Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Hi. Good morning or good afternoon, everyone. This is Rachel Vatnsdal with the life science tools and diagnostics team. I'm joined today by the Exact Sciences' management team. As is typical, this will be roughly a 20-minute presentation followed by 20 minutes of Q&A. We have mic runners in the room. So if any of you have a question, feel free to raise your hand. Otherwise, you can submit your questions via the app or just ping me directly. With that, Kevin, I will let you take it off.

Thank you, Rachel, and welcome, everybody, and welcome to all who are listening via the webcast. We all have a story about a fight to defeat cancer, whether it is a loved one, whether it's a friend, a colleague or ourselves. Cancer is the #1 cause of death for people under age 85. That's just about everybody in this room. And if we detect cancer earlier when it's most treatable, we know that's the start of defeating this disease. There is no therapy as effective as earlier detection. And we also, at Exact Sciences have been focused on this mission of eradicating cancer through tests that help detect it earlier, guide treatment and even prevent it, that's the goal of Exact Sciences, and we built a company that is highly focused. We are a cancer diagnostics company that is integrated. And today, we're going to talk about the Exact Sciences journey, the progress that we made in 2023, the progress that we expect to make in 2024. And hopefully, we can zoom out here and take a look at Exact's ability to impact this terrible disease. We will be making forward-looking statements. Let's start with an individual who is very important to us, Patty. Patty is one of our customer care representatives, an amazing person, and she works every day to help other people complete their cancer journey. Yet she was 1 of the 60 million Americans who are not up to date with their colon cancer screening. And she finally, she relented, and she got a Cologuard test, something that she works on every day. It came back positive. She was very nervous. She got a colonoscopy. And the gastroenterologists found and removed multiple precancerous polyps. One thing that has been established scientifically is that by finding and removing precancerous polyps, you actually prevent the disease. So Patty's story fuels us. And we all now heard stories of friends, family members, colleagues, who Cologuard have helped find the disease early in its most treatable stages. With the power of Cologuard and Oncotype DX, we have built a company that has tremendous reach, reach to health systems, over 300 health systems, 120 countries, 800 relationships with payers, payer agreements, and 400,000 health care providers who have ordered Cologuard or Oncotype DX. This capability with our commercial organization, and we believe the best science and scientific team in the industry, allow us to create this platform, a platform that we'll talk about today that will accentuate growth for years to come. We're focused on a disease for which there has been unbelievable progress over the past several years. When you look at a cancer, cancer is caused by -- it's a disease of the DNA, and it changes the way RNA is expressed in proteins. And we've developed these as an industry, an incredible array of targeted therapies that are changing outcomes. Just yesterday, I got to know from a friend of mine who is diagnosed with metastatic colon cancer, who is not an immunotherapy now, and it's having -- he's Stage 4, and it's having a positive impact. It's because of the knowledge of DNA. Well, that knowledge of DNA has also allowed us to detect cancer earlier and easier than ever before possible. This is an exciting time for us to continue to make progress. And the science at Exact Sciences has proven the platform technologies, DNA extraction, DNA detection, allows us to deliver innovations in a very cost-effective way. And it allows us to develop this portfolio of tests that we bring through this platform company that we have developed, starting with Cologuard, our next-generation Cologuard test. We're so excited about the results there. OncoDetect, our minimum residual disease test. We're excited about the ability to help play a role in changing the way that cancer recurrence is detected. And Cancerguard, our multi-cancer early detection test, one simple blood draw, many different types of cancer being able to detect earlier. We have two teams at Exact, our screening team and our precision oncology team. Our screening team is grounded by Cologuard, many other tests coming along the way, and then also precision oncology grounded by Oncotype DX. Maybe one of the things that's not fully appreciated about Exact Sciences is this incredible digital, large, complex IT platform that we have built that connects patients, physicians, health systems, payers, pharma. It is an incredibly sophisticated system that has been developed with an investment of over $1 billion, and it continues to impress and drive results. It allows physicians to easily and electronically order a test and get a result. It allows a health system to think about population health. I'll give an example shortly of that. It allows digital customer support and service. It's really amazing. And on the back end of this is the ability to do billing and reimbursement, and you'll hear more about this in coming quarters and years is prior authorizations, which are killing health systems, and payers are trying to address. We can automate this with the platform that we have developed. And it's unique, it's differentiated. And there's not quite anything like it in our field. When you think now about our screening business, you start with Cologuard. Cologuard has seen widespread adoption because it was a massive innovation. And it was an innovation that was born of a customer need. There are 60 million people who aren't up to date with screening, and a capacity in the U.S. of 5 million screening colonoscopies a year. So with Cologuard, we have been able to grow. We'll talk about the impact of that. Just last year, we generated $1.865 billion in revenue. We've delivered over 14 million tests since launch. And brand awareness is at an all-time high. Just last year, we saw 31% year-over-year growth. That was our ninth full year of launch. So what you're seeing is a culmination of a lot of work that I'm going to highlight here, the impact -- we'll go back to 2015, there was a cohort of 23,000 physicians who ordered Cologuard for the first time. And the purple line here is the frequency of ordering of that cohort, only that cohort, it has grown 25% compounded over those 9 years, over 6x frequency for that cohort of 23,000 physicians. That includes a lot of physicians who've retired since then. So that -- what you're seeing is that a frequency of order continues to grow. And the black bars here are the number of health care providers who order Cologuard -- who have ordered Cologuard each cohort for each of those years. So it's a multiplication of that. You're seeing an increased number of physicians every year. And each year, subsequently, they start at a higher frequency level and every one of those purple lines for each of those cohorts continues and goes up into the right. So what you're seeing here is a sustainable and predictable revenue growth and impact on patients. We're very proud of this, and it's not easy to do. Colon cancer is a big problem. It's the #2 killer still in the U.S. It's known as the most preventable and least prevented of all cancers. If you detect colon cancer in Stage 1 or 2, 9 out of 10 people survive. If you detect it in the later stage, Stage 4, 1 out of 10 people survive. We know that earlier detection is the most effective way to solve this problem. Yet there are 60 million Americans today who aren't up to date with colon cancer screening. Just a couple of years ago, the screening age came down from 50 to 45 because colon cancer is increasing at a rapid rate among young people. If there is anybody in this room who is not up to date with our colon cancer screening, please do not wait, it touches everybody. There is nobody who is free from risk of colon cancer. Family history or not, you're at risk of colon cancer, and 60 million people, it's a lot of people. Again, if everybody -- if all 60 million people lined up to get a colonoscopy today, there'll be a 10-year wait. That's how long it would take to do it with colonoscopy alone. Cologuard is a solution, and you can see it here. You can take a look -- go back to 2016 when the purple line that is Cologuard, you first start to see it. The black bar are the number of screening colonoscopies, 5 million a year for almost every year except during COVID when it dipped. You can't solve this problem without innovative screening like Cologuard. And we're now almost ready to cross that threshold where more people are getting screened with Cologuard than colonoscopy alone. I don't know 10 years ago when we first launched Cologuard, I think most people would say, it's just not going to happen. It is going to happen. And not only is it going to happen, but over time, with the recurring aspect of Cologuard. Cologuard is recommended every 3 years. We expect to get to over 40 million tests per year and over half of those being returning users of Cologuard. It's a powerful way to solve the problem, and it is also our economic engine that drives us. We don't just sit and rest on Cologuard, our next-generation version of Cologuard, our goal was to reduce the false positive rate. Biggest concern, criticism question that we heard about Cologuard, well, we'd like to see a lower false positive rate. We delivered this. It took 10 years, big clinical trial. We set a new performance bar. We improved not only the specificity but the sensitivity for both cancer and pre-cancer, not easy, 20,000-patient clinical trial, almost 100 people in that study with cancer. We set a new bar here. And then this allows us to very confidently address a problem that exists. A colon cancer is a disease that touches all people but not all people equally. So if you're a Black American, your risk of disease is 40% higher, your risk of dying of the disease is 2x. Hispanic Americans same. Who are the people that are least likely in our society to get screened in the first place, Black and Hispanic Americans. We have a solution. And just in 2023, we doubled the number of people screened in federally qualified health clinics. We expect that to continue to grow. And we, as a company, are committed to screening for all to have an impact. Oncotype DX, an amazing innovation by Genomic Health, we acquired Genomic Health in late 2019. And Oncotype DX is such an amazing test for women with early-stage HR-positive HER2-negative breast cancer. The #1 question you have is, will I benefit from chemotherapy? What is my risk of recurrence? And you can see it here. At a score of 0 to 100, a patient with a 13, and most patients, about 80% of patients are below 26. That means that they can be spared from the toxic effects of chemotherapy. Everybody in this room knows somebody who has undergone chemotherapy. Well, the world has changed. This test has changed treatment. There have been 1.3 million patients globally who have been able to be spared from the toxic impact of chemotherapy confidently. The TAILORx study read out, and it answered the question definitively. And so Oncotype DX has grown last year, our Precision Oncology team delivered $629 million of revenue. 2 million people have been tested, and in the U.S. alone, 98% of oncologists have ordered Oncotype. Not only have they ordered it. They've trusted Exact Sciences with the tissue block. That is the starting point for a relationship from which additional tests can be delivered, whether it's therapy selection, minimum residual disease, other tests that are actually practice changing for people who are diagnosed with cancer. Oncologists want and need these tools. So what you have heard here is we have built a platform and a platform for impact, and a platform for growth. And it starts with people. You've been pushing years and years to build this flywheel that creates momentum. But at the start of it is amazing -- the real start of it is amazing science and scientists, and an incredible commercial organization and clinical lab and operations, and finance team members. And if you accentuate any part of what makes Exact Sciences who we are, you get more momentum. Great scientists develop incredible tests like they did with Cologuard and Oncotype. Incredible tests deserve great clinical trials, and they justify those big complex clinical trials. Just between Cologuard and Oncotype DX, there are 6 New England Journal of Medicine publications that support them. And when you put a medium publication in front of a payer or a health care provider, what you see is more coverage and more utilization. And that's our approach, tests that truly impact clinical decision-making, test that justify large clinical trials that this rock solid evidence. This allows you then to go build an amazing commercial organization because you attract the very best people in the industry to your organization because you have a great test with wide coverage. That allows them to go do what they do really well. And then that allows you the profits to be able to invest in their IT capability, the digital capability to reach physicians, patients, health systems, payers. When you do that, what you see is the generation of growth and profitability. Now about a year ago, I got a call from a large health system that happens to take care of my family, and they said, look, our backlog for colonoscopy is so long. We need help. Everett and his team went in and they brought in our health information technology team that did some consulting at a population level to help them configure their system to automate colon cancer screening and help solve their problem. I was a beneficiary because I was sitting there at work 1 day and I get it, this message on my phone, which said, Kevin, you're overdue for colon cancer screening. That was ironic, and it led to a quick exchange with my physician, which led to a Cologuard test, which led to a negative result, which meant I was happy, and it was automated. So within a few weeks of me being overdue, I was able to get rescreened. And that technology capability has taken us over a decade to build. And you can see the impact in the fourth quarter where we were comping against a crazy strong fourth quarter of 2022, and we still delivered 20% growth here. So proud of what the team has done. And when I say the team, the broad team that has had an impact here. We delivered $2.5 billion in revenue. Now that was a culmination of many years of work. We have guided to $2.83 billion of revenue for 2024. We continue to deliver high gross margin results, which is the starting point for the ability to develop this ecosystem. And this is impactful. 2 years ago, I stood on the stage and said, we reported $243 million of EBITDA losses, and we said we will be profitable by 2024. Very few people believed us. We're so happy to report, and we haven't announced our EBITDA for 2023. We did provide guidance of $200 million on our last earnings call, and if you take that as the answer, we've basically generated year-over-year of $343 million improvement, and over 2 years, a $443 million improvement, driven by $870 million of revenue growth. This -- we have achieved escape velocity that allows us to continue to focus on delivering incredible innovations to the patients and physicians who want them and need them. This may be the best example of that profitability growth. Under Everett's leadership, we have seen keep managed our sales and marketing expenses, actually reducing them while delivering year-over-year growth. This is $368 million year-over-year growth, $402 million and then $467 million over a 3-year span while taking down sales and marketing expenses. That shows this flywheel is having a huge impact. Now my 89-year-old mother may be upset for me using the following language. But s*** talking is something that a lot of people do, some in this industry. And so I'm sorry, mom, but I have to do it. And one of our friends here Dak Prescott is an expert s*** talker. Let's see his video.

I'm begging for this to work.

Okay. We're not going to...

That's unfortunate. But maybe you play with that. And during Q&A, we can come back to it. [Presentation]

You may recognize that voice that's Ryan Reynolds and he has a marketing agency that's incredible partnering with the colon cancer alliance. Well, Dak's mom died of colon cancer at age 52. And he did that public service announcement for free as a public service announcement, and we supported the effort. That creative marketing. This reached 10 million people in a week. You're going to see more and more of that as we move forward. We're so proud of the work that the team is doing. We have some clear areas of focus in 2024 that we're going to talk about focusing on Cologuard and Oncotype, our health systems, the best customer care, and then also new product launches. So we're excited to answer questions. And Rachel, I know you have some for us.

Perfect. Awesome Thank you, Kevin. Maybe just to kick it off here. Could you spend a few minutes talking about some of the highlights of 2023. Obviously, a great year. We saw the preannouncement yesterday as well. So walk us through the high-level takes.

Yes. I think more than anything, the impact that we're having on patients, 4.1 million people across the world have had our test Oncotype or Cologuard and our other tests. So that's an area -- that's the biggest area of impact. We announced that we completed our submission for our next-generation Cologuard in December. So we've made that submission to the FDA, we expect that then hopefully to be FDA-approved by early 2025. And just the impact of this flywheel across all aspects of the company. And maybe, Everett, you can touch upon what you think the big impact areas were.

Yes. Thanks, Kevin. I think the flywheel is a great example. I continue to see the enhancement of our commercial organization, especially over the past couple of years, and 2023 really highlighted that. We're also really disciplined in terms of we know where our growth levers are. The growth levers of Cologuard are in the rescreen business. It's 20% of our Cologuard volume right now, the 45 to 49 cohort, that's a great example of Dak Prescott video of us being very intentional about marketing towards the younger cohort, the African-American cohort we're happy about and making it easier to order our products, order our solutions, and electronically interfacing with our important customers. Now I spend a lot of time out in the field and the one common feedback that I get is, you guys make it easier to screen people for colorectal cancer in terms of being electronically interface. And the last thing I'll mention is our relationships with our top customers. Health systems are growing, they're integrated, affiliated physicians are associated with those health systems and the business partnerships that we have around population health around making sure that we can make it easier for their staff to order and to really navigate the cancer continuum is really -- just it gained momentum in 2023, and we're looking to do the same in '24. And then Jeff, focused on the numbers. Maybe have you hit some of the numbers, Jeff.

Yes. It was probably the best year we've ever had as a company, Kevin talked about them. Cologuard growing 31% for the year. You think about that a product that today over $1.8 billion of revenue, growing over 30%. That's pretty special. And for me, it's been a passion of mine for many years. Another announcement we made yesterday that I wanted to touch on now is that after 8 years, I'm going to step down from Exact, really to spend more time with my family. I've got 2 young kids. For now, they still like me. I've got parents that are in their 80s and things happen when you're 80, health starts to deteriorate. So it's hard to leave such an amazing team, such an amazing company. But after years, I've got to spend time with the family. So it's going to help with the transition, but it's been 8 years of passion. And I'm looking around the room here, I know many of you for over 8 years. It's hard to step down. I'm going to try to hold back tears right now, but yes, I've got to spend time with the family while I can.

Perfect. And I wanted to dig a little bit into the 4Q pre-announcement yesterday. Can you walk...

I'm just going to interject here.

Oh, yes. Go ahead.

Jeff has been -- no, I'm going to get choked up. Jeff has been an incredible partner and a strategic adviser, and he's protected our balance sheet. He knows every nook and cranny of the company. And I just want to thank Jeff for 8 years -- and I have even more respect -- now I have a huge amount of respect for Jeff. I even have more respect now.

Perfect. I appreciate all the kind of comments. And just focusing in on that preannouncement last night, can you kind of walk us through some of the key drivers of 4Q? And what led to the beat there?

Well, it goes back to this huge 60 million group of people who are overdue for screening, continued growth with Oncotype, and this discipline that has been put in place. The other thing is these large health systems, and Everett can touch upon this, have a deep need for additional solutions. They are not only incentivized, they're mandated to get up their colon cancer screening rate by the Medicare system. And that has had an impact. They're coming to us and say, help us solve this problem holistically.

Yes. The health systems now -- phenomenon is they're coming to us. They know that getting population screened are more difficult than they thought. They love the fact that they can come to us for many reasons, a, we have a really good test that works, it's convenient. They also love our back-end, our customer experience, customer service. We have over 800 people that are every day, like Patty helping to solve, people get screened, and they love our data. We know exactly where those populations are, we know how to get to those populations. And the great thing about it is we're helping them in terms of making sure that they take the test and they take it appropriately. So those partnerships with them coming to us, making sure that we have that totality solutions, we're gaining more customers as we speak.

Great. And then I wanted to dig into some of the progress that you've made on profitability. So you've obviously made a lot of traction, especially this year. So what is driving that progress you've made on the profitability side? And then additionally, how are you thinking about the trade-off between profitability and growth in this environment?

So Kevin talked a lot about the platform that we've built over the past 8-plus years. And you're really starting to see the benefits of that. And the exciting part of this is that as this flywheel gets cranking as Kevin talked it goes faster and faster. So we built the foundation that took years building out the sales team, the IT capabilities, the brand awareness, but now as we grow, we don't have to think about a trade-off between growth and profitability. This growth engine was built for growth and profitability at the same time. And you're seeing that over the past 2 years, we grew the top line by [ $870 ] million. At the same time, we improved adjusted EBITDA by about $440 million. So at Exact Sciences, you get both, you get both in scaled growth, scaled profitability, and we're just getting started. Our longer-term growth ambitions in a [ $4 billion ] to $7 billion of top line revenue from Cologuard alone. And from a profit standpoint, we think we can get to adjusted EBITDA margins of at least 40%.

Yes. When people ask us what is the biggest opportunity that's next growing Oncotype from $600-ish million to $1 billion, and growing Cologuard from $2 billion to $7 billion. Those are huge opportunities to have an impact. And then on top of that are the new test. So we're in a unique position here in the field of health care, we feel, and we're in a unique position to have a huge impact.