Exact Sciences Corporation (EXAS) Earnings Call Transcript

All right. Good afternoon. Welcome to the Wells Fargo Healthcare Conference. I'm Brandon Couillard, cover life science tools and diagnostics. It is a real pleasure to have Exact Sciences back with us at the conference this year. Joining us for this conversation, CFO, Aaron Bloomer as well as Derek Leckow, new Head of IR in the audience. Aaron, thanks for being here.

Thanks so much for having us. Great to be here.

Never short of things to talk about when it comes to Exact. We'll get to all those things. I do want to just kind of focus on maybe to start with fundamentals in 2Q, which were kind of overshadowed by Freenome from which we'll get to, of course, Cologuard growth accelerated for the second straight quarter, you're up like 18% year-over-year. Guide implies you kind of exit the year at a high teens clip. Cologuard Plus pricing is part of that. Can you just kind of unpack the drivers of that acceleration, different programs and buckets and sustainability of each of those would look at kind of the next few quarters.

We're really pleased with the progress that we've seen in terms of driving increased Cologuard adoption and getting more and more patients screened for CRC. This is part of the broader network effect that we've built over the course of the last decade, whether that's our field force, which we've built up our record number of ordering providers, we have more than 250,000 providers now that order Cologuard in any given quarter. We have an EMR connection with more than 50% of physicians in the country, including all of the largest health systems. It's the power of our brand. We've invested a lot in driving awareness for Cologuard by investing in our brand. That's taken a decade to build. And I think you're kind of seeing the culmination of all of that really start to play out here in the second quarter and what we're guiding to in the back half of the year. If you look at what's kind of driving the growth, it's kind of equal parts contribution from 3 different areas. First is the power of our commercial organization. Those that are out in the field every single day, calling on physicians. We made a number of changes late last year, which went into effect in December. We were really pleased with the improvement we saw in terms of sales force efficiency in the first quarter. That allowed us to raise guidance early on in the year. Reps were making more calls than they were a year ago. We gave them additional kind of targeting tools, segmentation powered by AI and all of the data that we have. And that drove 20% more calls from our reps in Q2 than what we saw in Q1. That's a big part about what's kind of driving the underlying growth and momentum in Cologuard. The second is our Care Gap programs, where we're partnering primarily with payers, but also with health systems at record levels of breadth and depth. And so we're working with even more payers this year, and we're working with them on even greater order volumes. We're trying to help them close gaps in care and the message that's really resonating with them is get ahead, stay ahead. And so we're displacing these FIT programs that they've been running for many years. We drive 3x the amount of quality credit. Cologuard gets 3 years credit, FIT gets 1 and then 3x the level of adherence. So more and more patients do a Cologuard than complete a FIT test. And then the last area that we're really continuing to see accelerated growth in is with our rescreens. So once we get a new patient into Cologuard, whether that's from our commercial sales force or from our Care Gap initiative, they're then become part of our rescreen funnel, and we continue to get better and better at getting these patients rescreened. This is, I think, roughly a $500 million business a year ago. If you just look at the number of patients eligible for a rescreen over the course of the next 5 years, that's going to continue to grow at a 30% per year clip without any improvement in the adherence bucket. And so the thing that really has us pleased what we're seeing this year is it's broad-based growth, the commercial organization, the Care Gap initiative and rescreen.

I want to drill into 1 of those real quick on Care Gap. So you said it was $125 million revenue last year. I think it grew 2x last year, if I'm right. How big is that this year? And how does this business go towards $500 million plus next 3? How big can it be looking out?

So what we said was it was more than $125 million last year, and you are right, it was growing triple digits last year. We're really only about 2.5 years into this. We're learning a lot along the way, the importance for the payers in achieving their quality measures continues to go up in terms of CRC screening. And so we just continue to see increased adoption with the payers, again, partnering with more payers at much increased steps. When we were working with them last year, that was, I think, a bit of a trial, right? They wanted to see how we would perform with a small subset of their members relative to FIT. Obviously, they've been very pleased with the success thus far and are now engaging with us at even greater levels. We're not sizing it exactly this year, Brandon, but just to say that it's providing a meaningful leg of growth for us. What we have said is that in the near to midterm, we see this becoming a $500 million opportunity. We're obviously well on our way towards achieving that, with the opportunity to potentially exceed $1 billion. And that's -- the big unlock there would be improving the adherence. The kit return rate or adherence on these Care Gap initiatives is still in the 25% to 30% zone. And so we're trying to engage with payers now to be able to turn on more of our compliance engine and demonstrating data now that we have, we've partnered with a certain payer or set of payers where we're able to engage with them more frequently and able to use our whole digital tools, right, text messages, e-mails, phone calls, et cetera, versus maybe only a handful of engagements and many of those being snail mail, which are far less effective.

I think your overall compliance rate, correct me if I'm wrong, maybe 75% in terms of returned kits. You just said Care Gap is 25%. So 1/3 of the core business, how much of that volume are these patients getting any text, any calls? Are you applying any of the compliance engine today? And what's the bigger lever to getting to $500 million? Is it turning on compliance? Or is it expanding the number of partners and relationships?

So our overall adherence, you're close, it's actually 65%, not quite at 75%. We're working our way towards getting there, Brandon, particularly with 3 screens. But on the Care Gap side, look, we're showing the payers the data that when we're able to engage more frequently with patients in the way that we know works, that we can show where we've partnered with payers and can drive adherence north of 50% versus some of the other programs that limit the number of touch points and then you end up with something even less than the 25% to 30% that we see on average. And so again, we're still in the early days of this program. We're learning a lot, and I think we'll be able to kind of demonstrate to the payers which ones are going to be the most effective moving forward. To get to $500 million. I mean I think we can just do there by increasing the breadth and depth with the payer relationships. And then the big unlock, doubling that would be if we can take adherence from 25% to 50%, all of a sudden, overnight, you can have a doubling of the business.

You called out last quarter a bolus of Care Gap orders that were shipped late in Q2. That drove, if you exclude that, gross margins would have been up sequentially and year-over-year as opposed to being down more materially. Do you expect to convert that to revenue in the third quarter? And do you expect a similar kind of bolus of orders in 3Q such as like gross margins might not improve that much sequentially?

That's exactly right, Brandon. So if you look at when we ship most of these large care gap orders, it happens kind of late in Q2 and then especially in the third quarter. The orders that we shipped out late in Q2 we will get revenue from that in the third quarter primarily. And then we would expect another large bolus of really big program orders based off of the pipeline that we're managing with the payers, which will obviously hit us on the COGS side in Q3, then we'll have an influx in positive gross margins in the fourth quarter. On balance for the full year, we still expect gross margins to expand for the full year.

Got you. I want to touch on Cologuard Plus for a moment. You've had Medicare fee-for-service coverage since the launch, I think, back in March. You talked about you've picked up Humana, Centene, so you're seeing some, I'd say, earlier-than-expected conversion for commercial payers. What's the pathway to getting the rest of the commercial payers on board? How long will that process take? And how much is that -- is ASP contributing to growth in the back half?

So we've been really pleased, again, with -- it starts with the science that Cologuard Plus brought, 95% cancer sensitivity, 94% specificity, which was a 40% improvement in the false positive rate. So that's -- we go in with really good data and then the other thing we go in now is the relationships that we've established with the quality teams inside the payers from doing these Care Gap programs. And so we're in an entirely different spot than we were, say, a decade ago when we were launching Cologuard just in terms of overall payer acceptance of Cologuard, but not only acceptance actually driving it to help close gaps in care. And so we've been very pleased to have 2 of the top 10 payers. There's 2 things that have to happen. First, before you can do contracting is you have to have a positive coverage decision which we highlighted now, 8 of the top 10 payers have done their positive coverage decision, and we'd expect to get the other 2 yet later this year. That then allows you to go on to contracting. And we're bringing with their quality teams into those contracting discussions and we're really adopting the philosophy that we've always had, which is no one should get a better price than Medicare. And with Medicare, we're now at $592 through the clinical lab fee schedule. And that's -- with this new product that's at a 16% increased value relative to what we have with Cologuard. So we'll continue to make progress with the other top 10 payers. We look to exit this year with contract already signed with just north of 20% of our total volume being on Cologuard Plus. At some point, we're going to sunset Cologuard. We have to get a few more of the top payers signed, which we expect to get done. And then at some point, we look to transition with the goal of being fully on Cologuard plus in 2027.

So I guess, how do we think about the pricing contribution or the ASP phasing from Cologuard Plus in '26? And what would the tailwind be next year if you fully sunset Cologuard 1.0 by the end of calendar '26?

So what we've seen so far this year and kind of what's implied in our guide Q2 through the back half of the year is about 200 basis points of growth coming from pricing from the increased value that we're seeing with Cologuard Plus. Obviously, that will accrue to even more of a tailwind next year, just given the recent contracts that we just signed, really don't really start to take effect until kind of in the fourth quarter. To the extent we're able to sign even more of the large payers here before the end of the year, that will obviously then inform what our guide looks like for next year as it relates to total top line growth and pricing benefit. But overall, between now and 2027, we would certainly expect to see that increased value that we got via the clinical lab fee schedule to be able to drive that through our total book of business and will be a meaningful tailwind to revenue in the combination of '26 and '27. How that phasing looks like, we'll be able to speak more intelligently on that when we give our 2026 guidance in February.

Okay. Last one on this, is Cologuard plus accretive to gross margins yet? Just remind us the delta in COGS per test, let's say, its scale between 1.0 and 2.0.

So as we scale, we'll see efficiencies just from having fewer markers, so less lab processing time. That being said, in the early days, we are running both Cologuard and Cologuard Plus. So we're not really seeing any of those costs benefit flowing through the P&L right now. .

Okay. Any color just on COGS per test difference in...

You had it about right, yes, it's about 5% lower.

Okay, 5%. Got you. All right. Shifting gears. The Freenome deal got all the attention on 2Q from the outsider's perspective, you published your data, it wasn't that great, fine. It looked like that you had pivoted in a sense of urgency, right? In a sense of desperation to Freenome. Is that interpretation incorrect? How long have you kind of been in discussions with having a Plan B? And what are investors missing about kind of the whole partnership in general? Why is that initial reaction kind of misguided?

First of all, yes, that assumption was incorrect. So we've been working with Freenome since early this year where they had the opportunity to share some of their V2 data with us. That is ultimately what got us engaged and excited about a potential opportunity and partnership. They were obviously looking for a broader commercial partner for both their V1 and eventually their V2. But what it really did was allowed us to do diligence over a series of months and really get comfortable with the quality that they did with their pivotal study with PREEMPT and really the power that a company like Roche brought after they got involved and invested in Freenome from a regulatory, from a clinical, from a quality management perspective. And that really gave us comfort around their path forward with V1. They've submitted their final module for FDA approval. It's a PMA submission. So I would expect approval sometime later next year, but then also their pathway forward for V2. And so that's kind of the reason of the why behind it. It also gave us access to a test 12 to 18 months earlier. And so I think one of the maybe misunderstood parts of the deal and kind of as people have had more time to digest, what has us really excited is we view this as a test that's going to be additive and complementary to our existing portfolio. It's going to add to both the top and bottom line, and we're going to be able to really showcase the power of this network effect that we've built over the last decade. It starts with the brand of Cologuard and not only our CRC blood test but also now Cancerguard, our multi-cancer test, which we're launching here in the fourth quarter. Our commercial organization, the many, many people around the country that are out there calling on physicians every single day, the depth of the relationships that we've built, not only with payers but also with health systems. The EMR connectivity, the brand, like all of these are things that we're going to be able to bring together, and we're really looking forward to being able to go in and sell this test and to be able to compete. And importantly, too, is data. So we know patients right there have refused Cologuard or colonoscopy. And if you look at the publications that have come out, AGA recently came out and reinforced this that blood tests just based off of the performance really should be meant for those that refuse a Cologuard or refuse a colonoscopy. And that's who we're going to go and target this test with.

When do you expect Freenome's V2 subset readout to hit the tape? And what data were you able to kind of preview in the diligence process. I mean it seems like you've gotten some sense of where V2 performance might land.

We had the opportunity to do deep diligence on not only their V1, but also their V2. We are able to see a prospective hold out and kind of head-to-head comparison on a prospective set of samples from their PREEMPT study on V1 versus which obviously is something that I think we're looking forward to, Freenome's looking forward to. We put in teeth into the agreement. So there's a future milestone tied to V2 that it has to achieve at least 83% CRC sensitivity and greater than 19% advanced adenoma detection which is important because advanced adenoma detection of the existing blood tests, the V1 and others that are on market is still too low. And so trying to get a blood test that would be somewhere in the north of 20%, we believe would be meaningful and something that why we tied a milestone payment to that. And so to answer your question on timing, they look to share it at an upcoming scientific conference. They have the data. They want to make sure they announce it in a scientific conference.

Sometime in the second half?

Sometime at a scientific conference in the near future.

Got you. Okay. What is your house view on the size of the blood market? I mean there's 55 million unscreened average-risk Americans, I think, so far. It seemed like maybe all of those perhaps will be candidates? Just what's your assessment of just the size of the TAM for blood test specifically?