Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Good to go. I'm Tycho Peterson from the Life Science team. It's my pleasure to be here with Kevin Conroy from Exact. Actually occurred to me, this might be the one and only time I get to interview a former board member. So I get to put you in the hot seat. Kevin was on the board of Adaptive. Lots going on here.

So maybe just high level, stock move volatility. You've kind of been fighting ghosts all year, whether it was the Freenome data or Geneoscopy. Maybe just talk a little bit about those 2 in particular, and then everybody is obviously looking at the Shield label and trying to think about kind of the range of outcomes, and we'll follow up with that. But maybe start with the other 2 first.

Yes. Maybe I can start with just talking about how confident we are with the underlying growth and health of Exact Sciences. We're incredibly proud of the platform company that we had built with 2 of the best brands in cancer diagnostics. Cancer diagnostics, Tycho, as you know, is at this like the start of a golden era where you're seeing cancer diagnostics actually change outcomes, change how patients are being treated. And the innovation that is coming, is coming at a rapid clip. And what we're proud of is the ability to change outcomes in the field of screening and in therapy selection because of Oncotype and Cologuard. And so Exact really represents an open-ended growth story in this overall field and you're seeing that play out. So yes, there is -- there may be a disconnect, probably the biggest disconnect I've seen in 15 years as CEO between the underlying value that is being created for patients and the economics that we're driving in the stock price. But hey, our team is seeing these kind of dislocations before, and we're excited about the future. One of the reasons that we're seeing some element of dislocation is because there's a fair amount of innovation occurring in the field and investors are trying to, I think, get an understanding of is blood-based colorectal cancer screening testing going to change the dynamic. And I think that's really what you're getting to at this question. We have a blood-based test. We expect to see data in October of this year, Guardant, Freenome other aspiring entrants into this field of screening are trying to develop and bring new screening modalities based on blood. The challenge here is that let's take a step back and look at the market. You have colonoscopy, which over the last 10 years, pretty much year in and year out, except during COVID. There have been 5 million screening colonoscopies in the U.S., and that's about the capacity that the system has. Today, on average, there's a 5- to 6-month backlog for colonoscopies. 4 million Cologuard tests. And you've seen Cologuard continue to increase and FIT testing decrease. So now blood tests are coming in and what role will they play. Well, the challenge with the data being generated by the blood tests is, number one, they are blind to precancerous polyps. The sensitivity is about the same as the false positive rate, meaning you're finding some pre-cancers, but you're finding them because there's a background false positive rate. And 80% of the value in terms of life years gain comes from binding and removing precancerous polyps. Now they take, let's say, 10 to 15 years based on the evidence to turn from an advanced -- small advanced adenoma pre-cancer to cancer. And what you see here is that if you can't detect and remove those, you can't get the life years gained. Recently, about 1.5 years ago, Guardant, Freenome, Exact Sciences sat down with the American Gastro Association, and we were asked to fund a conference where they would come together and bring the best key opinion leaders, researchers in the world together so that they could model the performance of blood-based tests. And they did 2 modeling exercises with 2 different groups and published both of those results in March. And then the AGA opined on the appropriate role of blood-based testing, and what they said in their commentary piece was because liquid biopsy is predicted to be less effective and more costly than currently established screening programs, it cannot be recommended to replace established effective screening methods. So this was signed off by the AGA is the research oriented and really public health focused part of the gastro world. And then one of the other 2 papers, they said, compared to FIT Cologuard and colonoscopy blood-based screening was not cost effective with both a decreased quality adjusted life years gained and an increase in costs. So they basically say, it's better than nothing at all, but it's not as good as current screening methods. And these 3 publications occurred in March, I think these are the types of things the FDA, the guideline groups will look at. In fact, this modeling paper included Ann Zauber, and Ann runs the CISNET modeling group, which -- main guideline group looks to, to inform does the test get in the guidelines or not. So I think there's -- that's the reality. So the reality like you -- should you get a blood-based test or Cologuard or colonoscopy, you should get colonoscopy or Cologuard. There's no question about it. Cologuard detects 42% of precancerous polyps, you do it every 3 years over a 10- to 15-year period of time. You're going to find most of those precancerous polyps, you should be able to per the modeling. I want to be clear, we haven't run those types of longitudinal studies. We are looking at that data now. Colonoscopy detects, let's say, 75% to 95% of precancerous polyps, go get one of those 2 tests. And if the test is good enough for you in this room, if a blood test isn't good enough for the people in this room, is it really good enough for the rest of the country? No, probably not. So that's the kind of the background here. And I don't think the story has fully played out yet. Now let's take another step back. Exact Sciences, we have a blood-based test with data coming, and when I say data coming, we have not run the samples from the 20,000 patient study yet, we will, and we will immediately release the results when we do -- when we see them in October. If, for some reason, this market emerges and blood-based testing becomes a frontline screening test, we have a PCR test with the lower unit cost. When I say lower, way lower than next generation sequencing. We can price our test at the cost that the manufacturers of other blood-based tests would -- their cost, not where they would price them, coupled with the fact that we have a massive, really capable sales force, IT infrastructure, we are the colon cancer screening company. And we can work with payers to make sure that the right people get the blood test. In other words, people who refuse colonoscopy, people who refuse Cologuard, and there is a need for that. There truly is a need for some people who are absolute refusers to get a blood test. Now we'd be able to get them to get a blood test and then engage with them to convince them to get a higher quality test like Cologuard or colonoscopy, for that matter. Our mission is the elimination of this disease. The way you do that is to get everybody screened with tests that find precancerous polyps. The other part of the blood problem is Stage 1 cancer detection as a flip of the coin. 98% of people diagnosed with Stage 1 colorectal cancer survive. Most of them don't even get chemotherapy, surgery alone is nearly curative. And so that's the whole blood dynamic. And I don't know if that was -- went on for too long.

No, that was great. We're halfway through, that was only the first question. So it makes my job easy. So a couple of things to think about. I guess if we think about your data readout in October, is there kind of a threshold that we should be thinking about? And would you kind of pull the plug on it if it doesn't kind of...

Well, the threshold of Medicare has set the threshold of 74% cancer detection with a 10% false positive rate. That's what they will pay for. Look, if blood tests don't get into the guidelines, which we don't think they will. Commercial payers are unlikely to pay for them, which is why it's a limited role. We think we have a better chance to get commercial payers to pay because we can identify the right patients in our database, we call them ZPR, zero prior returns, of a Cologuard kit. 2, 3, 4 Cologuard kits, no return, okay. We know that you're refusing a frontline screening test. Let's get you in for a blood drop. So I think that's the dynamic there.

I guess, thinking a little bit about like, so recent ad-comm seemed fairly down the middle, didn't seem like there's any surprises. I'd love your take on that. And then as we think about maybe the labeling on Shield in particular, like if they come out first line with a very restrictive label, maybe not applicable to AA, not applicable to asymptomatic patients, what do you think that does to the market? And does that change your strategy?

Yes. If it's a muddy label, a label that said only good for Stage II, III and IV cancer detection, which is what members of the FDA panel were -- are arguing for, then you're going to have -- you're not going to end up in the guidelines and all roads lead to the guidelines. If you're in the guidelines, then you can get into the quality measures. And with the muddy label, the same -- this happened 8 years ago with a test called Epi proColon. It actually detected the same amount of precancerous polyps as the FIT test, which is the bogey. It still didn't make it into the guidelines because the cancer detection was too long. This is the inverse problem. Cancer detection is okay, but the pre-cancer detection is virtually 0 above the baseline false positive rate. So yes, we think this is going to be a limited niche market, and we think that Exact Sciences will lead because of our sales force, our IT infrastructure, relationships with payers, with health systems and because our unit economics are just far superior to a next-generation sequencing test. So we're -- either way we're excited about the future, and let me come back to the open-ended growth of Cologuard. There are 60 million people who are not up to date with screening and we are systematically growing that opportunity. This year, next year, we have given guidance of 15% growth through 2027 that double-digit growth will continue beyond them with Cologuard and our pipeline, which is the exciting thing about Exact, for a company of our size to continue to grow at that rate for such a long period of time with expanding operating leverage we've guided to 20% adjusted EBITDA -- over 20% adjusted EBITDA margins by 2027.

I guess if the data in October is good, can you help us think about the road map from there, time line for approvals, investments you may need to make?

You're probably looking at 6 months from data to approval, that could be shorter, could be longer, but roughly that period of time. And then that would mean a launch towards the end of next year.

Can you just make a comment or two on Geneoscopy because they're out talking to people and making noise. And just curious what your response is to that?

Yes. So Geneoscopy has a stool RNA test that was recently approved by the FDA. They have not launched yet. They have said because they don't have Medicare coverage, they don't intend to launch until they get Medicare coverage. So first, the performance of the test, they ran a small study. It wasn't run in the Medicare population. Only 15% of the patients were Medicare age that's where 75% of the cancers are. Only 3 of the 27 cancers in this study were in the Medicare population. They missed, I mean it's -- they missed their endpoint both for cancer detection and adenoma detection, not the point sensitivities, but because there are so few cancers that error bars the lower end of the confidence interval was below the target set by FDA. So they have to run another study, a post-approval study. And they didn't do the parallel review program like we did. It's not clear wide. They didn't seek a parallel review with Medicare. So now they have to go through the Medicare national coverage decision process. All I can say is that when we went through that process, Medicare insisted that we power our study, our pivotal study both for the FDA purposes, but also for Medicare, Medicare wanted to see about 50 patients with cancer in the study and over half of all of the patients in our 10,000 patient study with -- that were in the Medicare population. So I think that's a long road before Medicare covers a test. If you don't have a national coverage decision that you don't -- you can't really launch a test, that's one issue. We have sued Geneoscopy for infringing -- willfully infringing one of our patents. I won't comment on that further. However, we'll continue to enforce the intellectual property that we own. And we look forward to our day in court there.

Let's talk about sales and marketing. It was a big focus, obviously, on the first quarter call. Can you talk about when you decided to kind of pull the trigger and hire additional reps? I think they've been in the field 2, 3 weeks now, just talk a little about early traction. And importantly, are you committed to kind of profitability going forward?

Yes, sure. I think there's been just a confusion in the messaging, I'll take responsibility for that. I'll go back to what we communicated at the beginning of the year at JPMorgan. Look, over the last 2 years, we have grown revenue by $800 million, and we've reduced sales and marketing by over $100 million. That's very unusual to -- for any company to do this. And in our first quarter call, we said we were going to make a modest increase in the size of 1 of our 2 sales forces, and The Street, I think, thought that we were going to double our sales and marketing spend. Our sales and marketing spend increase on that sales force is less than 5% of our overall spend. So let's put that in perspective. We continue to see, let's call it, in the range, if you look at the model, $350 million of Cologuard growth annually over a period of time, and investing 10% of one of those years in increasing the size of our sales force, but still resulting in significant operating margin leverage. And why do we do this? Well, in the last 5 quarters, we've added 10,000 new ordering health care providers of Cologuard, and you want to be able to reach those, all of your customers and engage with them because what we see is if we call on a physician who orders Cologuard one time in a quarter, they will order about -- they will screen about 6 people with Cologuard. If you call on them 6 times in a quarter, they will order 26. So this isn't new reps in order to protect the base from falling, it's new reps in order to drive more growth. And so it is a logical thing to do. I think there was some thinking on the part of commercial leadership, let's -- we can do this with fewer, that is in primary care. We have found over the last decade, that's not the greatest strategy. It's to modestly increase the size of our sales force over time. We've done that every year except for the last couple of years. And again, we've seen great revenue growth. And what we expect to see in the future is modest investments in sales in order to boost the -- what you're really trying to do is elevate in the primary care office prevention. And when you do that, you actually see more people getting colonoscopies, you see more mammograms occurring, and you see more people getting screened with Cologuard. And so that's the message. Now remember, if and when a blood test comes to market, it's the same, let's call it, around 800 people in the field and a sales organization that is able to educate. Last quarter, we had 176,000 ordering health care providers to educate that big base of true believers in Cologuard and get them to order more Cologuard as more marketing comes into the field of colon cancer screening. And this where as a rising tide does lift all boats. Aspiring entrants will invest more in marketing, and we will see more growth because of that investment, too.

But their investments are very targeted. I think they've been very clear, and first of all, your sales force is going to be 7, 8x the size, but they've talked about kind of going after high Medicare population, maybe states with ACS guidelines. And so how do you think about that vis-a-vis you have a much larger channel, larger sales force? Do you have to counter detail? Do you have to pivot?

Well, we actually get to shape the market now because we have the field force. And I think it will take a long time for these aspiring entrants to be able to make their case. Our case is made very scientifically. Here right out of USPSTF is the performance of colonoscopy, right next to that is the performance of the FIT test, right next to that is the performance of Cologuard. Here is the performance per label of blood testing in a really -- just like the way the main guideline group does, lay it out, let the pros and cons, lay out what tests are covered by insurance, what tests are covered by Cologuard, 98% of patients are covered with $0 out of pocket. What's the case for blood test, et cetera. And by shaping the market well in advance of much, much smaller initiatives, I think that we will control this dynamic in a very responsible and scientific way. And so if there is noise and confusion that is generated, it is, if anything, I think, going to inure to the benefit of a company we've always taken great pride of being scientific in our approach in the primary care office, and there is a great degree of trust because of that.

And sticking with sales for a minute. You've got a couple of upcoming launches, MRD and Cologuard 2.0. I guess anything different about the sales channel as you kind of -- we think about those products coming to -- those tests coming to market in '25?

Yes. So Cologuard Plus, I'm glad you asked about this. So we invested for 10 years in the next generation of Cologuard, and we did something that's very hard to do in diagnostics, and that is to increase sensitivity and specificity of a test, while reducing the number of DNA markers from 10 to 3, lower cost of goods, simpler automation in the lab, about half the Hamilton robots that are needed that are $130,000 instruments, half the footprint and better performance. So a 30% reduction in the false positive rate, which is the #1 critique that people would have about Cologuard, 91% specificity, so a 9% false positive rate, 94% cancer detection. We're starting to push the upper limits of what is possible there, improvement in the cost effectiveness so that now it's on the cost effectiveness curve along with colonoscopy displacing FIT from that. So it's a wonderful message. We launch that hopefully next year with FDA approval expected later this year. Same sales force, same relationships with payers, better message. And so that, too, is part of the dynamic that blood tests are being launched into, which is, wait a minute, we have a test that is approaching perfection from cancer detection and false positive, right? And we also increased the advanced adenoma detection. So there's other one nuance that was really important in the primary care office, which is it used to be that the follow-up colonoscopy from a positive stool test was not covered. And so patients -- Medicare patients would have to come 20% out of pocket, $400 really expensive for many seniors. That was put to bed. It was only put to bed for stool test. It is not put to bed for blood test. And so we are able to -- with a lower false positive rate and that message, wow, it's going to be a really good marketing kick off beginning of next year.

You also increased the price. So how do you think about that? First, higher price test in 10 years for Cologuard. So how do you think about that? I think you said 50% of docs say they'll order. So it doesn't seem like it's a hindrance, but...

Yes. 2 out of 3 docs say they will order more Cologuard when they see the data -- Cologuard data -- Cologuard Plus data. In terms of a price increase, look, we haven't taken a price increase with Cologuard in a decade. We intend to have a modest price increase. Again, our approach here has been be very responsible as you're going to Medicare and to commercial payers so that you are not adding to the cost burden of the American health care system. You have a great, great screening test at what we think will be a modest increase in price.

Maybe in the last couple of seconds here, just a message around capital deployment and M&A, right? So you've been consolidating some of the industry with Genomic Health. I'm just curious, there's a lot of dislocation in the market. How do you think about the M&A landscape over the next couple of years?

We are a platform company. Our commercial team is hungry to sell more products into those same offices because of our credibility and reputation in those offices, both on the precision oncology side and the screening side of our business. I think what you're going to see is tremendous leverage. As we look out over the next 5 years, we have 10 product launches internally, and I suspect more things coming into the bad, too.

Great. Good to see you, Kevin.

Thanks, Tycho. Welcome back.