Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Thanks. We'll kick off our next session. Thanks, everyone, for joining us. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. And we're excited for our next session, which is Exact Sciences. We're joined by Kevin Conroy, Chairman and CEO. Brian Baranick, General Manager, Precision Oncology; and Aaron Bloomer, CFO. Gentlemen, thanks for joining us.

Thanks, Mike.

Maybe just to kick things off, Kevin, I don't know if you want to make any opening remarks to get us rolling?

Yes. I want to congratulate Derek on retirement. Congratulations. And Mike, congrats on your new role. Thanks, Derek, for the years and years, just great coverage. You're a gem of a person to work with. This is, I think, our 14th year at the conference. It's really been incredible to watch the growth of BAML during this time period. You could tell me 5% to 7% growth every year, and it's going on in perpetuity. We think you can do more, Mike. We can talk about the drivers of that growth. And it's really been wonderful to be part of this. We started out as a small company trying to solve the problem of colon cancer with a long-term vision to apply our technology platform to many cancers. And we're happy to be where we are today. Our mission is to help eradicate cancer by preventing it, not just colon cancer, cancer by preventing it, detecting it earlier and guiding treatment. So hopefully, we can talk a little bit about this and the open-ended growth story that exists because we're at the -- in the early, early innings of how genomics and the understanding of cancer genomics is going to change how cancer is diagnosed, how it's treated. And when you look at Exact Sciences, it's built on the foundations of Cologuard and Oncotype DX, 2 of the top brands ever in cancer diagnostics and the power of those 2 brands is helping us build a platform company through which other innovative cancer diagnostics will help patients. That's -- you have this growth story we've guided to 15% growth through 2027. We believe that growth will continue for a long period of time and over 20% EBITDA margins by 2027. So we're really excited about what we can deliver in terms of patient impact and also what we can deliver in terms of shareholder value creation. The near-term drivers that we look at are Cologuard growth and also Oncotype growth outside the U.S. to kind of open-ended growth stories and then a pipeline in screening with multiple tests and precision oncology, Brian Baranick, our GM here, we'll talk about that. So it's an exciting time at Exact Sciences, and we look forward to the conversation today, Mike.

Great. Thanks so much, Kevin. I'll jump right in. You recently reported your first quarter results. You reiterate your fiscal year '24 guide, both on overall revenue and EBITDA and lot of the debate we heard after the print was on the screening number. It was down a little bit sequentially versus 4Q. It was up 7% year-over-year. You just talked about the guide you have for fiscal year '24, which is 16%, 17% screening. So can you walk us through sort of the bridge between what you saw in the first quarter, how that fared relative to your expectations and sort of the ramp as you go through the year for screening?

Sure. And taking a step back, there are about 60 million Americans who are not up to date with colon cancer screening. So there's just a huge number of people to get screened. And what we saw in the first quarter, the comparison to the first quarter of last year, which was our highest dollar growth in percentage -- dollar growth in our history, and it was a 45% growth for a number of reasons. Typically, Q1 has seasonality because of primary care utilization. And so we grew at 7%. That's not what's going to happen for the rest of the year. The comps get easier in the back half. the drivers of growth, typically Q2, the spring into the summer is primary care utilization screening increases at a rapid rate and then usually post summer into the Thanksgiving time period, you see tremendous growth. We are confident in our ability to achieve our second quarter guide, our full year guide. There are 3 major legs of growth is calling on primary care offices. Just like steady, very predictable growth based upon the input of the number of sales calls that you make and visits you make to primary care office. And then secondly, the health and we can talk about that more. And the growth there, it's been really, really exciting to see. And then a new business starting last year is screening in the Medicare Advantage population and also in large health systems that want to do these large, what we call gap closure programs to their screening gaps. So in terms of the year, we're excited about what the rest of the year looks like. I don't know if you want to add anything, Aaron?

Yes. I would just say that Q1 was in line with expectations and due to some of the onetime impacts that we called out in Q1 of 2023, we think it's informative to look at it on a 2-year stacked basis, in which case screening revenue grew approximately 24% in the first quarter. Q2, the guide is 22% to 23% on a stack basis. And in the back half of the year, very consistent with that as well. So we think it's important to look through kind of the noise of Q1 of last year.

Okay. That's helpful. And then the other bid data, I think really stood out on the call was you had a little bit of this focus that you pulled back spend a little bit too much towards the end of last year and early this year, and you may need to ramp that up a little bit just to reaccelerate. Can you frame the magnitude of that, the timing of it, how it's going to impact your future investment decisions?

Yes. So we spent about $800 million in sales and marketing and the increment in terms of the sales force component of that. We haven't quantified it, but it's relatively small, and it brings our sales force back to the levels that we were at in 2022. Over time, what you'll see is there is a high ROI on investing in additional salespeople, think of it really simply as more salespeople, more sales. The dynamic is that in the last 5 quarters, we've added 80,000 first-time health care provider users in the primary care segment. So that means primary care docs, PAs and nurses. And they -- once they start ordering Cologuard, they order at a predictable and steep curve. Every cohort of is true since we launched Cologuard 10 years ago. They keep ordering at a faster rate. And the more frequently you call on them, the more frequently they order. And you may ask, well, why is that the case? Shouldn't you be able to set up an start just using Cologuard. The problem is if you're a primary care doc today in America, first of all, it's chaos. You have 8 to 12 minutes with a patient, and you may start with obesity. You may start with diabetes, cardiovascular and 20 other things before you get to prevention and colon cancer screening. So what our sales force does is really brings tools, education, motivation to elevate colon cancer screening, and it works. So you see if you call on a Doc on time in a quarter, you get 6 Cologuard tests. If you call on a Doc 6 times in a quarter, you get 24 Cologuard tests. There are just that many people not up-to-date with screening. So that's really the dynamic that we see. So I think there was some confusion about when we decided to make a modest increase in the sales force. We saw some signal in the fall. And in the fourth quarter, we made the decision as a team to increase the size of our sales force. So with our guide this year at beginning of the year, it encapsulated what we expected to do in terms of this modest increase in the size of the sales force. And I think that -- I think I didn't make that particularly clear on the Q1 call.

Okay. Aaron, maybe let's -- I want to bring you into the conversation a little bit. I think today is your first day as CFO officially. So congrats, thanks for spending it with us. Any initial impressions you want to follow up on? Or maybe just you want to outline your near-term, long-term priorities?

Yes. Thanks so much. Thrilled to be here. This is my fifth week here now with the company. unbelievable company, great purpose, mission, what we do and the impact that we have on patients and for me, from a priority perspective, it has to start with growth and maintaining the growth engine that we've built out not only on the Cologuard and Oncotype DX, but also, as Kevin talked about, the new product pipeline. And so ensuring that we've got flywheel going from an innovation perspective. So that's number one. I think the second thing be ensuring that we have clear and credible pathway to the adjusted EBITDA goals that we set out. As Kevin mentioned, we have a goal of 20%-plus adjusted EBITDA margins. by 2027. We have very clear incredible path to do that. We hit 9% adjusted EBITDA last year. We will expand over 300 basis points of margin in 2024. And as we look through the P&L, I think, significant opportunities to drive leverage, particularly within G&A. And I'll bring some of the past experiences in that and bring that here to exact. And then the third would be just a focus around cash flow. I think again, exact flipped free cash flow positive. In 2023, a remarkable achievement will have free cash flow growth and positive free cash flow delivery of the next quarters throughout the balance of 2024, and we'll look to further enhance that on a go-forward basis.

Great. Maybe let's pivot to Cologuard a little bit. You've had a really impressive CAGR over the last couple of years, really impressive growth there. You're guiding to something in the mid-teens in 2024. We talked about first quarter and why you think that's going to ramp through the rest of the year. Is this the number we should be looking at going forward? Just given the size of the base.

If you look at our guide through 2027 embedded in there is 17% Cologuard growth. So we have a clear path to doing that. And what we're seeing is opportunities to enhance the utilization of Cologuard as a frontline screening test. It's taken a long time really to get -- build the brand, build the platform, the commercial team and very importantly, the IT capability, the ability to do electronic ordering, right from embedded within the physicians' electronic medical record. This is what we call exact Nexus. Our platform built on Epic with over 100 other applications that surround it. We're able to do electronic ordering, resulting prior authorization, reimbursement. And so you get a huge amount of leverage customer satisfaction by being able to deliver this incredibly customer-friendly ecosystem that makes their life easy. If you make colon cancer screening easy, it's super powerful. We've invested about $1 billion in that platform. We've also invested in the brand and importantly, in making sure that Cologuard is part of the quality measures, which is a long, arduous process because we're in the quality measures now we can help health systems and health plans increase their star ratings. And the goal is to be a 4 out of 5 or greater rated system or plan in order to get the quality bonuses, which are absolutely key to the success of the systems and plans. So there are so many drivers here. It's exciting how we think we can help solve the problem of colon cancer. It's the #2 cancer killer. It kills 50,000 people a year, 130,000 new cases in a year. I would suspect there are people 45 and older in this room who haven't who are not up to date with colon cancer screening. You can go to the cologuard.com website, and you can have a kit delivered to your home within a week. You go there, you enter your insurance information, name, address, family history, et cetera, we are making this easy so we can go get 60 million people screened. And one of the great dynamics is that we're serving the need that colonoscopy can't even fill. So there's capacity for colonoscopies in the U.S. of around 12 million. Half of them are screening colonoscopies. The rest are diagnostic colonoscopies. The U.S. isn't making more GIs. We've about 600 a year and about 600 retirements. So it's just flat. The capacity is not there. And Cologuard is just helping meet the needs of health systems of primary care physicians and now even GIs get more people screened.

And Kevin, you touched on a lot of different levers there. Commercial team are trying to order and things like that. I mean there's others in terms of rescreening in terms of rate of expansion. So how do you think about pulling on all those levers. Maybe this kind of goes back to that initial point on sales force expansion, could you push on it even more sort of like which levers do you see as most attractive?

Yes. I mean you can always push on it more now that you're a profitable company, you have to balance this investment in IT, which allows you to push it more investment in the growth of your sales force allows you to push it more. And that's good. But this consistent pushing is what makes a difference by investing in IT solutions, you're able to screen America in these large programmatic orders. So as an example, you have health plan A that comes to us and says, we have 100,000 people who are persistently under screen for colon cancer. Can you help us screen them? You bet. We look at their list of 100 patients. We help them clean up all the data. It goes into our system and what we do is then ship 100,000 collection kits out. We followed up with text, letters, e-mails, telephone calls to inform that member of the health plan, why this kit is coming to their house. We get about 20% to 40% of those people to complete a test. And these are the people who have been immune to screening for a decade or more. So the levers of growth when you think about rescreening, what does that mean? Well, it's just a recurring part of our screening opportunity. So Cologuard is indicated as a test that should be performed every 3 years by the main guideline group and by the quality measure group. So on your third year anniversary of your last Cologuard test, for me, I just got a digital reminder by my health system, University of Wisconsin Health System, that I was overdue for colon cancer screening. I thought that was ironic last year when that happened. But with a quick message to my primary care from within my chart, I was able to get a Cologuard kit within a week and return the collection kit. It came back I was good to go. That's what we are doing. So rescreening eventually will be over half of our revenue today, let's say it's in the mid-20s. That's pretty exciting because every time you get a new customer, health care provider, patient, what you do is you have a lifetime relationship with each. And so there is this additive effect. And if you take a look at the last 2 years because of the COVID year, we are now starting to lap that. 2 years in a row, we had 1.2 million people eligible for a rescreen. This year, it's 1.6 million. And 3 years ago, the screening age was lowered to 45. That's 20 million new prospective customers. The group that got Cologuard in that 45 to 49 age group in about 3 years ago, are due for rescreen this year. We want them to be happy customers of Cologuard for the next 30 years or more.