Q3 2022 Exact Sciences Corp Earnings Call

So the platform.

Additional highlights from the third quarter include delivering 960000 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 risk guard.

<unk> to oncologists through an early access program.

Jeff will now review our financial results.

Kevin Good afternoon.

Third quarter revenue grew 15% to $523 million or 20%, excluding COVID-19 testing.

<unk> revenue increased 29% to $361 million, including three points of growth from prevention genetics.

10000, new health care providers ordered cologuard during the quarter and more than 292000 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 fun ways to partially offset inflation.

Adjusted EBITDA was a loss of $32 million, an improvement of $33 million from last quarter.

We ended the quarter with cash and securities of $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 two years to 2025, we also have up to $100 million available on our accounts receivable facility.

We have made significant progress in our goal to generate positive adjusted EBITDA.

Thanks to our heightened focus from our team we now expect to generate positive adjusted EBITDA, starting 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 profit sooner than expected, while maintaining a strong cash position.

Turning to our guidance, we now expect total revenue between $2 <unk>, five and $2 <unk> 2 billion for the year. This.

This assumes screening revenue between $1 375, and $1 382 billion, including prevention generics revenue between 40% and $42 million.

Precision oncology revenue between 595, and $600 million, including a $2 $9 million fourth quarter FX headwind based on current rates and Covid testing revenue between 55 and $60 million.

Moving to annual operating expense guidance, we're lowering sales and marketing expense by $45 million and now expect between 825 and $845 million, we're seeing significant leverage and total sales and marketing and now expect the expense 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 and $760 million, we expect R&D expense between 390 and $405 million a reduction of $38 million that Tim is becoming more efficient by prioritizing our highest impact projects and reducing planned hiring we can.

We 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.

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 has become becoming a preferred screening standard include nearly 10 million people have completed the test.

More than 150000 health care providers ordered during the third quarter, a new record.

We saw a 25% increase in orders from the first week of August 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.

Excluding COVID-19 disruption every cohort of new providers orders more cologuard tests each year.

Since the start of last year, we have added 65000, 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 one percentage point next year, improving cologuard revenue and margins.

Exact sciences scale and reach with a thousand person primary care sales and marketing team and millions of touch points with patients and providers. Each year will powered our continued leadership in colorectal cancer screening, we will 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 151000, new cases, and 53000 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.

Detecting pre cancers contributes two thirds of the life years gained through screening and early and early stage cancer detection provides most of the rest.

That's why we develop cologuard and its making a difference because it detects 42% of all pre cancers, and 16, 9% of advanced pre cancers, and 94% of stage, one and two cancers we.

We estimate it is helped by nearly 350.

315000 people with pre cancer and 46000 with early stage cancer above.

About 90% of people 45 and older.

Cologuard advertising advertisement once a week or.

Our sales team meets with physicians and their staff a million times per year.

We will use each of those touch points to make sure patients and providers understand cologuard as the superior noninvasive tests and the appropriate role blood tests should play.

Oncotype Dx provides the groundwork for exact sciences to guide a cancer patients every step.

We're using its powerful brand and our deep oncology relationships to introduce new products like our hereditary cancer test.

Risk guard 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 test 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 tests to patients combining for biomarker classes and different technologies and a large well designed case control study our tests detected 61% of cancers at a 98, 2% specificity across 15 different organ types include.

<unk> 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, one and two 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 a minimum residual disease and recurrence monitoring breast and colon cancer.

We have relationships with most oncologists in the U S and.

And about 170000 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 naive and tumor informed test, allowing oncologists to use the best test for each patient with one lab partner.

We plan to share marker discovery data supporting our tumor nave 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 nave approaches for colon cancer at <unk> Gi in January .

Exact sciences has the right team by 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.

At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad. Please limit yourself to one question.

Pause just for a moment to compile the Q&A roster.

Your first question comes from the line of Brandon <unk> from Jefferies.

Line is open.

Hey, Thanks, good afternoon.

I'll stick to one question with Kevin the Opex.

For the full year outlook pretty substantial just elaborate on exactly where that's coming from whether its head counts level programs.

Well I think it's a.

Broad based.

Continued focus by all of our employees.

The frontline to the leadership team of making sure that we deliver on our promise that we made several quarters ago.

Rapidly moving the business to profitability I believe Jeff will have more color.

Yes, Thanks, Brendan and the team has just done a really good job of focusing on the highest impact programs across the board.

When you talk about sales and marketing due to suit a really nice job, making sure we target the right physicians and allocate financial appropriately across all the various marketing and levers we have to Paul I think what you're really seeing here is a turning point we've talked for years about the platform that we have we have built over time and this has been a significant investment, but now you're really starting to see that.

This platform as Cologuard grew we grew 25% in the quarter sales and marketing was down 5% overtime. It's clear where this is heading with that foundation in place and two very strong profitable profitable brands on market now on growing this is going to turn into a cash flow generating machine over time.

Your next question comes from the line of Derek Brown from Bank of America. Your line is open.

Hi, good afternoon, and thank you for taking my question.

So can you talk a little bit more about physician access and.

That had been an issue during the during prior quarters can you just talk about the metrics.

Sort of where we are penetration access there and then.

Just anything on.

Anything on sort of what's happening with <unk>.

Precision oncology business, our U S any sort of like slowdowns in demand there.

Does macroeconomic issues Rick again thanks.

But why don't you take the access question and Jeff If you would take the precision oncology question, Thanks, Kevin and good afternoon, everyone.

Thanks for the access question, we're seeing modest improvements in access, but the access is not back to pre COVID-19 levels.

I do like about our commercial organization has were deployed very smartly across all of our geographies.

Or deployed at the highest targets that drive the largest growth for cologuard.

Our our representatives across the board have really good data in terms of knowing where to target winded target and each month that were in our revised structure, we get better at making sure that we're making high quality calls I look at my team looks at that.

Call that we may just not the quantity of pulp, but the quality of call and quarter over quarter, we're getting better so while the accesses.

Showing modest improvement.

The activity of our field force is much more efficient.

Derik This is Jeff I'll take the <unk>. 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%. So when we got there was international growth of about 26% again adjusted for FX, So really strong growth outside the U S.

More ingrained in their business and over time.

That growth to continue when you consider the size of this market and the fact that as many as 60 million people remain on screen today.

Your next question comes from the line of Jack <unk> from <unk> Research. Your line is open.

Thank you good afternoon.

Kevin or jazz, it's that time of year everybody's very focused on 2023.

Good to see some of the momentum in the quarter and on the order commentary in a year and was just curious if there are any thoughts you can share around.

Kind of positioning into 2023, I caught the profitability comment by the third quarter, but uhm just how're you feeling about the business in the menu here.

Well this is Kevin I am a thrill 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 20.

<unk> in the first quarter of 21 to the low forties this last quarter.

<unk> of the 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 high number of tests ordered.

Physician are at an all time high and.

So cologuard is gaining momentum and it feels that it is being used now much more frequently among physicians, who are very slow to adopt new technologies and change.

We've always said that a primary care launches more like a jumbo jet.

Then a rocket ship and you start what you're starting to see is that it's becoming broader <unk>.

<unk> guards utilization is a deeper among the physicians who are using it and the interesting data point is that we continue to add about 10000, new ordering healthcare providers.

Per quarter.

And so much of this is driven by two incredible teams one as a marketing team that we think is mastered both television advertising digital and consumer as well as a sales force that is just continued throughout the pandemic and now beyond.

To continue to educate healthcare providers physicians and increasingly now nurse practitioners to order Cologuard and.

And how it should be used in their practice, so something else something is changing maybe Jeff <unk> provide a little bit more clarity for the year.

Basically we provide guidance at our fourthquarter, calling February and that is our plan now.

As you look at the next year I think it's safe a lot of this momentum that we're seeing.

Both in Q3, and we guide to Q4 should continue to next year is Kevin said, we're very optimistic under long term risks.

Two two things to keep in mind when.

When you think about physician office access has ever said, it's not back to normal. It is still somewhat muted that seemed to set a really nice job working around that but.

Keep that in mind, if you think about next year also in a re screen business. It has been a phenomenal growth driver for us.

When you think about that pool of patients who've become eligible next year.

<unk> COVID-19 years, so that the growth in that pool is about flat year on year and I do believe Reskins will grow next year, but that is it will provide as much incremental growth next year as it has.

And lastly, next year, you'll get a full impact of the Medicare sequester, which kicked in midyear and it does take dawn Medicare reimbursement across the board. So you'll get a full year of that next year. So thanks to keep in mind will provide full guidance on the fourth quarter call. We are very optimistic.

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

Hey, guys. Good afternoon, thanks for taking the questions and I'm glad to be back on these calls.

Maybe we could start just given some news that sort sort of expected.

And 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.

Pre cancer detection should be playing in these tests I think you've reiterated some prior commentary about two thirds of the benefit is coming from pre cancer. So.

Maybe give us a level set on how you're thinking about that again. Thanks.

Sure.

Thanks.

So first of all there is an enormous amount of room to improve screening rates $60 million out of 110 million Americans and the screening population Thats ages 45 to 85.

Remain on screen today. So there is just enormous opportunity to get people up to date and they're screening.

And we believe that our blood test is going to play a role in improving rates.

But to date.

<unk>, we haven't shown data.

And there is no prospect of data is showing pre cancer detection to be that similar to the fit test which is 24%.

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 and with multiple attempts at screaming.

You can actually prevent the disease.

If you look at the drastic drop off and cervical cancer mortality in the U S. It's not because the Pap smear found cancer because it found the precancerous lesions that lead to cancer.

And that's where you've seen mortality dropped from 45000 people women a year to 4500 or thereabouts.

And so the goal of any screening tests should be to find precancerous and then.

Detect stage, one or two cancers at a high rate.

And we know that colonoscopy is good at finding stage, one and two cancers cologuard detects 94% of stage, one and two cancers.

Blood tests aren't to detect 94% of stage, one and two cancer. So if you look at that population wise, if you see a 100 people screened with.

With.

Cologuard and a blood test there may be.

I don't know 10.

People, who cologuard would fine, but a blood test.

And so that's why finding those stage one and two cancers is critical.

And so blood tests will have a role.

Now there may be a challenging getting blood tests into the guidelines because again they look at modeling and the modeling that that is done two thirds of the light years gained comes from pre cancer detection.

So there is going to be some challenges here and without getting into the guidelines you don't get into.

He this four stars quality measures and without that it's really difficult to launch a test is going to be a number of years before all of this place out.

And we plan to share data that we have generated including more recent data on our blood base CRC test.

And I just wanted to.

Mind people the.

The huge investments that is required to participate.

A serious player and as a serious provider.

Of colon cancer screening tools.

We have invested about $4 billion today.

And our patient engagement engine and our commercial team and our 323.

320000 square feet of lab space.

And it really importantly, and the 250.

Health system connections using epic to be able to electronically order cologuard and get results.

So this is a a really.

Important goal is to get more people screened.

One other comment is that.

We have recently gotten feedback from the FDA on our blood test and they have been clear like they were clear with Cologuard that there is an expectation around pre cancer detection. So they have said there is a certain expectation around the sensitivity for detecting cancer or.

For detecting pre cancer.

And also for <unk>.

The specificity or the false positive rate those are three critically important metrics that will come out of our blood Crc's study.

And.

These are serious scientific things that still need to be established and we look forward to sharing.

Sharing our data with you at the completion of our study.

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

[noise] Hey, guys. This is Dave <unk> Sykes.

Tell us more about what drove the oncotype outperformance in the quarter.

Yeah. This is Jeff I'll take that one.

Talked before about having really strong growth outside the U S up 26% adjusted for FX I would say that's part of it processing continued very strong momentum in the node positive indication recall. This is that the newer indication. Thanks to the responder data that came out a couple of years ago contingency really good uptake there and lastly.

This doesn't get enough attention, but we do have a pretty sizeable therapy selection business. The continues to gain momentum will have an additional product launch there early next year.

I would say, it's a broad based good quarter from that team.

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

Vijay we can't hear you.

I don't know if you're on mute on your end.

Colby if we can go to the next caller will come back to you VJ.

Your next question comes from the lineup Thomas Stevens from Cowen and company here.

Your line is open.

Hey, all of my questions such as <unk>.

On those Paul using an equal disgust seeing.

In some headwind system.

On your contact previously.

Iowa.

Doctors and the second one is an offshoot of dies question.

Looking at 2027 and blog and Medicare what kind of work did you see <unk>.

<unk>.

Population D C anything else happening tuberculosis. Thanks.

Thanks God. This is Jeff I'll start on the I think your comment on the power users and maybe ever controlling here too.

We had previously talked about different color. It's like I think the the results here really showed that we've seen broad based improvements in utilization, whether you look at different cohorts based on wind Doctor's first ordered there's some data in the deck that people are seen for the first time no matter. When you first ordered the order right continues to climb higher which is really.

Powerful to see especially when you consider all the new doctors that we're adding.

If your segment doctors based on their level of ordering.

Broadly also there whether you're kind of towards the top or newer to Cologuard was teen continued strong uptake in utilization. So those are the overall trends in an effort to add there yeah, and I will add a little bit I've spent a lot of time out in the field on the past few quarters and the way our commercial organization looked at it Thomas is a little bit more simple.

They do is they look at where is the growth opportunity.

Cologuard and we have targets, we have priorities that we focused on like re screen opportunities 45 to 49 opportunities and where those opportunities are we go and we make the call.

And we had boil it down to the more quality calls that we may with those targets.

The more that that PCP writes cologuard.

And so we sent our representatives to go out every single day focus on the priorities focused on the opportunity to grow Cologuard and I think that that's the reason why we're continuing to have good quarter over quarter growth.

I'll take the second question, which was on the the blood opportunity in 2027 looked at as Kevin talked about he talked about the broader framing I would just add to that that.

This is going to take time, when you think of the obstacles you've gotta get through whether it's your first developing the test get into the guidelines quality measures FDA Medicare there's a whole series of things that have to happen.

And if you look back at Cologuard. It took it takes about four to five years. After it launched for all those things to come into play. So I think of the 20th century 27 timeframe, which is what you asked I think the opportunity there is still relatively minimal <unk>.

Potentially you could see blood being positioned for specifics niches of the market one that stands out to us as somebody who say over the age of 75.

Where perhaps at that age.

Cancer actually may be less important.

But.

They're likely on Medicare commercial insurance brought adoption is going to take longer than that for that you need to be in usps's guidelines need to be in the quality measures and I don't see that coming together in 2027.

Your next question comes from the line is Patrick Donnelly from Citigroup. Your line is open.

Hey, there you got chased around for Patrick maybe just one I know you're not getting twenty-three guidance right now, but just got a high level of thinking about the goal of being adjusted EBITDA positive in the third quarter next year, how should we be thinking about gross margins next year and the moving pieces there like inflation that backs and then kind of our automation and re screens.

Fit into that thanks.

Yeah, we'll give more color on this on our fourth quarter call but.

It helps that it starts with a really strong.

Growth drive resembled Cologuard, an archetype both are profitable today, we expect continued momentum into next year from a gross margin standpoint, obviously, there were headwinds out there there are headwinds out they're not unique to us with inflation with fuel supply chain complexities with COVID-19. So there's a lot of pressures they're the team did a really nice job of that.

And that I think when I look to queue for in the near term here I think margins pretty similar to Q3, maybe down here just based on the seasonal trends with revenue into.

Next year and inflation is still the wildcard so what we'll talk more about that longer term.

Gross margin, we're very optimistic there because again, the teammates and a really nice job.

The foundation that we can scale. So we expect nice margin improvement over time from an operating expense standpoint, I can't take a hallmark of what you saw in the third quarter. The team has done a nice job you find inefficiencies throughout the business I think that will continue throughout next year next year, we do have the the store study starting to four multi cancer.

There'll be some additional R&D otherwise, we continue to efficiencies throughout the P&L.

Your next question comes from the lineup Vijay Kumar firm Evercore. Your line is open.

Hey, guys. Thanks for taking my question and not congrats on the steady execution here, maybe my my questions here on the cashless Jeff.

This is a pretty impressive quarter in terms of cash burn rate.

Looking at that exact.

Scientists exiting first and 23, perhaps the castle neutral to positive how.

How should we think about operating expenses.

And Ah.

Maybe just give me some.

Some color or <unk>, what what change is is this a function exact pulling back expenses and is that going to come at the cost of revenue growth or are the structural changes which are sustainable. Thank you.

No. Thanks D J as Kevin talked about it it's not either or it's 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.

Well not only get us the profitability, but allow us to punch through it continued generally improving margins steady cash flow generation for years and years to come and you know I think that turning point now worth a turning point, where you 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 like the legs that a little bit what's helping recently is that we've had some really nice improvement and working capital management, you see Dsos down 16 days a year on year inventory turns continued to improve so the team has done a really nice job with the heightened focus on profit.

The ability and cash flow.

To our next question comes from the line of tile Nixon from Canaccord. Your line is open.

Hi, Alex a kiss on the line for Carl makes sense.

Graduations on the quarter on one brief questions for you. So there's probably little value back into the soft currently thermaltake cancer largely ended up a biopsy test.

Why.

Don't you think investors are taken as asset seriously and when are you gonna do.

Beggary exciting Thomas a potential longterm growth drivers.

This is Jeff I'll I'll take that one it may be Kevin could jump in.

Look at it we're focused on executing on the business starting with Cologuard, an archetype, making sure. The foundation is there and we're in the middle of this period, where it's an intense data read up period for a pipeline. We started this year with really strong data on Cologuard too we shared some additional data on our <unk> program and <unk> and then.

Since September shared data on M said, we thought it was all really good data looking ahead. This robust period of a pipeline data continues when you look ahead to this month additional data coming out.

<unk> said program next year is Kevin talked about our top line read out starting with Blue Sea.

Data on our Coleman gets their blood program and overtime I think as investors fully appreciate this.

Like we're optimistic here not only we can continue to delivering on the core on market programs, but we have a really robust growth in store throughout the pipeline.

Your next question comes from the line of Alex Novak from Craig Hallum Capital Group.

Your line is open.

Hi, Greg Good afternoon, everyone couple a call. This evening, so positive severity drive baseball's or something and you can get your latest ideas on M&A in the genomic space. They seemed evaluations come down across the sector that make it more appealing to slot. Some of these names and <unk> got clients commercial engine. What are you looking forward that new capabilities or.

Or would you rather add established products with the bag.

Well our primary focus is on Cologuard archetype, and then three pretty remarkable opportunities in colon cancer screening, both stool and blood multi cancer screening, which probably is the biggest potential for impact and human help any diagnostic.

Ever develop and then also minimum residual disease testing our philosophy on M&A Hasnt changeable concern consider it three conditions are met number one it contributes to our long term strategy.

The company is good culture fit and three it create shareholder value.

So no changes there and our focus I'd point out that we editor prevention.

Our prevention genetics team.

It's an amazing talented team, it's added over $40 million a profitable revenue in.

New product line risk guard and so you know it's it's.

It's all about quality and strategic fit.

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