Exact Sciences Corporation (NASDAQ:EXAS) Wells Fargo 2024 Healthcare Conference September 5, 2024 3:45 PM ET
Company Participants
Aaron Bloomer – Chief Financial Officer
Conference Call Participants
Brandon Couillard – Wells Fargo
Brandon Couillard
Alright, folks. We’ll go ahead and get started. Good afternoon. Welcome to the Wells Fargo Healthcare Conference. I’m Brandon Couillard, cover the life science tools and diagnostics sector here at the firm now. And it’s my great pleasure to have Exact Sciences with us at the conference this year. Joining us for this conversation, CFO, Aaron Bloomer. Aaron, thanks so much for being here.
Aaron Bloomer
Awesome, Brandon. Thanks for having us. And congrats on the position here with Wells.
Brandon Couillard
Thank you, thank you. So, we’ve both started new roles fairly recently. You’ve been in the CFO seat for about four months now. Maybe just start with what surprised you, maybe both good and bad in these last – in your short few months on the job, and where are you spending the majority of your time right now?
Aaron Bloomer
Yeah, sure. So just as a reminder, we are Exact Sciences, and our vision is really ultimately about helping to eradicate cancer by preventing it, detecting it earlier and helping to guide treatment. And it’s just been a really awesome opportunity being here with the company for the last five months.
We have helped more than 16 million patients get screened for colorectal cancer screening and over 2 million Oncotype DX tests performed for breast cancer. And so, the impact that we’re having on patients is just profound and it’s a really, really exciting time to be here at Exact Sciences.
Building upon that, the financial strength of the company and being able to come in here at a time where we’ve got our top line growing solid double digits, we have a long-term guidance out there to grow 15%, really, really excited about where we’re at and where we’re progressing on that to date. We’ve got margin long-term guidance out there at 20% plus by 2027. We’re tracking way ahead of that. We delivered a record level of adjusted EBITDA in the second quarter, 16%, and really, really pleased with the progress that the team is making and the impact that we can have.
And this just really helps set up, we’ve got a strong balance sheet, we’ve got almost $1 billion of cash sitting on the balance sheet. We’re generating positive free cash flow, which is a pretty unique thing for a company in our space. And so, we feel that as we continue to build upon that, we’re going to grow the top line, expand margins, and be able to reinvest back into the business and do that by ourselves to be able to generate the free cash flow, grow that to several hundred million dollars per year into the future. That just gives us the capital allocation flexibility that we need to be able to reinvest back in the business.
You talk about surprises. I think one of the areas that’s been surprising is just the new products that we have coming to market. We’re really, really excited. We’ve spent the better part of the last decade reinvesting and building out world class tests. We have four new products that will come to launch over the course of the next 18 months. I’m sure we’re going to get into talking about many of those over the course of the next half an hour. But really, really excited that we’re finally coming close to commercializing many of these.
And I think it’s a really big, underappreciated part of what makes Exact Sciences tick and the value we’re going to create for patients and for shareholders into the future.
Brandon Couillard
That pipeline story’s definitely been a long time coming. And a lot to look forward to. I do want to get to that in a minute. First, I want to start with Cologuard. So it’s now 10 years old, hard to believe. It’s been 10 years.
Aaron Bloomer
We celebrated the 10 year anniversary the other day. It was great.
Brandon Couillard
$2 billion franchise. Yeah. Like it’s now double digits. Cam it still grow double digits. And what are the biggest near and midterm drivers that investors should focus on if you had to stack rank them, be it 45 to 49, rescreen, EMRs? What are the biggest drivers of that durable double digit growth?
Aaron Bloomer
Yeah. So, again, we celebrated our 10-year anniversary. We put out a press relief. We’ve impacted, like I said before, 16 million patients have been screened. It’s just phenomenal, the work that the team has put in.
And what makes it so exciting is there’s so much more room for us to grow moving forward. There are still 60 million patients who remain unscreened for colorectal cancer screening. And we are finding new and innovative ways to help reach this unscreened population.
And if you think about what’s going to continue to contribute to this open-ended growth story, for us, a couple of key factors. One would be rescreens. And this is a big part about what’s driving our growth in the back half of 2024 as well. We’ve got a deep, deep relationship with all of the patients that have come through and used Cologuard. And as part of COVID, that was kind of stuck at about 1.2 million patients eligible for a rescreen.
As we’ve worked through that COVID cohort, that number jumped from 1.2 million last year to 1.6 million this year. And a lot of that comes in the back half of the year. That number then grows again next year to nearly 2 million patients. And so, you have our re-screen, which last year represented roughly 20% of our Cologuard revenue, growing to be approaching kind of mid-20s as a percentage of total revenue by the end of 2024 with a very clear path to being roughly 50% of our total revenue. These customers are very sticky, and we expect this to be a really great annuity for us into the future.
The second area of growth would be around our care gap programs. This is still a very new market for us. We’re really, really excited about what care gap is. For those of you who don’t know what care gap is, these are opportunities for us to partner with primary commercial payers as well as health systems who have historically just sent out several million FIT tests every single year in hopes of getting additional patients screened.
The challenge with a FIT test is you only get one year worth of quality credit and the adherence or the compliance rate of those who complete a FIT test is less than 10%. And so, these payers and health systems have come to us really starting in the back half of last year, looking for ways to get their quality scores up.
And one of the opportunities to do that is to advance their colorectal cancer screening rates. And so for us, we have much higher compliance rates. We’ve demonstrated that with them as we’ve launched this program. And instead of one year’s worth of quality credit, they’re now getting three years’ worth of quality credit.
Those are two of the really big areas that I would focus on for near to midterm growth drivers in our Cologuard business.
Brandon Couillard
Maybe just sticking with the care gap program. You haven’t really put any revenue sizes around it. You have said that the first half was – revenue was more than all of 2023 combined. You do have electronic ordering with 300 health care systems today. How many of them are participating in the care gap program? And is it a flawed logic to actually think about that is perhaps creating a headwind next year? Because if you think about these patients, they’re the lowest hanging fruit, and then they’re good for three years. And so you have to refill that bucket plus some more. So can it actually be sustainable growth going forward as opposed to maybe episodic?
Aaron Bloomer
We view this as sustainable growth. And let’s take a step back and remember that there are still 60 million patients that remain unscreened. And as we’re working on these care gap programs with the health systems and the commercial payers, they are giving us some of the hardest to reach, hardest to screen patient cohort, almost as like a pilot, right?
If we were to send out all of our Cologuard kits to really address all of the unscreened patients they had in their entire cohort, that would be very expensive and, two, you might end up with some of the concerns you had. We’re taking this very, very programmatic with them. We’re proving out success. We’re proving out that we can drive compliance rates up. And then we’re going to work with them to continue to build upon this.
Just to maybe frame this, because we haven’t necessarily sized it, if you just look at the Medicare Advantage programs, they send out anywhere from maybe 3 million to 4 million FIT tests per year at a one-year interval. If you translate that to Cologuard on a three-year interval, in the MedAdvantage cohort alone, we could see this being a $500 million opportunity.
Brandon Couillard
Assuming 100% capture of the 3 million to 4 million on a three year cycle.
Aaron Bloomer
Yes. Just in MedAdvantage alone.
Brandon Couillard
Okay, interesting. Last question on this. How much of this business is just driven by inbound as opposed to a dedicated commercial effort where you’re pitching this program to systems and payers? I’m curious what that looks like.
Aaron Bloomer
This just shows the innovative spirit that exists within Exact Sciences. We’re so proud of the team that put this together and came up with this. And this really just started a little over a year ago.
And what I would say what’s been really interesting navigating over the last 12 months, you rewind a year ago, it would be more us approaching them and engaging in the conversations. And we are now working with roughly 100 health systems and payers, and it’s far more inbound.
And again, this goes back to them wanting to get incremental value towards their quality scores and get their colorectal cancer screening rates up. So we’re very much in discussions with them, and I would say the transition has been from us approaching them to them now approaching us.
Brandon Couillard
So you’re with Cologuard. What’s your latest view on timing of FDA approval for Cologuard Plus? Could it come before the end of the year? And then post-approval, help us think through how you expect to transition from 1.0 to Cologuard Plus and the timeline of what that looks like. Initially, you’ll have Medicare. I think that’s about 35% of the Cologuard volume, or at least screening revenue. But just help us think through the steps of how you roll that out once it is FDA approved.
Aaron Bloomer
Yeah. So, we’re just so proud of the innovation and the science that the whole team really delivered with Cologuard Plus. So we’ve been working at this for the better part of the last decade in the innovation that they’ve brought to Cologuard Plus, which is our new colorectal cancer screening product, which we do expect to get FDA approval in the coming months and then would plan to launch this in the early part of 2025.
The exciting thing about what this is going to mean for not only the overall health system, but patients is around reducing the impact around a false positive. And so, Cologuard Plus really pushed the boundaries and improved the false positive rate by nearly 30%, which is going to help save the health care system billions over time.
In terms of launch, yeah, so we are in active discussions, obviously, with CMS from a pricing perspective. There’s multiple different pathways we have. We are trying to secure a price increase, as you know. So we had submitted for a 25% price increase through the CDLT pathway. We’ll find out more about that here. We’ll know more here at the end of September, then a final determination in November. But ultimately, whether we go the CDLT pathway or the ADLT pathway, we are excited to bring Cologuard to market. It would start with the Medicare fee-for-service or Part B population, and then very quickly thereafter, we are actively working on negotiating with the MedAdvantage. plans as well as then the rest of our commercial payers.
But again, really excited to bring Cologuard Plus to market and the impact that that’s going to have on patients.
Brandon Couillard
Is there a minimum number that you would accept in terms of a price increase? I mean, what’s the likelihood that it maybe lands up 10% to 20% and you don’t get the full 25%? And then to help us understand the nuance of what the ADLT route would look like for those that might not be familiar with it.
Aaron Bloomer
Sure. Yeah. Look, we went in with a proposal for a 25% price increase. Obviously, we’ve had a lot of inflation. We’ve invested hundreds of millions of dollars into this program over the last decade. And we know that this is going to help save the overall health care system, like we said, billions of dollars. So felt that the 25% would be appropriate. We are in active discussions with them right now, so can’t comment exactly on where we would expect to land.
But we do expect to get a meaningful price increase, whether through one of the two pathways. If we were to go the ADLT pathway, we would basically set what our price is with Medicare, and then we would have a period, I think it’s about nine months, whereby eventually would reset to the average of what our selling price is with commercial coverage that is carrying Cologuard Plus. And then it continues to go on through a series of that. And so, it takes a little bit more time than if we were to get the CDLT path. But either way, we’re really excited to bring this product to market, excited to, again, be able to negotiate with the commercial payers and MedAdvantage to be able to bring this into health systems and into patients. But you would expect a rollout of, I think, 12 to 24 to 30 months transition from Cologuard to Cologuard Plus as we renegotiate those contracts.
Brandon Couillard
Okay. Will you wait for that pricing, I guess, to be clarified before you start shipping Cologuard Plus kits to Medicare patients?
Aaron Bloomer
What’s really great is we’ve already built out all of the infrastructure, our lab is phenomenal and ready to go to handle Cologuard and Cologuard Plus. But what really brings us to life is our Exact Nexus platform, so our IT infrastructure. And so, it will be seamless for the patient and for the physician. So when you go in and you order a Cologuard test, you won’t click down whether it’s Cologuard Plus or Cologuard. We’ll manage all of that on the back end. And we will be able to know through our Exact Nexus platform whether or not your insurance coverage reimburses you for Cologuard Plus, or whether or not your insurance coverage reimburses you for Cologuard. And so, again, we’ll manage that on the back end.
We’re really proud of all of the work we’ve done to ensure that our patients don’t get a bill. We think that that’s very important. We have 98% insurance coverage in the United States, and so we’ll make sure that we manage that and think that is a huge priority as we work through this launch.
Brandon Couillard
Got you. I want to touch back on the rescreen population and compliance rates. Are there any patterns that you’ve seen that would suggest that different age groups are more or less likely to adhere to rescreens? Understanding 45 to 49 is relatively young, right, in terms of being a large part of that pool. But where does that capture rate today and then where can you take it, I guess, over time and what are the drivers of that?
Aaron Bloomer
Yeah. So, overall, the capture rate or compliance rate for a rescreen is approaching high 50s, upwards of 60% and that’s up from maybe where it was at a few years ago of about 50%. What’s really great and interesting is that once we ship you your kit, you’re eligible for your rescreen and we ship you your kit, the rescreen rate actually moves from roughly 65% for a first-time user of Cologuard to nearly 80% for a second time and 90% now that we’re starting to see third-time rescreens come through the cohort.
We have not noticed an appreciable difference by age group in terms of overall capture rate or compliance. Obviously, we’re just kind of going through this, as you noted, for the 45 to 49. That first cohort is just starting to become eligible for their first rescreen, so we will learn more about this.
But the 45 to 49 cohort is a really, really important cohort for us. It’s a significantly under-penetrated market opportunity today. It’s still less than 20% screened. That’s a cohort of 20 million Americans that remain unscreened in the 45 to 49 age group. And we’re really excited about getting ways to get that patient group screened.
Brandon Couillard
Earlier this year, you made a number of commercial investments, expanded the sales force for Cologuard. Can you talk about the size of that investment, why now, and how those reps are maturing? As part of that, any changes to the commercial strategy since Everett left?
Aaron Bloomer
We’re so proud of the roughly 1,300 total commercial organization that we have across sales and marketing, selling both our screening Exact products, as well as our precision oncology products and the depth of relationship that they’ve built with physicians, healthcare practitioners, and oncologists.
We did decide to incrementally add on the screening side to the sales force back in Q1. That sales cohort came on board in early May. Really, really excited to have them out in the field. It usually takes roughly five or six months for them to become productive.
And so, the question of why now? It was really about ensuring that we have the infrastructure in place to be able to continue to support long-term growth in Cologuard. Surprisingly, we are still adding 8,000 to 10,000 new ordering providers, first-time ordering providers to Cologuard every single quarter.
When I got here, I thought there is no way that that’s possible. And yet, quarter after quarter, we continue to add 8,000 to 10,000. And so, this was just in response to really start to address and get to the levels of reps that we needed to be able to support 2025 growth. But we did that while still getting leverage.
And again, a lot of the narrative coming out of Q1 was, does Exact Sciences need to invest a dollar of sales and marketing to get an incremental dollar of revenue growth? And, hopefully, we put that to bed here in the second quarter, the record levels of profitability, both in dollars and percentage, and we got leverage in sales and marketing. There’s over 100 basis points of margin expansion in sales and marketing while making those investments.
And so again, it kind of builds upon one of the themes, which is we can expand our margins in a meaningful way while reinvesting back in sales and marketing. But from a modeling perspective, a good way to think about this is roughly for every $100 million of incremental revenue we generate, we’ll plow back $10 to $15 million back into incremental sales and marketing investments. That continues to fuel top line growth, but still gets meaningful productivity and leverage on the bottom line.
Brandon Couillard
Got you. Okay. I want to touch on the revenue outlook for the back half. So the guide implies screening growth accelerate to like 20% in the second half up from, call it, 10% roughly in the first half. You usually guide the fourth quarter to be flat sequentially due to seasonality, right? And most years, that typically outperform to the upside. But the current guide actually implies, I don’t know, a double digit sequential step up. Would you just unpack the key drivers of that visibility and just the confidence level in hitting that, let’s say, more optimistic. I looked in, you typically give for third and fourth quarters.
Aaron Bloomer
Sure. So, yeah, if you look at first half versus second half revenue first, and then we’ll come back and unpack Q3 versus Q4, what we’ve typically seen, with the exception of 2023 is roughly a split of 46%, 45% first half of the year, 54%, 55% in the back half of the year. And that’s right in line with what we’ve delivered in the first half of this year and what we’re guiding to in the back half of this year.
Growth accelerated from Q1 of this year to Q2, right? So we accelerated to 15% screening growth in Q2. You are right, we do then accelerate further to nearly 20% in the back half of the year, and with more so coming in the fourth quarter.
Really driven by three key reasons. First and foremost is rescreens. So again, the number of patients eligible for a rescreen increased from 1.2 million patients to 1.6. million patients. We saw very little impact from that in the first quarter. We saw a very meaningful pop from that in the second quarter.
But the number of patients eligible for a rescreen back half of the year versus first half of the year sequentially is up more than 10%, with more of that coming in the fourth quarter. So Q3 builds on Q2, Q4 builds on Q3.
The second reason is our care gap programs. And while we have not sized the overall size of the opportunity, other than the commentary you noted earlier, we’ve done more first half of this year than all of last year, we know from working with these payers and health systems that these are back-end loaded programs. And so, while we’re very proud of the impact we’ve made in the first half of the year, we have deep relationships with, like we said, over 100 health systems and payers. The team does a phenomenal job of managing what that pipeline is. We know exactly the quantity of orders that they want shipped, by when they want them shipped. And it’s a week by week discussion, but great visibility, proud of where we’ve progressed thus far quarter-to-date in Q3, with line of sight to what we guided to in Q4. Those are the two biggest reasons.
The third one to call attention to would just be the incremental sales reps. And so, we added the incremental sales reps. They came on board in May, again, five to six months to start to see an impact from that. We’re monitoring that obviously very closely, but we would expect a small impact from that to come think, like, the November, December timeframe, which would impact Q4 relative to Q3.
Brandon Couillard
Sorry, last question on care gap. Then I want to get to the fun stuff. Are the payers of health systems, are they pre-buying those kits or are you betting on some compliance number of the kits that you ship out actually come back in and that translates to the revenue that you’ll book and I imagine there might be a lot of variability to that number because it’s a new program.
Aaron Bloomer
Yeah. So, we only record revenue based on a completed test. No different than in our point of care programs. And so, as we ship that out, we’re basically taking on the risk of that. And so, what’s happening is these care gap programs are highly accretive to overall total profitability. We do see some dilution on the gross margin line just because the compliance rates tends to be a bit lower with this cohort. And we saw that now both in Q1 and Q2 of this year, gross margins slightly down year-over-year, total adjusted EBITDA up very significantly.
Brandon Couillard
Yeah, okay. Got you. All right. Shifting gears to blood-based CRC screening. Okay, would you just give us an update on your expectation for data release on the initial 3,900 samples from BLUE-C for your blood test and in terms of timing or conference circuit and how should investors be assessing that data? What would you characterize as good data or success relative to comps that we’ve seen this year?
Aaron Bloomer
Yes, let’s start with the role of blood-based screening. And again, given that there are 60 million patients that remain unscreened, we feel that a blood-based screening test does have a role in the marketplace. We believe, though, that that’s going to play a niche role for a couple of key reasons.
First and foremost, one of the primary goals of doing screening is to be able to detect cancer early. And detecting cancer in stage 3 or 4 has a much higher mortality rate than if you detected early. And so, it’s so important that your advanced adenoma detection as well as stage 1 cancer is in a good spot. Cologuard detects 43% of advanced adenomas. And if you look at the blood tests that are out right now, the advanced adenoma rate is 13%. And even at a one-year interval, just doesn’t model out anywhere near where it would need to be in order to get into guidelines based off of the CISNET modeling that’s been done on this. So that’s number one.
Number two, the blood tests costs matter as well. And so, when we design tests, one of the key considerations we put in to the overall design of the program is our cost of goods sold. And so, as we developed a blood test, we wanted to make sure that if we were going to be launching a blood test that had inferior performance to Cologuard that we were able to price it appropriately. And so, we wanted to make sure that we had a very competitive cost of goods profile, which we feel we will have with our blood test.
And then, you launch that and you bring it into our commercial organization that’s 1,300 plus strong, that’s got deep relationships with the physicians, with the health systems, with the payers. You plug it into our Exact Nexus IT platform, which just enables a complete seamless electronic ordering. And we feel that when we launch our blood test, we will have a competitive advantage.
Now, we have run 3,000 study sample to lock our final algorithm. We are really, really excited to be able to share that data. We’re going to share that here in the coming weeks. And we’re going to do that at a scientific conference. We here at Exact Sciences, again, feel that it’s important that we develop our tests the right way and then we share that in the right forum. And so, didn’t want to do that on our earnings call. Wanted the focus of that, to be on the strength of the underlying business, the strength of the quarter, the margin expansion, the cash generation, and give our science team, our R&D team, that put in all sorts of effort to bring this product to market the opportunity to share that at a scientific conference. So stay tuned on that. We’ll share that data in the coming weeks.
Brandon Couillard
Hate to pin you down, but coming weeks might suggest some time by the end of October rather than later than that, which you talked about – Kevin talked about October. It’s still valid or still holds?
Aaron Bloomer
Yes. Yep. So there’s several scientific conferences in the coming weeks. And we will be sharing that 3,000 sample population data at that scientific conference.
Brandon Couillard
Real quick, when do you expect to publish data on the entire 20,000 BLUE-C samples? Should we still expect that by the end of the year? And should we expect some level of degradation relative to – although case control is the right term for it, but this initial 3,000 data set?
Aaron Bloomer
Yeah, what we have said is that we plan to share the data on the full BLUE-C population by the end of the year. And, ultimately, when we share the data at a scientific conference, we will make sure that we give a holistic update on our entire blood-based program, which again, we are very, very excited about sharing that data. You’d ask the follow-up question too.
Brandon Couillard
Just about, should we expect some degradation…
Aaron Bloomer
Oh, degradation, yeah.
Brandon Couillard
…in the performance as you go to a population sized pool?
Aaron Bloomer
Yeah. So again, here at Exact Sciences, we’re really proud of the work that our R&D and science team have put in to run tests the right way. And we’ve learned a lot as we’ve done trials and case control studies over the course of the last decade about how to do them. And without getting into the secret sauce of what all that entails, we are confident that we would not see really significant degradation at all between what we release in our algorithm study and what the final BLUE-C readout would be.
What’s interesting actually, if you look at Cologuard Plus between case control and the final readout that we saw with BLUE-C, there was actually an improvement in overall performance that we saw. I’m not advocating that we will see an improvement with our blood data, but I think it again just speaks to here at Exact Sciences how we go about running trials and studies.
Brandon Couillard
Got you. Switching gears real quick. MRD, what attributes are you designing your MRD test around? You’re also planning to release data. Is sensitivity as critical here as it is for screening? And will you add reps to support that launch in 2025, or will you fold it into the existing oncology team?
Aaron Bloomer
Yeah, we are unbelievably excited to not only help patients, but really enter the MRD marketplace. It remains a significant opportunity. It’s very, very low penetrated today. Think like 5% to 10%. We will be releasing data later this year starting on CRC. And then we will release data on breast sometime next year. So think launch in CRC sometime early part, middle part of next year. And then in breast, maybe late next, late 2025, early 2026.
Speaking on sensitivity versus specificity when it comes to MRD, it depends on when. And so, when you take that first tissue block, what matters most in the first baseline readout is actually sensitivity. And the reason for that is because if you’re an oncologist and you’re sitting there having to decide whether or not you send a patient to chemotherapy or not, if you look at the tests that are out on the market today, they’re in the 50 percentile range in terms of overall sensitivity.
And so, if you’re an oncologist, again, at that level of sensitivity, what we’ve heard from them, are you ultimately going to not send someone to chemotherapy when it’s maybe just a little bit better than a flip of a coin? So they want to see that initial cancer sensitivity come up. Over time, what matters as you’re going into recurrence monitoring is specificity.
Brandon Couillard
In the one minute we have left, two questions. Is Exact done with tuck-in M&A right now? Are there any areas that you’d like to fill? And number two, just talk about the key drivers of taking gross margins, which are already pretty good, low 70s today, toward that 80% plus target over time.
Aaron Bloomer
Yeah. So, from an M&A perspective, we’ll continue to look at opportunities that are out there. We obviously want to make sure that it’s the right financial profile, that it’s the right culture fit, and ultimately it’s going to be additive for us to our overall portfolio growth as well as bottom line performance. So we’ll continue to actively manage our portfolio. And again, the strength that we have in our balance sheet, we’re confident we’re going to have the ability to do that.
With respect to margins and just maybe in closing on that, we’re really, really excited about where we’re at from an overall adjusted EBITDA margin perspective. Again, the guide we put out there is 20% plus by 2027. We’ve seen significant leverage on sales and marketing, R&D, and the area probably most exciting is on G&A and the opportunity in front of us on there to really meaningfully add to margins while reinvesting back in the business.
And on gross margins, look, yeah, we have industry-leading gross margins. It’s important for us to keep that north – well north of 70% that really allows us to be able to reinvest back in the business and continue to fuel growth.
Brandon Couillard
Super. Unfortunately, we’re out of time, so I have to leave it there. Aaron, thanks so much for being here. Everybody have a great day.
Aaron Bloomer
Brandon, thank you.
Question-and-Answer Session
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