Exact Sciences Corporation (EXAS) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. And I'm excited to host for our next session Exact Sciences. We're joined by Kevin Conroy, Chairman and CEO; and Aaron Bloomer, CFO. Kevin, Aaron, thanks for being here.

Thanks, Michael.

Thanks, glad to be here.

We'll keep this as a fireside chat, but if you guys have a burning question, raise your hand, and we'll get a mic to you.

Kevin, maybe just to kick things off, you've been busy. You had a very interesting first quarter update a couple of weeks ago or last week, maybe you could give us sort of the high points from that. What really stood out to you as the quarter played out?

Yes. And just taking a step back, I believe this is my 15th conference at Exact Sciences. And a lot has changed in 15 years. When we first presented, I think we were a $50 million market company with this idea of reinventing colon cancer screening and solving the problem what was then the #2 killer -- cancer killer in the U.S. and so proud of the progress that we've made the first quarter highlights work that has been done over a very long period of time, we believe, giving us the ability to go solve this 1 of the big problems in cancer. Taking another step back, though, what is our bigger purpose or bigger mission is to help eradicate this disease with diagnostic tests and screening tests that help prevent it, what Cologuard does, detect it earlier like Cologuard, you'll hear about Cancerguard, both of those tests do and then help to guide treatment like our test, Oncotype DX, OncoExTra, Oncodetect. It's an exciting time because we have built a company that is now a platform company, scientific platform, which powers just the incredible performance of our tests. Number 2 is the commercial platform. Nobody has a commercial engine like we do, the ability to reach health systems, health care providers, payers, patients, the consumer of health care, and then this technology platform that we call ExactNexus. So that technology platform has multiple benefits. We'll talk a little bit about that today. Those assets that we have, those capabilities we've developed, create a unique competitive ability on our part to address this big need of prevention, earlier detection and guiding therapy in a way that leads to better outcomes. The first quarter, we had a wonderful first quarter, maybe, Aaron, you can touch upon that.

Yes. So we said back at the beginning of the year that this was going to be the most transformative year in the company, and we kind of outlined 3 key things. One was going to be momentum and growth back in the core of our business. Second was around new product launches. And then third was leveraging the scale in the platform that Kevin talked about, to really deliver sustainable profitability and execute against all 3 of those in the first quarter. And so if you look at, we exceeded expectations on the top line, really pleased, I'm sure we'll get into some of the changes we made to the commercial organization and allowed us to beat on the top line and importantly, raise then given line of sight that we have already into the second quarter and then into the back half of the year. New product launches. We launched 2 of the 3 new product launches that we intend to launch here and announce that in -- on the last call. First, Cologuard Plus; and second, our Oncodetect, which is our molecular residual disease test. And then third would be around the platform. We grew profitability by more than 60% in the first quarter, 60%. And that's on the backs of growing nearly 50% last year. And so this is all part of, again, us creating scale and leverage for our company moving forward.

Great. That's a great intro. Maybe I'll start with the first point, the momentum on the growth in the quarter. You talked about the commercial organization, and how that's gaining traction. Could you expand on that? Sort of how are you seeing the benefits play out? What do you see in the first quarter, sort of what are your expectations for the rest of the year?

So we made a number of changes as we diagnosed kind of some of the challenges we had last year. First was around making sure we had the appropriate size organization. So just going back to levels that we had just a few years ago. And in the meantime, we've grown Cologuard more than $1 billion over that period of time. And so significant leverage, but resizing that. What that's allowed us to do and what we talked about on the call was increased engagement with health care providers. We said that, that was up more than 30% year-over-year in the first quarter. The second thing we talked about was around going back to geographic territories. And so ensuring that we had the right size, every key territory in ZIP code around the United States had the appropriate rep in that territory. And that they owned it. They own their territory. And what that's led to is increased accountability and productivity for the reps. We've talked about -- not only did we increase engagement with health care providers, our reps are more productive on a per rep per day basis, calls are up more than 10% year-over-year. So going to the geographic territories has led to increased productivity and then ensuring that we're giving them the right tools for them to be able to be successful. A couple of examples of that. One is we used to have this program we called no order left behind. And so where we're seeing the most growth is coming from the newest ordering providers to Cologuard. And we've rebuilt our inside sales organization such that when a dock first orders Cologuard, we want to make sure we're reaching them within that first week, and we're back to the basics of doing that, giving them the right tools, and reps, when they're out in the field, and they've got maybe a lunch appointment, they've got a free hour or 2, helping them prioritize and be able to see right in their apps -- in the Salesforce app to be able to see who is the next best stock to call on, sliding that into their schedule and going and making more calls, again, speaking back to the productivity. That said, it's still early. We did increase guidance. We take guidance increases this early in the year with a great degree of caution. But at the same time, we were really pleased with the results that we saw in Q1. And the line of sight that we had from those commercial changes in the second quarter.

I was going to touch on the guide increase as well. You just kind of touched on it there, Aaron. Like you said, it's not typical to increase the guide this early in the year, and you must have a lot of confidence. Could you break out sort of like where that confidence has come from specifically? Is it really tight the commercial organization changes? Do you expect more benefit from that as the year rolls on? Are there additional changes you're going to be making as the year goes on in terms of refining the geos maybe rolling out some additional tools?

We will always continue to look to optimize, but all the changes that we made to the organization went into effect last December 1st, so we'll continue to monitor it. It is still early. But if you look at back to the first part of your question, the guide increase. We increased by nearly $40 million. Almost all of that can be attributed to the changes and the benefits we're seeing from the commercial org changes and then the productivity that we're seeing from that. But if you take a step back, and you look at contribution to growth, that's just 1 key element that we have. It's maybe part of the element that we didn't necessarily have as much of last year. But rescreens, and I'm sure we'll get into that, too. It's a recurring form of revenue. It is the single biggest dollar contributor to our growth this year and will be for years to come. Our care gap programs, which was up triple digits last year, saw a very robust growth again in the first quarter. We have line of sight to even more robust growth in the second quarter. And so there's many, many elements driving the growth, but the guide increase from the commercial changes.

I mean you just touched on rescreening care gap, so let's go there next. First, on rescreen. I mean it's something you've been talking about for years and years, just given the nature of of the business. It seems like you're finally sort of hitting that critical mass, and you're also getting into that now that just that second rescreen but the third. Can you talk about sort of the attach rate, the capture rate there, and how that's playing out to your expectations?

So what is a rescreen? Cologuard is a test that is indicated every 3 years. And our goal is to make sure not only that we get somebody into colon cancer screening, but we keep them screened because the challenge with colon cancer is it can start at any time, and it starts as a precancerous polyp, and you want to find it. So every 3 years is a very protective way to ensure that you have the maximum chance of actually preventing the disease by finding and removing a precancerous polyp or finding stage 1 or 2 cancer eminently treatable. Just -- so most people may know this, but stage 1 cancer, 98% survival. 5-year survival. Stage 4 colon cancer, about 8% survival. So it is imperative that you keep people screened. As you know, over time -- in the first year, we launched Cologuard, we screened 100,000 people. Last year, we screened in the range of 4 million people. And new news is as of yesterday, we completed our 20 million Cologuard test that represents 17 million unique people. That means 3 million rescreens. Well, over time, that builds, and it builds in a kind of a quadratic way because you keep adding new layers of growth over time. First time rescreen or second time, now we have third time rescreeners. I'll be on my fifth Cologuard test. And that is a very powerful tool for growth. And as Aaron mentioned, if you kind of look at the growth drivers out over the next 5 years, this is just getting started. It's a sizable portion of the total number of tests that -- patients that we screen. Over time, it will become over half. And the capture rate is between about 50% and 60% today of the eligible patients. We're making it a lot easier to get patients rescreened with a simple text. Answer 2 questions. And if you answer those -- if you basically don't have symptoms or a family history, you're eligible for another Cologuard test, that data goes to a telehealth provider who is able to order a test. That's a powerful way to just keep people screened. So our goal is to get people screened. That's the sales force goes out to our nearly 200,000 customers on a quarterly basis and educate them, prompt them to -- remember, Cologuard when a patient comes in, automate that, so you're getting more patients into getting screened with Cologuard and then over time, you're going to see more and more people rescreen. It's an enormous -- I mean it's really exciting to be able to think about this idea of moving to someday 10 million people screened a year and 15 million people screened per year. Rescreening is a big part of that.

Just talk about some of the tools that drive rescreening. Can you talk about -- tying it back to the commercial organization, sort of what's the commercial energy required for rescreen test versus a new test?

There's education that is required because many primary care docs when they first order Cologuard, they don't know what the guideline says about rescreening. 1/4 of docs don't know that the screening age lowered from age 50 to 45. So there's a ton of education that is required because of the nature of the primary care setting which is chaos. And our job is to bring clarity to that chaos, simplicity, repeatability, to say, here's how you order a Cologuard test. Here's how simple we make it. So a rep comes into an office with their Veeva iPad, and the rep can see that, say, that individual position has 12 patients who are due for rescreening test in the next 12 months. Doc, I'm going to click on this, send you an e-mail, you will be able to see who those 12 patients are. And then you can -- you or your staff can go in, check the medical records of those patients, call the patient. However, you handle your practice and order a rescreen test for all of them. Today, about 40% of all of our rescreen tests come from that preordering because the prescription is good for 1 year. You can order that test for up to a year before you actually send that test out, it's wonderful. And that rate will grow over time. So the technology platform enables that. We've made major investments over $1 billion of investments into the tech platform. Because of those investments, we can power rescreens at a much more efficient clip.

Is there also an angle of sort of the DTC side of things going straight to the patient, straight to the consumer that, again, might be more fruitful with the rescreening with the new patient?

Yes. So if you were due for rescreening test, you're too young -- far, far too young for that. But if you -- you would get a text or an e-mail or both saying, okay, it's time for a rescreen, here are 2 questions to answer. And you answer those questions. And again, that data goes directly to a telehealth provider, who's then able to see. It's pretty basic. If you're not up to date with screening, and you don't have symptoms or family history or you haven't recently had cancer, et cetera, then you're eligible for your next Cologuard test. And we are able with the ExactNexus platform to go into the cloud and look up your insurance plan. We weren't able to do that 5 years ago. We need to enter that. And imagine what the falloff rate was in the completion of that rescreen order, a consumer-initiated order. Same thing. We know who your health plan is. We can populate it for you, and then you can confirm. So -- it's -- are we a tech company, or are we a diagnostic company, we can have that debate. You can't do 1 without the other. When we started -- 11 years ago, when we launched Cologuard, 100% of our Cologuard orders came in by fax. Today, a small -- much smaller -- a small fraction come in by fax. Electronic ordering, electronic resulting leads to about a 30% step increase in the physicians' willingness and frequency of ordering Cologuard. And we've integrated with about 400 health systems. With our ExectNexus platform, we still have about 300 to go to cover the country. We are so far ahead of anybody else in the field. We've been at it for 8 years. And that requires work on both sides. And then education with every office, how do you order Cologuard within the Epic environment? How do you do it within the Athena environment. It's what we have built is a powerful tool that will lead to this incredible recurring testing, keeping people up to date with screening, leading to better outcome, also recurring revenue.

Maybe just tying the last few questions and answers together. You hit on DTC. One of the things that's so exciting being a CFO here at Exact is we have so many ways to get net new patients screened. You talked about DTC and customer-initiated ordering. We highlighted that on our call for the first time just a few weeks ago, which was that, that was up triple digits. It's still small, but it's something that we're trying to meet patients where they are. And to the younger patient population who might not be going in and seeing a physician, we now are able to leverage our platform that we've built out to be able to engage with them in a really, really simple way, answer a couple of questions, we'll get you a kit. We've talked about care gap programs. We've talked about our sales force. All of these are ways to drive net new patient growth. And then once you've got that patient, you have the opportunity to have them for life, right? So the recurring revenue stream. And so this whole flywheel just builds on each other, it's fantastic and very powerful.

We've seen screening rates jump 11 percentage points nationwide in the last decade. That almost solely attributable to Cologuard. And now with Cologuard Plus, which we can talk about at some point, it's another -- we believe, another step function increase in the ability to go get the unscreened people screened or people who've done colonoscopy once and don't want to do it again, screened with another highly sensitive, highly specific method.

Okay. You just touched on Cologuard Plus, Kevin, let's go there. What's been the market reaction since launch. Was really stood out to you in terms of the doc and the HCP reaction?

Yes. The HCP reaction has been phenomenal. So Cologuard detects 92% of cancers with a 90% specificity or a 10% false positive rate. Cologuard Plus detects 95% of cancers with a 94% specificity, so a 6% false positive rate. That's a 40% reduction in false positives. Why does that matter? Well, you don't want people to unnecessarily get a Cologuard result and have to go get a colonoscopy. That is value to the patient, obviously, and to the provider and to the overall cost of the ecosystem. So if you look at false screening test, mammography, Pap smear, PSA test, Cologuard, there is no other cancer screening test that is 95% sensitive, 94% sensitive. It detects 75% of what's called high-grade dysplasia, which is a step before cancer. It's so -- it's powerful and it's driven by the scientific platform. So now the field is saying, "Hey look, it's a heck lot easier to get time with a doc." HCPs in the primary care setting are busy. And now they're saying, "Look, it's just easier for us to get that access." As we review the New England Journal of Medicine paper publication that covers Cologuard Plus to take then through the package insert and the training materials. So we're excited right now. It is -- Cologuard Plus is covered by Medicare at a step-up in value at $592 a test. Over time, we believe that payers will also -- commercial payers will put that same rate, that is the rate that we offer to large -- the largest plans. And over time, with coverage, coding, contracting, kind of over the next 24 months, we will eventually sunset Cologuard and make Cologuard Plus the single test that we run. It's good -- better for patients. It's better for the economics of the health system, and it will change outcomes.

You mentioned Medicare vs commercial payers. Where is the commercial payment level now and sort of what needs to happen to get that there so that $592 rate?

The first step is coverage. So right now, the medical policy groups frequently, which only update medical policies once a year, are reviewing all of the data around Cologuard Plus. It's better than Cologuard. We don't expect problems there. We expect that to be very smooth in terms of adoption. You have a handful of plans. United, some of the Blue plans that have already issued positive coverage decisions. It's not going to be -- we think that will take time, but it will occur. Then there's coding and then there's contracting. So we're starting to have some of those contracting discussions. We will talk about that more kind of over the coming quarters and into next year. So what we have guided is don't expect much this year at all in terms of commercial plans and more next year. So that's where we are. And they're excited because, look, the lower false positive rate means less colonoscopy, follow-up colonoscopy expense to them and also a better experience for their member, which they care about.

So what's in the guide this year just to build on what Kevin said, it's just the Medicare Part B, which is already covered at the $592 level. And so that's what's embedded in the guide. We started resulting Cologuard Plus tests. Now I'm very proud of the work from our laboratorians to be able to do that in the second quarter. We'll start to see that uplift from that portion of the business. That's about 14% to 15% of our total volume.

Okay. So any commercial payer move this year would be upside to the guide at this point?

Yes.

, Yes, I was talking that. Okay, and then can you talk about...

One of the quick thing about Cologuard Plus is up. So in screening, everything comes back to a group called USPSTF and the modeling that they do to determine whether a service should be admitted. And it's basically cost-effectiveness modeling. Do you gain life years with this method? Does it cost you more? And Cologuard Plus pushed the fit test off of what is called the efficient frontier. So there are 2 tests now that are deemed efficient in screening. Cologuard Plus and colonoscopy. That gives us the ability to confidently say Cologuard first, and that's the message from the commercial organization is, look, we all know that there's a 3- to 6-month backlog around the country for a screening colonoscopy in some places more. The message is Cologuard first, you get your patients screened now. No why -- if your patient has cancer, why would you want to wait 6 months, it makes no sense. When you have a test that's 95% sensitive, 94% specific, colonoscopy in these models assume 95% sensitivity. So that performance is the only performance difference is around precancers, and that's why you do Cologuard every 3 years and colonoscopy every 10. So it's -- we couldn't be more excited about what Cologuard Plus means for the long term.

I mean taking a question -- taking a comment as you transition the mix from Cologuard to Cologuard Plus, you've previously given an LRP, and we sort of gotten used to how to think about Cologuard, both seasonality, quarter-over-quarter growth, year-over-year growth. The Score Guard process change that dynamic at all in terms of having the higher sensitivity specificity, just in terms of as that becomes a bigger part of your mix, how should we think about pacing through the year?

You mean in terms of adoption or the transition from Cologuard Plus. So we flipped a switch and now Medicare Part B patients effective in this quarter get Cologuard Plus. Other patients get Cologuard. So until new plans start to get implemented. So the kit comes to the lab, we can look up and see for every individual patient, what test they have access to and give them Cologuard Plus if their health plan has access to it. So again, think about Cologuard Plus in that 14% to 15% of the population that is Medicare Part B.

We wouldn't expect it to shift normal seasonality. So normal seasonality is what it is. And then yes, we'll keep everybody updated on contracting and more to come in the future.

Okay. We've got a couple of minutes left. I want to touch on a couple of other points. One is, you also mentioned Oncodetect earlier. Could you just give us some quick points on sort of feedback, expectations for the product, Medicare reimbursement.

Oncodetect is a molecular residual disease test. It really helps answer the question of what is the likelihood that a patient is to recur. Our data around Oncodetect and the Alpha-CORRECT study showed that a patient with a positive Oncodetect result was 50x, 5-0 times, more likely to recur than somebody with the negative results. So your patient with apparently well treated, stage 3 or stage 2 colon cancer, and you want to understand is that what's the likelihood of recurrence as soon as possible. So you can be aggressive in treating it or deescalating treatment, Oncodetect can answer that question. It's a long-term investment. It's highly sensitive and specific. It is delivered through that same ExactNexus capability and also our commercial organization that has brought Oncotype DX to about 90% of patients who get tested in the breast cancer space for chemotherapy guidance and the prognostic how likely are you to recur. We have about 90% market share in that segment. So oncologists know Exact Sciences incredibly well. We will leverage that incredible Oncotype DX brand to extend into the molecular residual disease space. That's going to take time. It's going to take a number of years, we think, but this is a market that is less than 10% penetrated. And we believe that due to the strengths that we have as a company, we'll be able to to have a significant presence in that -- an impact in that space.

Let's touch on CG Blood top line results from Blue C mid-summer. There's been a lot of questions on exactly what does summer mean? Anything else in terms of progress, expectations?

Summer starts June 21st, it end September 21st. So the summer would be -- mid-summer, there's no change at all. Here's -- the team that developed Cologuard, the team that developed Cologuard Plus, and many people who developed a cervical cancer screening test at a company I was involved with -- previously 20 years ago. This is the same team. This will -- for many of them, it will be their fourth AMA cancer screening test. There -- those people don't exist out there. And what they have done to develop a robust test, we've taken the time to do this the right way. It's caused some people, I think, on the street to be frustrated, "Well is it June or is it mid-summer?" Here's answer. I don't care. Go to the science team and ask them what is the right thing to do. And they say, "Give us all the time to perfect this because we have 1 shot at 15,000 samples." And their level of confidence is high. We believe that we will have a test that is competitive, that has strong -- relative to the other blood test, cancer detection, hopefully, better precancer detection. It is a clinical trial, so anything can happen. But I'm so proud of the work that this team has done to lock down the algorithm, to do all of the work around manufacturing quality and software validation in lab, training, et cetera, et cetera, to put ourselves in the best position for success. This is our -- not our first [ heal. ] There's a way we do things, and I think that we're in a good position. Taking a step back, let's all understand that if you are given a choice between colonoscopy or Cologuard and a blood test, please choose colonoscopy, Cologuard because the performance difference is significant. These blood tests don't detect very many precancerous polyps. And I'm looking around this audience at your age, your risk of cancer is still pretty darn low. Your risk of a precancerous polyp is not. And precancerous polyp takes 10 to 15 years to progress to cancer, best they can tell. You want to find that intervene and remove it and prevent the disease. And so that's why we believe colonoscopy and Cologuard. And why is Cologuard performing so much better is because cancer starts on the interlining of the colon and the mucosal layer, and those cells shed. It's called hyper exfoliation. They shed at a super high rate. They break open and the DNA is accessible. Even for a 1 centimeter small precancerous polyp. We find those. And you do that every 3 years, the goal is not to get cancer. The goal is to find and remove a precancerous polyp, and make it a procedure that is part of the colonoscopy procedure, done. And so that -- we are excited about the ability to have both because there is a role for blood testing. The role for blood testing is for people who refuse every other guideline recommended test. And we -- so we are excited. We're in a good position. We're bringing the best of our science through our scientist to this endeavor, and we think it's going to be part of the long-term growth story on the ExactNexus platform with our commercial team.

We're pretty much out of time, but I'm going to squeeze in 1 more question, just to make sure we get to it. EBITDA -- positive EBITDA, something you've been talking about for a while really important. As you're sort of right there, can you talk about prioritizing spend going forward versus driving more profitability. You've got a lot of commercial initiatives, got a lot of R&D initiatives, just sort of walk us through the various buckets.

You've got a year of investment. I would just ask how many companies are out there that are at scale, right? So we'll be approaching $3 billion of revenue, still sustaining high double-digit growth rates and grow profits by 60%. And that's in a year of investment. And we're prioritizing investments in sales and marketing right now that's paying immediate dividends on our screening side. We've talked about that at length. We're also making meaningful investments in R&D and sales and marketing towards the launch of Oncodetect, which we believe is a long-term investment. But to fuel that and fund that, we've got gross margin expansion, which we've talked about, and we lowered G&A by nearly 500 basis points with more to come here in the future. So a long runway for us to be able to continue to expand margins over time.

Great. And with that, we're going to have to end it there. Thanks, everyone, for joining us. Kevin, Aaron, thank you.