Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Thanks, everyone for joining us this afternoon. I'm Vijay Kumar, the life science diagnostics and medical analyst at Evercore. A pleasure to have Exact Sciences with us. We have CFO, Jeff Elliot. Jeff, thanks for joining us.

Thanks for having me.

You guys have had a pretty remarkable past 12 to 18 months, right? We went from the trough of the fear cycle to some exuberance, if you will. And the numbers certainly back it up, right? Your third quarter numbers came in pretty strong. Cologuard still up 30%. Maybe just if you can talk about the performance in the quarter, are they pretty much in line with the expectation? What surprised you? I think in the past, you've given some details about existing versus new prescribers, where the growth came from, small versus health systems, some color on how the quarter progressed?

Sure. And thanks, ISI Evercore for having us here. I really appreciate the time in Miami. We're based in Madison, Wisconsin, which is 15 degrees and cold now. So a little warm weather here is great. Thanks for those of you in the room. For those of you who don't know Exact Sciences is focused on helping irradicate all the suffering from cancer and really helping fend it off through early detection. It's a mission, it's a bold mission, but one we know that we can win. Third quarter was a really good quarter. We're pleased with the state of the business, the progress we're making. You had mentioned that there's many different growth drivers out there. Today, our [ flasha ] product is Cologuard. It's a noninvasive test for colon cancer screening. And part of why this is such an exciting opportunity for us is that there's 60 million people today we need to be screened, 60 million. Our market share is just 10%. So there's a long ways for us to grow. And we're fortunate to have a wide variety of different growth drivers, from more doctors ordering Cologuard, on a quarterly basis, about 10,000 new providers are ordering Cologuard every quarter. The bigger opportunity is to get the existing base of ordering doctors to order more. How do we do that? It's through a broad surround-sound campaign of marketing direct to consumers. It's through our talented team on the field, our sales team, calling a physician, it's through digital tools that are engaging patients more effectively every year. Perhaps some of the biggest growth drivers we enjoy are health systems, as you mentioned. In this country, about 2/3 of all primary care doctors work for or are affiliated with a big health system. Our growth there has been very good. Today that's over 60% of our revenue. Rescreens, Cologuard rescreens, the guidelines recommend repeating Cologuard every 3 years. That's almost 20% of Cologuard revenue today and growing. That's been a material driver for us. And lastly, I would say, the younger population. 2.5 years ago, guidelines updated to now recommend screening start at age 45, previously it had been 50. And the reason being is because incidence has been growing in the younger population. We're not entirely sure why. We believe it's related to diet and lifestyle, but the change to the guidelines added 20 million more people to the screening pool. The team has done a very nice job executing and really penetrating that market. Today in fact, our penetration rate there is higher than it is in the older population, the 50 and over population. So we're fortunate again to have many growth drivers and a huge market that we serve.

Fantastic. I think with that as the background, maybe some near-term dynamics here. When I look at your Q4 sequential assumptions here, almost I think it's at flattish for Cologuard. Was there any cadence issue or something that got either pulled forward, anything one-off in the third quarter?

Well, Q3 to Q4, a normal trend for us is really tied to primary care trends, utilization trends. So I would expect that going forward to be pretty much flat. Really, our business goes through a pretty steep inflection starting around late August, early September as people come off of vacations, get back to work and primary care visits really pick up. That continues all the way through Thanksgiving and then things typically slow throughout the holidays. So we're in the midst of that now. And then what that leads to is, from a revenue basis, a pretty sequential flat quarter Q3 to Q4 in normalized terms. Going forward, I think I would just probably model that. Then when you look ahead into the -- after the holidays, then the growth really picks up January all the way through summertime and a pretty steep growth trajectory for the business.

This -- earlier this year, Jeff, I think there was some commentary about like reimbursement dynamics, having pull-forward revenues. Could you just remind us what it was? And has it any impact for cadence for '24?

So Cologuard is routinely covered as preventative care. Over 95% of our patients pay 0 out of pocket, which is that's how it should be. Tests that are validated in guidelines should be covered in full. What's happened here is the team -- our internal teams that are really doing a good job of executing and making sure we're getting paid fully for all the tests that we perform. So about a year ago, we upgraded our internal billing systems. That allowed us to collect at a higher rate. When we make those upgrades, we also go back in time and try to pull through collections, really get paid for tests that historically, maybe we didn't get paid in full on. So what that did is it added some, let's say, above and beyond revenue. Last year in Q4, and a bit still into the first part of this year. Now on a go-forward basis, I don't expect that to continue. The team is doing a very nice job making sure that we get paid in full. Again, we're paid for over 95% of our patients. So there's not some big incremental opportunity to win new coverage. It really was just about improving the efficiency of our teams and systems.

Got you. You did bring up rescreening 20% of your revenues, but you also cited like $50 million of headwind from rescreening. I just -- just walk us through because when I look at the quarter number of rescreen cohorts 2020 versus 2019, didn't seem like there was any change. So where is this headwind coming from?

And what a rescreen is that the guidelines recommend you repeat Cologuard every 3 years just because colon cancer can form spontaneously. So you can't just screen once and be done, you've got to screen over the course of your lives. Guidelines typically say, 45 to age 85 or so to continue screening. And that's why we build Cologuard to get more people screened and keep them screened over time. Cologuard rescreens are about 20% of revenue today. The reason why we face what I've sized as a $50 million headwind this year is because when you look back to early days of the pandemic, Cologuard volumes were depressed in April and May of 2020. So people that didn't get screened then aren't now due for rescreens this year. So if you size that in rough terms about $50 million.

All right. Welcome, everybody.

What -- just over 1/3 of that hit Q3 of this year, if I -- just under 1/3 hit in Q2 and Q4. So we're almost done with that $50 million headwind. That should continue -- or that should at the end of this year. Looking at the next year now, part of what excites us about next year is that the pool of patients become eligible for rescreens grows. This year was 1.2 million people, last year was 1.2 million people. Next year, now it's 1.6 million people. So the pool of patients coming in for rescreens is growing. And our success rate at getting them to come back to Cologuard on that repeat basis is growing, too. So I see rescreens to be perhaps our biggest driver next year and for the years to come. Over time, if you look out into the future, I think half of Cologuard revenue will come from rescreens. As CFO it's exciting, you start the year, and you have a pretty good sense of where a big chunk of the revenue is coming from, it's also higher margin revenue because these patients come back. When they come back, it requires fewer resources for us to reengage them, it is a nice gross margin tailwind. It's also a way to help just provide recurring revenue that gives us better visibility and better predictability in the model.

Fantastic. A lot of details there, Jeff. The -- I guess, you did mention the success rate in rescreens, right? Can you give us some numbers on what those success rates were over the past few quarters or how that's trending?

So about 50% of patients who come back today who are eligible for rescreens come back and eventually do Cologuard. Over time, that number has been growing. It's been growing because our teams are in the field doing a great job educating doctors on the need for rescreening. Our digital tools are getting better at informing patients of when they're due and just really make it easy, taking that friction out of the system. When you think about that success rate relative to other tests out there, it is actually very good. There was a study published based on UnitedHealth data years ago that showed that the FIT test, which is another noninvasive test that's available. It's an at-home test that looks for blood in the stool. That test, which the guidelines recommend doing every year, only about 3 out of 1,000 people do it every year as recommended over a 10-year period. So us getting to even 50% is much better than we see in other noninvasive means. Our goal though is to get up to about 70% over time, and I think we'll get there. We'll get there through better execution and better digital tools.

And that 50% is the implication your 2021 cohort is 1.6 million. So that's a step-up of 400,000. So half of those will indicate a rescreen test incrementally? Is that the right way to look at it?

They'll eventually get it. Well, it's really half of the 1.6 million people. Now they all won't get it next year because someone who becomes eligible say in December, they're not getting tested next year probably. They're more likely to get tested in '25. Of those that we retest, about half do so within that first like calendar year, about half will do it in the second calendar year. So it's still -- look, it's a huge driver for us. It is almost 20% of our revenue today. If I look out in a few years, this is easily a $500 million business and eventually it becomes half our revenue.

And where was that number a couple of years ago? Was it at 50% or in a sub-40%?

A couple of years ago, yes sub-40%. It's been steadily working its way higher. This is -- we have, obviously, great visibility into leading indicators here, and we can watch this closely. So we can run experiments to find out what works, what doesn't work and use AI tools to continue getting better at this. So that rate has been steadily marching higher.

So it's been going up a few points every year and the implication is next year should be in the low 50s, low to mid-50s?

Let's hope so. Yes. Look, we'll try to get as many people as possible. The goal again is to get to at least 70%. That's going to take some time to get there, but I'm confident it will keep marching higher.

And that goal of 70%, Jeff, what gives you -- what were the assumptions in arriving at 70%? And what gives you the confidence that, that's the right number? What tools does Exact have that would allow you to hit those numbers? .

Yes. So one way to look at it is to look at breast and cervical cancer screening. I know it's women versus both men and women. But in breast and cervical you see screening rates 75%, 80%. And this is -- it's been out there for a long time. Women have been educated for a long time, like get a mammography. And so those rates are pretty high. So there's precedent to say that you can get up to that high. We say, let's -- we'll get to at least 70% knowing that I'll speak for half of men out there. Me typically aren't quite as compliant as women on this stuff. And so from a blended basis, our goal is to get to at least 70%.

Got you. If I just stop, maybe I'm not doing the math correctly here, Jeff, but if I look at the rescreening revenues in fiscal '23, seems like it grew 50% year-on-year despite the headwind. Do I have those numbers right, that the rescreening number of revenues at?

Yes, we had guided to last year at least $220 million of revenue. And we had said before that we beat that. And this year, we guided to about 20%, which implies somewhere around $350 million of revenue. So going from $220 million-plus to $350 million. Yes, I mean that's 50% or so growth. Now I'd call out this headwind of $50 million. Those teams did a really good job of offsetting that. So that while the headwind exists, all else equal, through better execution, we've offset that -- a big part of that headwind.

And that still feels like a pretty big step up from $220 million to $350 million, Jeff? And was this some new capabilities that allowed you to reach these patients?

Yes. It's -- I think it's improved access from the teams in the field. It's improved capabilities. I'll give you an example of one. About a year ago, we launched the ability to do what we call an advanced order. What that allows is if you go back to your doctor, let's say, it's been 2 years and 6 months since your last Cologuard, you're technically not due yet. Well, odds are, you're not going to come back again in 6 months. You may wait for a whole nother year for your next physical. When we allow that doctor to submit an order up to a year in advance of that patient actually being ineligible, we then hold that order up until the time the patient is due and then we send the collection kit out. The patient then collects and then we report the result and record revenue. That advanced order workflow gives the physician comfort that they can order the Cologuard whenever and then we take care of making sure the patient's screened at the right time. So it's capabilities like that, I talked about digital tools, these digital tools are allowing the frictions to come out of the process and allow us to increase that success rate. Another dynamic here, I'd point out is that Cologuard was first FDA approved back in 2014. You do the math, 9 years -- we're 9 years into it, which means that some patients are coming back for their third Cologuard now. When you come back for your third Cologuard, I've done Cologuard 5 times. So I may be a little biased here, but each time you do it, like you -- the compliance rate gets higher, it's easier to do. When people come back for their third or fourth Cologuard, the success rate there continues to climb higher. So that's a newer dynamic, but it's one that will really start to play out in a major way in the coming years.

Got you. And do you have any more tools, which would further take you down this journey of converting those rescreening patients and improving those compliance rates?

We do. I'm going to give you one more example here. I don't want to share too many secrets, but another one is that we allow patients to go to our website. Again, we want to make it super easy for patients to get screened. If they don't have a physician right there that they can readily access, they can go on to our website and ask a physician using telehealth, submit the key questions on Cologuard to make sure that you're on-label and have a physician, through telehealth, order the test for them all from -- you could do it right now. If you're on your laptop, go to cologuard.com and request that Cologuard is ordered for you. If you haven't been screened, please do. It's -- colon cancer is the most preventable, but least prevented cancer out there. So you can go right to our website, order Cologuard that way. Again, it's a whole suite of digital tools to make it even more convenient to order.

Got you. And then switching to the 45 to 49 age group. Why did that group adopt so quickly? Was it the pandemic effect? Or was -- did the exact approach that cohort slightly differently? Did you use more DTC campaign?

Yes. So what happened 2.5 years ago, the key guidelines here updated to lower the age from 50 to 45 at which we should start screening. That brought in almost 20 million people new unscreened to the recommended colon cancer screening. And in that age group, many of you are, I'm in that age group, I'm 46. In that age group, people are typically really busy with kids and work and other activities. They don't have time or they don't want to take off 2 days for a colonoscopy. So Cologuard really fits into their lifestyle. Also, some of the digital tools we have, I think, really appeal to the younger audience. And if you're in this age group, many of us, myself included, have heard of friends or know people that have gotten colon cancer younger. So it's scary. It's -- again, it's one of the most preventable, maybe the most preventable cancer. So people, I think, in this group, just readily said, "Hey, I want this new technology that I can do. It fits in my lifestyle." We've been educating the market for many, many years on Cologuard and the brand name. And so the brand name wasn't new. It's just the guidelines changed. So we saw rapid adoption. We went to 11% penetration today in an age group in just 2.5 years. Our penetration rate there is now actually higher in the younger age group than it is in the 50 and over age group. So the teams did a nice job here. I think over time, this will still be one of our key sources of growth. Now the beauty of getting somebody who is 45 tested is that through rescreens, we could have that patient for 30 to 40 years. So that's a -- when you think of lifetime value of customers, we'll take anybody, but that's a really valuable customer for us.

In that cohort, Jeff, I think revenues were almost up like triple digits, right, year-on-year, '23 versus '22. Do I have the numbers right?

It is approaching 20% revenue, not quite there yet. It's approaching it. If you think back a few years ago, before the guidelines updated, it was maybe 1% of revenue, now it's almost 20%. So the team did a really nice job of executing there. And look, this is going to be a big source of growth for many years to come.

And in that cohort is a colonoscopy indicated? Or is that not part of the guidelines and then that...

It is. The recommended modalities are the same for 45 to 49, and as they are 50 and above.

But I would think like that patient population is a little bit hesitant to perhaps go for a colonoscopy.

Hesitant and, look we've got -- in this country, we've got a capacity constraint on the number of total colonoscopies that can be done. Not many new GIs are graduating and wanting to go out and do colonoscopies. So the capacity is relatively fixed. Whereas when the guidelines changed, that expanded the people, it actually grew the people needing to be screened by 50%. Cologuard capacities can ramp quickly. We've got capacity to do 10 million tests per year, and we're just under 4 million now. So we can absorb the incremental capacity, where screening colonoscopies are really maxed out around 5 million or 6 million per year. So we've got a big problem in this country. Even if you wanted to screen everybody who's due now with a colonoscopy, and let's assume nobody else came into the pool needing to be screened, it would take 10 years to screen everybody. That's just -- we can't do that. And remember, new people are coming in every day. On a daily basis, 10,000 new people come in, into the screening age pool. And people who have been screened say, 5, 10 years ago with other means, come back and are eligible again. So we're capacity constrained with colonoscopy, so where Cologuard can really help fill that void.

And I think you caught a tailwind from this capacity issue. There's been some debate Jeff on whether that's a onetime or if that's sustainable. Can you talk about what the tailwind was?

There really should be no debate. It's not onetime. It is sustaining. We see it. We see it in the numbers. I think you saw a shift probably 1.5 years ago. I think part of the reason for the shift was the pandemic. The pandemic led to more people -- or I'll say fewer people getting screened temporarily that created this backlog, but other sources have since come in, like lowering the screening age to 45, that added 20 million more people. And so when you add that on top of this backlog, that started with the pandemic, the problem is getting worse. When you look ahead, other factors are coming down, too. The need for payers and health systems to achieve their quality metrics, Stars and HEDIS is getting harder. Starting next year, there's a full audit of all the beneficiaries on those plans. Historically, it had been a partial audit, a small sampling. So Exact Sciences is well positioned to help out providing data on millions of people, who's been screened and who hasn't. So the payers are increasingly turning to us as a partner to help them screen more people and provide them valuable information. So the problem is getting harder, not easier, and Exact is uniquely positioned to help solve it.

Or maybe I'm confusing this with I think what you called out as care gap program, Jeff, can you just remind us what care gap program was? Was that like onetime? Or should that be recurring?

What we call care gap or our gap closure program, there's really 2 flavors of it. One is a health system, one is on the payer side. So in any other case, what this is, is a concerted effort to screen a bold number of patients who are historically reluctant to be screened. So an example here could be a, let's say, a health system comes to us and says, we've got these 10,000 people. We've been trying to get screened for years. We've been unable to so far, can we partner? And so they could submit an order where we provide all these digital tools around helping get these people screened reach out through e-mail, text, even with phone calls and try to bring them in. And in many cases, we're able to get a lot of these people screened that historically, again, hadn't been. So this is a big opportunity, one that I think we're pretty early on. But over time, you can imagine there's millions of these tests done per year, at least attempted to be done per year. And Cologuard, I think, is well positioned to screen the masses because again, it's an at-home convenient test, where capacity is not really a rate limiter for us. And we can get 3 years of quality credit for a payer or health system. And many times, if you're a big payer, oftentimes, they get scored on these, and it could be billions of dollars of credit from the government for achieving quality scores on Medicare Advantage plans. Cologuard can help get many people screened. Again, 3 years of credit is a differentiator. The FIT test is often used today in these programs, only gets 1 year of credit. So that differentiator is really helping Cologuard start to succeed in some of these care gap programs.

Got you. And so this is definitely -- it feels like it's sustainable. It's not a one-off, fair statement?

That is. And look, it's relatively small in terms of revenue today. Thematically, it's very important. Over time, I think it could be a pretty big part of our business.

So when I roll all of these 3 elements together, Jeff, between health systems, 45 to 49, rescreen -- or just let's look at the 45 to 49 and rescreening, numbers I have, maybe $600-plus million of revenues in fiscal '23 from those 2 pockets in a slightly north of $300 million the year prior. So year-on-year, we're looking at a $300 million step-up in '23. And when you think about those 2 buckets, I should be looking at a similar $300 million step-up? Is that -- what's -- is the growth rate the right way to model these opportunities or on a dollar basis? Like what's the right way to think about them?

We haven't given guidance for next year. Like I said before that in a couple of years, I could see those 2 combined being over $1 billion. So we expect a lot of growth. And I mentioned before long-term rescreens are half the revenue or more. So there's clearly a lot of runway ahead. The pool of patients is growing. You're seeing more, many people come back at a higher rate on rescreens. 45, our goal there, it's -- we've got about 11% penetration now. The goal there is to get to over 40%. I could see that one being closer to 50% long term. So a long runway in both of those to add.

Got you. And so when you look at the, I guess, penetration within the 50-plus age bucket, right? I mean that group feels like it's been growing like double digits, low double digits. Is there anything that you could do to accelerate compliance adoption rates in that group?

I mean there's a lot -- that's where the teams out in the field really come into play. We hired a new Chief Commercial Officer 2 years ago, Everett Cunningham. Everett's done a really nice job getting the teams focused on the initiatives that matter the most, helping draw a clear lens of accountability. And so what we saw last quarter is the highest productivity we've ever seen out of our sales team. So I think that will continue. I could see a multiple expansion of our sales rep productivity over time. A big effort we have, you talked about health system as well. One of the key steps there to really unlocking a health system is electronic ordering. Today, we're up to about 70% of Cologuard orders come in electronic. What that means though is that 30% of orders still come in through a fax. I don't know how many people here use a fax every day. I use one maybe once a year, it's typically like some random health care thing. But we've got to get more and more oriented through digital tools. When you do that, when you make it easier, make it where it's look, you're sitting down, you're looking at your Epic health care record, doctor patient, the doctor could just click 1 button, that easy button and order the test, you see a step up in adoption. In fact, when we see a health system convert fax to electronic, you see at least a 30% increase in orders, and that is sustainable. So getting more and more systems to order electronically is a big push. Before the pandemic, so call it 3.5 years ago, our electronic ordering rate was like 30%. So it's been going up almost 10 points a year for a while. Each year it gets harder to keep driving that number higher, but that is a big effort, again, because you see such a big lift in orders. The beauty of that, once you've curated that electronic connection, us, our lab to the health system, we can leverage that for other tests. So imagine dropping in our colon blood product or MRD products into that same foundation. That gives us a massive advantage that creates really good scale, and get ease of ordering for everybody.

And I think part of that is the electronic prescription is your connectivity to EHRs and Epic was a big part. Like are you now connected with all major EMR vendors? Or are there still certain vendors you need to connect Cologuard prescription?

Athena has been -- we've been electronic there for a long time, Practice Fusion, eClinicalWorks. So we do have other electronic connections. What's unique about Epic is that we are on Epic internally. We are a health care provider. So we run Epic. And essentially, all the big health systems out there run Epic as well. So Epic, they're right in our backyard, they're a great partner. They created a new ordering functionality called Aura. It used to stand for orders and results anywhere. They've kind of renamed it, but Epic Aura, what that allows is any other health system on Epic can create a direct connection right to us and place an order without having to take any special steps. So it's a quick way to create that electronic connectivity to other Epic health systems. If you're talking about Cerner or Allscripts, some of the other ones, we can create the electronic connection. It takes more work on both ends to create an HL7 interface between our lab and that health system. So we can do it. We've done it. It just takes longer and more steps than it does to create that connection with an Epic user.

Got you. And so this 70% of prescriptions coming in electronically, is that -- should that still be going up next year or?

It better. Everett, if you're listening it should go up next year. Yes, it will. I'm confident, there's a pretty massive backlog of systems waiting to connect. What this requires is a little bit of work on both sides, the health system, IT team, our IT team. We can do it in a matter of weeks and once you do it again, you unlock higher order rates.

Got you. And like when you said 70% of prescriptions that are coming in, they're electronic. But from a number of health care provider perspective, like how many of those health care providers have access to these electronic prescription?

Well, they all typically have access. Any doctor can order. We've got a web portal, anyone can use, any health care provider could use. Some still -- maybe they're -- they're not -- they don't know about it or they just love sending faxes for some reason, not everybody is using it yet. So part of this is on the reps to go out there and make sure doctors health systems know about the electronic connections. And they're doing that. Look by going up 10 points a year for -- this is our fourth year at that pace. That's pretty rapid adoption. I don't know if that will keep up with that pace next year, but part of it is awareness. Part of it is just getting in line, getting it through the IT workflow at the health system and making sure that we're connected.

And what is Everett focused on right now when he's thinking about fiscal '24? Is that mostly on health systems, large health systems?

Boy, I think it's all of the above. Everett's got a great team below and around him. If he oversees all of the Cologuard sales team, he oversees our marketing efforts and our overall customer experience. I think all 3 get a lot of focus from him. But again, he's got a good team around him. The sales team specifically, health systems are a big part of it. They -- that's over 60% of revenue, making sure that the doctors all know about the guideline change. Our best estimate is that maybe 50% of doctors know that the guidelines now, say, order -- start screening at age 45. So we've got to change that. We know in this country's screening saves lives. We have to get more people screened. The majority of colon cancers that happen, happen in people who are unscreened. I think it's 75% happen to somebody who was unscreened. So again, if you haven't been screened, please get screened. Yes, Everett is making sure that doctors know about these guidelines, making sure these -- the digital tools we have are used, electronic ordering happens.

Where is that number coming from, Jeff, 50% awareness amongst docs that the screening guidelines have changed?

Well, it's an internal number. Anecdotes from the field, some survey work we've done. And obviously, we know -- we can quickly tell through our ordering systems, the doctors are ordering a higher month rate ages 50 and above, but not for younger. That's a pretty good tell that they're just not aware of the guideline change. So we can quickly go out and make sure that doctor is aware.

Got you. So maybe switching on to CG 2.0. We saw the data, pretty impressive data, both in terms of sensitivity, specificity. I think the submission was by year-end. Has it been submitted to the FDA?

First on the -- the final submission will go in this month, actually December, early December. It's a rolling submission, so there's multiple parts to it. So it has started, it's just not done yet. And then it's a -- think of it as a year or so for FDA to work through the process. So we're assuming we launch in early 2025. First off what Cologuard is, Cologuard 2 is. It's an enhanced version of already a very good test. The reason why Cologuard 2 came to be was because there are some doctors that push back clinically on Cologuard 1 because what they say is the false positive rate, which per the FDA is 13%. They say that's too high. Look, a false positive, it's not the best outcome for the patient. That's a patient who goes through a colonoscopy unnecessarily. So Cologuard 2, the goal of that was to improve the false positive rate. and also -- and add some operational enhancements to the test. Vijay mentioned, we shared some data over the summer, showing that we had improved that false positive rate by 30%. We have 30% fewer people going to a colonoscopy unnecessarily. That helps in patient experience, that helps in health economics. It also helps in our financials significantly because that's more patients that stay in our rescreen pool over time. We also added in some enhancements to our lab workflow to improve the efficiency there. So we expect Cologuard 2, once it's FDA approved, to improve our cost of goods by at least 5%. So it's a pretty major impact on margins. And over time, perhaps the biggest driver of growth will be going back to the doctors, and we know who they are, back to the doctors that historically wouldn't order Cologuard or wouldn't order as much because of that false positive rate. When Everett and the team knows who they are we can go back to target those doctors directly, and we expected a nice step up in orders because of that.

Do you have any sense on what percent of docs had the resistance or inertia, if you will, due to false positive rates?

Internally, we know who they are. We haven't shared that number, but we're excited to get the new product out there. Look, Cologuard 1 is an awesome test. It's included in the guidelines. It's FDA approved. We've now screened over 13 million people. I think we can help save even more lives with Cologuard 2, both in terms of getting more people screened and getting them screened more accurately.

Any sense? Like is it like low single digits of like your prescriber base?

Stay tuned, VIjay, on that one. Look, it's -- we invested over $100 million in Cologuard 2 because we know the impact it can have patient outcomes, and we know the size of the opportunity.

That's helpful. That's another way to size it. The -- I guess, the 1 year for FDA approved because it's a rolling submission, like my understanding is when you have these rolling submissions, you have constant back and forth. FDA is familiar with it, it should be a faster, quicker process.

The FDA has been a fantastic partner for Exact across a wide variety of different tests that we work with them on. Cologuard 1 took almost 16 months for approval. Part of that was it was a new modality. Part of that was they asked for an outside advisory panel to review the test. I'm not sure if that will happen for Cologuard 2. But they've been a good partner. We've had a good relationship there and expect approval to eventually come. But the FDA is busy. We're not the only ones working on this and the FDA has limited resources. So we're just trying to estimate based on historical experience that it will take about a year. If it comes faster, great. We want to get it out there as soon as possible.

Is it a supplemental PMA or new view?

It's a new PMA. So it's a brand new product.

Okay. Okay. And you did mention the 5% reduction in COGS. Are you going to let all of that drop down to the bottom line? Or will there be some reinvestments?

We will likely let a lot of it drop through. We've put out long-term margin targets. Cologuard 2 is a part of how we'll get there. The margin targets are at least 20% adjusted EBITDA in 2027. Again, it's at least, we'll try to get to as high as possible. But to get from here to there, we're at more like a 9% margin this year. So we'll have to let some of it drop through. But we want to make sure that we're balancing kind of near term and long term in everything that we do. That means that we'll continue to invest in growing our top line, invest in key R&D programs. Cologuard 2 and our -- the other R&D products we have will help us do both of those, grow the top line and drive better margins.

And will -- once you launch a new test, Jeff, is that going to be run in the same facility? Or will you be offering both tests? Or is there a transition period?

Yes, there will be some overlap. Yes, the same facility. Anybody who would like to come to Madison, Wisconsin and see our lab, you're welcome to. It's a highly automated lab. That team does an amazing job. But they'll both be run simultaneously for a time because when we ship a Cologuard kit out, that patient has up to a year to return it. So today, there's kids out in the field that will come back, let's say, next year. So if assuming we launch Cologuard 2 in early '25, they'll be 6, 12 months of Cologuard 1 kits out there. that we'll still -- obviously we'll still serve those. From a marketing standpoint, though, I don't think we'll continue to keep marketing Cologuard 1, but we'll obviously process the tests that are still out there.

Got you. And because you'll be running 2 tests, Jeff, does it have any gross margin implications? Or are these like similar lines, similar?

I guess what it means is the benefits on gross margin from Cologuard 2, the full benefit will take, call it, a year to really phase in because we -- obviously, we recognize revenue on the test that we process. So some of the work flow advantage of Cologuard 2, you'll see a partial impact and that will build over time. And about a year after launch, you'll see the full impact.

Got you. And on competition, I think like 12 months ago, there was a lot of fear. We went through that tough year cycle. But there still seems to be on and off noise. I think one of your competitors or potential competitors, I should say. They -- presented 2.0 data and it wasn't clear if it was a formal trial. Have you guys given any thought on competition from these spot-based tests?

Look, I mean, I've been studying this space we're working in for over 10 years, and you hear about companies trying to get in. I get why, it's a -- there's over 50,000 people die per year from a very preventable disease. So it's a big problem, one that we are I think well positioned to help address today and for many years to come. But most of these companies that have tried have failed. Cologuard is the only -- let's say, the only new game in town, and Cologuard was first FDA approved 9 years ago. On the market today, you have a colonoscopy, which has been on the market for 25 years. People who are willing to do it, it's maybe 40% to 50% of people are willing to do that. And there's also a fecal blood test on the market that looks for blood in the stool. They've been on the market for decades, and they've got about 10% share. Beyond that, others are trying to come in, but it's a tough, tough market to get into. You first have to do things the right way to develop a test that is based on sound science, run a high-quality study, work with the FDA, work through the guideline groups, work through the quality measures and the payers, build up a sales and marketing team. We've invested billions of dollars in Cologuard to a point now where we've got good momentum. We're seeing good margins fall through. I get why others are trying to get in, but yes, I think it's a long road ahead. And it's a long road, we have a blood test that we'll share data on middle of next summer. There's a role for blood. Again, there's 110 million people total this market. There's a role for blood. It's more of a niche test than anything though.

Got you. Anything in the pipeline? I think you've spoken about launching Oncotype in Japan. There is an MRD test, a therapy selection test. And I don't think I've heard much about your MCD test where we are on the validation. So which of these could be meaningful or could be opportunities in '24 and which would be in '25 and beyond?

Multi-cancer from a revenue standpoint is beyond '25, I would say. The reason being is because that test before it gets real material adoption would need FDA approval and guidelines. So that's an active program. It's 1 of our big 3 investment areas for the future. And look, what multi-cancer is, it has the potential, in our view, to have the greatest impact on human health outcomes of any test out there, even greater than Cologuard. Because for the majority of cancers out there, there is no effective screening modality. This could be a way to help find more cancers earlier, it helps shift that to where perhaps surgery could remove it rather than having to go on chemo and other advanced therapies. So it could have a huge impact. We are invested in it. No change to the timing here that one of the key things we're looking at is will Medicare have a pathway to reimburse the test. Today, they do not. We are hoping and waiting for Congress to act to create this pathway. If Congress doesn't, then we're less likely to invest the dollars in the pivotal study to bring it to the FDA. And we need a clear line of sight to that return on investment before we spend shareholder dollars. So it's an important program, one that I think eventually Congress will create that pathway. There's a little uncertainty right now.

Understood. And Oncotype Japan and MRD test?

Yes. So Oncotype Global test on the market over 15 years, helps answer 2 key questions for a woman diagnosed with early-stage breast cancer. One, what's my risk of recurrence. Two, will I benefit from chemo? It's the only test out to do both those. It has 5 New England Journal publications. It really is the standard of care in the U.S. Internationally, it has only about 25% share. One of the key areas of incremental growth is Japan. Finally, Japan reimbursement just came online in September. So that launch is starting. The potential there is huge. The potential is the biggest market outside of the U.S. So it could be a big growth driver for that business. The exciting part of our international business, which this year is about $150 million. The really exciting part is we've got a great team there. A great team that helps -- can serve as the foundation for other product launches. So you can imagine a world down the road where we have MRD, therapy selection, multi-cancer, perhaps colon cancer screening all outside the U.S. built around to this existing platform.

And how -- like have you sized Japan, like how big from a dollar perspective Japan could be?

Japan could be north of $25 million. I think it's early there still, but it could be a big growth driver in the next few years.

Got you. And on therapy selection and MRD, could they be meaningful next year?

MRD, I think the real -- look on a base of revenue of close to $2.5 billion this year, for something to be material, it takes some time, right, to get there. MRD, we expect reimbursement to start likely the back half of next year. So I think the real contribution from a top line perspective is probably more likely '25. But we're excited about MRD. MRD is we see as the potential to be over a $1 billion franchise for us. It fits right into our sales and marketing team, it fits right into our labs. And in many cases, at least when you look at breast cancer, we're already touching those patients. At least 50% of all the breast cancer tissue in this country already comes through our lab. We can take that same block of tissue today to answer that key question with Oncotype. In the future, it can answer a question around residual disease, recurrent disease, possibly therapy monitoring, all starting with that same block of tissue. So that sample synergy, that engagement with the patient, we're well positioned to move forward on.

Got you. And here in closing last few minutes here, Jeff, anything else from a macro perspective for '24 plus or minuses we should be thinking of?

Look, this is a health care group, let's say that we're not exposed to many of the pitfalls you see out there in health care, whether it's GLP-1 or bio-production or a slowdown in China, Exact, in many ways, we control our own destiny. We've got a strong balance sheet with over $700 million of cash. We've got massive markets that we serve today. Core growth on market products, that is the top priority. I would say our #2 priority is R&D. The next couple of years will be exciting times for our pipeline. We plan to make our first MRD test available still this quarter and next year with reimbursement coming online. We'll share data next year on our colon blood program and Cologuard 2, we expect approval and launch in early '25. So it's an exciting few years. I think that these are huge markets, and I think we've got a great team inside that can help execute on the opportunity.

Maybe a last question here on margins. Jeff, you've laid out a 20% adjusted EBITDA margin target. Gross margins will be part of that thesis. But when I look at your G&A, that's the highest. Why is G&A so high? And when do you start leveraging G&A?

Yes. G&A is an area. I think going forward, it will be our biggest area of incremental leverage from here. This year, we're getting -- if you look at it on an adjusted basis, we're getting about 3 points of leverage this year. So it is starting. It is -- I'll say G&A is too high, both as a percent of revenue and in absolute terms. What's in G&A, the biggest areas now are IT, building out some of these digital tools we've talked about. Our customer care team and customer care engine are in there. So there's ways we can continue to automate more and more of that. But over time, my goal is not only to bring it down as a percent of revenue, down towards the 10% to 12% range, but actually start to bring it down in absolute terms. It's going to take some time to get there. But I think the efforts have started to help leverage the G&A line.

Fantastic. I think with that, we're almost at the end of time, last few seconds. Any closing comments, Jeff?

Thank you, Vijay. 45 minutes is a long fireside chat. But thank you very much and thanks to everybody in the room.

Fantastic. Thanks Jeff.