EXACT SCIENCES CORP Q3 FY2022 Earnings Call

Good evening. My name is Colby and I will be your conference operator today. At this time, I would like to welcome everyone to the Exact Sciences Third Quarter 2022 Earnings Call. I will now turn the call over to Megan Jones.

Thanks, Colby, and I thank all of you for joining us for Exact Sciences Third Quarter 2022 Conference Call. On the call today are Kevin Conroy, the company's Chairman and CEO; and Jeff Elliott, our Chief Financial Officer and Chief Operating Officer. Everett Cunningham, our Chief Commercial Officer, will also be available for questions. Exact Sciences issued a news release earlier this afternoon detailing our third quarter financial results. This news release and today's presentation are available on our website at exactsciences.com. During today's call, we will make forward-looking statements based on current expectations. Our actual results may have material differences from such statements. Discussions of non-GAAP figures and reconciliations to GAAP figures are available in our earnings press release, and descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings. Both can be accessed through our website. I'll now turn the call over to Kevin.

Our third quarter results demonstrate the strength of our business and the unique platform this team has built to engage patients and physicians. Together, we're working to help fewer people turn into cancer patients and improving care for those who do. During the quarter, we had record revenue of $523 million or 20% growth, excluding COVID-19 testing. We're raising our full year revenue guidance by $33 million, while decreasing our operating expense guidance by $113 million. We're also pulling forward adjusted EBITDA profitability to the third quarter of 2023 from our previous target of 2024. We're building an unstoppable engine that will allow us to achieve our vision to help eradicate cancer. Our differentiated approach starts with world-class science and scientists rigorously developing tests to solve real patient needs. When launched, these tests are immediately supported by our sales and marketing teams with broad reach and deep relationships. Our well-known test, sophisticated patient navigation, electronic ordering and resulting platform, expansive lab capabilities and deep payer relationships will support new cancer tests with modest incremental investment. This fuels revenue growth and profit generation, which we'll invest in better cancer test and solutions for patients. As we quickly approach profitability, this engine is set to gain momentum with each new test dropped into the platform. Additional highlights from the third quarter include delivering 960,000 total tests, including a record number of Cologuard and Oncotype DX results to patients; improving our adjusted EBITDA loss by more than 70% from last quarter and 86% from the first quarter; launching an innovative Cologuard collection kit to give patients more time to get their samples back to our lab; displaying the power of our multi-cancer early detection approach at the European Society for Medical Oncology Congress; and making our hereditary cancer test, Riskguard, available to oncologists through an early access program. Jeff will now review our financial results.

Thanks, Kevin. Good afternoon. Third quarter revenue grew 15% to $523 million or 20%, excluding COVID testing. Screening revenue increased 29% to $361 million, including 3 points of growth from prevention genetics. 10,000 new health care providers ordered Cologuard during the quarter and more than 292,000 have ordered since the launch as of September. Precision Oncology revenue grew 4% to $151 million or 9%, excluding a $2.9 million FX headwind and the sale of our prostate business. COVID testing revenue decreased 64% to $11 million. Third quarter GAAP gross margin was 68%. Non-GAAP gross margin, which excludes amortization of acquired intangibles, was 72%. This was slightly better than expected as the team found ways to partially offset inflation. Adjusted EBITDA was a loss of $13 million, an improvement of $33 million from last quarter. We ended the quarter with cash and securities of about $670 million. Our total liquidity is about $900 million, including our available credit facilities. During the quarter, we extended our $150 million revolving credit facility by 2 years to 2025. We also have up to $100 million available on our accounts receivable facility. We have made significant progress on our goal to generate positive adjusted EBITDA. Thanks to our heightened focus from our team, we now expect to generate positive adjusted EBITDA starting in the third quarter next year, ahead of our previous target of 2024. The attractive financial profiles of Cologuard and Oncotype DX allow us to continue investing to support growth, drive efficiencies, and generate profits sooner than expected while maintaining a strong cash position. Turning to our guidance, we now expect total revenue between $2.025 billion and $2.042 billion for the year. This assumes screening revenue between $1.375 billion and $1.382 billion, including PreventionGenetics revenue between $40 million and $42 million; Precision Oncology revenue between $595 million and $600 million, including a $2.9 million fourth quarter FX headwind based on current rates; and COVID testing revenue between $55 million and $60 million. Moving to annual operating expense guidance, we're lowering sales and marketing expense by $45 million and now expect between $825 million and $845 million. We're seeing significant leverage in total sales and marketing and now expect expenses to decrease about 3% year-over-year while delivering more than 25% Cologuard growth. We're also reducing our G&A expense by $30 million and now expect between $740 million and $760 million. We expect R&D expense to be between $390 million and $405 million, a reduction of $38 million. The team is becoming more efficient by prioritizing our highest-impact projects and reducing plan hiring. We continue to expect CapEx of about $200 million. I'll now turn the call back to Kevin.

Thanks, Jeff. Cologuard is becoming synonymous with colorectal cancer screening. It is standard of care because it is accurate, it's a convenient at-home test. It's included in all major guidelines, quality measures, and nearly universally covered by insurance with no cost to the patient. Proof points that Cologuard is becoming a preferred screening standard include nearly 10 million people who have completed the test. More than 150,000 health care providers ordered it during the third quarter, a new record. We saw a 25% increase in orders from the first week of August to the last week of October, and its Net Promoter Score has nearly doubled since early 2021. The longer a health care provider has been ordering Cologuard, the more ingrained it becomes in their practice. Excluding COVID disruption, every cohort of new providers orders more Cologuard tests each year. Since the start of last year, we have added 65,000 new ordering health care providers, and we expect them to follow a similar trend, increasing their order rate every year. We pulled forward a major benefit of our next-generation Cologuard by launching an enhanced collection kit in September. Our talented team of scientists developed a new protein preservative to extend sample stability by 33%. This provides patients more time to ship their completed Cologuard kits back to our lab before the sample expires. We expect this to increase completed tests by more than 1 percentage point next year, improving Cologuard revenue and margins. Exact Sciences's scale and reach with a 1,000-person primary care sales and marketing team and millions of touchpoints with patients and providers each year will power our continued leadership in colorectal cancer screening. We'll lead with an intense focus on what is best for each patient. Colorectal cancer is the second leading cause of cancer death in the U.S., with more than 151,000 new cases and 53,000 deaths annually. As screening rates increased over the last 20 years, incidents and mortality rates decreased by 35% and 40%, respectively. The most effective screening tools help prevent the disease by detecting pre-cancer before it turns into cancer. Detecting pre-cancers contributes 2/3 of the life years gained through screening, and early-stage cancer detection provides most of the rest. That's why we developed Cologuard, and it's making a difference. Because it detects 42% of all pre-cancers and 69% of advanced pre-cancers and 94% of Stage I and II cancers, we estimate it has helped nearly 315,000 people with pre-cancer and 46,000 with early-stage cancer. About 90% of people 45 and older see a Cologuard advertisement once a week. Our sales team meets with physicians and their staff a million times per year. We will use each of those touchpoints to make sure patients and providers understand Cologuard is the superior non-invasive test and the appropriate role blood tests should play. Oncotype DX provides the groundwork for Exact Sciences to guide a cancer patient's every step. We're using its powerful brand and our deep oncology relationships to introduce new products like our hereditary cancer test, Riskguard, which helps people understand their inherited risk of cancer and the genetic makeup of their tumor, arming them with critical information to make better treatment decisions. Next year, we plan to offer additional genomic tests to patients, oncologists, and our biopharma and academic partners, including minimum residual disease and enhanced therapy selection with RNA analysis. Combining information from our tests at different stages of cancer treatment will provide a more complete picture of each patient's disease. Our multi-cancer early detection data presentation at ESMO in September demonstrated meaningful progress toward our goal to bring the best multi-cancer blood test to patients. Combining four biomarker classes and different technologies in a large well-designed case control study, our test detected 61% of cancers at a 98.2% specificity across 15 different organ types, including 11 with no screening option available today. Adding curated DNA mutation markers detected by next-generation sequencing to methylation, aneuploidy, and protein markers improved stage I and II cancer detection by 35%. Next, we plan to complete a larger case-control study to further optimize the test, finalize its design, and then start enrolling SOAR, our prospective interventional trial to support FDA approval. Exact Sciences is uniquely positioned to support the two biggest patient needs in minimum residual disease and recurrence monitoring in breast and colon cancer. We have relationships with most oncologists in the U.S., and about 170,000 early-stage breast cancer tissue samples are sent to our lab each year. Each sample represents a person who could benefit from a minimum residual disease test. Screening millions of people every year with Cologuard puts Exact Sciences in a leading position to help those likely to develop colorectal cancer and improve outcomes for those patients. We're the only company planning to offer tumor-naïve and tumor-informed tests, allowing oncologists to use the best test for each patient with one lab partner. We plan to share marker discovery data supporting our tumor-naïve approach in breast cancer at the San Antonio Breast Cancer Symposium in December. We also expect to present results of our tumor-informed and tumor-naïve approaches for colon cancer at ASCO GI in January. Exact Sciences has the right team, a unique financial profile, and the broadest and strongest foundation in cancer diagnostics. Continued execution from the team, over 70% gross margins, a clear path to profitability next year, and a leading presence in cancer screening and precision oncology put us in the best position to eradicate cancer and the suffering it causes. We're now happy to answer your questions.

Your first question comes from Brandon Couillard from Jefferies.

I'll stick to one question. Kevin, the OpEx cut to the full year outlook is pretty substantial. Can you just elaborate on exactly where that's coming from, whether it's headcount or other programs?

Well, I think it's a broad-based continued focus by all of our employees from the front line to the leadership team of making sure that we deliver on our promise that we made several quarters ago of rapidly moving the business to profitability. I believe Jeff will have more color.

Yes. Thanks, Brandon. The team has just done a really good job of focusing on the highest impact programs across the board. And when you talk about sales and marketing, they're just doing a really nice job making sure we target the right physicians and allocate finances appropriately across all of the various marketing levers we have to pull. I think what you're really seeing here is a turning point. We've talked for years about the platform that we have built over time. And this has been a significant investment. But now you're really starting to see the part of this platform. As Cologuard grew, we grew 25% in the quarter, but sales and marketing was down 5%. Over time, it's clear where this is heading with that foundation in place. And two very strong profitable brands on the market now and growing; this is going to turn into a cash flow generating machine over time.

Your next question comes from the line of Derik De Bruin from Bank of America.

So can you talk a little bit more about physician access? That had been an issue during prior quarters. Can you sort of talk about the metrics, sort of where we are, penetration, access there? And then just anything on sort of what's happening with the Precision Oncology business, OUS, any sort of slowdowns in demand there? Do macroeconomic issues sort of kick in?

Everett, why don't you take the access question? And Jeff, if you would take the Precision Oncology questions.

Thanks, Kevin. Good afternoon, everyone. Thanks for the access question. We're seeing modest improvements in access, but the access is not back to pre-COVID levels. What I do like about our commercial organization is that we're deployed very smartly across all of our geographies. We're targeting the highest regions to drive the largest growth for Cologuard. Our representatives across the board have really good data in terms of knowing where to target and when to target. Each month that we're in our revised structure, we get better at ensuring that we're making high-quality calls. I look at and my team looks at the calls that we make, not just the quantity of calls but the quality of calls, and quarter-over-quarter, we're getting better. So while the access is just showing modest improvement, the activity of our field force is much more efficient.

Derik, this is Jeff. I'll take the PL one. So globally, we had a good quarter in Precision Oncology. If you adjust for FX and the sale of the prostate business, that core growth was about 9%. What we got there was international growth of about 26%, again, adjusted for FX. So really strong growth outside the U.S. You're seeing improved insurance coverage outside the U.S. You're also seeing very strong uptake in the node positive indication. And then when you look at next year, I expect that momentum will continue. We're on track to launch in Japan early next year. So good momentum will continue for the international side of the business. In the U.S., another really steady quarter with mid-single-digit growth and balanced contributions from the Oncotype Breast franchise as well as the therapy selection business, which is becoming a much bigger part of overall Precision Oncology.

Your next question comes from the line of Catherine Schulte from Baird.

I think on one of your slides, there was a graphic showing 30 million patients screened by Cologuard by what looked like 2027. Did I read that correctly? And can you just talk to what kind of assumptions go into that outlook?

Catherine, you did read that right. It's at least $30 million. And what we did to get there is as we look at the model that we have and all the broad momentum we have that Everett and team are driving across a growing base of providers. Kevin talked about a record number of new order providers in the quarter: over 150,000 ordered during the quarter. We're seeing a deepening of the utilization as Cologuard gets more ingrained in their business. And over time, we expect that growth to continue when you consider the size of this market and the fact that as many as 60 million people remain unscreened today.

Your next question comes from the line of Jack Meehan from Nephron Research.

Kevin or Jeff, it's that time of year. Everybody is very focused on 2023. Good to see some of the momentum in the quarter and on the order commentary in the year-end. I was just curious if there were any thoughts you could share around kind of positioning into 2023. I caught the profitability comment by the third quarter, but just how are you feeling about the business in the new year?

Well, this is Kevin. I am thrilled, first of all, that there is something different about what's going on with Cologuard now than ever before. You've seen our Net Promoter Scores double from the low 20s in the first quarter of '21 to the low 40s this last quarter. Awareness of Cologuard as a brand is at an all-time high among consumers, relevant consumers, and health care providers. Reorder rates are at all-time highs, and the number of tests ordered per physician are at all-time highs. Cologuard is gaining momentum, and it feels that it is being used more frequently among physicians, who are very slow to adopt new technologies and change. We've always said that a primary care launch is more like a jumbo jet than a rocket ship. And what you're starting to see is that it's becoming broader. Our Cologuard's utilization is deeper among the physicians who are using it. The interesting data point is that we continue to add about 10,000 new ordering health care providers per quarter. And so much of this is driven by two incredible teams: one is a marketing team that we think has mastered both television advertising and digital and consumer, as well as a sales force that has just continued throughout the pandemic, and now beyond, to continue to educate health care providers, physicians, and increasingly now, nurse practitioners, to order Cologuard and how it should be used in their practice. So something is changing.

Yes. We usually provide guidance during our fourth quarter call in February, and that is still our plan. Looking ahead to next year, I believe the momentum we are experiencing in Q3 and that we anticipate for Q4 will carry over into the next year. As Kevin mentioned, we are very optimistic about the long term. There are a few important factors to consider. Regarding physician office access, as Everett noted, it has not yet returned to normal and remains somewhat limited. Our team has done a great job adapting to this situation, but it's something to consider for next year. Additionally, our rescreen business has been a significant growth driver. However, when we look at the pool of patients becoming eligible next year, we expect to see a comparison with the COVID years, leading to flat growth year-on-year in that area. I believe rescreens will continue to grow next year, but the incremental growth will be less than in the past. Finally, next year will also see the full effects of the Medicare sequester that started midyear. This will reduce Medicare reimbursement across the board, so we will experience a full year of that impact next year. These are important points to keep in mind. We will provide complete guidance during the fourth quarter call. We remain very optimistic.

Your next question comes from the line of Andrew Brackmann from William Blair.

Maybe we could start just given some news that's sort of expected in the next handful of weeks in the space here. Kevin, can you just sort of level set us again sort of on the role pre-cancer detection should be playing in these tests? I think you reiterated some prior commentary about 2/3 of the benefit is coming from pre-cancer. So can you just maybe give us a level set on how you're thinking about that again?

Yes, sure. Thanks. So first of all, there is an enormous amount of room to improve screening rates. Sixty million out of 110 million Americans in the screening population with ages 45 to 85 remain unscreened today. So there is just an enormous opportunity to get people up to date in their screening. We believe that our blood test is going to play a role in improving rates. But to date, our test, we haven't shown data, and there is no prospective data showing pre-cancer detection to be that similar to the FIT test, which is 24%. And I go back to when we started 13 years ago with Cologuard, one of the most important things we focused on was the detection of precancerous polyps, which take 10 to 15 years to turn into cancer. With multiple attempts at screening, you can actually prevent the disease. If you look at the drastic drop-off in cervical cancer mortality in the U.S., it's not because the pap smear found cancer; it's because it found the precancerous lesions that lead to cancer. And that's where you've seen mortality drop from 45,000 women a year to 4,500 or thereabouts. The goal of any screening test should be to find pre-cancers and then detect Stage I or II cancers at a high rate. We know that colonoscopy is good at finding Stage I and II cancers. Cologuard detects 94% of Stage I and II cancers. Blood tests aren't going to detect 94% of Stage I and II cancers. If you look at that population-wise, if you see 100 people screened with Cologuard and a blood test, there may be, I don't know, 10 people who Cologuard would find but a blood test wouldn't. That's why finding those stage 1 and 2 cancers is critical. The blood test will have a role. Now there may be a challenge in getting blood tests into the guidelines because, again, they look at modeling, and the modeling that is done, 2/3 of the life years gained comes from pre-cancer detection. There are going to be some challenges here. Without getting into the guidelines, you don't get into HEDIS or Stars quality measures, and without that, it's really difficult to launch a test. There's going to be a number of years before all of this plays out. We plan to share data that we have generated, including more recent data on our blood-based CRC test. I just want to remind people that the huge investment that is required to participate as a serious player and provider of colon cancer screening tools. We have invested about $4 billion today in our patient engagement engine, in our commercial team, in our 320,000 square feet of lab space, and really importantly, in the 250 health system connections using Epic to electronically order Cologuard and get results. This is a really important goal to get more people screened. I wanted to make one other comment: we've recently gotten feedback from the FDA on our blood test. They have been clear, like they were clear with Cologuard, that there is an expectation around pre-cancer detection. They have stated there is a certain expectation around sensitivity for detecting cancer, for detecting pre-cancer, and also for specificity or the false positive rate. Those are three critically important metrics that will come out of our blood CRC study. These are serious scientific things that still need to be established, and we look forward to sharing our data with you at the completion of our study.

Your next question comes from the line of Matt Sykes from Goldman Sachs.

This is Dave on for Matt Sykes. Can you tell us more about what drove the Oncotype outperformance in the quarter?

Yes, this is Jeff. I'll address that. Previously, I mentioned the strong growth we've experienced outside the U.S., which is up 26% when adjusted for foreign exchange. That's certainly a contributing factor. Additionally, we're noticing significant momentum in the node positive indication. This is the newer indication that emerged from the responder data released a couple of years ago, and we're seeing excellent uptake there. Furthermore, I believe it doesn't receive enough attention, but we have a substantial therapy selection business that is gaining traction. We plan to launch another product in that area early next year. Overall, I would describe it as a broadly positive quarter for that team.

Your next question comes from the line of Vijay Kumar from Evercore.

Congrats on the steady execution here. Maybe my question here on the cash flows, Jeff. This is a pretty impressive quarter in terms of cash burn rate. Are we now looking at Exact Sciences exiting fiscal '23 perhaps being cash flow neutral to positive? How should we think about operating expenses? And maybe just give us some color, Jeff, on what changed. Is this a function of Exact holding back expenses? And is that going to come at the cost of revenue growth or are these structural changes which are sustainable?

Thanks, Vijay. As Kevin talked about, it's not either or; it's growth with efficiencies and a focus on profitability. I don't think this is a shift or change in the business. We've been talking for years about building the foundation that will not only get us to profitability but allow us to punch through and continue to generate improving margins, steady cash flow generation for years to come. I think we're at that turning point now, and you're really starting to see that fall through. As far as next year, we're excited to pull ahead the EBITDA profitability on a free cash basis, likely lags that a little bit. What's helping recently is that we've had some really nice improvement in working capital management. You see DSOs down 16 days year-on-year. Inventory turns continue to improve. The team has done a really nice job with a heightened focus on profitability and cash flow.

Your next question comes from the line of Kyle Mikson from Canaccord.

Alex Vukasin online for Kyle Mikson. Congratulations on the quarter. And one brief question for you. So there's probably little value baked into the stock really for multi-cancer, MRD, and liquid biopsy tests. Why don't you think investors are taking these assets seriously? And what are you going to do to reinvigorate excitement in these promising potential long-term growth drivers?

This is Jeff. I'll address that question, and Kevin may have additional insights. We are dedicated to executing our business strategy, focusing on Cologuard and Oncotype to ensure we have a solid foundation. Currently, we are in an intensive phase of data analysis for our pipeline. We began this year with impressive results for Cologuard 2 and presented more data on our MRD program at ASCO. In September, we shared promising results from our NSABP program. Looking forward, we anticipate a continued flow of strong pipeline data. This month, more findings regarding our NSABP program will be released. Next year, as Kevin mentioned, we expect key data readouts starting with BLUE-C and findings from our colon cancer blood program. In the long run, we believe that as investors understand the potential of our pipeline, their optimism will grow. We are confident that we can maintain success with our core programs while also achieving significant growth across the pipeline.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.