetration in the fourth quarter. Where -- which it took, I think you're about that penetration overall for the over 50, and it took, I don't know, how many of the [indiscernible] 10 year. Where does that go over the next couple of years? Like how much does this momentum that you saw -- not that you're still not going to grow up, but does that momentum slow? Or could we be sitting here at 15%, 20% penetration in the next 3 years?

I'll take the first part of this and then pass it over to Megan. You go back to the fact that there are 60 million people [indiscernible] screened, who are not up to date in the screening. Some of them have never been screened. Some of them are overdue for screen. That's a lot of people. And -- so the opportunity for us to go capture half of those patients, people make them part of our long-term screening approach and making them customers for large [indiscernible]. This is not something that is a quarter or 2 quarter or 1 year or even 2 years. This, we believe, is going to continue to build, Megan may add more color.

Yes. Like Jake said, I think Cologuard in the 45 to 49 population makes a ton of sense because those people are busy with work. They don't want to take days off for colonoscopy. They have kids at home. But also, if you think about where Cologuard started in that age group, it had really high awareness, broad insurance coverage. It had been on market already. So it kind of benefits from having that buildup of awareness that Cologuard in the 50 and over population didn't start. So if I think about the path forward for Cologuard, the path from 0% to 10% market share will be slower than 10% to 20% for the overall market. I think 45 to 49 will lead that growth, but because Cologuard is now starting from such a broad base that we didn't have 8, 9, 10 years ago, I think the path forward will be much faster than what it took to get to 10%.

So you could be penetrated how much in the 45 to 49 [indiscernible]. So rescreening, obviously, is the other lever which you brought up today and it was a really strong '22. The guidance for '23 suggests north of $300 million, call it, somewhere $323 million, $325 million based upon 20% of Cologuard revenues. And it implies like a really big, I think, step up in continued compliance. So just give us a sense of why that compliance has gone up so much is the math, right? And then similarly, I know in the past, I think Jeff has talked a lot about where that could go to. And Kevin, I'd love to hear just where does that settle out in 3 years? Like what kind of rescreen opportunity are we looking at out in 2024, '25?

It's 1 of the areas, Jake, is [indiscernible] of the screening business has done really an amazing job [indiscernible].

I think ultimately, about 50% of our revenue will be rescreened. I mean this will become a recurring revenue stream for us years out. As you mentioned this year, think about it closer to 20%. What's exciting is our engagement, our digital engagement. Remember, this is a patient we've already screened before. We know who they are. We know where they live. We have their cellphone number, their e-mail. We can now communicate with them better than we've ever communicated before. We can also understand how they want to be communicated with. Some people want to text, so we can push them a text reminder and go talk to your doctor. Some people want an e-mail and that email might say, hey, if you don't have a doctor right now or if you've changed health systems, here's a link where you can get a telehealth provider. Some people want a snail mail or a phone call. We now know more about these millions of people that we screened. We've now screened 10 million people. We know a lot about them. And so reengaging with them allows us to get better at rescreening every time. The other thing is that we also know that if you've done Cologuard once, they're more likely to return that Cologuard kit at a much higher level. We see about 20-point higher return rate for someone that's done Cologuard before. So as that return rate continues to grow and the rescreen population continues. Now we have a lower cost of acquisition. Now we have a higher gross margin, if you will, in that product because we're working a little less to get them to return that kit, which is why it's a very, very favorable business for us in the future.

Yes. Not only is that higher margin revenue, but it's more predictable. So you know when those patients become due every 3 years, it's stickier, so that makes just overall the model, it's easier to predict.

I'll give you 1 example of, again, when you've done this a lot, how this works, not always do you show up at your wellness exam exactly when you do for rescreen. We can now go to a doctor who has 30 patients do for rescreen that year. We can actually get that order for all 30 in January, loaded into our system and released the kit and a text message that said the kits coming when they're due for rescreen. We call that advanced order. Just little things like that improve the ability to engage with the doctor. We're using our time with them wisely and then also improves the engagement with the patient, and now they know what they need to do, when they need to do it.

So then if you roll up Cologuard with the 45 to 49 and the rescreen and then the underlying momentum in electronic and IDN and the base, what kind of growth rate is reasonable to assume for Cologuard looking out?

Well, we've said that we expect Cologuard over the long haul, we continue to grow in double digits, not less than 15%. And clearly, the trajectory that we've been on over the past few quarters, it implies higher than that. So it's, again, take it 60 million patients. There are about 6 million screening colonoscopies a year in the U.S. It takes 10 years to get through all of those patients with colonoscopy and then people are [indiscernible] just not going to happen. And part of the dynamic is that about 30% to 40% of GI's retire over the next 5 years and they're retiring [indiscernible] post COVID that accelerated the dynamic and hospital staffing in the endoscopy [indiscernible]. They have the same labor shortage that exists throughout healthcare. And so there is a limitation on the number of patients that we're going to go in for a screening colonoscopy. It happens to be at a time when a lot of innovations are coming to the GI suite, where there's higher value procedures to be done. So all of those -- there are so many tailwinds where people say, why is Cologuard doing well? Well, it's not because of 1 or 2 or 3 reasons, it's because of 12 reasons. As a result of that, we feel confident over a very long period of time about the impact that we can add back to the story of this woman, Megan, who was diagnosed early stage. There are 52,000 Americans every year for the last decade that have died from colon cancers. This is a preventable disease. It can be treated when detected early. Outcomes can be changed. And the thing that inspires us is take a look at what happened in cervical cancer in the U.S. Most people forget that cervical cancer was the #1 cause of cancer death among women as recently as the early 1970s. But what happened was the Pap smear came into be and on the Pap smear -- the goal of the Pap smear wasn't defined cancer, was defined the precursor lesion, so you could avoid them and prevent disease. And you've gone from 45,000 cervical cancer deaths in the U.S. to 4,500. It's just -- that's what we're going to -- we believe we're going to do this with colon cancer. And the neat thing is you're seeing it in the data. So the data that came out last week showed a rise in the incidence for early onset colon cancer, below age 50. It showed a significant decrease in people aged 65 and older. And those are the people who have been, when we first launched Cologuard 8 years ago, were first people to get Cologuard because Medicare covered it. So we know we're having an impact here. That drop isn't all because of colonoscopy. Colonoscopy has been flat for 2 decades.

So maybe moving over to blood. What's the -- when you think about where blood will stand over the next year or 2 after a competitor goes through FDA and then eventually you're going to have your data later this year and then you all see approval -- kind of what are the guideposts do you think in terms of what's like the best case in terms of blood actually has a meaningful impact and define meaningful? And what's the downside case where maybe it's really limited. Just whether you want to talk through the outcomes on FDA or just how you see the data for your competitor and your own pivotal trial planning out?

You're talking about a blood-based screening tests?

Yes.

So in colon cancer, what kind of who influences colon cancer screen. It's the guideline groups, it's the payers, it's Medicare and of course, it's the healthcare provider. And healthcare providers have looked at colonoscopy as a leading screening method because it has a high detection rate for cancer, about 95%. Cologuard detects 92%. I'm not quite sure how many precancerous polyps [indiscernible] let's assume that it's probably in the 50% to 75% to 80% of precancerous polyps. So it's a high-quality test. Then you have Cologuard, which detects 42% of all precancerous polyps. And the way the screening group looks at this is, okay, if you put those accuracy data through the model, how many lives do you [ save ]? And how many life years gained do you get compared to how many unnecessary colonoscopy you should do. Those are the 2 factors: benefit, life years gain; harm, unnecessary colonoscopies, which is kind of a proxy for cost. Now you compare that to the 5th test, the fecal immunochemical test, which misses a lot of Stage I cancers. It detects about 24% of precancerous polyps. We do that test every year and it models out pretty well, in part because it detects 24% of precancerous polyps. If you have 10 to 15 years to find a polyp and remove it, it models out really well now. In the real world nobody does the FIT testing every year, like nobody does it every the year, 3,500 people do it every year. But when you pump into the model, it models out really well. So those are the 3 tests that make it into the guidelines. The problem with the blood test is the cancer detection is, let's call it, in the low 80s and precancer detection is in the low teens. It models very poorly. It doesn't model in a way that even gets it into the guidelines. Okay. What happens if you have a screening test that has lower, worse performance than even a $16 FIT test? Well, is there room for it? Probably. Does it make it into the guidelines, probably not. Does it make it into the quality measures and docs are driven by, do they get a quality check if they run the test, they do for FIT. They do for Cologuard. They do it for colonoscopy. Will they for a blood test, probably not. We tried to offer Cologuard before we got into the quality measures. It was really hard. So we just set me a photo of our kind of whiteboard all-employee update from 2016. 100,000 Cologuard tests. I mean you do more than in 2 weeks today. But that's because we are in all of those things, we are covered. We're in guidelines, we're in quality measures. Any 1 of those falls short, a blood test is going to be challenged. And the data is going to be about the data. It's hard to detect precancers from blood. They just -- there's a barrier between that precancer and the blood supply. We know that. Stage 1 cancer is very hard to find because half of them are truly small and there's a physical biological barrier between that tumor and the blood supply. So it's hard to find what's not present, if you're looking for circulating tumor DNA. Is there going to be a role? Yes, because back to the 60 million. Is the compliance going to be 90% with the blood test? No. Can you show that if you offer a blood test to all comers, what percentage of people go to get a blood test after their doc tells them, go to Quest or LabCorp maybe 2/3. Jake what [indiscernible] Quest for sold this company to Quest, what was the compliance rate?

Yes. The compliance rate to Kevin's point, 60%, 70% for routine blood testing for specialized testing, maybe 50%. It's not easy. Just think. The data says 20% to 30% of patients don't pick up their medicines. So just think about what -- we're not talking about this room. We're talking about the population that we're trying to get screened.

So the only way to get to 90% compliance is to offer the test for free and only offer it in offices that don't care about HEDIS scores. So you can do that like in an OB/GYN office. An offer -- only in offices where they have a [indiscernible] onsite. Can you get to 90% then? Yes, maybe. Can you get to it in a real world? No way. So there is no magic solution to colon cancer screening. The benefit of Cologuard is highly accurate. You can do it in the friendly confines of your own home and even then it's not perfect. You combine colonoscopy and Cologuard, and we think over time, that's how you move to disease eradication.

So we have about 5 minutes left. Maybe let's move to the pipeline, and then we'll go to the cash flow and margins, which are, I think, a really important part of the story. So 2.0 data is midyear. You discussed on the 4Q call -- obviously, specificity improvement is the key focus here. You saw great AA improvement in some of your case control, but I'm just wondering, you also did talk about maybe sensitivity degrading a bit. Just talk through how we should be thinking about the 2.0 data and kind of what it's going to mean?

So Cologuard 2.0 is a next-generation version of Cologuard. It has more accurate DNA markers. And we know that. We've done 2 case control head-to-head studies, Cologuard, next-generation against Cologuard, and it's a better test, better sensitivity, better specificity. The main goal of this study is to reduce the false positive rate and see the cancer detection rate and the precancer detection rate, at least being no worse. That's what we would expect to happen. Of course, you never know in a big prospective study. We expect to see that data out around midyear or to complete that study midyear and then present the top line data, et cetera. You asked about cash flow and I don't want to lose this opportunity, just a few minutes left. What you saw at the end of last year, we became profitable from an adjusted EBITDA standpoint in the fourth quarter, well ahead of when we guided to. There's operational discipline combined with top line growth, combined with strong gross margins. We expect to have growth in OpEx by -- in the low single digits. So there has been this platform that we've invested in for years. Now you're starting to see with continued revenue growth, the fall through to profitability is really strong. We expect that to continue. We're excited about that. And what that helps fund them is the pipeline. And the 2 things that you mentioned on molecular residual disease helping us detect recurrence in metastatic patients earlier or even Stage 2 or 3 patients where you think you've gotten all the cancer, that's a very important program. And then also our multi-cancer early detection test, which could be a lot bigger even than Cologuard. So our teams are hyper focused on these 3 big opportunities: colon cancer, MRD multi-cancer, top line growth, generating cash. We're excited about where we start this year.

So on the margin, we've seen it is -- I think it's probably difficult for a lot of us to think through when a company turns profitable kind of how quickly can those margins kind of expand further when you punch in flat OpEx growth, sometimes it seems like how long can that be sustained for. Sort of when we think through the level of expansion, how we should think about, I think you're going to host an Investor Day later this year. Just any initial thinking about the pace of margin expansion. Jeff talked about best-in-class margins, which I assume, is 30% plus operating margin. Just how do we think about the profile, the margin profile of Exact as we look out?

Yes. So if we look at kind of the base business today made up mostly of Cologuard and Oncotype DX, Oncotype DX already has 80% plus gross margins, and we see a path to get Cologuard there as well. So if I think about the broader business, pipeline is a little bit harder to predict, like things like the multi-cancer early detection test. Before you have an assay finalized, it's kind of hard to predict where the margins are going to be. But the base business today, 80% gross margins shooting for 40% adjusted EBITDA margins over time. The way you get there, Dan, is about 20% of revenue would be on sales and marketing, 18% to 20%, about 10% to 12% in G&A and then about 8% to 10% longer term in R&D.

And is there like a revenue base that kind of gets you there?

We haven't been more specific there other than it's a longer-term target, but we're obviously in that direction quickly.

Great. Well, I think with that, we're out of time. So thank you, Kevin, Jake and Megan being here, and thanks all for being in the room.

Thank you all.