Exact Sciences Corporation (NASDAQ:EXAS) Q1 2024 Earnings Call Transcript

Exact Sciences Corporation (NASDAQ:EXAS) Q1 2024 Earnings Call Transcript May 8, 2024

Exact Sciences Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Danica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Exact Sciences First Quarter 2024 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to Erik Holznecht, Manager, Investor Relations. Please go ahead.

Erik Holznecht: Thank Danica, thank you for joining us for Exact Sciences’ first quarter 2024 conference call. On the call today are Kevin Conroy, the company’s Chairman and CEO; Jeff Elliott, our Chief Financial Officer; and Aaron Bloomer, Executive Vice President of Finance, who we recently announced as our next Chief Financial Officer; Everett Cunningham, our Chief Commercial Officer, will also be available for questions. Exact Sciences issued a news release earlier this afternoon detailing our first 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.

Kevin Conroy: Thanks, Erik. The Exact Sciences team is off to a strong start to the year. During the first quarter, we advanced our purpose of helping to eradicate cancer by further embedding Cologuard as standard of care, increasing adoption of Oncotype DX internationally and deepening our relationships with health systems, payers and patients. Highlights from the first quarter include testing more than 1 million people globally for cancer and rare diseases. Being recognized as a Gallup Exceptional Workplace, a prestigious award given to only 60 companies worldwide, increasing Cologuard adoption in large health systems, organized screening programs among payers and in federally qualified health clinics. Expanding the number of Oncotype DX international ordering providers by more than 20% year-over-year, making progress towards moving our precision oncology portfolio onto Exact Nexus, our proprietary IT plan.

Launching our hereditary cancer test risk guard to our oncology channel. Announcing the New England Journal of Medicine published results of our pivotal BLUE-C study, which will support FDA approval of Cologuard Plus and generating evidence to support future including OncoDetect, our molecular residual disease test. These achievements reflect our commitment to solving the needs of patients and health care providers, and we’re well positioned to achieve our goals for the year. Jeff will now review our financial results for the quarter.

Jeff Elliott: Thanks, Kevin. First quarter revenue of $638 million grew 6% on a reported and core revenue basis. Screening revenue of $475 million increased 7%. Recall, screening revenue in the first quarter of last year was very strong and benefited from enhancements to our billing and patient compliance systems and a weak flu season. Growth was 24% on a two-year compounded basis. We expect year-over-year growth to be faster than Q1 for the rest of the year. Precision Oncology revenue grew 5% to $163 million, or 4% on a core basis, excluding FX and M&A. Group was led by Oncotype DX, which expanded 7% globally. Reference Lab agreements were a headwind of $3 million or 2 points of Precision Oncology growth, as we discussed on our last call.

First quarter GAAP gross margin was 70%. Non-GAAP gross margin, excluding amortization of acquired intangibles, was 73%. Margins were slightly lower year-over-year. The added fixed cost of automation brought online temporarily weight in Q1. We expect gross margins will improve over time as we realize the benefits from lab automation, leverage investments in a lab infrastructure and see an increased mix of rescreened patients. Net loss was $110 million. Adjusted EBITDA was $39 million. Of note, G&A included $4 million of unique onetime items related to facilities consolidation and a $6 million of noncash expense related to acquisition earnouts. In the first quarter last year, G&A was reduced by $9 million from a noncash gain related to earn-outs.

We continue to expect leverage across the P&L this year, especially within G&A. We are taking further steps to optimize costs and increase operational efficiency, enabling us to reinvest in our core business and prepare for new product launches. Free cash flow was negative $120 million during the first quarter, consistent with our expectations and typical seasonal trends. We expect robust cash flow generation for the rest of the year. We ended the quarter with cash and securities of $652 million. In April, we announced our primarily negotiated refinancing. Our primary goal was to smooth and extend existing debt maturities. We accomplished this by issuing $621 million in 2031 notes at attractive financing rates. In return, we have reduced our 2028 notes by $360 million and received $260 million in cash net of fees, bringing first quarter pro forma cash to $912 million.

Our capital allocation priorities remain unchanged. Our number one priority continues to be growing Cologuard and Oncotype DX. Second, we’re focused on high-return pipeline opportunities with large patient impacts. Turning to guidance. After a good start to the year, we’re well positioned to achieve our annual revenue guidance of between $2.81 billion and $2.85 billion and adjusted EBITDA guidance of between $325 million and $350 million. Our recent investments in sales and marketing have already started to pay off in the second quarter. We expect to see a bigger impact in the second half of the year, but we also faced easier comparisons in the second half. In addition, we’re seeing greater demand for Cologuard and Care Gap programs run by payers and health systems, which typically accelerate during Q3 and Q4.

During the second quarter, we expect total revenue of between $677 million and $697 million. This assumes screening revenue between $522 million and $532 million and Precision Oncology revenue between $155 million and $165 million. This is my last Exact Sciences earnings call. It’s been an honor to be part of the team over the past eight years. I’m extremely proud of what we have accomplished. Together, we’ve helped build Exact Sciences into a differentiated growth story with strong recurring revenue, healthy margins and a robust balance sheet. Most importantly, we’ve delivered over 17 million cancer tests. I also want to thank the many investors and analysts that follow Exact Sciences. I’ve always appreciated your support and enjoyed interactions.

The future of Exact Sciences is extremely bright. I’ll now turn the call over to Aaron.

Aaron Bloomer: Good afternoon, everyone. I’d like to thank Jeff for his support during my transition. It is an honor to be Exact Sciences next CFO, and I look forward to leading our talented finance team. During my career, I’ve had the privilege of working for Baxter International and 3M, where I emphasized growth and operational excellence. I also focused on margin expansion and free generation and played a key role in portfolio management and business development. Exact Sciences is in a prime position to be a global force in the fight against cancer for years to come, and I’m excited about the opportunities in front of us. Together, we’ll continue delivering differentiated financial results, all in support of our purpose to help eradicate cancer.

Kevin Conroy: Thanks, Jeff, and thanks, Aaron. Our commercial engine is fueling Cologuard growth through millions of targeted engagements with patients and healthcare providers. We continue to bring the power of the Cologuard brand to life through new marketing experiences, offering a consistent flow of compelling content to patients ages 45 and older. Marketing investments like these listed Cologuard brand awareness and customer satisfaction to an all-time high in the first quarter. Since the start of last year, 50,000 healthcare providers chose Cologuard and became new customers to Exact Sciences. Our data show the more time we spend educating these healthcare providers about the benefits of Cologuard, the more test they order for their patients.

Our productivity per customer visits had a record in the first quarter, and we have initiatives underway to drive that even higher. To meet demand among our growing base of ordering providers, we will continue investing in high-impact sales and marketing opportunity. The number of patients do for their next Cologuard test continues to increase, and our growing sales team can help improve the rescreen success rates in this patient population. Health systems and payers are highly motivated to improve screening rates through financial incentives built into quality measure programs. Screening backlogs and colonoscopy wait times continue to increase. In addition, the new quality measure reporting standards evaluate colon cancer screening metrics at the population level rather than through random sampling, increasing the burden for payers on [data reports].

Cologuard is an ideal solution, and it’s emerging as a preferred choice within large organized screening programs run by health systems and payers seeking to close their gaps in care. They’re turning to Cologuard because it’s in USPSTF guidelines and HEDIS and STARs quality metrics. Cologuard is a highly accurate at-home test that offers three times more quality credit than the FIT test, which has historically been used within these programs. Our patient compliance engine and the Exact Nexus platform, simplify data reporting required in the quality measures to help payers and health systems earn financial incentives. We’re also helping health systems and payers unlock efficiencies by leveraging artificial intelligence and their electronic health record systems to automate workflows to determine patient screening history, streamline patient communications and track patient outcomes.

This gives healthcare providers more time to solve real patient leads. Our Precision Oncology team delivered outstanding results during the first quarter by testing a record number of people globally with Oncotype DX. We’re making great progress towards increasing Oncotype DX adoption internationally with the number of ordering providers expanding by over 20% during the first quarter. There is still a huge unmet need to provide life-changing answers to women who aren’t currently being tested, especially in markets like Japan, Italy and Germany. Dedicated efforts are ongoing to broaden our reach and deepen relationships with providers around the world. Building our international presence and team also provides future growth opportunities across our broad portfolio of tests.

Over the next 18 months, we’re set to launch a range of new tests that will change how cancer is diagnosed, monitored and treated while also helping accelerate Exact Sciences growth. This includes OncoDetect, a bespoke MRD test to detect fragments of residual disease earlier than advanced imaging systems can as well as OncoLiquid a blood-based therapy selection test to complement our tissue-based OncoExTra offering. It also includes Cologuard Plus which will be the most efficient noninvasive way to screen for colon cancer. The New England Journal of Medicine publication of our pivotal BLUE-C study shows Cologuard Plus raises the performance bar in colon cancer screening. The test achieved 94% overall cancer sensitivity. 43% sensitivity for advanced precancerous lesions, including SSLs. 91% specificity when including patients with small polyps and other incidental findings.

And 93% specificity with no findings on colonoscopy. No other noninvasive approach comes close. We plan to share data from BLUE-C later this year for our blood-based colon cancer screening test which will be powered by Exact Nexus, our unique technology platform by our proprietary PCR technology and the commercial infrastructure supporting Cologuard. Exact Sciences has deep relationships with over 350,000 healthcare providers and a powerful colon cancer screening database. These unique advantages give us the opportunity to identify patients who refuse standard of care screening and offer our blood test as a second-line option at a very reasonable cost. We have built an unrivaled foundation to engage patients and healthcare providers, and we are set to gain momentum with each new test added to this platform.

We’re using this platform to help eradicate cancer by preventing, detecting it earlier and guiding personalized treatment. Cologuard, Oncotype DX and our pipeline of life-changing diagnostics will power years of double-digit growth and continued profitability, helping us achieve our purpose. Before we turn to Q&A, I’d like to thank Jeff for his many contributions to Exact Sciences over the last eight years. He’s been an invaluable business partner and leader. We’ll miss him once he departs. We wish him all the best as he enjoys well-deserved time off with his family. We’re now happy to take questions.

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Q&A Session

Operator: Great. [Operator Instructions] Your first question comes from Catherine Schulte with Baird. Please go ahead.

Catherine Ramsey: Hi, guys. Thanks for the questions, and congrats to Jeff. You will certainly be missed. Starting with Cologuard, Screening revenue grew 7% in the first quarter. Guidance implies more like 16% for the full year, kind of mid-teens in the second quarter and over 20% in the back half. So can you just talk through what gives you confidence in that growth outlook and excite you about the Cologuard growth story from here? And if I could just squeeze one in on profitability. And you saw adjusted EBITDA decline year-over-year in the first quarter. So if you could just talk through the drivers there, that would be great? Thank you.

Kevin Conroy: Sure. Why don’t I take the first part and hand it over to Jeff afterwards. Here’s why we’re excited about this year. The size of the opportunity remains enormous. 16 million people in the U.S. are not up-to-date with colon cancer screening. And our customer relationships have broadened and deepened – immeasurably over the last year. There are over 330 health systems today that rely on electronic ordering and advanced tools that we provide – are really our consulting services that we provide around IT patients. There are over 2 million people today who are due for rescreened. There will be 400,000 new patients due in Q2 alone. Payers, their gap closure programs will get into them, but that is a new and significant growth area.

The biggest impact will be in Q4. And then Q3, we’ll start to see that impact. The power of the commercial team, Everett will get into talking about that the Exact Nexus platform, our customer service, customer experience and IT has been a differentiator for us with health systems and payers. And clearly making an impact with patients. And then the power of our brand, it hit an all-time high in Q1 in terms of brand awareness, the positive reaction to the creative digital and in-line television commercials and social media engagement we’ve had. So all of these things are drivers. Yes, we had a tough comp relative to Q1. We also – we turned down our sales and marketing investments, as you know, over the last year and really over the last couple of years, while we saw about approaching $1 billion of growth.

And the truth is we probably turned that down a little bit too much. We recognize that at the back end of last year. And starting in Q1, we increased our marketing investments. As of now, we have a complement of new primary care sales reps, who are hitting the ground now. We’ve already seen the impact from the marketing investment in terms of accelerating growth. So that typically takes three to six months. And we’re seeing that, plus we are adding a significant contingent of new reps around the country, and we expect to see additional growth from those reps. Our overall spend will still be less in sales and marketing in ’24 than it was in ’22. We know this added firepower will have a positive impact. And one thing that we always look at is the promotional response to Colo.

The number of test orders that result from calling on deciles of physicians. And it’s clear the more time, the more frequently our reps call on an office in a position, or a nurse or physician assistant, you see a straight line increase with no flattening from zero to six calls per quarter. That gives us confidence that by adding reps, we will see it. If not. You will see an increase in the total number of test orders. So I’ll pause there, we’ll be able to get into a lot of these areas Everett is here. And Jeff, why don’t you take the profitability?

Jeff Elliott: Yes. And just to add to these remarks on the comparison. As I said in my remarks, we did have a really hard compare. If you look at the two-year stacked comp. Q1 was up 24%. When you think back to last year, part of why the way whole first half was so strong is, because in late in ’22, we made some pretty significant upgrades to both our billing systems and our patient compliance systems. That led to a bolus of high-margin revenue, really consider this really out-of-period revenue that helped out the first half of last year. Obviously, that’s not going to keep repeating. So, we do face a really difficult compare in the first half. Kevin, you walked through some of the comparisons. In the second half, conversions do get much easier, and we do expect 20% growth plus in the second half.

The reason I bring that up is also from a profitability standpoint, that comparison help revenue and profits, because when that revenue came in at it came in at a very high margin. So when you look at Q1, we expect Q1 in a normal year, Q1 profitability will be the lowest of the year. We expect – the latest revenue growth and the highest OpEx as a percent of revenue throughout the year, I expect faster growth and lower OpEx as a percent of revenue. Again, the comparison is a bit easier. When you look at gross margin in Q1, they were a bit lighter in part, because of the automation we brought on. We had a huge step forward in automation. The team did a nice job bringing that online. That will help margins improve over time. In the short-term, that added some fixed cost that weighed our margins a bit.

We also have this care gap initiative that we’ve talked about bring the source of revenue. It is adding significant EBITDA dollars, but it does come at a slightly lower gross margin that we’ll work our way through, but that did weigh in Q1 a bit as well.

Catherine Ramsey: Great. Thank you

Operator: All right. Our next question comes from Vijay Kumar with Evercore ISI. Please go ahead.

Vijay Kumar: Hi guys. Thanks for taking my question. And Jeff, wishing you all the best. My one question here, Kevin, perhaps on what is the – this comp that you didn’t mention at the different ways of looking at it, is the right way to look at this is on a CAGR basis versus pre-pandemic level over? It seems like it’s pretty consistent when we do the CAGR math in related to that. There’s been some noise on the competitive landscape. I think one of the stool-based companies got an approval, an FDA approval. I’m curious on your thoughts on the competitive landscape? Thank you.

Kevin Conroy: Sure. Let me go back to Cologuard and Cologuard Plus. Both tests offer performance that is unequal to that is – superior to the FIT test. And the performance of the studies that we ran were large studies with a significant number of cancers, cancer patients across a broad age range. And Cologuard Plus advance the standard of care over Cologuard. Our specialized teams make sure that healthcare providers are aware of the broad studies that support Cologuard. And we have the ability to deliver that in a very clear way, plus the strength of our platforms and all of that. But now you’ve got to go to – remember, anybody who brings a new screening test to market. One of the key things that they need to do to have that test be relevant is to get into the quality..

The path to getting into the quality measures is a very long one. We think a new test, and this excludes Cologuard Plus, because Cologuard Plus, like Cologuard is already in the quality measures, we’ve already – all that work has been done. New tests coming online need multiple studies – needs broad studies. You need to study the Medicare population in a broad way, and may get all the way through USPSTF, which is the trigger for the quality measures. Well, USPSTF, our best guess is 2027 is the next update, and then it would be ’28 or ’29 for the quality measures. As you know, we have a patent infringement and false advertising suit against an aspiring new entrant into the market. We won’t be talking about that case. We will, of course, defend our intellectual property aggressively.

And Jeff, why don’t you take the CAGR question?

Jeff Elliott: Sure. Vijay, on the two-year stack. I do think it’s informative to look at the two-year growth rates in this case, because of the unusual growth we had last year. It is informative. And to add some more color on it, if you look at some of the major growth drivers, like we’ve talked a lot about re-screens in 45. If you look at that two-year stack in the first quarter, both of rescreens and that 45 to 49 younger age group. Both grew over 40% on a two-year stack, and that’s 50-plus age group grew consistently over 10%. So that gives us confidence that what we’re seeing here is primarily a comparison issue. And again, when you look at the back half, the comps do get easier. So in addition to what Kevin talked about, the investments that we’re making will help accelerate growth after last year leaving some growth on the table through underspending.

Operator: Okay. Our next question comes from Doug Schenkel with Wolfe Research. Please go ahead.

Doug Schenkel: Hi, good afternoon. Kevin, thanks for all the comments on the market opportunity, which remains large and unpenetrated are underpenetrated. It’s helpful to hear about your awareness building efforts and the progress you’re making. And I think we recognize that the comparison was tough here. That said, I do think recognizing you’re cutting things a smidge different, or at least not giving us quite as much information as you told us to be prepared for. It does seem like orders per practice dropped relative to what we saw maybe in every quarter last year. And I think it’s fair to say that folks expected the Cologuard number to be a little bit better. So, I just want to make sure that we understand a few things. Like one, was there any transitory impact?

Was there something that you maybe saw that was worse than expected, when it came to respiratory? Or anything else that might have been transitory? Two, was there anything different in terms of capturing reorder opportunities, maybe more of those lagged into the following quarter? And then, I guess kind of building off of this, when would you expect reps to make an impact? Is there still going to be a six to nine-month lag? Or is there something different here that can give you a quicker return on investment? All of this is meant to just get to the question of – based on what you’re seeing in terms of trends, based on what we saw in the quarter. More importantly, as we look longer term and think about the opportunity, the progress you’re making with awareness all of those good things.

How do we get comfortable that Cologuard for not just this year, but for the foreseeable future is a double-digit growth franchise? Thank you.

Kevin Conroy: Yes. Well, let me start by seeing – despite the items you raised, I’ve never been more excited or confident about Cologuard. And one thing that we learned from turning down the sales and marketing spend is that for six months, you’ll see continued progress. I mean – and we saw that last year. You can’t go forever, though with the brand is large and it’s impactful as Cologuard, with the size of the investment that we were making. And the good news is we have the data and analytics to back that up. We made the investments in the first quarter. And as we sit here today, without the addition of all of the salespeople in the first quarter, most of them are coming online right now. We’ve already seen a return to the growth that we expected.

So, we have confidence that we’re going to be able to deliver on this full year. And the other thing is this and we’ll get into this in more depth. Health systems – there are dozens and dozens and dozens of health systems who have come to us to say, please help us improve our colon cancer screening rates. With gap closure programs with helping them optimize their EHR platforms, Epic et cetera, to use population health tools to get more people screened. That is at a rate we have never seen. And then these payer programs are significant programs. Last year was the first year we really saw that demand being generated and just kudos to the team who’s worked so hard to deliver there. And we already have strong insight into what is happening with those programs.

So when we say we expect those programs to have an impact in Q3 and Q4, we have line of sight into that. That’s not guesswork. So Jeff, do you want to add color?