Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Good afternoon, everybody. Welcome to -- or thanks for joining us at the Raymond James Institutional Investor Conference. We're happy to have folks from Exact Sciences here with us today. Nobody wants to hear from me. So I'm just going to sit down and give Kevin a little bit of time with some slides. And then I'll join him again for -- and Megan as well, for some Q&A. Kevin?

Thanks for having us at this great conference. We appreciate the opportunity. Exact Sciences is a cancer diagnostic company. We are the leading cancer diagnostic company at a time that is a very innovative time in the field that's having a huge impact on patient lives. And our goal as a company is to move detection from late stage to early stage, and we'll talk about the impact. This is our safe harbor. We will be making forward-looking statements. Our mission as a company is to eradicate cancer through tests that help prevent it, detect it earlier, and to guide treatment. The field is changing. It is kind of the golden era of cancer diagnostics because of all that we have learned from the analysis of genomic medicine, the analysis of tumors and how their DNA differs from normal cell DNA. With this, we can power changes in the way cancer is diagnosed, how it is screened for, how it is treated. Exact Sciences last year achieved $2.1 billion in revenue off the power of 2 of the best brands in cancer diagnostics. Cologuard, a test for colon cancer screening average risk patients aged 45 to 85. That's 110 million Americans. And then also Oncotype DX, a global product that is a test for patients with early-stage breast cancer, certain types of early-stage breast cancer. And it answers 2 important questions. Number one, will a patient benefit from chemotherapy? Most patients don't. And knowing if you are one that will versus one that won't, Oncotype answers that question definitively. It also answers the question, am I likely to recur? At the time of surgery, you can take a piece of the tissue, analyze it and tell your percent likely recurrence risk. Powerful 2 tests that are generating a significant amount of revenue, revenue growth and margin that we are investing in an incredibly bright future. How are we doing this, and how are we different than others in our space? Number one, we start with great people. This has always been the hallmark of Exact Sciences, and it really starts with great science and scientists. Then we do our very best as IT commercial organization reimbursement teams to deliver on the value that our science and scientists bring to patients. We offer tests that clearly change clinical decision-making. Not all companies start with this in mind. But can you convince a doc to change how they're going to treat a patient or the next step, that's an important question. Then our hallmark is that we generate clinical evidence that is so powerful, it leads inevitably to this kind of change, which leads inevitably to greater access, commercial insurers, Medicare payment for tests, and access by primary care physicians, our commercial capabilities. Customer experience, it's so important. I'm sure we'll talk about this a little bit, Andrew. And then all of these things inevitably drive profitable revenue. That's what we look at. This is how we think about our company. With that, we can hire better people. There's never been a stronger, better time at Exact Sciences. We're more excited starting this year than we ever have been. I've been CEO for 14 years since we were 3 employees with a dream of changing and eradicating colon cancer. We'll talk about that. But then we'll also talk about a bright future where we bring an array of tests to the physicians and to the patients who need them. You can really think about this in 3 big buckets. Number one is genomic medicine is powering a world where we can tell people in this room what your innate risk of cancer is based on the genes that you inherited from your parents. We can also provide new screening tests. Cologuard is one of them. We'll also talk about a pan-cancer screening test that we are developing. We believe will change a cancer forever. We also have the ability to guide cancer treatment for people diagnosed with cancer by taking a piece of their tumor, analyzing the DNA, and matching these amazing new therapies to your particular tumor. 10 years ago, 15 years ago, you couldn't do that. This array of new immunotherapies and targeted therapies that are changing outcomes. That's powered by diagnostic. And then finally, tests that are prognostic like Oncotype DX. They tell you what the likelihood of recurrence is. They change the treatment paradigm. And so we are bringing this broad array of tests onto the most powerful IT platform, the Epic platform, that most health systems use in this country. We've built our company on that platform that allows physicians to electronically order a test and result in test and do a lot of other really amazing things to help increase utilization appropriately. So that IT platform is also something we'll touch upon. It is giving us an advantage to reaching more physicians and patients. In 2014, we saw -- Cologuard was approved by the FDA. In 2016, we had 100,000 completed tests. Last year, we achieved 10 million cumulative Cologuard test. Oncotype, 1.5 million tests globally. We've seen steady growth. We're entering a year where we've never been more excited about the prospects for growth across the business, and we'll talk about that in detail. Our margins are different than others in the industry. When we develop our test upfront, we think about the gross margin profile. And this is so important so we can continue to invest in research and development. We have provided clear guidance for the year, $2.3 billion. We've divested our urology business. And so when you look at year-over-year comparator, that was about a $40 million business. We also, over the last 3 years, have been doing COVID testing. So -- that's about a $50 million decrease. That's okay. We are focusing on the most value-add tests. We're excited about the year. And Andrew, happy to answer questions.

Perfect. Thank you for that, giving a great intro. I want to start with kind of Cologuard, and I know you've been asked this before, and I'm kind of going to ask it again, and kind of see if we can get a little bit more descriptive of an answer just on -- 4Q was so strong, right? And the answer has been there's a lot of things that drive it. It's 45 to 49, it's rescreens, it's what we've done on the IT side, it's a little bit of billing. Can you just help frame for us how they all fit together maybe to be bigger than the sum? But also a little bit of sizing on how big each of those is as a driver?

We had a strong fourth quarter. I think that's an indication that Cologuard, number one, is becoming an accepted standard of care, coequal to colonoscopy. If you're an average risk patient, the main guideline group, which the United States Preventive Services Task Force, they do deep work. And their analysis is take your pick, Cologuard, colonoscopy. Docs should talk to the patient, inform the patient. Our educational materials for docs line up the various tests and -- with the data there. Most people start -- individuals will choose Cologuard because Cologuard -- for those who haven't been tested, it is a test that comes in a box and it goes to your home, and you can provide a stool sample in the privacy of your own home. And it's taken a long time to get insurance companies, the guideline inclusion, electronic ordering for physicians, health systems that say, we think that Cologuard is an acceptable alternative to colonoscopy. Many of them were protecting their own endoscopy suites, that are revenue generators. I understand that many of them -- like, many physicians are slow to look at change. Well, all of those things are kind of going by the wayside as individuals are asking for Cologuard. And then also 18 months ago, something happened, something that changes colon cancer screening forever, which is the screening age dropped from age 50 to 45. And you'd think, well, that's not that big of a deal. It's a huge deal because there are 20 -- 19 million Americans in that age group. Well, there are only 30 million unscreened Americans 50 and older. So you've seen a huge increase in the total number of people that need to be screened for colon cancer. How does that affect Cologuard? Well, the endoscopy suites in America can screen about 6 million average risk patients a year. They're not making more GIs in America. And they've been retiring and nurses have been retiring. So it's hard to staff the endoscopy suites like we did pre-pandemic. Okay. How does that affect Cologuard? That means these health systems who are measured on their percent of their patients -- Medicare measures the percentage of patients who are screened within that health system, and then bonuses flow that way or not. Well, they're looking at the same, we can't possibly screen 50 million people with colonoscopy. So now they are starting to recommend Cologuard at a higher rate. That's part of the reason for the fourth quarter. The other thing is our sales force went through transitions as we exited a partnership with Pfizer, and we brought on 450 Pfizer sales reps direct to Exact Sciences. We changed territories. That now has settled out. We have an incredible commercial organization. If any of the salespeople are listening, all I can say is it's only 4:15, why are you listening? No. It's really an amazing sales organization, and they have delivered so much value, especially over the last 12 to 18 months. Really proud of the work that they've done. So all of these conditions are working in our favor. The last big one, an objection that's primary care docs had was a legitimate one. If you got a Cologuard test and it was a positive result, and then you went under colonoscopy, you had to pay a co-pay, both Medicare and typically commercial insurance companies. Well, the Biden administration weighed in last year and ended that and like for all screening tests made the complete screening zero dollar copay. That's effective January -- so now we get to educate these primary care physicians who recommended patients get a colonoscopy because the colonoscopy is zero dollar copay. Now they're starting to -- as we educate them, they're starting to say, "Oh, great, I'll start to recommend Cologuard. It was my last big objection."

I think you hit on pretty much every topic I wanted to hit on from here. So we're going to dive a little bit deeper on a couple of them. I think the biggest thing that kind of stuck in my brain from earnings was the number you gave around penetration at 45 to 49. So I think you said you reached 8% versus 9% in 50 plus. What are some of the characteristics there in that group?

Now let's put that in perspective. We got to 9% over 8 years for 50 and older. It took us 18 months to get to 8% in 45- to 49-year olds.

So -- what made that happen so much faster in that group? I think it's a little bit of demographics, but what else was there?

Unbelievable digital marketing capabilities in social marketing capabilities, where you target a 45- to 49-year-old very differently than you target a 65-year-old, driving them to ask their doc or to directly order a Cologuard through cologuard.com. If you're not up to date with your colon cancer screening, please ask your doc or go to cologuard.com and order a test.

And then thinking about the Pfizer sales reps and kind of some of the movement there in terms of the sales force and what you've seen, there was a great slide on the 4Q presentation on sales force productivity. So -- how much more room is there to improve that, right? There's only so much time in the day for them to visit individual clinicians. How do we think about that pathway and that productivity continuing to ramp?

I'll go back to 2017, '18, we entered into a partnership with Pfizer. We had 200 reps calling on -- we could call them like 30,000 primary care physicians out of 300,000 effectively. So we partnered with Pfizer, which had 2,000 reps. They put their efforts towards Cologuard. And they dramatically -- they helped us dramatically increase the rate of colon cancer screening with Cologuard. We had a 4-year partnership COVID intervened there. Pfizer pulled their team out of the field. It was more challenging in the last couple of years than they exited a part of their primary care business, and we ended up hiring their reps. We now have a combined team of historical exact reps of 400, so we kept hiring reps. Their reps altogether, about 700 people in the field. That is enough for us as we look out into the future for years to come, 700 is probably the right number. So we've actually guided to slightly to about flat, maybe even slightly down sales and marketing expenses. And we can do that because we have an incredible brand. We have incredible reach now. We increased the size of our sales force that are calling on health systems. And I'll because health systems now employ over half of primary care physicians, they're setting the policies for screening. They're helping to implement courses of recommendations for patients that automate screening. And Cologuard now is part of that. It's the primary care reps working with the health system reps to drive engagement, and we're seeing the impact of that. We're seeing that every day, every week, every month.

Yes. Andrew, in case you didn't see the slide, what we showed is just a very simple calculation of the revenue generated per field call made. So a rep going into an office and having a conversation with the doctor, that jumped in the fourth quarter of '21 from the mid-$600 to over $1,500. So that more than doubled in a year. And to give you a feel for where we think that can go, right now, we're approaching 10% market share for Cologuard. And our ultimate goal is to get that to 40%. So that $1,500 number could easily 4x, 5x from here.

Perfect. And I wanted to touch on health systems. And I think it's easy to kind of hear it. I would love to get a little bit of a sense for how does that really work in practice in terms of what we get at -- the health system gets a reward if they do more screening. But those clinicians aren't in the hospital. They're not necessarily right under the thumb of a top-down management style and sometimes they like to book sort of what the man is telling them. So how does that work in practice when it comes time to kind of go operationalize a health system who says, "Okay, we're in and we're excited about it?"

At a high level, it's really simple. Medicare Advantage, 4 star in rated systems, get a bonus. Health plans, help insurers get a bonus. They are obligated to share a portion of that bonus with the primary care physicians who deliver quality care to patients. So the money flows from Medicare to the Medicare Advantage plan to the physicians who are responsible for about 30 different quality measures, blood pressure rates, colon cancer screening, cervical cancer screening, breast cancer screening, all of those. And when you achieve a bonus, which is a big bonus for the best-rated plants, part of that money flows directly to the primary care physician at the end of the year. So at the end of the year, we see this every year. Physicians who finally kind of in September, look at their colon cancer screening rates, and they're scrambling to get caught up because they may have a $5,000 or $10,000 bonus at the end of the year based on their quality measures. So they can thumb their nose at demand, but they lose out on that big end of the year bonus.

And so from the system side, is it just -- hey, it's helpful that they're there kind of being your second part of the marketing department and sales department, and you still go call on the doctors, I guess, is the question from a sales force perspective?

Yes. So our sales force is constantly calling on those docs and then the health system reps are helping to configure their software, their EMR system in such a way as to remind a physician that a patient who's in front of them is due, or even if the patient isn't in front of them, to go through their EMR system and then be able to recommend extending Cologuard kits out to all of those patients who are overdue for screening or who are due for a second Cologuard test because Cologuard is recommended by the guideline groups every 3 years. So today, about 20% of our Cologuard revenue comes from patients who are on their second or now even third Cologuard test.

Okay. Helpful. And I want to -- this has been covered at [indiscernible], but I'm going to have to ask the question anyway just in terms of competitive landscape. So maybe asking it a little bit differently than I think it has repeatedly in the past. Just if you think about what you see out there, what people are trying to do, what keeps you up at night a little bit more? Is it somebody else entering in the stool landscape? Is it what blood may do for that unscreened population that you'd still like to penetrate more deeply? What's the place where you see opportunity that they could be a threat to?

So for those who haven't followed our company, there are a number of companies out there who are trying to develop a blood test for cancer screening. Unfortunately, the biology of cancer is, those precancerous polyps and Stage I cancers are very difficult to reliably detect from a blood draw. And it's not a problem of having a better measuring tool. If the -- if there's no circulating tumor DNA in the blood, you just can't find what's not there. And so the data that has been shared shows what we've known all along, a blood test is a step back in terms of performance. It's not even as good as this $15 fecal immunochemical test, which is used by millions of people every year that is inexpensive. So these blood tests probably don't make it in the guidelines. They don't make it into the quality measures. If you're not in the guideline, you're not in the quality measures. Commercial insurers, if you're in neither of those, they will not pay for it because then their quality measures will go down. Why would they do that? We're still developing our own test, but it's likely -- the FDA is likely to give what's called a secondary screening claim here. And that means if a patient refuses colonoscopy, Cologuard, a FIT test, then that secondary screening tool could be used. Okay. Well, we know who those patients are because some patients, we ship them a Cologuard kit and they don't return it. And 2 years later, they still haven't been screened. Well, these people still need to be scrapped. This is a -- it's a preventable disease. It's highly treatable if detected early. So we will offer our tests and Medicare has said they would pay for a test that needs a certain performance level, not a great performance, but an okay performance level. And we -- as a last resort, we will offer that test. And our commercial team, our IT infrastructure has been built over a decade. All I can say to those who aspire to get into this space, come with a balance sheet that -- with a couple of billion dollars. I don't want to say it, it's a massive investment. And come with a sales organization that is huge and able to go and call on primary care offices. This has not been easy to commercialize Cologuard. We have earned, I think, the position to be able to now bring new tests to patients and not worry so much about these inferior tests. Innovation is not going backwards in this field. Performance, worse performance is not improvement. And so with some of this noise out of the way, we are looking forward to this year, next year, and the year after.

And Andrew, whether it's stool or blood, the modality for the test, I think coming to the market now when Cologuard has already screened more than 10 million people, it's an established brand, that's a much different challenge than when we entered the market, we were basically up against colonoscopy and the FIT test. Colonoscopy is incredibly accurate, but it's not convenient. The FIT test is the opposite. It's pretty convenient, but it's not very accurate. Cologuard is the best of both. So now it's not a new standard for noninvasive test that everybody else is up against as they try to enter.

So thinking about that, sort of the next step to raise that bar, to raise that standard, is Cologuard 2.0. And next-generation Cologuard expecting a readout around midyear. Maybe just give us a sense again of kind of the time line from there and how we think about what you really need to implement to get that in the field? Is it new codes, new contracts? Or is it pretty simple plug-and-play relative to Cologuard first generation?

Yes. So the goal with Cologuard 2.0 is to reduce the false positive rate of Cologuard by about 20% to 30%. Cologuard has a 10% false positive rate among patients with no findings in their colon. Now some of that is because colonoscopy simply missed the precancerous polyp or even in some cases, cancer. But the goal with our new version of this test is to -- with newly identified markers that have been very well vetted by our scientific team, to change the makeup of the test, so there's fewer false positives with at least as good of cancer detection and precancer detection. That will send fewer people to colonoscopy unnecessarily bringing down the total cost of care, grade, making patients happier that they don't unnecessarily undergo a colonoscopy. That's great. And because we can help payers save money, we will seek to increase for the first time the cost of Cologuard to share in some of the gains and the investment that we've made here. So we expect that data to be available mid-2023. We then would expect a 6- to 12-month FDA review cycle. And after that, we would replace Cologuard 1.0 with Cologuard 2.0. That will probably take 12 months to get all of the old Cologuard 1.0 kits out of the system and the new ones in. Better for patients, better for total cost of care.

And I'm looking at the time and realizing I wanted to talk about a few more things. So maybe shifting away from Cologuard for a moment here. Multi-cancer early detection is the big, exciting opportunity out there that potentially is even bigger than colorectal screening in the first place. So -- maybe just give us a sense for how you guys approach it. I think it's a little bit different in terms of really an acute focus on sensitivity, maybe specificity is not quite as important. So talk about that. And then on top of that just is the world ready? Are payers ready are people ready for what that product brings to the table?

I can answer the second question. No, they're not ready. They never are ready for change, but they will be. They weren't ready for Cologuard change. And look, what we've built. It takes time. The return is phenomenal. It's, I think, a great time to invest in Exact because you can see what we have built. You can also see our track record. And -- when I joined the company in 2009, it was after a meeting at the Mayo Clinic, where we talked about 2 things. Number one, we talked about this crazy idea of screening for colon cancer from a stool sample, and the second idea was to screen for all cancers from a blood draw. The first one was crazy enough. The second was, come on, science fiction. Well, it's not science fiction. Now the data is in, and you can detect in a population of people over 50 about, we think somewhere between 40% and 50% of cancers, many of them, 2/3 of them, early stage, more treatable cancers. And there is no screening test for 70% of cancers. This test would screen in addition to colon cancer screening, breast cancer screening, not to replace them because this test won't be that accurate. But it will go into a population of those 70% of cancers we don't screen for today when with a blood draw, find -- let's say we're buying half of them, and you move that to earlier stage detection. There just is no therapy as effective as detecting a cancer earlier. There just isn't a therapy that affected because surgery on an early -- surgery alone for a Stage I cancer is more effective than the most advanced immunotherapy on a stage 4 cancer. That's the reality of the world. So our goal, cancer eradication, move cancer detection earlier. We're developing blood tests. We're going to run a huge clinical trial. We're working hard to get Congress to create a new benefit category for this type of screening. And eventually, we're going to win. The science is in though, and we'll have 2 more studies, what we call case-control studies, that will show the test performance -- 2 data releases, one midyear, an interim look, and then a final look at the end of the year. Then we move into a big, large FDA study, and we're excited about that.

And the -- plenty I want to talk about, but we're running low on time here. So I think we have to stop it there and move down to the breakout.

Thank you.

Thank you, everybody.