Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

All right. Thank you, everybody, for joining us. I'm here with CEO, Kevin Conroy; and CCO, Everett Cunningham. So I'll just start off with saying -- oh, and I'm David Westenberg, the diagnostics analyst.

You came up a lot of consecutive beat-and-raise quarter, where operating margins, frankly, probably surprised even you guys. As we approach the tough comps, how should we think about the momentum in the business, and what your potential is to beat expectations?

Not a lot surprises to us about our business [Indiscernible]. Thanks for having us. We are really happy to be back at the Piper Conference, and Dave, our business continues to grow. It's a strong business, and it starts with our lead colon cancer screening opportunity. There are 60 million people in America that aren't up to date with colon cancer. Colon cancer is the #2 cancer killer in the U.S. Just last week, an old good friend of mine told me he has stage 4 colon cancer, late 50s. There are just so many people who are not up to date with screening, and they're finding out that they have the disease when it's metastatic. So the opportunity here continues to be one where we just have a passion. Our mission is to help eradicate this disease -- cancer broadly with test that help prevent it, detect it earlier and guide treatment. And that's our Cologuard, our screening business on one side, our Precision Oncology business with Oncotype DX on the other. And as we look at this business, we see growth this year over last year. We see growth next year. We see growth out in the future. And every January, as a team, we sit down, we map out our our 5-year plan, give that to the Board of Directors and that's an aggressive, exciting path forward for us.

Got you. How far are we into the rescreening opportunity, or we -- maybe with penetration rates or percent of tasks or however you want to slice and dice that?

Yes, thanks. Rescreen, which is a big growth lever of Exact Sciences. Just the definition of rescreen, we have those people that take Cologuard and then since it's a 3-year interval test, when they take it the first time, it's that second time, we call that the rescreen patients. It's about 20% of our Cologuard revenue this year. In 2025, we look at it to be about 50% of our Cologuard revenue. So a big continuing growth lever for us commercially, which I lead that commercial organization. We have people out every single day, helping physicians, helping hospitals with their rescreen population. We have the data, we have the list. We can digitally help them screen those patients. Our marketing campaigns are geared towards that rescreen population. So as that population grows, we know exactly by territory, by market on where to do that. Lastly, around rescreening, we want to make it easy. We want to make it easy for our health care providers to care for that population. So if a patient goes in, and they might not hit their rescreen anniversary, we can order Cologuard anyway. We can give that physician the list of their rescreen population. They can cover that, order those for the population. Then when their 3-year anniversary comes up during that year, they get Cologuard. So it's just a way in which we're making it easier to order Cologuard for one of our biggest growth levers.

So this year, in March, I was at work, and I got a message on my iPhone, and it said, "You have a MyChart message." So I went into the MyChart app, which is my health systems in Epic app. I went in there, and it said, "Kevin, you're overdue for colon cancer screening," which I thought was ironic. And so I was able to e-mail directly my health care provider, who then immediately ordered a Cologuard test for me. It was just a couple of clicks. And a week later, I had a Cologuard kit at home, and I was able to get rescreened then in very short order. That is the power of the IT platform. As much of a cancer diagnostic company as we are, we're also a very advanced IT company and that those capabilities fuel growth. I think Everett may have said that we'll be 50% rescreened by 2025. We haven't guided as to when that will be. It won't be 2025 quite at 50% that would -- if it is, everybody here who's along Exact Sciences would be very happy. But we -- over time, we expect that 20% to be 50%, which means over half of our Cologuard screening revenue is recurring revenue. That's a really powerful part of the Exact Sciences story.

Got it. Very helpful. So let's just talk about the pace of ordering from the 45 to 49 crowd. Has it been faster than average? And has that been feeling some of the recent growth?

It has. The 45- to 50-year-old population is a big growth contributor for us. About 2.5 years ago, they took the screening age from 50 down to 45. So it introduced a new population for us. We look at it like this. Every year, there's 4 million people that turn 45. It's a big opportunity for us. What is some of the things we're doing, our marketing messages are now geared towards a younger cohort of 45 to 50 year old. The way in which we message positions, we let them know every single day that there's a new screening age of 45. We have to let them aware of that. Interesting, I was out in the field a couple of weeks ago, and I was working with one of our colleagues, and we had a customer, a physician health care provider, that was writing a lot of Cologuard for their 50-plus population, but wasn't writing any Cologuard for the 45-year population, 45 to 49. So it kind of told us were they aware of that change, the guideline change. So we're out there every single day messaging that. Last thing I'll say is Cologuard is picture perfect for that 45- to 50-year-olds. They're in jobs, they're busy, they have kids. Do they really want to go through all of the process prep for colonoscopy, or do they want an at-home test noninvasive, no prep needed, no dietary restrictions, that's where we position Cologuard, it fits perfectly.

So maybe we can talk about the 40, maybe like a 40 to 45 aged potential cohort. I mean I know -- I mean, every study I'm seeing basically is saying colorectal cancer for some reason or another is starting to happen in an earlier age than we've seen historically. Is that a possible age group that some of the guideline committees or whatnot suppose to look at, who ultimately decide -- will decide when to move that?

So the question is, well, if and when will the age lower from 45 to 40.

Is that even possible?

It is possible. So the basic dynamic is how many people in that age group get cancer. What's the rate of prevalence of cancer in that age group. And if it keeps growing at the rate that it's growing, which is alarming, we would expect, maybe not in this cycle, but then the next cycle that the guideline group USPSTF looks at this. So it may be in the 10-year range before that has changed, but we do expect that another new 20 million Americans will come into the screening at some point. The calculus is basically what is the cost of screening versus the benefit. They frame it as benefits to harms, and harm is being measured as the colonoscopies or the cost of colonoscopies generated in that cohort. And if the incidence rate keeps increasing, we would expect maybe not in 2026 when the guideline group meets, but by 2031.

Okay. Got it. That's helpful. Maybe this one is probably for Everett. What is the strategy around targeting health care systems versus just individual docs?

Yes. It's a [ AND ] strategy. We target individual doctors with our commercial organization. We have a great sales organization. I mentioned districts, territories that are really focused on their individual customers, and we also focus on health systems. A couple of years ago when I came on board, Kevin and I, we knew that health systems were critical for us to get our Cologuard volume from. So we more than doubled our resources in our health systems. We have more than 100 account managers that are calling on our largest systems. A couple of things that we do with our health systems. First of all, we need to make it easy for health systems to order Cologuard. So we have a big focus on making sure that we can electronically interface with that health system, so they can be in their Epic system. They can order Cologuard. They can get the results back, it makes it easy, and they love that. They're always talking about operational efficiency at the health system. The other thing we do at health systems is, we provide the health. Health systems right now are adding capacity for colonoscopy. And not only are we calling on health systems, but they're coming to us saying, "How can you help us with our colorectal cancer screening rate?" So what they're doing is they're saying, not only will we have that capacity of colonoscopies, but we can use Cologuard for our average risk patients to making sure that we can get those people screen and get them screened at the appropriate time. So that partnership is increasing every single day around our health systems, and it will continue to be a big, big focus of ours moving forward.

Got you. What's the latest on Cologuard 2.0. Can you talk about the process of raising ASP, what that looks like, how fast that can happen? And then on the cost side of it, can you remind us the COG differences between Cologuard and Cologuard 2.0 if there are any.

Yes. So the second question first is about a 5% decrease in our COGS, which was about $125 per test, roughly speaking. So there's about a 5% decrease, we think, over time because of -- it's a more streamlined product with fewer biomarkers that we're targeting that streamlines the workflow in the lab. Cologuard 2.0, what was the goal of that program. It was to improve the performance. And the #1 goal with our next-generation Cologuard test was to decrease the false positive rate. Feedback from customers said 1 of the top 3 reasons primary care physicians chose not to order Cologuard or didn't order it as frequently as we would like them to was because of the false positive rate. So the #1 goal was to identify all new biomarkers that would improve the performance, maintain or even increase cancer and pre-cancer detection, while significantly decreasing the false positive rate, taking that down. And we achieved all of those goals. Higher cancer detection by 2 points, pre-cancer by 1 point and dropping the false positive rate by 30%. That means 30% fewer unnecessary colonoscopies. Colonoscopies are very expensive at about $2,500 per. So we plan, and we're working with health systems now to share in those cost savings by increasing the price of Cologuard in a modest way so that we can recoup our R&D costs, our investment here, and we expect Cologuard 2.0 to launch around the first quarter of 2025.

Perfect. Can you discuss the key IP around Cologuard? I know you can't talk about legal ongoing legal issues, but maybe if you can maybe discuss what you have IP around.

So let me start by saying there's -- in fact, I just ran into somebody in the hallway who said, "Kevin, I -- remember you, 14 years ago, talking about this at-home stool colon cancer screening tests, and I didn't think it had a prayer of being successful." And next year, we expect it to be over a $2 billion product. We've invested immensely into our research and development efforts. We have found new markers. It has been an enormous amount of effort and cost. And we have secured intellectual property. We have 80 patents in the colon cancer screening field. We have about 80 patents pending. And if companies want to try to copy what we have done, they have to respect our intellectual property. And we've never really had to talk about this. There are some companies that don't respect IP, but there's a reason we have the laws that we do in the U.S. and we intend to enforce our intellectual property and expect that to be enforced.

Maybe we can talk about some of the competition in blood. I don't think I'm going to get an answer on asking which of Freenome, Guardant Shield or Natera, I mean, Natera, I think, is going to have an initial readout not necessarily a later-stage readout, which of these would concern you? And why is blood maybe generally not a concern? I'll probably get more of an answer from that versus a rank quarter of the [Indiscernible].

Well, there are a bunch -- I wouldn't say there are any competitors. To date, I've been hearing about blood-based colon cancer screening for 7 years, and I haven't seen any people tested with an FDA-approved test. And the reason being is, yes, there is a need for more different unique improved forms of testing. But in theory, your performance is not progress. And that's what all of us -- look, Exact Sciences has a blood-based screening program. We think there is a niche application for it for people who refuse guideline recommended forms of screening. There is a need, no doubt. Is a fit like -- let's say, the hemoglobin in the stool test is fit like cancer detection in the 70-plus percent range. And with a high false positive rate, with some of these blood testing to have and no pre-cancer detection is that progress, no, not really. Will it -- will there be a role for it, yes, but it will be a limited role. And so I think it's easy to talk a good game. It's really hard to go run a massive prospective screening study and put up good results. And the reason is a biological one. For early-stage cancers and pre-cancers, very little DNAs being shed into the blood. Many of us in this field have looked for a signal from the immune system. We've looked at protein markers, DNA markers, RNA markers, et cetera, et cetera. The challenge you run into is in stage 1 tumors and pre-cancer just there's not signal that is reliable from blood. In stool, there is because the interlining of the colon is where the cancer is, and those cells as soon as you have a precancerous polyp are being shed at a very high rate, directly into the sample that we test. So there isn't the same biological barrier. How we, as a field, overcome this, we don't know that there's a path forward, but we've been hearing about this for -- I've been CEO for 14 years. For 14 years, we have been hearing that a blood test would take over this market, 14 years later, not one person who's been tested with an FDA-approved test. That's not true, Epigenomics did. They just went out of business. So the performance wasn't there. So the Epigenomics test never took off.

Got you. Maybe you can talk about the fact that you're getting operating leverage now. You have a pretty decent balance sheet here. I mean, I do think you have $2 billion in debt, but with '25 maturity, and that one's [ posting ] the money right now. So I don't think there's necessarily any kind of financing overhang on your balance sheet. How do you think you be -- might be using that balance sheet in the coming years? Do you see any M&A opportunities? Do you see any holes in your Precision Oncology business, where you think you can incorporate new areas testing there? I don't think there's any holes in Cologuard. That's why I am asking Precision Oncology.

First of all, in terms of balance sheet, our philosophy has always been the leadership team has to own that balance sheet. The CEO has to own that balance sheet. This isn't something that is delegate. And we always believe that from day 1 is make sure that you're adequately capitalized. We took a range of, I think, '25, '27, '28 converts and pushed those out to 2030. We have a small tranche of '25 that are -- 2025 that are still very manageable with the current cash that we have on our balance sheet. Over this time, we'll generate a lot of cash, be able to pay off those instruments, refinance them. We have tons of different options there. In terms of how we think about M&A, it hasn't changed. There are a lot of seemingly cheap assets out there. We -- a week doesn't go by that somebody doesn't approach us about something interesting that they have, and we have a robust business development team and an advanced technology group that helps us take a look at opportunities. But we look at, number one, is there the right mission. Do they help us in those 3 areas: prevention, earlier detection, guiding therapy for Precision Oncology. And that's one is, is it a right culture fit? And can this be fast growing and profitable. So those are the things that we look at. And there are some interesting companies out there. You just have to make sure that the science is really strong. You need to make sure in the Precision Oncology field that a path towards very broad-based reimbursement is strong. And the secret to Exact Sciences is look at our brands, our 2 leading brands, Cologuard and Oncotype, strong gross margin profiles, deep brand awareness primary care physicians, oncologists for Oncotype DX, international capabilities. That has provided real strength to this company. And we compare those opportunities to the internal programs that we're funding, and those external opportunities have to be better than the best thing that we have internally to fund.

Got it. No, that's actually great a segment because I'm going to ask you about your MCED business. Clearly, cash burn here. I mean, generally speaking, right now, we're seeing a lot of move from investors outside from higher cash burning large TAMs into more tangible cash flow positive like Cologuard, honestly. Any thoughts to reducing activity in that business, whether it be spending on R&D or any kind of other overhead or allocations?

The MCED business refers to multi-cancer early detection or one-blood draw, most cancers. And it's really an amazing technology that works. We have data that we've released showing 60% cancer detection with only 1.5%, 2% false positive rate. It's remarkable. Do you screen a whole population you're going to, on average, shift the stage of detection by 1 full stage. There is no therapy as effective as earlier detection. We acquired Thrive. We added our own technology, DNA methylation technology to the effort, and we're seeing great sensitivity and specificity performance with the R&D team. The caveat is that Congress still hasn't given Medicare the authority to pay for a test that detects more than 1 cancer at a time. We have -- there is a bill pending. We have been working with the American Cancer Society and other advocacy groups. There's a bill pending that has over 50% of Congress as cosponsor. You would think that would lead to legislation that gets signed into law. But that is not the case. If that legislation doesn't pass, next year, we will bring down our spend, not eliminate it, it will still be a strong investment in the field, and we would run the pivotal clinical study after we see movement within Congress. So we think that's a good plan that allows us to let some of those profits flow through and then also make investments into other high ROI programs internally.

Got you. And then maybe just on the blood test, the non-MCED blood test, the -- for colon cancer. What are the latest time lines on that? And what are the puts and takes to make it shorter or longer than your...

So first question is why would we have a blood-based program if the performance isn't there? Well, we know that there's about 1 in 3 patients who get a Cologuard test that never returning. Just like there's about 1 in 3 people who don't show up for a colonoscopy. Many of those people get a Cologuard test. They don't -- many of those people don't return the Cologuard test. So we know who these people are, and we have a direct ability to work with their health care provider to get them tested. We can reach out to the individual directly. We can reach out to their physician. Medicare has provided a pathway for reimbursement with those patients. We expect our blood-based colon cancer screening test to have data from our large pivotal study, the blue -- deep blue -- I'm sorry, the BLUE-C study. And the middle of next year followed by a submission to the FDA and approval probably within about a 12-month time frame.

Got you. Perfect. With 22 seconds left, what's faster, your marathon time or Everett's fastball?

Oh, my goodness...

Not a close call.

Your marathon.

Well, I did shatter the 5-hour mark by a minute and 10 seconds. Everett's fastball, I guarantee you, is faster than that.

It was so fast. I'm sitting up here talking to you guys. So here you go.

Thank you, guys.

Thanks.

Thanks, Dave.

Thank you.