Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

All right. Hi, everyone. Good afternoon. Thanks for being at the William Blair's Growth Stock Conference on Wednesday afternoon. This afternoon, we are excited to have the team from Exact Sciences joining us here today. We have CEO and Chairman, Kevin Conroy; and the best in the business from Investor Relations, Megan Jones, joining us. Before turning it over to Kevin, just a quick bit of housekeeping here. We'll do the breakout in the [ Mirror] room after this upstairs. And then finally, for a full list of research disclosures and potential conflicts of interest, please see williamblair.com. So with that, I'll turn it over to Kevin. Thanks, Kevin.

Thank you, Andrew. It was December 13, 2010, that William Blair first picked up coverage on a little micro cap company called Exact Sciences. I we think were trading at about $3 a share and maybe at 30 million shares outstanding. And we had this dream, this vision that we could become a preeminent cancer diagnostic company. Our mission was, let's eradicate colon cancer with a test that would help detect it earlier, prevent it even. And later, we became a company that also helped guide treatment of cancer. And we made a decision to become focused on the advanced tests that could help change the landscape in oncology forever. I don't know that any of us thought that 14 years later, we would be a $2.4 billion company with aspirations to just keep driving forward and change the world. But I just want to thank the William Blair team for all of the work that they did. Didn't always agree with it, but I always respected their team and the effort that they put forward. So Andrew, congrats on your new role. And thanks, Brian if you're here, for all of your years of work. We have a few disclosures here, so we will be making forward-looking statements. A little bit about Exact Sciences. We built a platform company. We built a company with a 500-person R&D team, with the best technologies in molecular diagnostics. We've built a 1,200-person commercial team. We've built an IT ecosystem that allows hundreds of thousands of health care providers to order Cologuard and other tests electronically and get those results. A much bigger investment than, actually, the incredible investment we needed to make to develop Cologuard. This allows us now to deliver tests like Cologuard, like Oncotype DX, which we'll talk about. Tests like OncoExTra that will help guide therapy -- that today, help guide the therapy decisions around patients with metastatic cancer. It's also fueling our financial performance and our growth. It's a team that is committed to this broad mission of eradicating cancer through tests that help prevent it, detect it earlier and guide treatment. That's where we are. That's -- hopefully, you'll get a chance to learn more about it. And there's a reason we're so passionate about developing these tests and the ecosystem that help deliver them in a seamless way to physicians and patients. Cancer, for people who are under age 85, most of the people in this room, is the #1 cause of death. It used to be heart disease. Broadly, the mortality rate for heart disease has dropped 75% over the last 50 years, it's amazing, by focus on earlier detection and prevention. Our mission is to do the same thing for cancer, and we started with Cologuard. So I'll use that as an example. There -- this year, there will be about 150,000 people in the U.S. diagnosed with colon cancer. 50,000 people will die. And this is a test that's imminently preventable, if you diagnose it when it's a pre-cancerous [ PALA ], find it and remove it. 90% of people with Stage I and II colon cancer survive. 10% of people with late-stage, Stage IV colon cancer, survive. The whole goal is to detect it as early as possible. Stage I colon cancer is treatable with surgery alone, typically no chemotherapy. We know that what we can do for colon cancer, what we've done with Cologuard, you can do more broadly with a multi-cancer screening test. We'll talk about that. This is the mission we think it's -- we know it's a mission that gets our whole team of 6,500 people energized, focused, delivering results for you, most importantly, delivering results for patients and physicians. And over the years, we've developed a philosophy about how we brought new test to patients and how that created this virtuous circle of impact, and it starts with having great people. Everything starts with the best thing. The team that developed Cologuard, the scientific team and the medical team from the Mayo Clinic, were just world-class. The science that went into it, best-in-class. Coupled with great science, with an unbelievably robust clinical trial program. At the time, we ran the largest colon cancer screening program in the world. That's our philosophy. Don't cut corners, invest like crazy in clinical trials that answer the question, evidence that gets published in the New England Journal of Medicine. Two products, 6 publications in the New England Journal of Medicine. Don't shoot for second tier. Aim for big studies that answer the question. Build that rock solid evidence. With that rock solid evidence, now you can go and educate physicians with a market access team that is able to access payers and a commercial team that can change how does the practice of medicine follows these new innovations. It's critically important then to be able to provide a seamless experience for patients. 6, 7 years ago, we moved on to Epic, which is the most commonly used software EMR system in health systems across the U.S. That has allowed us to provide unbelievable digital capabilities to engage with patients. For example, I was due for my repeat Cologuard test in December. I went into MyChart, and I saw, you're overdue -- it's ironic. You're overdue for colon cancer screening. I quickly made a request to my doc right in that app, I'd like to get screened with Cologuard. Five days later, I had a Cologuard kit sitting at my home. That was all done electronically because we made the $1 billion IT investment that we've made over the last 14 years. That seamless experience only gets better. It helps physicians, it makes their lives easier, it helps patients. That leads to profitable revenue. We'll get to that at the end of the presentation. By having a strong growing company with growing profits, you can go back to recruiting the very best people. And If there's one thing we've seen over the last 12 months, we have seen the very best people from our industry want to come work at Exact Sciences. We've had 10,000 applications for people wanting to join Exact Sciences this year. So with the very best people, we can reinvest into this platform company and keep bringing new products, and that's how you achieve your mission. We're doing it across the landscape. So everybody in this room, if you haven't been tested for your base germline hereditary risk of cancer, you should. You should know that. Are you carrying a gene for BRACA, confirming a high-risk of breast cancer? Or Lynch syndrome, confirming a really high risk of colon cancer? And there are other genes too. I only got tested a couple of years ago, and it was very informative. I was very happy to know. They looked at all 125 known genes, and I had a low risk of hereditary form of cancer. Everybody should know that risk. Screening test, Cologuard, we'll talk about that. A multi-cancer screening test. Oncotype DX, a test that answers the question for a patient with Stage I or II breast cancer that it's hormone receptive positive, HER2-negative. Will you benefit from chemotherapy? It answers that question with -- based on a 10,000 patient randomized study. Nobody has ever run a study like that. It also answers the question as what is your risk of recurrence? Is it 1% or is it 30%? You can start to treat differently. That is now standard of care. Exact Sciences and Oncotype has 90% market share, 70% class penetration in the U.S., 25% class penetration outside the U.S. A lot of room to grow there. We are the definitive standard in oncology for -- to answer this important question. We also answer -- we are developing a test for minimum residual disease that will be used, we believe, for patients diagnosed with Stage II and III cancers, maybe in the Stage IV setting. What is -- has your cancer recurred? Did you get all of the cancer during surgery? These are really important questions, amazing technology that we think will change the oncology landscape. It's starting to change the oncology landscape today. And then late-stage therapy selection, OncoExTra, helping make sure that every patient diagnosed with later-stage metastatic cancer that they have the right therapy. And so we are the only company that is going across that whole spectrum, what we call the cancer continuum. Moving to Cologuard. So back to -- there are 50,000 people this year in the U.S. alone that will die from cancer. In Europe, that is 150,000 people who will die from colon cancer. Only about 25% of people in Europe are screened for colon cancer. There's a big opportunity. Cologuard, which was developed starting in 2009, got FDA approval in 2014 detects 92% of cancers and has a 13% false-positive rate. There is no other noninvasive test that performs this well. We are developing Cologuard 2.0. We expect that the data from the BLUE-C study to read out and be presented this summer. We hope that, that presents a whole new level of performance and yet a new standard of care in colon cancer screening with improved biomarkers that we discovered jointly with the mayo clinic in a decade-long project with them. That study represents 27,000 patients that enrolled in a study, and we can't wait to have that data presented so that the world can see it and see the new standard of care. But the beauty of Cologuard is that it's not invasive and you can do it in the privacy of your own home. If you haven't seen the SNL skit and Woody Harrelson's rendition of being a Cologuard patient, which we had no idea they were going to do, it shows that the marketing that the team has done around Cologuard has changed the way that people think about colon cancer screening. And colon cancer screening is a big problem still in the U.S. Out of about 110 million people who are -- should be screened, about 60 million people in the U.S. today are not up to date with their colon cancer screening. I know some people in this room are part of that 60 million. Don't wait. Ask your doctor what's right, colonoscopy or Cologuard? Whatever you do, don't use the [ fit ] test because the performance is pretty poor. But it's Cologuard and colonoscopy that are, really, the 2 best tests in terms of performance. And if you took those 60 million people and said, okay, we're just going to screen them with colonoscopy. How would that go? Well, the screening colonoscopy capacity in the U.S. is capped at about 6 million per year. It will take you 10 years to screen all 60 million people. But in the meantime, all those people who were screened 10 years ago will now start to come in back into the screening population. You could never catch up. And that's one of the reasons you've seen such tremendous growth with Cologuard, is it has become a recognized standard of care. It's in the preeminent guidelines. It is -- the brand is known. Ease of ordering, and we're making that impact, and we believe that we can go get a majority of the share here. And that takes us from where we've guided to $1.7 billion of revenue today to, we believe at some point in the future, $8 billion of revenue. Maybe at that point in time, you're on Cologuard 3.0, and that provides an incredible growth trajectory top line and also growth bottom line so we can invest in these other amazing tests that we know will change cancer care forever. Oncotype DX, I explained that. It's been performed on 1.8 million people globally. And it's like changing for patients because it gives them either the confidence that they can go without chemotherapy, or I was just talking to one of our team members who had just treated for breast cancer, and her Oncotype score was really high. She had to go. She really knew then that she had to go on chemotherapy, even though it was a small early-stage breast cancer. That's the power of looking inside the cells, at what's going on in the cancer genes. And remember, cancer is basically a disease of the DNA. The DNA goes haywire. And when the DNA goes haywire, the cells go haywire. And when the cells go, haywire, they grow. And peering inside the cells rather than just looking at a slide and guessing what -- whether that cell is a bad actor, whether that tumor is a bad actor, that's key. That's what's going on in our space, and Oncotype is leading the way. We have 3 major programs. Colon cancer, we keep investing. Cologuard 2.0 is one example. More to come there. We have an Investor Day on June 21 in Madison, Wisconsin. You're welcome to attend. We'd love to see you. A multi-cancer screening test. One blood draw, we've shown the ability to detect most cancers with that single blood draw. There's a lot of challenges in getting the multi-cancer screening test broadly adopted. If we can make this happen, scientifically, we think we've overcome most of the hurdles. Now, it's regulatory and reimbursement, and does -- can we get Congress to act to allow Medicare to pay for this. So more to come there. And then MRD testing. We're really excited. We -- about 90% of oncologists in the U.S. order Oncotype DX, and we think that adding an MRD test to help determine, did you get all the Stage II or III cancer in surgery? In treatment? Has it recurred? And a story there, a friend of mine who was diagnosed a couple of years ago with kidney cancer, 2 mets to the pancreas, okay? Surgery, Keytruda and an MRD test. Not our MRD test, the Natera MRD test. They've done a remarkable job of building awareness in the market. And she's had multiple tests that come back negative, so there's no circulating tumor DNA from that tumor, and they can't see the mets anymore. That means that Keytruda is really working at some point [where] you deescalate therapy. Wow. You could save a lot of money and save the patient from [BM]. Or can you still see circulating tumor DNA, you can see that potentially 6 months, 9 months, 12 months before you can see it on a PET scan. Escalate therapy, move to a different therapy. That's how the world is going to change there. We're developing a test. We have the infrastructure, the commercial team and the relationships with customers and also, the customer experience engine that would automate that process of getting the blood test. Our performance has been strong. Q1 was an inflection point. I think somebody said on the way in that we weren't expecting that. We weren't fully expecting it either, but we've seen this business take a step up. And I will -- maybe I'll wait until Q&A. But [indiscernible] 18 months ago, something changed that changes colon cancer screening forever, and we'll come back to that. The performance has been very strong. Our core business grew at 33% and the screening business grew at 45%. Again, we believe we can go from $1.7 billion with Cologuard to $8 billion with Oncotype. We think we can go from $600 million to about $1 billion with MRD. That is a multibillion-dollar opportunity, so there -- we can see growth for years to come. And the investment that we made in the platform has now we were investing, investing and investing. And people -- I know people in this room are saying, Kevin, are you ever going to become profitable? And we kept saying, yes, yes, yes, yes, yes. At some point, we'll be able to hold spending relatively flat and let the top line grow, and that's what you saw first quarter. And so we've pulled forward profitability, provided guidance around this full year, and we think we're off to the races now in terms of being able to continue to grow those profits. So we're really excited where we stand today. We have provided this full year guidance. I'll leave this up during Q&A so you can take a peek at it. And happy to answer Andrew's questions or any of yours.

Yes. Maybe I'll start, Kevin. And if anybody has any in the audience, certainly, just raise your hand and we can get those answered. And again, there's a breakout. But maybe to start here, right? Entering 2023, I think the fourth quarter obviously saw very strong trends. Q1, you were able to sort of pull forward some of your profitability metrics as well. And it just overall seemed that Cologuard and the entire franchise was operating on all cylinders. Maybe if we could just focus on the Cologuard side of things. Can you maybe just sort of talk about the different drivers of that product specifically here? And what gives you the confidence of that multiyear runway?

Yes. It's a long checklist. First of all, it was getting the evidence of 92% cancer detection, 87% specificity, 42% pre-cancer detection, getting into the New England Journal of Medicine, getting in to the key guidelines, USPSTF , getting covered by Medicare, all the major commercial, 97% insurance coverage across the U.S., including Medicaid. That took years, building a commercial organization, growing from 80 calling on primary care docs when we launched and delivered 40,000 tests in the first year to 700 calling on primary care physicians, 100 calling on health systems. This major marketing effort where we built a brand, you can't do that overnight. Try to do anything in primary care, it takes a long time. That's kind of the backdrop. So we kept investing and investing in that IT ecosystem to be able to deliver results electronically, order electronically. Hugely important. Then 18 months ago, the guideline group surprised everybody and lowered the screening age from 50 to 45. It didn't surprise us. We knew that colon cancer incidence in that 40-year old population was climbing rapidly, and as a result, 15 million average-risk unscreened people came into the population overnight. That's on top of 35 million to 45 million people who were presently unscreened. So all of a sudden, you have this big [ bowl ] that's permanently come into the screening population. And what do health systems do? They kept trying to screen them with coloscopy. And after 6 months, the backlog for colonoscopies grew to the point that now, people who had symptoms couldn't get in to get a colonoscopy. And all across the country now, our health system salespeople started getting calls, started having their calls returned, please come in and help us deal with this backlog. So that's one of the things you're seeing in Q1 as a result of something that happened 18 months ago. Again, nothing happens quickly in primary care. What has happened is a permanent shift around how people think of health systems think, and health systems pretty much control primary care in the U.S. Probably 70% of all primary care physicians are employed by a large health system. And now, those large health systems are saying, help us please. Before, they really saw Cologuard as a competitor to their colonoscopy practices. No longer. They have obligations around quality metrics, and one of the most important quality metrics is colon cancer screening rates. Their only way to compete and to show high quality measures is to bring Cologuard in and offer it as a choice to patients. So today, we only have 10% penetration with Cologuard. We can grow and grow and grow. We have publicly said now, we think we can reach 50%. In the past, we've said 40%, 50% market share, that's eminently doable. If the screening age ever comes down to 40, now we think that creates an even bigger opportunity. The competitive landscape is great for us because of the investments we've made.

And maybe just sort of sticking on that, right, and the notion of being a partner with these health systems, right? Obviously, you have a massive beachhead with Cologuard as sort of a first product into that sort of initiative. But as you think about that continuum of care that you're building out here and all the additional products, how do you sort of think about those products being sold into those health systems over time?

So let's take, for example, a minimum residual disease test. The first thing that you need from a patient who has just undergone surgery for Stage III breast cancer to develop a blood-based, a liquid biopsy to probe whether they're still circulating -- if you remove the tumor, now, you want to be able to do a blood test to see if the tumor -- if there's any tumor left some place in the body. The first thing you need is the tissue to do what's called whole exome sequencing or whole genome sequencing, like sequence the hell out of that tumor. And then identify specific mutations and -- unique to that patient that you then go look for in the blood over and over and over, every 3 to 6 months. We have built the sales force, 100 people in precision oncology. The customer relationship, 98% of oncologists in the U.S. have ordered at least one Oncotype. We have pathologists, they ship us. Over half of all breast cancer tissue samples are processed in our lab in Redwood City, California. We have -- try to ask a pathology for a tissue block, see what they say. We've built that capacity, the platform, the IT capability, what we call the compliance engine, the ability to remind people of telephone calls, text, letters, whatever it takes to get them to do that blood test or the Cologuard test. We've built the relationships with the payers. We have strong relationships with Medicare, UnitedHealth, Signa, Aetna, the Blues, et cetera. We have the ability to have conversations, meaningful conversations about our pipeline. And that is not something that we had when we launched Cologuard, and it's hard for smaller companies in our space to do that because they lack scale. So we've built that scale, and with this platform, we can bring new innovations to physicians and patients with the current existing platforms. So you can start to think about we have this OpEx base that supports future growth. And since we've hit this inflection point in terms of profitability, we plan to keep growing that top line while moderating the investments at an awfully high level. It's an exciting time as a result.

Yes. And maybe just following up on that, right, because I think a handful of years ago, you said you're going to punch through to profitability, right? And at the time, it was pretty hard to sort of see how you were going to be able to do that. But I think now as a lot of these new products start to come and they're sort of more on the near-term horizon here, I think the question is, how do you sort of balance that investment towards the new products and new product development versus what you already have on the infrastructure side of things? So as you're looking towards that profitability, can you maybe talk about the balancing act there?

Well, the balancing act is not a difficult one because we've guided to low to mid-single-digit OpEx growth, and we've guided to an increment of over $300 million in top line growth with 75% gross margin. So that allows us to continue to deliver profitability growth while we continue to invest -- this year, we're investing about $400 million in R&D. That's more than anybody else in our field. Keep doing that. So it is an advantage that is built over 14 years of investment. And I recognize, look, I think that again, a lot of you in this room look at us and say, well, this is not a company that's been focused on profitability. I can tell you, our team is intently focused. I have -- one of our investors I've known for a long time, I had a great deal of respect for [a said] Kevin, it's going to take a long time before investors believe that you have flipped from being in the investment mindset to be in the cash-generating mindset. And one of the things he said is that last year at JPMorgan, you said you were going to pull profitability a full year forward and he said, neither I or anybody else really believed you. Well, we delivered on that and pulled it forward yet another year. And so I'm here to tell you the team -- put me aside. The team is focused on profitability. They are the ones who deliver on this promise, they're focused. And now the beautiful thing is, since every employee at Exact Sciences gets some amount of equity, our frontline team members fully engage in our efforts to deliver more profitability. So it's cultural. We always knew we would get to this point. We believed, and we want you to probe and ask the tough questions because we plan to deliver.

Okay. We're out of time for this room. We'll head to the breakout, and that's in the [ Mirror ] room. Thanks, Kevin.

Well, one other thing real quickly. It's Megan Jones' birthday, and she would be unhappy if we didn't wish her a happy one.