EXACT SCIENCES CORP Q4 FY2023 Earnings Call

Good afternoon, and welcome to the Exact Sciences Fourth Quarter 2023 Earnings Call. Please be advised that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Mr. Nate Harrill, Vice President of Investor Relations. You may begin your conference.

Thanks, Jeanne. Thank you for joining us for Exact Sciences fourth quarter 2023 conference call. On the call today are Kevin Conroy, the Company's Chairman and CEO, and Jeff Elliott, our Chief Financial Officer. Everett Cunningham, our Chief Commercial Officer, and Brian Baranick, our General Manager of Precision Oncology will also be available for questions. Exact Sciences issued a news release earlier this afternoon detailing our fourth-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 be materially different 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.

Thanks, Nate. 2023 was another record-breaking year for Exact Sciences and our fourth quarter results set the tone for an impactful year ahead. A special thanks to our team for testing a record number of people during the quarter with our established brands Cologuard, Oncotype DX, and PreventionGenetics. We've built an unrivaled platform that will allow us to achieve our purpose to help eradicate cancer. We're hosting today's call from our San Diego R&D Center. Our talented scientists are harnessing the power of DNA, RNA, and proteins. They are developing a range of new tests that will change how cancer is diagnosed and treated. We're set to gain momentum as we bring these new tests to physicians and patients at regular intervals over the next few years. Highlights in 2023 include testing a record 4.1 million patients for cancer and rare diseases, growing core revenue by 24% to $2.5 billion, improving adjusted EBITDA to $362 million year-over-year, turning free cash flow positive, submitting next-generation Cologuard for FDA approval, launching Oncotype DX in Japan on a reimbursed basis, accelerating our molecular residual disease or MRD program, launching OncoExTra, our solid tumor therapy selection test, adding OncoLiquid, our liquid therapy selection test, and advancing our multi-cancer early detection initiatives. The Exact Sciences team is laser-focused on five things this year: further embedding Cologuard as standard-of-care, increasing Oncotype DX adoption internationally, advancing key pipeline programs, deepening relationships with health systems, and delivering experiences that patients and providers love. Jeff will now focus on our financial results and our outlook for 2024.

Thanks, Kevin. Fourth quarter revenue of $647 million grew 17% or 18% on a core basis, excluding COVID testing, FX, and M&A. Screening revenue of $487 million increased 21%. We continue to see broad-based momentum in Cologuard adoption by healthcare providers with an all-time high 172,000 ordering Cologuard during the quarter. This expanded base of ordering providers supports our long-term growth outlook. Precision Oncology revenue of $160 million grew 12% or 11% on a core basis. Growth was led by Oncotype DX, which expanded 48% internationally. Fourth quarter GAAP gross margin was 70%. Non-GAAP gross margin, excluding amortization of acquired intangibles, was 73%. Net loss was $50 million, and adjusted EBITDA was $50 million, an improvement of $45 million driven by better-than-expected revenue and continued operating expense discipline. Free cash flow was $35 million, an improvement of $55 million. We ended the year with cash and securities of $778 million. Turning to guidance, we expect total revenue between $615 million and $630 million for the first quarter and between $2.81 billion and $2.85 billion for the year. This assumes screening revenue between $460 million and $470 million for the first quarter and between $2.155 billion and $2.175 billion for the year, and Precision Oncology revenue between $155 million and $160 million for the first quarter and between $655 million and $675 million for the year. Annual guidance implies 13% core revenue growth, with 16% growth in screening and 6% growth in Precision Oncology. We expect to generate between $325 million and $350 million of adjusted EBITDA for the year. We also expect CapEx to be around $150 million. We expect first quarter screening revenue to be down sequentially because of typical seasonal trends. Primary care utilization is lower in December and early January because of the holidays. This impacts screening revenue during the first quarter due to the normal timing between a Cologuard order and a completed test. We expect first quarter screening to be about 22% of full year revenue, consistent with the historical average. In Precision Oncology, we expect steady Oncotype DX growth in the US and strong double-digit growth internationally this year. Exact Sciences acts as a reference lab and processes tests for other lab customers. Starting in the first quarter, we're assuming a $20 million headwind or 3 points of revenue growth for Precision Oncology as various agreements related to whole exome sequencing and prostate cancer testing are transitioned in-house by those ordering labs. The team did a great job implementing automation within our state-of-the-art labs, which will drive gross margin expansion this year and beyond. We're also expecting continued OpEx leverage this year, especially within G&A. Sustainable double-digit revenue growth and industry-leading gross margins are powering adjusted EBITDA and free cash flow as we continue investing in growth and efficiencies. Priority areas of investment this year include reaching more people through new digital and TV advertising campaigns for Cologuard, further improving the patient and physician experience through our technology platform, and advancing our MRD program. Back to you, Kevin.

Thanks, Jeff. Brand awareness and loyalty are fueling Cologuard adoption and helping to reach 60 million Americans who are not up to date with colon cancer screening. The number of healthcare providers ordering Cologuard and the number of Cologuard testing orders have consistently grown. Cologuard is an essential part of their screening toolkit in part because patients prefer and ask for it. During the fourth quarter, Cologuard brand awareness reached 89%, an all-time high, and our market research showed people who have never been screened prefer Cologuard 2 to 1 over colonoscopy. We're building on this momentum by helping health systems achieve positive clinical and financial outcomes, designing innovative ways to get more patients rescreened, and partnering with federally qualified health centers and healthcare providers that serve diverse communities. Our Precision Oncology team has guided treatment decisions for more than 2 million cancer patients around the world, including a record 230,000 last year. Oncotype DX recently celebrated its 20th anniversary. During those years, Oncotype DX has become the global standard of care for patients diagnosed with early-stage HR-positive HER2-negative breast cancer, the most common subtype. We've received Oncotype DX orders from more than 120 countries, and 98% of US oncologists have ordered it. Oncotype DX has helped spare over 1.3 million patients from unnecessary chemotherapy. Increased international adoption led by Japan will be a key growth driver in Precision Oncology this year. We also plan to move our Precision Oncology portfolio onto our proprietary IT platform, making prior authorizations, billing, and reimbursement highly efficient. This will also enable rapid scaling of future tests, including OncoDetect, our MRD test, and OncoLiquid, our blood-based therapy selection tests. We are using our deep scientific capabilities and regulatory expertise to advance impactful pipeline programs, including multiple colon cancer screening initiatives and MRD. In colon cancer screening, we shared data from the prospective BLUE-C study demonstrating next-generation Cologuard will raise the performance bar in noninvasive screening. We submitted our premarket approval application to the FDA in December and expect to make the test available to patients in 2025. Most BLUE-C study participants also provided a sample for evaluating our novel blood-based colon cancer screening test. This year, we plan to announce top-line results from BLUE-C or our colon cancer blood test. In MRD, we plan on sharing several sets of data this year, including evidence that will support reimbursement in colon cancer. We're excited about the performance of OncoDetect and look forward to integrating it into the powerful technology we licensed from the Broad Institute. Our mission is to help eradicate cancer by preventing it, detecting it earlier, and guiding personalized treatment. Our unique platform, deeply embedded standard of care tests, and pipeline of life-changing diagnostics will power years of growth and continued profitability, helping us achieve our mission. We're now happy to take your questions.

And your first question comes from Brandon Couillard with Jefferies. Your line is open.

Hey, thanks. Good afternoon. Two-part question for Jeff. First, on the first quarter revenue guidance, can you just unpack the $20 million headwind in the Precision Oncology business that you referenced, a little more detail on that? And then secondly, as you think about the guide for '24, what do you pinpoint for OpEx and gross margins for the year? Thank you.

Sure, Brandon. The $20 million figure represents an annual impact. As I mentioned, Exact serves as a reference lab for others in the industry. We aren't surprised that some contracts are ending as those labs start handling that work internally. Over the year, we anticipate a $20 million headwind, which will likely be more noticeable in Q1 compared to Q4, but that's the overall impact. The true growth drivers for Oncotype will continue to be the increasing adoption in the node-positive indication and international markets, which experienced a remarkable 48% growth in Q4. Additionally, this provides a solid foundation for future product launches like MRD and therapy selection. Overall, the business remains very robust. This year, we have a comparison point regarding gross margin expansion that I've discussed for years. We expect to make ongoing progress this year thanks to lab automation. The team has done an excellent job automating our labs, and many of you may have seen it. If not, we invite you to tour our state-of-the-art facilities. Further automation will assist our growth this year, and leveraging our fixed costs is crucial. Generally speaking, we anticipate improvements in gross margin and operational expense leverage, which has been a key focus for us. We've established a strong foundation, as demonstrated by our significant adjusted EBITDA and leverage over the past couple of years. We expect this trend to continue. This year, the primary area of leverage is likely to be in General and Administrative expenses, but I do anticipate leverage across all three categories: G&A, sales and marketing, and research and development.

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

Hey, guys. Thanks for the question. I have a two-parter for you. Maybe first on the screening guide, you've been clear in the past to expect Q1 to be down sequentially. But can you just talk through phasing for the rest of the year and what gives you confidence in the ramp there? And then second, Kevin, I know you have a fairly big chunk of options that are expiring, I believe, later this week. Any comments on what you're planning to do with those? Thanks.

Let me start with the second first. Yes, I have options that are expiring; they're 10-year grants. So they were granted in 2014. And I plan to exercise and hold while selling just enough to pay the cost of exercising and the taxes. But the goal is to hold the difference. And I will just say before handing it over to Jeff, we came off a great year in 2024. The momentum is something that is generating enthusiasm across internally and also our important customer and patient base that we take care of. There's still 60 million people out there still this year, like there was last year that are not up to date with screening. And we have a huge opportunity there, and we're making incredible progress with health systems, payers, and the brand awareness of Cologuard. It's an exciting time with Precision Oncology continued growth and node-positive internationally, and then just a number of new product launches over the next two years. So we couldn't be more excited. Jeff, why don't you take the rest?

Sure, Catherine, regarding your question about phasing, we've discussed this multiple times before, but just to reiterate, primary care utilization is usually affected around the holidays. Essentially, we lose about two weeks of the quarter during Christmas and New Year's due to patients and physicians being on vacation. This results in fewer office visits during that period, which means that about 30 days later, when we finalize that test, there’s less revenue we can recognize. Therefore, the holidays significantly impact Q1, so I would expect a sequential decline from Q4 to Q1 in your modeling. Our screening business is expected to decrease sequentially, similar to trends observed in Precision Oncology. While the Oncotype brand continues to grow, you will notice that drop due to slower physician office visits around Christmas and New Year affecting Q1 revenue. From a phasing perspective, we typically anticipate strong growth in orders for Cologuard in the early part of the year leading up to May, with flattening during the summer months and then a significant increase from Labor Day through Thanksgiving, which is what we expect this year. In terms of revenue, I mentioned that 22% of Q1 revenue for screening this year aligns with the historical average. Looking at growth, we anticipate a 23% increase on a two-year stack basis in Q1. As Kevin mentioned, there are very strong trends; just keep the phasing dynamic in mind for Q1.

Your next question comes from the line of Doug Schenkel with Wolfe Research. Your line is open.

Good afternoon, everyone. Thank you for taking my questions. My first question is about guidance clarification. I believe you projected a 16% growth in screening revenue for the year, as mentioned back in January. Considering the potential for repeat orders this year, which I estimate could be between 250,000 to 300,000 tests, what does this indicate about the growth of first-time orders? It seems like there might be a moderation there. If so, I want to confirm that this is a conservative approach rather than anything else. My second question concerns competition. With some significant results anticipated from blood-based competitors soon, I am curious if you could share what you believe the benchmark should be as we examine key data, such as advanced adenoma detection, when those results are released. Thank you.

Doug, this is Jeff. I'll take the first one on screening. So yes, we did guide to 16% growth for the year coming off of a year, just a tremendous year in '23. Kevin talked about some of the highlights there. We're comping against 31% growth. So feel good about that, and there's a long runway ahead here. One of the slides we shared today showed the broadening of the ordering base and the deepening of the ordering base. This has continued for nine years, and we expect that to grow for many years to come. Rescreens this year, to frame this, last year rescreens at three-year repeat customer was about 20% of screening revenue. This year, it's going to be, call it, a couple of points higher. So it is growing rapidly. It is one of our biggest growth drivers. The reason why it's growing is really twofold. One is that the pool of new patients becoming eligible accelerates this year; it's up to 1.6 million. It was at 1.2 million new patients becoming eligible for the last couple of years, and also, our success rate at getting those people back to Cologuard continues to grow. The team has done a nice job executing there. What this implies for first-time users, we typically think of that age 50-plus first-time users as still double-digit growth. That's one of the beauties of this business model: that because this is such a massive market, 110 million people in total, you can expect predictable sustainable growth, double-digit growth from that key ordering group, Doug.

Yeah, Jeff, let me just add a couple of things, Doug. As Jeff said and Kevin said, we're coming off an incredible year in '23. I've participated in our global sales meeting and I'm just telling you, everybody feels that we have an incredible opportunity to continue this growth to fulfill our mission. As we've said, Cologuard has grown by 31% last year. And the one thing that we're continuing to do is to smartly invest in areas where we know we can grow profitably. We're looking at our core business, our sales leaders, and marketing leaders; we're understanding the trade-off between investments and growth. A couple of things that I feel really confident about is how we're getting at this. Marketing, as an example, we're being very smart at the way we're taking advantage of key growth levers like rescreens and our 45 to 49 segment, which is fantastic opportunities for growth. Secondly, in sales, we are investing wisely in areas that we know we could put additional heads in the marketplace to talk to the right customer at the right time with the right message. We're going to continue to do that. So 2024 can be another incredible year.

The second question, Doug, on competition blood tests, what's the bar? I mean first, just reiterate what Everett said, this is never a straight line, we're always sober; there are always opportunities for improvement. That has been every quarter since we launched Cologuard almost 10 years ago, and it's going to be every quarter this year and next year and beyond. But the team is focused, and we're really excited about the path ahead. In terms of blood tests, we talked about this many times, so I'm not going to add a lot here. The final arbiter of whether a blood test would be widely adopted is the main guideline group USPSTF. They do sophisticated modeling. Their modeling nets out at two key factors. One is life years gained; 83% of life years gained in their model comes from precancer detection. The second factor comes from the question of unnecessary colonoscopies generated per 1,000 people screened. You see that model is the bar, not anything we believe; it's very objective. And it's very difficult to get into the guidelines with the performance characteristics of what we see today in this category of tests. So I think you really do the digging into the USPSTF guidelines. Anybody investing, anybody studying this space, that's where all roads lead to long-term commercial traction and impact.

Your next question comes from the line of Dan Brennan with Cowen. Your line is open.

Great. Thank you. Thanks for taking the questions, guys. Maybe first one would just be on 45 to 49 Everett, you mentioned it. Just wondering kind of where that finished up for the year and kind of what you guys are baking in for further traction in '24. And then, B, Kevin, if I could just go back to the question on blood-based; I appreciate exactly what you said, which is completely fair, but it's hard for us to untangle; we'd have to build the model to kind of untangle that, which some of us have tried to do. Is there a way to think about just bluntly when that data hits like how kind of you've been pretty open about the biological barrier for blood, but I'm just wondering, assuming 90% specificity, where do you still view like the most likely outcome for that data? And is there an upside case that would kind of make you worry? Thank you.

The FIT test is effective because it detects 24% of precancerous polyps with only a 5% false positive rate, unlike many blood tests that usually have a 10% false positive rate. This means that doing blood tests annually could lead to twice as many unnecessary colonoscopies compared to the FIT test. In terms of detecting precancers, blood tests tend to yield lower results, which does not translate into significant life years gained. This creates a challenge in optimizing efficacy. When comparing to the FIT test, blood tests tend to generate excessive false positives and offer fewer life years gained, while also costing significantly more. Guidelines for test ratings take these factors into account, which makes it challenging for blood tests to earn high ratings. The value of Cologuard comes from designing it to meet these standards from the beginning, ensuring it is positioned effectively within the market. We believe that both colonoscopy and Cologuard will remain the top screening options, as observed by Cologuard’s growing market share at the expense of the FIT test. The number of screening colonoscopies has remained stable over the past decade, at about 5 to 6 million per year, but backlogs are increasing. Our focus is on reaching patients and simplifying the screening process, ensuring that everyone who turns 45 considers colon cancer screening and recognizes Cologuard as an option. These are significant challenges, but we have a dedicated team and a purpose-built technology platform to help us succeed.

Dan, this is Jeff. Regarding the age group of 45 to 49, one of the aspects that makes Exact uniquely competitive is our nearly three years of efforts to raise awareness and engage this younger demographic. Currently, this age group accounts for almost 20% of our screening revenue, and it has been a significant driver of growth. I anticipate this growth will persist, especially considering the limited capacity for colonoscopies in the country. With the addition of 20 million more people eligible for screening due to updated guidelines from three years ago, Cologuard stands out as the best choice. We are gaining considerable market share, which is growing above overall business trends. I believe this trend will continue for many years ahead. Do you have anything to add?

I'll add just maybe some field detail around the 45 to 49 segment. Our field organization knows this is a great opportunity to grow Cologuard, and we're helping our customers. I'll give you two examples around health systems. There are still some health systems that don't have the new guidelines in their health maintenance systems. As Kevin said, the easy button, we know where these health systems are. So we're targeting these health systems to ensure they have it in their health maintenance systems. The second is this is the data that our sales representatives have. Our sales representatives know by individual prescriber which healthcare providers are ordering Cologuard for the 50-plus audience but are not ordering it for the 45 to 49. They gear their message to ensure that they know the new guidelines and to ensure we get our fair share in that younger cohort. Lastly, as I mentioned earlier, we have specific marketing campaigns for the younger segment, 45 to 49. We'll continue that in '24.

Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question. I had a two-parter. Kevin, on the life years gains here, I'm just curious with your sensitivity for advanced adenoma being, I think, 43% to 44%, if the blood-based is around 25% or 30%, I'm curious what the life years gained differential would be? Jeff, on adjusted EBITDA margins, it looks like the guide implies 300 basis points expansion year-on-year. That's a little light. I think it implies OpEx showing high singles. Perhaps, I think when you go back to your longer-term model, maybe there was a little bit more leverage expected. So curious if this is just conservatism on the OpEx assumptions.

So on the first question, you are testing my memory of the ranking. Cologuard has the best ratio of any screening test. Cologuard has the best ratio of life years gained to unnecessary colonoscopies. Colonoscopy has the highest life years gain. Some of that is simply because of the assumptions in the model. It also has the highest number of unnecessary colonoscopies. Between the FIT test and Cologuard, the FIT test done every single year, which, by the way, only about three people in 1,000 due to the FIT test every year for a decade. But if you model it that way, compared to Cologuard every three years, the FIT test detects about maybe 7% or 8% more life years or saves 5% to 10% more of life years than Cologuard. Blood falls off by like 25% because of the lack of sensitivity of refining precancerous polyps. This is the challenge to getting an A or B rated test; they don't hand out As or Bs very easily at the USPSTF. There is a standard, and it's driven off of this model. Pre-cancer detection matters.

On your EBITDA question, look, we gave the guidance last summer. We ended last year a lot further along toward our long-term goals. Remember, our long-term goal is for at least a 20% EBITDA margin in 2027. Last year, we were at 9%; we're way ahead of plan here. This year, we expect another 3 points improvement. Over time, we expect continued increase every year. That's what we built here. We’ve built a foundation, our customer technology platform, our labs, our sales teams, and you name it, to scale very effectively. When you look at the numbers this year, I do expect to see leverage again across all three major OpEx lines. Sales and marketing after the last two years where that had come down in absolute terms. Everett has done a really nice job of leading this team, but we see such strong returns on investment there that we are going to raise some investment there. It makes sense; it is the right way to build a business and the right way to take care of patients and add value to the system. So we will invest in all three. We talked about last year, midyear, we accelerated investment in our MRD program given the near-term opportunity there. As some of the bigger programs get toward market, the investment dollars do increase temporarily. And then G&A. G&A, I think, will be the biggest source of leverage. We've got major initiatives there across our customer care teams, our customer experience teams, and IT that will help us run the business more efficiently.

Let me add on to that what Jeff just emphasized about continued investments. As we've mentioned, we've taken our sales and marketing spend down by over $100 million over the last two years. We believe that if we were investing more, we would be growing even faster. This isn't sub-position. We have very sophisticated modeling that shows the responsiveness of marketing and sales activity to the output. During that same period, we have grown $870 million from a revenue basis. It is judicious; it's prudent for us to make additional investments so that we can grow faster and grow profits faster so that we can reinvest and move forward.

No, and I'm glad we're at the point that we are because our data and analytics get better as I speak. That matches nicely with our market structure, so the data and analytics just don't sit at my level, but they go all the way down to the local level so we can invest in resources smartly, and that's driven by our local leaders. They make the call in terms of where that opportunity of growth is, where we can grow our business, and continue to be a real value to our patients and customers.

Your next question comes from the line of Dan Arias with Stifel. Your line is open.

Good evening guys. Thanks for the question here. Kevin, I too wanted to go back to the blood-based assay development topic, which I'm sure you don't love, but hopefully, you can appreciate just how much that's playing into the stock conversation for you guys right now, or at least for us anyways. My question is really, though, on process rather than performance. You mentioned the importance of USPSTF. When we think about that, can you just talk to the confidence that you have when it comes to getting everything squared away in time for consideration there? In other words, if the data reads out midyear and the guideline folks want everything to them by say early 2025, is there any reason why you wouldn't make the cut-off there for whatever they need for their evaluation?

No, we will make that cutoff.

And is that the right timeline that you are assuming plays out on that by the end of this year, USPSTF is ready to accept data and have what they need in front of them in order to do this thing?

If you look at this historically, the last cycle was, I believe, five years in between updates. The cycle before that was eight years. It's a group of volunteers. They do dozens and dozens and dozens of guideline updates every year. They have limited resources. So they are due to have the final update by '26. Does that get pushed out? We don't know. We would expect in the nearer term to see something from USPSTF where they lay out what's called their study plan. The topics they review and the essential timing, etc. We haven't seen that yet. But it was eight years, then it was five years. We'll see if it's five years, six years, or longer. We don't know.

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

Hi everyone, good afternoon. I appreciate the opportunity to ask a question. I'd like to revisit some comments regarding efforts with health systems. It seems that you are providing significant value to these systems through your internal initiatives. Could you elaborate on the structure of these partnerships? Are there any aspects of the agreements that might help protect against potential competition in the coming years? Thank you.

It's less about contractually and more about the value that we're bringing to health systems. Health systems, we've seen this over the past couple of years, they're coming to us, and they're coming to us to solve healthcare problems and issues. One is around screening. They tell us on a daily basis that we need to go beyond the product. Many things that we bring to health systems are great products, outstanding customer support, of which they're looking for. We have an outstanding medical organization that partners with them, and they love our surround sound. Cologuard, Oncotype DX, OncoExTra. What's also exciting is our portfolio that drops right into our bag, and we can sell a portfolio to them. It's all about partnership, and it separates us from the competition in terms of our products, our portfolio, and all the surround sound that we can partner with to help them improve healthcare for their patients.

It's incredible. This technology stack that we've developed creates a competitive uniqueness. That investment has been well over $1 billion. It's about 100 different applications internally built, externally sourced that lead to this compliance engine that Everett referred to, the ability to automate things like reimbursement, prior authorization, campaigns to remind people to get screened, and population health initiatives. This is a contractual-based relationship. It's a relationship based on real value for health systems and patients. It ends up leading to significant growth and profitability.

I'll layer in one additional comment. We are having very meaningful conversations with a number of health systems just to reiterate what Everett was talking about around the portfolio. While it's not walling off the competition, a lot of these vendors are looking at us as a one-stop shop and thinking about preferred vendor agreements. They're realizing the benefits of transacting with one company, talking to one customer service rep, calling one service number, sending samples to one company for testing. We are having very meaningful and real-time conversations around this preferred vendor agreement type of structure with some of our key customers.

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

Good afternoon, thank you for taking my questions. I have two quick ones. First, I know you mentioned that Oncotype DX international grew 48% in the quarter, and that Japan was just launched in October. Can you explain what Japan contributed to the overall international growth and what kind of traction you're seeing there? Secondly, Kevin, you mentioned at JPMorgan that the Oncotype business aims to grow from over $600 million to $1 billion, but you didn't provide a timeframe. Could you discuss some of the key factors that could help achieve that? Considering the low to mid single-digit growth we've experienced, what kind of acceleration do you anticipate to reach that $1 billion mark? What are the main drivers for this growth? Thank you.

Let me put Japan, if I may, in the context of our broader international business, which is approaching about $200 million in annual revenue. I tend to think about our international business in three archetypes. We have one group of countries, like Canada and the UK, where very established markets, molecular penetration is standard of care, and oncotype brand shares and market share is very, very high. The second archetype is where we are driving rapid adoption, both of molecular testing and oncotype share. I'll give you examples like Germany and Italy as two key countries where we're seeing that grow. Thirdly, we're launching in new markets, the biggest of which is Japan, our largest opportunity. In Japan, there's about 45,000 eligible patients in that important geography, and we expect that to contribute about $30 million of growth to 2024 for our international business more broadly. On the second assumption, again, I think growing Oncotype to $600 million and the broader PO business to $1 billion, we have to do a lot of things: we're continuing to penetrate underpenetrated markets, we have an opportunity to launch in new markets, and then we have an opportunity to convert indirect markets to direct markets, where we actually have Oncotype sales folks, teams, and resources in-country that are under our direct control. Those are some of the key drivers for Oncotype. And outside of Oncotype, the broader business, I would really focus on the expanding pipeline. Within 24 months, we already launched OncoExTra, our tissue therapy selection test. We will launch OncoDetect, which is our MRD platform. We acquired OncoLiquid from the Resolution Bioscience acquisition, which we will introduce in due course. We also have Riskguard, our hereditary cancer test. So that growth from $600 million to $1 billion will be driven by that pipeline.

Your next question comes from the line of Patrick Donnelly with Citi. Your line is open.

Hey, guys. Thanks for taking the questions. Kevin, maybe just on MRD, can you talk a little bit about expectations for this year? What we should be looking for, both on the data side and then just the ramp? How do you think about the incremental dollars invested? I know previously, MRD was above blood on the early detection side. Maybe just talk a little bit about the priorities there would be helpful. Thank you.

Thank you for all the questions about Precision Oncology. Let me just say that I'll reiterate: I'm so proud of the team that worked so hard over the last months and years to develop an organic MRD product, which we're now calling OncoDetect. We are already having meaningful discussions with customers and Medicare on the payer side of the equation. We're excited to share the powerful data that we believe will help us secure Medicare reimbursement later this year. We are working closely with the business unit, with Everett and the commercial team, in planning activities and look forward to introducing that test into the commercial team later this year or very early next year. That timeline is very dependent on how quickly Medicare gets back to us on the reimbursement side of the equation, which can vary by a few months. But ultimately, that will determine when we really step on the accelerator from a commercialization perspective. One of the things that I'll add is that we are thinking creatively about how to integrate the portfolio, particularly the Oncotype portfolio into our evidence development plans around OncoDetect. We'll be asking patients to undergo testing every three months, which poses challenges, particularly in the out years when a patient tests negative for three to four years consecutively. We need to ensure that patient is tested in year four and five, and a strong adherence and compliance engine can support OncoDetect. Over to you, Jeff.

From a modeling standpoint, we've been sober about the revenue contribution we're assuming this year. It's really more of a 2025 effect, given the base of this business, $2.8 billion MRD; while this is one of our biggest pipeline opportunities, I don't expect a material contribution from a revenue standpoint until next year. From an R&D investment standpoint, this has been and continues to be one of our top three investment areas. Colon cancer screening broadly, MRD, and multi-cancer are the big three. In MRD last year, we did step up the investment given that the near-term opportunity we see.

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

Thank you. Good afternoon. For Kevin or Jeff, I was hoping for an update on multi-cancer. We're still waiting on progress in BC around the Medicare benefit. Is there any context you can share around what's in the earnings forecast around R&D investment for MCAD? Are you still planning to move forward with SWOT at this point?

We've been saying for probably the prior 18 months, if Congress did not move to pass legislation to explicitly give Medicare the authority to pay for a multi-cancer early detection test, we would likely scale back our investment. We have scaled back our investment in MSET. In the long term, we still believe that multi-cancer early detection is going to be much more impactful even than Cologuard in terms of creating real value for patients. In terms of this year's impact, Jeff, you can give color or not?

We did moderate the level of investment in multi-cancer temporarily. As Kevin said, until we see a clearer pathway to reimbursement. From an R&D standpoint, though, it is still one of our big three investment areas. Colon cancer broadly, multi-cancer, and MRD are over two-thirds of our R&D investment, probably closer to three-quarters. These are investments that represent the opportunity that we see and the value we can provide for both shareholders and patients.

Your next question comes from the line of Puneet Souda with Leerink Partners. Your line is open.

Hi everyone, I appreciate the opportunity to ask a question. Kevin, you addressed the blood competition topics very thoroughly. Could you provide more details about the expectations for the BLUE-C blood readout? Should we anticipate that it aligns with your earlier comments on blood in general? Also, regarding the advanced adenoma performance, how significant is that in the context of the BLUE-C blood readout? Please remind us of the positioning of this assay in your overall portfolio. Thank you.

Our blood test, and we think, as a class, most likely blood test will receive a best second-line screening claim by the FDA. A test to be used when a patient refuses frontline tests that are in the USPSTF guidelines. We know who the patients are that refuse high-quality tests like Cologuard and colonoscopy, and when they refuse those tests, there's an opportunity for us to help those patients at least get screened even if the doctor isn't going to get a quality credit or the Medicare Advantage plan, etc. There's still an uphill battle, no doubt. One of the things that's competitively unique about our approach is just the cost structure. It's a test that's built on a supercharged PCR platform. That provides a cost structure that we believe will be best-in-class and provide real value to the health system and to those patients that get tested. I'll take you back to 2014, '15, '16 when we first launched Cologuard without being included in the quality measures until I believe 2017; we were really limited in terms of the patients that we could address, and we believe that's going to be the case with any test that isn't in the guidelines or quality measures. That’s how we're looking at things. In terms of what our expectations are for data, we're getting pretty close to that date. So we'll let the data speak for themselves.

Your next question comes from the line of Andrew Cooper with Raymond James. Your line is open.

Hey, everybody. Thanks for the time. Maybe just sticking with MRD since we've talked a lot about Cologuard. You called out submitting for reimbursement or expecting reimbursement this year, I think for colon. I think the slide also said validation data for breast as well. I just want to get a little bit better understanding of should we expect that to be the sort of data to support reimbursement? Is it broadly? Is it more narrow for a portion of breast patients? Just a little bit of help there. Then as we think about these launches, I know, Jeff, you called out a little bit of increased R&D or increased OpEx in the prep for the launch. But anything we should think about in terms of gross margin impact versus the tailwinds you'll have with next-generation Cologuard and things like that as we think longer-term, especially if some of these are not widely reimbursed at least by commercial upfront?

In terms of the breast data, most of the data that we're generating right now is really validating the platform. The plan would be to look towards Medicare more in the 2025 horizon on the breast side. Some of these subtypes of breast cancer can be somewhat challenging. They tend to be low shedding tumors, meaning there's not a lot of ctDNA in the blood. One of the things that we're doing is setting up studies such that we can look at our current version of OncoDetect, but also look at what the technology that we license from the Broad Institute might allow us to do. What that technology allows us to do is really twofold. One, it allows us to shift from whole exome to whole genome and design the assay. Thereby, we can find more mutations that we want to track in the patient's blood. And two, it allows us to track more mutations in a patient's blood at a very attractive cost point. We maintain very high gross margin on that particular product. So it's a little early to say when we go full force in blood because we do want to deliver a technology that is competitively unique and differentiated. We are not sure based on the data that we've seen to date from some of the players in the field whether in certain subtypes the performance is really there. We are being very careful about how we think about evidence building and investment in breast based on the different technology stacks that we have.

On gross margins, more broadly, I expect steady improvement for years to come. When you look at our pipeline, Cologuard 2 should carry even better gross margins than Cologuard 1, given that the team did a fabulous job of finding efficiencies to build into the cost of goods. We've talked before about having at least a 5% reduction in cost per test for Cologuard 2 based on the investment and the efficiencies we gain. New products overall should help drive better gross margins, temporarily some, as you highlighted, that don't carry full reimbursement in the beginning could put a little downward pressure, but I think the overall gross margin still continues to walk higher. From an OpEx standpoint, though, given the investment in this broader foundation, again, the teams are out in the field; Brian could talk all day long about the fabulous team we've got out in the field with Precision Oncology; the deep relationships they have; that foundation provides a very attractive incremental leverage opportunity as you introduce new products, which are many of the same physicians you're calling on. In many cases, it's the same patient in the same block of tissue that you're using for both Oncotype DX today and the MRD and therapy selection down the road. From a margin standpoint, these are very good investments for us to make now and for years to come.

Your next question comes from the line of Dan Leonard with UBS. Your line is open.

So I have a couple of questions on Cologuard 2.0. First, could I get your latest thinking on what pricing could look like for that product? Secondly, when would you expect the BLUE-C study could get published?

In terms of publication of the BLUE-C study, we would hope that would be in the nearer term. You never can tell, but in the nearer term. In terms of pricing, all we will say here is we are creating value. In particular, we've developed a test that detects 30% fewer false positives that directly saves the healthcare system significant money. It saves patients from having to undergo an unnecessary invasive procedure. That's a tangible value. Because of the huge investment we've made and resetting a much higher bar, we expect to get value from that. However, we won't provide any specific pricing guidance until you see the day that it is priced by Medicare and commercial payers. That's all we can offer now.

Your next question comes from the line of Subbu Nambi with Guggenheim. Your line is open.

Hey, guys. Thank you for taking my questions. An extension to Doug's question actually. What's the rescreen hit rate? In the past, you said it was 55%. Do you expect it to increase in 2024? From an observation perspective, do you see individuals who are eligible for rescreen stick to the three-year mark? Or do you see a lag of a few quarters? Basically, what percent of 2024 rescreen eligible patients actually spill over to 2025?

Sure, Subbu. This is Jeff. Thanks for the question. The success rate is a bit below what you said today. However, it is moving higher quickly. We see consistent progress every quarter. The longer-term goal is to get to the 70%. That's very good. When you put it into perspective for FIT testing, for example, on the first go-round, the first test is often at about 20%. Over time that, as Kevin talked earlier, only about three out of 1,000 people complete the test every year for ten years. Even where we're at today is a good outcome; we think we can do even better, though. Of the people who become eligible in a given year, it takes about three years, call it, 3.5 years for them to come back. So if 1.6 million people become eligible this year, some of those people become eligible in, say, December. They probably won't get retested until next year. So if you look at the median time to rescreen, it's closer to 3.5 years. Again, that time frame is coming in, but it doesn't happen immediately. It takes a little bit of time to go out and get that person back to the doctor and get them rescreened. If I could just add something from a customer standpoint, when we look at our rescreen population, we give them that customer experience. Our customers, our doctors, healthcare providers, build confidence in the brand and ordering Cologuard. As I see that, the rescreen population gets bigger, as we get more ordering prescribers, that helps all around in terms of confidence, compliance, customer experience, and we're seeing that across the country.

And your last question comes from the line of Mark Massaro with BTIG. Your line is open.

Hey, guys. Thank you for including me in the call. My first question is OncoLiquid. When can we see data? When do you think we can see this commercially launched? Can you discuss timing around Medicare reimbursement? My second question is, obviously, we've been getting a lot of questions on what the minimum bar might be for advanced adenomas to be considered a first-line test. Kevin, you talked about 24% for FIT. Is it reasonable to think that perhaps folks might anchor the 24 number? Or how are you thinking about that minimum level? Thank you.

We're really excited about the technology that we inherited as part of the Reds bio team, and also the team that we inherited up in Kirkland, Washington, just outside of Seattle. A very robust chemistry platform has been developed over many years by that team. We're really excited to get that in the hands of our commercial team. The team is working on validating that test and backbone so we can get Medicare reimbursement as well as New York State approval. We have a goal to submit to Medicare this calendar year for reimbursement on the OncoLiquid side of the equation.

Let me come back one more time to a topic that people have a lot of interest in. Remember with USPSTF, when they analyze a new screening test, they look at two factors, not just life years gained, but they also look at the false positive rate of the test leading to unnecessary colonoscopies. The challenge with this whole category of blood tests is that with a 10-plus percent false positive rate, you're generating twice as many unnecessary colonoscopies as the FIT test. You can't get away from that fact as you look at the model and whether you get to the efficient frontier. It's a combination of adenoma detection in large part, cancer detection in minor ironically, and then what is the false positive rate? The FDA looks at this one way, CMS looks at it probably similarly to the FDA; USPSTF looks at it in a totally different way.

Thank you, everyone, for your participation. This concludes today's call. You may now disconnect.