Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Good afternoon, everyone -- rather good morning, and welcome to Day 2 of Baird's Global Healthcare Conference. I'm Tom Peterson, I'm an associate on our life science tools and diagnostics team here at Baird. We're very excited to have Exact Sciences presenting today. Representing the company, we have CEO, Kevin Conroy; and CFO, Aaron Bloomer. Thank you both for joining us. I think Kevin is going to start with a quick presentation, so I'll toss to him and we'll use Q&A from there.

Please pull up the slides.

Yes, slide should be up.

Thank you, Tom. It's great to be at the Baird conference. I think I don't know if there's like the 15th health care conference that I've been at with Exact Sciences. And one of the things I really appreciate about Baird is just how you approach focusing on your clients across research, across advisory and it's just a super high-quality firm. So thank you for having us. Exact Sciences, our mission is to help eradicate cancer with tests that prevent it, detect it earlier and guide treatment. That's who we are as a company. We are focused on being the best cancer diagnostics company in the world, led with two franchise products, Cologuard and Oncotype DX. We -- there is a safe harbor statement. We will be making forward-looking statements. We're a team of 6,500 people. But at the core, we have an incredible group of scientists that are focused on developing amazing tests that change the way that cancer is diagnosed and treated. It's who we are as a company. We're a lab company. We're focused on high-quality results. And if you ask yourself, are we a diagnostic company or a technology company, you could have that debate. Because in the background, we've built Exact Nexus, a technology platform that we'll talk about today that allows us to connect electronically with patients, with physicians, with health systems and with payers and it's a huge competitive advantage, along with amazing tests that change outcomes. That's the combination. It's an open-ended growth story and it's being driven back -- by the scientists and the science that we are putting into our tests. When you look at our pipeline, you have this base of Cologuard, Oncotype DX and OncoExTra. We have a range of tests, and not all of the tests in our pipeline are on this page, that will have an impact. It starts with a deep franchise in colon cancer screening. We'll be talking about that more as the year evolves as more data comes out, but we'll highlight Cologuard Plus and the advancement that, that represents and what that can do to help us achieve our mission. Our technology platform is built on Epic, but it has about 100 apps that are connected to this that we have invested about $300 million a year for the last 7 years to build deep connectivity. And the thing I'd focus on this slide is 350 connections with health systems. So enabling docs to order and get results automatically but also prompt patients to do things like get rescreened with Cologuard 3 years after they do their first Cologuard or after they do their second Cologuard. It's an amazing platform that confers a significant advantage for years to come. It also allows us to connect with payers in a way that allows us to get prior authorizations also to bill and get paid much faster than anybody else in the industry. And you have tools like population health management that are going to become an enormous part of health care. And so this is a big advantage for us. You can see the growth in colon cancer screening. This is an open-ended growth story. There's still 60 million people who have not been screened for colon cancer, 60 million. We have the ability to reach people wherever they are in the U.S. because wherever the U.S. Postal Service or UPS delivers and picks up, we're able to reach patients. And it's changing the way not only health systems are thinking about engaging with Exact Sciences, also payers. So you'll hear about our gap closure program, which is a fast-growing part of our overall business. Our brand awareness is incredibly strong with Cologuard. We're very proud of the innovative approach we've taken to engaging with patients that not only drives patient behavior, it drives physician behavior. Oncotype DX has been in the field for 20 years, changing the way that early-stage breast cancer is treated. it's an amazing story. Today, we have about 90% market share in the U.S., about 80% class penetration. 98% of oncologists have ordered an Oncotype DX, about 90% on a regular basis. This gives us an advantage as we begin to launch additional tests into the -- into oncologists and surgical oncologists. And so we expect a lot of growth as you look at our MRD test and beyond. Let's talk a little bit about these key pipeline programs in colon cancer screening, next Monday morning, look for a press release, we will announce the results of a 3,000 patient prospective -- mainly 95% of the samples were collected prospectively. And we will show the results of the performance of our blood test. It's been a long time coming. We've talked about our blood program for a long time. Next Monday morning, it will be the first time you see data. We've been getting questions this morning in one-on-one. We're going to answer -- start to answer those questions starting next Monday. But we're excited about this program. I can say that still Cologuard will remain the standard and Cologuard Plus because of the performance level, we do believe there is a role for blood-based screening. We'll talk about that more in the months to come. Molecular residual disease will also have validation data by the end of this year, look for that and multi-cancer screening at ESMO. There will be a presentation that lays out the sensitivity and specificity in the ASCEND 2 study, the new data that is coming out at ESMO is that cancer type by cancer type, 21 different types of cancer the performance across the board and the performance, if you really want to focus in on the cancers that today aren't screened for. These are three tremendous growth areas and the whole company is so focused on delivering on the promise of this pipeline. Back to our purpose. It's to stay focused as the best cancer diagnostics company we can possibly be and to help eradicate this disease by prevention, earlier detection and guiding therapy. So that is the intro. That's who we are. And Tom, Aaron and I are happy to answer any questions.

Awesome. Thanks, Kevin, for that presentation and overview. I wanted to start on the core Cologuard business. So you reiterated the 2024 guide that assumes about 16% year-over-year screening growth. And embedded in that outlook are a couple of drivers to accelerate the second half growth profile. So I wanted to kind of take each of those in turn. Let's start with rescreening. So you've mentioned that the rescreening pool is about 10% higher in the back half of '24 versus the first half. I wanted to get a sense for how you would characterize your performance overall in successfully capturing the rescreening opportunity. Where is rescreening compliance today? And what kind of investments and initiatives are you undertaking to get that higher?

So rescreening is an important part of the long-term growth story because it will be over 50% of our testing. We've done 16 million tests so far. About 16% of our testing -- I'm sorry, about 25% of all of our volume this year by the end of this year will be rescreen volume, and that will become over 50% over time as we help physicians make it easier to just rescreen patients with Cologuard. So that's an important part of the story. But let me take a step back and say, look, there are 110 million Americans that should be screened for colon cancer, 50 million are up to date, 60 million are not. So the open-ended growth part of this is getting to those patients and how do we get to them? We get to them with an incredibly strong marketing program aimed at both physicians and patients. That DTC advertising, an incredible sales organization that continues to add about 800 new primary care health care providers every week. That hasn't slowed down. And now we're seeing a dramatic increase in physician assistants and nurse practitioners. So there's tremendous growth in the breadth of our customer base and now in the depth of ordering the frequency with which they order Cologuard. So that's another driver on top of the rescreening. 45 to 49, that age group, which is still a newer age group is only, let's say, 20% penetrated today. That is going to continue to grow over time and be an important overall driver of growth. Now think about the lifetime value of somebody who gets screened for the first time at age 45 with Cologuard. They're too busy to go in and get a colonoscopy. They're not too busy to do a Cologuard test. The lifetime value of getting that patient screened every 3 years is high. And we can remind them digitally by text and right through your MyChart account on Epic. So we -- the growth of Cologuard is tremendous. And now with the addition of Cologuard Plus, we're seeing 30% improvement in the false positive rate, 30% lower false positive rate, huge benefit while increasing cancer sensitivity and increasing specificity -- precancer sensitivity. So that is enormous, plus with the blood test coming, there is a niche, an appropriate niche for blood-based testing with our low cost profile there that is another driver of growth in the future.

Great. Maybe on the care gap orders and the programs that you're seeing here. This is something you've been talking about a little bit more as we got into 2024. What's your level of visibility on the sequential increases in the back half? On the 2Q call, you mentioned over 100 opportunities with payers and health systems for potential care gap orders. So I guess, as you think about it holistically, what's driving the increased interest and proactive outreach to Exact to kind of fill these care gap orders?

So I remember about 18 months ago, when one of our just tremendous leaders came to me who runs our managed care efforts and said, Kevin, look, there is an enormous opportunity these payers need to drive their quality measures even higher, and they're starting to come to us now because they are so comfortable with Cologuard and they believe in it. And Cologuard gives a 3-year quality credit versus the FIT test, which only gives 1 year of credit. And she said, "Look, these payers have been sending out FIT tests for decades and getting 10% of the kits returned." And she said, they're asking us to ship out Cologuard tests. And she, "I think this is going to be a big part of Cologuard testing if you look out over the next 5 years. So we gave her 25 people and they have focused on this. And it has been a home run, taking care of the needs of the payers who are actively giving us list tens of thousands, over time, hundreds of thousands of patients who need to be tested and they won't come in to get a primary care appointment. But the payer is accountable to the rate at which those people are screened for colon cancer. And so the solution is not only Cologuard in the 3-year benefit they get, but also what we call our compliance engine, our customer service capability, our digital outreach this Exact Nexus platform. And it is -- the growth there is remarkable year-over-year. We just started in the back half of last year. We're seeing growth throughout this year. We're excited about what the growth is going to be in the back half. And the visibility that we have into this is significant because we start working with the payer, and it typically takes a couple of months to implement the order. And most of those orders that will impact the back half of this year will occur by the end of October. So I think the next 7 weeks, do we have visibility into that? We have pretty good visibility into the orders that we're getting through about 100 payers. And about 80 payers and about 20 health systems. Now health systems who care about their quality measure score are also asking the same thing of us. The kit return rate is a lot lower than if a doc prescribes a Cologuard test right in the office. Over time, another driver of growth is improving the kit return rate in this cohort. So it's an area that we're excited about because of the impact that we can have.

Got it. And a final driver in the back half would be impact from some of the sales and marketing investments you made earlier this year. Kevin, I think you've kind of characterized the sales force investments as bringing things more in line with 2022. Can you just talk through your level of confidence that this is the right size for Cologuard today?

We talked a little bit about that on the Q1 call. Going forward, I think we're going to talk more about what our total sales and marketing spend will be in and Aaron can touch upon that. The way to think about our sales force is that we will continue to get more efficiency and productivity out of our sales force. It's a great team. We're proud of the team. And over time, as we grow the top line, we'll increase the size of that sales force because our customer base continues to grow by 40,000 health care providers every year just in the screening side of the world. So if you want to drive more people getting tested through that customer base, you want to reach out to them and talk to them and engage with them.

Yes. What makes us unique is we were actually able to reinvest back into our sales and marketing, which is something we are going to continue to do but we did that while expanding margins, including getting productivity on the sales and marketing line. If you look at Q2, we had over 100 basis points of margin expansion coming through sales and marketing while making reinvestments back into that. And so from a long-term guidance perspective, how we think about it is for roughly every $100 million of incremental top line revenue growth, we'll reinvest back 10% to 15% back into the sales and marketing line to be able to continue to fuel long-term growth while also continuing to expand margins.

Great. Let's flip over to Cologuard Plus. So you expect FDA approval here in the back half of this year. What additional steps do you need from a lab perspective ahead of the launch? And do you expect this to be a multiyear transition period for both patients and physicians? How do you expect that dynamic to play out with original Cologuard versus Cologuard Plus?

Yes. Cologuard Plus has fewer DNA markers than Cologuard. What that means operationally is fewer Hamilton robots in the lab. However, the rest of the test is very similar. So the workflows of the two lines, the Cologuard line and the Cologuard Plus line are very similar. Initially, we will be covered with Cologuard Plus by Medicare Part B, about 20% of overall patients. And then by the Medicare Advantage plans, which are obligated to pay the same rate that Medicare pays and then commercial plans and then Medicaid plans. So think about a transition in testing over a 12- to 24-month period of time from Cologuard Plus to Cologuard. We are presently seeking a price increase for Cologuard Plus. And we believe that we have justified a reasonable price increase because of the financial benefit to payers as a result of a decrease in the false positive rate.

Got it. You covered my next question on pricing. We get a lot of questions on that. Can you just remind us the potential for the ADLT pathway for Cologuard Plus and just the elevated value proposition that you see for the product?

There are two pathways to get a price increase for a diagnostic test. One is through the conventional pathway that most tests go through the clinical lab fee schedule approach and the CDLT approach. It's -- that's a tough pathway to get a price increase. We have made a request. We're in the process of that the way those decisions are made, there's a decision in late September, so this month, a preliminary decision or recommendation by Medicare that becomes final, what potentially could be changed in about November. If we don't get a price increase, and we have not expected through that pathway. It's a tough pathway to get paid for innovation. But the ADLT pathway was created a number of years ago to reward companies for innovation. We've invested significantly in this program and we're making the case that we'll find more cancers and have a lower false positive rate, find more precancers have a lower false positive rate. We don't know which pathway is actually going to be the one that works, but you're more in control of your own destiny with the second pathway.

Got it. Let's flip over to the blood-based program. You mentioned that we're going to get some data next Monday. I guess I know now what I'm going to be doing next Monday morning. But what gives you confidence that your assay can demonstrate similar sensitivity and specificity performance with the improved precancer performance that you alluded to in the past?

Yes. So let's talk about the study design that we -- where do the samples come from? So there are 3,000 -- approximately 3,000 samples in this study. They -- most of these samples, 95% of them came from the BLUE-C study. They are the normals, what we call categories 1 through 6, people with no findings in their colon plus small polyps, non-advanced precancerous polyps, non-advanced adenomas. Those are the categories 1 through 6, they're normal, your test should be negative in those patients. When you set an algorithm, you want to set it on the largest number of normal samples positive, so you control for your false positive rate. That is -- so the study that you will see -- the reason we did this was to set that algorithm and have super tight confidence intervals on specificity. We added precancerous polyps that were -- the majority of them were collected prospectively. So this isn't -- it's a partial case control, but it's mainly a prospective study. About 60% of those samples were collected prospectively, the advanced adenomas and 40% were the samples were collected after the advanced adenoma was found by colonoscopy. And then we added cancers into that, which are cases. So we found the cancers and then did the blood draw. Why are we doing this study and why are we sharing the data? We're doing this study to lock down an algorithm to give us a high level of confidence that it will be reproducible in the remaining 15,000 samples from the BLUE-C study. This was done with FDA blessing. So we randomly took 3,000 samples from the BLUE-C study. Those 3,000 samples will not be used in the pivotal study results, and I want to make it clear. We have not yet generated the pivotal study results. We'll talk about that next Monday and the timing for the pivotal study, the data generation and submission to the FDA. But I want to make it clear that we do not yet have the pivotal study results. What we have today is our results from a big cohort of patients, 95% of which were collected prospectively. So it'll give us great confidence. And we look forward to sharing that data with you next Monday.

Yes, we're looking forward to it as well in our end.

Let me say one more thing. The science and the scientists at Exact Sciences, we have been focused on this for almost the full 15 years that I've been at Exact Sciences. And this is a hard area of science to find biomarkers in blood from precancerous polyps and even Stage I cancers. It's difficult. And after that, we won't be saying much until next Monday.

Fair enough. Broadly speaking on blood-based testing, I guess, can you remind us how you see a blood-based test fitting into the exact ecosystem? And how do you envision this test as an opportunity to bring these unscreened patients into your system and potentially bring them on to Cologuard down the road?

Yes. So the important thing is to -- if you look at a family member or a friend, what form of screening would you recommend to a family member or a friend? The highest sensitivity test. And there are really two tests, colonoscopy and Cologuard, that detect over 90% of cancers and a good percentage of precancerous polyps. And that's what I'd recommend. When people ask me, I say, either get a Cologuard test or a colonoscopy don't do a FIT Test. Don't do a blood test that is blind to precancerous polyps. So any blood test is going to have to be at least as accurate as a fecal immunochemical test, which detects 24% of precancerous polyps and is done annually. If you do that test annually every year, nobody does it annually every year, like 3 in a 1,000 people do it every year when they should. It's a reasonably protective means. But blood tests have to perform at a higher level. And we still recommend that Cologuard or colonoscopy should be the frontline screening. We believe as we continue to advance and we're already working on Cologuard 3.0 that over time, we think Cologuard becomes the frontline screening test for colon cancer. A blood test may have a role for people who refuse either colonoscopy or Cologuard, and that we have the platform, the sales force, the deep relationship with health systems to be able to get some of those people who refuse other forms of screening to get screened. And then eventually get them to move over to Cologuard to get them screened regularly. With the blood test though, if you're better than the FIT test and you can control to get them screened on a very regular basis, that is another approach that theoretically could work over time. We're confident in both of our approaches and we'll -- again, we'll talk more about it next week.

Yes. We've got about 5 minutes left. Let's flip over to MRD and the opportunities here. So you mentioned you expect to publish OncoDetect data in CRC patients later this year. I think one of the initial challenges for investors and analysts for MRD is making comparisons across data sets just given patient mix. So I guess how would you frame expectations for performance here? What does success look like? And what do you think is important for an MRD test here as you prepare for launch in '25?

So for an MRD test the point right after surgery and before that patient goes on to chemotherapy or targeted therapy is to understand the sensitivity of the test at detecting circulating tumor DNA postsurgery. Because if you're going to de-escalate therapy, you want to make sure that if they're circulating tumor DNA, you can detect it. And I think that's going to be a strength of ours. And I think that's something that oncologists are looking for. I really want to complement Natera for what they've done about how they've built this emerging market by doing a lot of studies that show that there is an incredible benefit. Basically, if you're circulating tumor DNA positive after surgery, you have a 10x greater likelihood of recurring than if you were negative. We think over time with our deep relationships with oncologists especially in the breast cancer space but just broadly, our 20-year relationships with oncologists because of Oncotype DX, we are going to be able to penetrate this market. We believe our technology is a really strong technology that confers a high level of sensitivity. Then looking at recurrence to detect cancer recurrence before you can see it on even a PET scan. At that point in time, maybe specificity is the more important metric. And so that -- our goal is to have a really strong test, drop it into the Exact Nexus platform, outreach to our oncology customers today. And we believe that over time, this is going to be an important part of our growth. And we think it is also a testing regimen that is going to change the way people are treated. And you're seeing that today. There's only 5%, 6% penetration today. So there's a lot of room for this to grow over the next decade, adding a second leg of growth for example.

Got it. The profitability profile continues to evolve. Yes, I'm going to loop Aaron here on this. So you raised the 2024 adjusted EBITDA guide on the 2Q call, saw a nice acceleration in 2Q. Where are you seeing the most leverage on operating expenses? And just give us a sense for how comfortable you are on that 2027 target of 20% plus.

Yes. So first of all, we're just so incredibly proud of the work and the progress that the team has made. We delivered record levels of profitability, both in terms of dollars as well as a percent basis. And that really helps give us confidence in the 2027 guide, as you alluded to of 20% plus. We just did 16% in the second quarter. And I'll go back to something we talked about earlier, which is what makes us unique is we're able to expand our margins and be reinvesting back in the business at the same time. We're at -- we're investing heavily in all of the pipeline programs that Kevin just talked about, four major ones, most of which are coming to market in the next 12 to 24 months. And we've been able to do that while expanding our margins. It's just remarkable the progress from the team. I think in the -- in the near to midterm, the biggest opportunity and we saw this in the second quarter as well is in G&A. Our G&A is still elevated. Part of the reason for that goes back to what Kevin talked about for we've built and invested a lot in our Exact Nexus platform. Now it's time for us to leverage that, get scale. And so there's a number of different levers we have within G&A in the near to midterm. And over the long term, we'll get productivity out of sales and marketing like we saw in the second quarter as well as in R&D.

Great. We've got about 15 seconds left. I'm going to sneak in a quick one. You've got a little under $1 billion of cash and equivalents on the balance sheet. At least we're modeling positive free cash flow going forward. So how would you think about capital allocation priorities? Do you think M&A becomes more attractive here going forward? And any particular areas you would look at?

Yes. So again, we do have roughly $1 billion of cash on the balance sheet. We feel that, that puts us in a unique position of strength. We're proud of the balance sheet that we have. And as you alluded to, we generated positive free cash flow last year. You saw in the second quarter, we delivered a record level of free cash flow. We'll look to build upon that over the back half of the year and into the future, which is going to give us the financial flexibility to be able to do what we want to do into the future. Investing back in the core business organically will continue to be our primary objective, but we'll look opportunistically at M&A as well.

Great. Well, I think we're out of time. So we're out there. Kevin, Aaron, thank you so much for your time.

Thanks, Tom.

Thank you.