Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Diagnostics here at William Blair. This afternoon, we're very pleased to have the team from Exact Sciences joining us. We have Chairman and CEO, Kevin Conroy; CFO, Aaron Bloomer, and from IR, Erik Holznecht. Before we begin, just a couple of pieces of housekeeping items. We'll go run 20, 25 -- 25 to 30 minutes, and then we'll do a breakout session afterwards. And then for a full list of research disclosures, please see williamblair.com. With that, I'll turn it over to Kevin.

Thank you, Andrew, and it's really great to be back at the conference. It must be like the 15th in a row. And William Blair, really appreciate all of your professionalism and support over the years. Exact Sciences has a purpose that is focused on eradicating cancer by preventing it, detecting it earlier and guiding very personalized treatment. We're in a golden era of cancer diagnostics. And hopefully, Exact Sciences has been a leader to help fuel this whole field. This field can have more of an impact on outcomes in health care, I believe, than any other part of health care. And it starts with cancer for people in this room, cancer today is the #1 risk of death. For people under the age 85, it's the #1 risk of mortality. And that means globally every 3 seconds, somebody dies of cancer. Cancer though is a disease that if detected early is treatable. That's what Exact Science is built around that scientific principle. This is our safe harbor. We will be making forward-looking statements. This is also available on our website. My favorite slide here is kind of Exact Sciences in a nutshell. This is our flywheel. It's the thing that powers us, and we believe will lead to long-term open-ended growth. This is a growth conference, and Exact Sciences has growth in spades. It starts with world-class people. That's always been the start of who we are and what we are, and I'm really proud to say our 6,500 person team is committed, capable, highly experienced people. And then it leads into these other aspects of the flywheel, developing tests that actually change clinical practice. Not [ cool ] test that like make a small difference but tests that make a big difference in outcome. And then being willing to run the studies that prove those points, even if those studies take a long time. That's how we've developed Cologuard, Oncotype DX, generating this evidence and then building a commercial capability that is second to none, that is the case with Exact Sciences. It's bigger, better, more adept at educating physicians, health systems, payers about the benefits of these new technologies physicians and patients. And then providing a seamless interaction with patients and physicians through our technology platform, what we call Exact Nexus, all of this drives sustainable top line growth and profitability. And the flywheel starts over again. If we're able to grow and grow profitably, we're able to attract more talented people. And you look at what we have built over the last 15 years since we were first invited to this conference and there were 2 of us, I think, are 3 of us with an idea. We've grown in terms of the strength of the organization. And importantly, I'm going to zero you in on the 400,000 physician health care provider network of people who order our tests and count on them every day for answers for their patients, including 330 of the largest health systems in the U.S. and relationships with over 800 payers. It's a huge advantage. This advantage us allow us to solve the problem. And the problem starts that cancer is a disease of the DNA. And we know that there are alterations in DNA, RNA and proteins that are expressed that allow us to detect cancer earlier and also to guide treatment. And so this is fundamental being expert and world-class at diagnosing and finding these alterations in the DNA or proteins and also being able to operationalize the laboratory infrastructure, the IT infrastructure, the commercial infrastructure, regulatory, quality, manufacturing is something that over the last 15 years, we've built an organization that is the best in our field. So our goal is to pack cancer earlier and guide treatment. And what you see here is a range. And I'd encourage everybody in this room to start by thinking about -- have you -- maybe a show of hands. Have you ever had to test that answers whether you have a high risk of cancer because you've of your genes. I had my first test 3 years ago. I would guess only a handful of people. But people in this room, somebody in this room probably has Lynch syndrome, which confers a 85% lifetime risk of colon cancer. Somebody in this room probably is a carrier of the BRCA gene which confers a very high risk of breast cancer. And so on, those genes also confer a high risk of other cancers. It starts there. It moves to screening test like Cologuard, Oncotype DX, a test that helps guide the right treatment for breast cancer. We'll talk about that. OncoDetect, a test that we are bringing to patients and physicians that in a field that is changing the way patients are treated for metastatic cancer and Stage II and III cancers called minimum residual disease testing. We'll also talk about that and therapy selection. The world is changing, is changing at a rapid pace, and we believe it will continue to change for decades to come, fueling growth for that duration. The importance of having a very sophisticated IT capability can't be overstated. So think about when we first made Cologuard available to patients, every one of those orders came in by fax. Shockingly today, 30% still do. Building an electronic capability to interface with primary care physicians all over the U.S., oncologists all over the world is essential because physicians want to order a test electronically. They want to get a result electronically. We want to be able to bill a payer electronically. We want customer service to be digital. And that's what the Exact Nexus platform does. It allows this integration with the electronic medical record. And that's the basis. We built our IT platform on and around the Epic platform, which is the #1 platform in the U.S. And it's really powerful. One of the things that it does is allows population health management. So we are -- we have a team of about 50 health care IT leaders who go into health systems in the U.S. and help them optimize for colorectal cancer screening. They go into the oncology office, and they help automate samples getting tested with Oncotype DX. These are just a couple of the many use cases and they're becoming more sophisticated. So the next iteration of opportunity is the ability to automatically handle prior authorizations, which is killing the oncology offices. It's just absolutely a nightmare for them to manage all of the prior offs that are required, and our platform is helping to automate this. Now let's shift to Cologuard, which is over a $2 billion franchise, it's an amazing test that addresses a huge need. When we first brought Cologuard to patients 10 years ago, 59% of the population, 50 and older was up-to-date with colon cancer screening. Today, 72% is mainly because of Cologuard. And then what happened is a few years ago, the age of screening dropped from age 50 to 45 and 19 million more people are due for screening, including people in this room. And I would guess, if I ask for a show of the hands, I won't, that many people in this room are not up-to-date for colon cancer screening. If you're not, go get screened. And you can go on to the Exact Sciences' website and have Cologuard ordered before the end of this presentation. And all -- you don't need a credit card anymore. Now you just need your health card. So if you do that, you get tested, you reduce a negative Cologuard result, which occurs in 85% of all patients confers a 100-fold risk reduction of cancer. That's the power of this test. It finds 42% of precancerous polyps. Precancerous polyps take 10 to maybe 25 years to turn into cancer. So if you get Cologuard every 3 years, over time, the idea is you will detect more and more of those precancerous polyps. And we'll talk a little bit about the next-generation version of Cologuard. But since we launched Cologuard 10 years ago, what we've seen is incredible growth. Our screening business this year, we're guiding to $1.865 billion in Cologuard revenue. And it's a 15 -- I'm sorry, that was 2023. Our guidance for Cologuard for the screening business, I need to break that out. I just -- by the way, I just caused Erik Holznecht, our IR head to have a heart attack. Our brand awareness for Cologuard is 89%. And so everything has been changed over the last 10 years and the customer satisfaction for Cologuard is 8.7. For a patient that's a combined patient and physician for patients, it's even higher. It's really an amazing test, and it squarely address it 60 million Americans aged 45 to 85 who are not up to date with screening. Talk about open-ended growth. We've guided to 15% growth through 2027. The exciting thing about being CEO of Exact Sciences is that growth can continue for years and years to come, and there's a recurring revenue part of this because our customers are due for rescreening test, a second Cologuard test or a third Cologuard test every 3 years. And we're getting better and better at getting those people tested. This slide here shows each year, we -- the number of new ordering health care providers that order Cologuard for the first time. And if you take a look at -- the ones in 2015, the purple line is how those -- frequently those physicians have ordered Cologuard since then. What you have seen is just an increasing frequency with which they rely on Cologuard just screen their patients. And this has been true for every cohort of new customers ordering Cologuard every year since then. You break this down to quarterly cohorts. It's the same thing. And this week, we'll have another 800, 900 or 1,000 new ordering health care providers. Today, about 30% of health care providers that order Cologuard are either nurse practitioners or physician assistants. So altogether, the universe of ordering providers that we can target is up to 600,000. Last quarter, 175,000 physicians, nurse practitioners, PAs, ordered Cologuard. Just last quarter. So -- and they are promotionally responsive. They order more frequently as you engage with them more. And why is that? Why is it that you don't just set up an office and they start ordering Cologuard frequently? It's the nature of the primary care office in America today. We have a declining number of primary care physicians. It's harder to get into an office. And America isn't getting any healthier. So when a patient comes to see a doc, they get 8 minutes, maybe in a lower volume office 12 minutes. And there's obesity issues, cardiovascular issues, diabetes issues, all of those more pressing issues tend to be before prevention. And our job at Exact Sciences is to lift screening and prevention to be one of the top three things and to automate and simplify the process of ordering Cologuard, which we have done a wonderful job of streamlining that. So today, over 70 approaching, 75% of all orders come in just with an electronic order. As we look at where we think Cologuard can go. The black here you see is the number of screening colonoscopies every year in the U.S. As you can see, you take 2023 -- 2014, 5 million screening colonoscopies. Why isn't it growing? There's a fixed capacity. Today, if you go to Madison, Wisconsin and you want to get scoped, it's a 1-year wait. So Cologuard is filling that need. And we believe that we can go from 4 million tests to over time, 14 million tests. And that's the open-ended growth here that we plan to deliver on because of the performance and quality of Cologuard and all of the other aspects of the company and platform that we have built. That leads to over $7 billion of revenue, not including what over that period of time, we believe we can do outside the U.S. So you have a number of Cologuard drivers here. And I tend to think of it in three big drivers. We're -- first of all, kind of a bedrock driver is our brand that we have built. It's powerful. And that brand fuels success in the primary care office, in the large health systems, which today employs 75% of all primary care health care providers, 75%. When we started on this journey, it was 25%. Health systems are an amazing partner for us because we can do population health level screening. And then payers. So payers are highly motivated to boost their colon cancer screening scores because of the quality measure performance bonuses. And we have seen in the last 18 months, incredible uptake by payers who are saying, "we want to use Cologuard instead of shipping FIT test out to patients to get up-to-date." And the reason for that is the FIT test only gives them 1 year of quality credit. Cologuard gives 3 years. You'll probably hear about blood-based colon cancer screening testing. Since blood-based testing is not in the quality measures and the earliest possible our blood test could be in the quality measures is probably 2028. It's just not enough. It's not a viable option. So these are important growth drivers. Cologuard Plus, the key takeaway here is our next-generation version of Cologuard is even slightly better cancer and precancer detection and a 30% decrease in the false positive rate. Hugely important hundreds of millions of savings to the health care system and far fewer number of unnecessary colonoscopies. Blood tests. So you've heard a lot about probably blood testing. Here's the biological challenge with detecting colon cancer from a blood draw. Your colon is really well designed to keep things out of the blood supply. But where the precancerous polyps and early-stage cancers first start growing is on the interlining of the colon, and they do shed cells and the cells break open and DNA into the stool. And that's why Cologuard is so incredibly accurate. Cologuard Plus detecting 94% of all cancers with a 91% specificity or 9% false positive rate. It's remarkable. Blood test, however, don't reliably detect Stage I cancers, a flip of the coin. They are -- the blood tests are essentially blind to precancerous polyps. But the benefit of screening, if you look at the screening models that inform the guidelines, 80% of the benefit and the cost effectiveness modeling, comes from finding and removing precancerous polyp. So with the test that's blind to detecting precancers our blood test, which we think is a good test, but is it good enough to be in the guidelines, probably not same with others in this space. They're just not impactful enough for the cost that they generate. And we -- our expertise in this field means that there's going to be a niche for patients who refuse all other forms of screening. And our test has much lower unit cost because of the technology that is embedded in those tests. We will release -- we will generate and release our top line data. We're shooting for October of this year to be able to broadly share that with investors and take that to the FDA. And so we win because we have the largest and only commercial organization focused on colon cancer screening, our IT capabilities, comparable -- we expect our data to be comparable with the others who have released data in this space and the attractive economics. So we can price at a much lower and rational price point. We've already started discussions with payers, and they do like our approach. Now moving to our precision oncology side of the world. This is where we serve oncologists, people who are helping patients who have been diagnosed with cancer. Our lead test in this area is called Oncotype DX. It's amazing test. 20 years after being brought to the market, it is the top recommended way to guide patients with early-stage breast cancer. That's what's it's called HER2-negative and HR positive. So the vast majority of early-stage breast cancers. And you get a score, a score from 0 to 100, this patient got a score of 13. And what does that mean? For this patient, the risk of recurrence is only 4% over 10 -- over the next 9 years. And they have less than a 1% likelihood of being benefited from chemotherapy. So the wonders of Oncotype DX, it has been able to tell women who are diagnosed with early-stage breast cancer, you have less than a 1% chance of benefiting from chemotherapy. And that's true of 80% of all these patients are in that low-risk category. They also know their risk of recurrence. It answers both those questions. And there are two big randomized controlled studies, which informed us. It answered the question definitively. Oncotype DX is informative for both chemotherapy response and also the risk of recurrence. It's $1 billion potential market. Today, it's about $600 million. The biggest expansion will be -- come from outside the U.S. Just last year, Japan adopted and paid for this test, and it is already the second biggest market in the world. So there's a huge amount of growth, and we have about 250 team members outside the U.S. focused on it. So you can see the growth here. One of the amazing things is 98% of all oncologists in the U.S. have ordered Oncotype. This field of molecular residual disease testing is for patients who've been diagnosed with, say, a Stage II or III colon cancer or breast cancer. And you want to answer the question after surgery and chemotherapy, did you get all of the tumor? And you do that by going into the tumor tissue and finding mutations and then doing a blood draw and looking for that patient's tumor mutations in the blood. And if you see tumor mutations still in the blood, you know that there's still some tumor left in that person. You can do this testing over a period of time and help patients give them comfort that their tumor is gone or pick up a recurrence of that tumor a full year before you can see it on a PET/CT scan. And so we expect to make our test available in the colon cancer setting, it's called OncoDetect, the beginning of next year. So we're excited about that breast cancer would come next, and we have deep relationships again in the oncology setting. We are driving profitable revenue growth. You can see the growth trajectory here. It's amazing. Back in 2016, we generated $99 million in revenue. And here we are less than a decade later, approaching $3 billion. So we're excited about that, and we have industry-leading gross margins of 74%, allowing us to invest in R&D, commercial growth and our infrastructure growth. I want to reemphasize our long-term growth trajectory. We guided to this last summer of 15% CAGR through 2027. We believe we'll see growth because of all of the opportunities in this field beyond 2027, and that by 2027, we'll have over 20% adjusted EBITDA. So we're excited about what we can do to serve patients. We've always believed you just focus on the current year. And these are the things that we're really focused on. You can see Cologuard, credible focus, Oncotype, our pipeline of new tests, deepening the relationships with the health systems. And more than anything to driving high-quality customer care. That is our brand. That's our reputation. And we think that helps drive growth for a long period of time so that we can help play a role in the purpose of, hopefully, someday, playing a role in the eradication of cancer. So that's Exact Sciences. We'll have a breakout. And I don't know, Andrew, if you have any specific questions.

Yes, maybe I just have one. Obviously, I think -- you spoke a lot of growth here over the next couple of years, both in the Cologuard franchise today and Cologuard Plus, but also in the pipeline. You did make a change to the commercial organization yesterday and announced that [indiscernible] would also be [ leaving ]. So can you maybe just talk about those moves and how they might sort of make the commercial organization a little bit more agile?

Sure. I think you're -- I'll repeat the question. So those listening can hear. Yesterday, our Chief Commercial Officer, Everett Cunningham, we announced that he is taking a new role as Chief Commercial Officer of Illumina. We're thrilled for Everett. He's really a spectacular leader, one of those special people that add to any team, and he's done a great job over the last 3 years at Exact. He's taken on a broader role at Illumina, and he's also moving closer to his children who live in L.A. And so we're really happy for Everett. He's built a pretty special sales and marketing leadership team, and we're thrilled to have those leaders continue to drive Cologuard, drive Oncotype and launch our pipeline test. And so people have asked the question, is anything going to change? This gives us an opportunity to strengthen our business unit, org structure. And there's no perfect org structure. We've been living with a make trust organization where sales and marketing span both of the business units. We're excited about the opportunity to take the sales and marketing leadership and put them in those business units for clear one point decision. So Brian Baranick, Head of Precision Oncology, Jake Orville Head of screening, have the ability to take total ownership of those businesses. And we're thrilled for Everett. So I think we're in a really good shape. We reiterated our Q2 guidance. We reiterated our full year guidance. And we today reiterate our long-term guidance.

That's perfect. Thanks, Kevin. We'll leave it there. The breakout for that will be in [ Virginia, Roanoke ].