Exact Sciences Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

There are 17 speakers on the call.

Operator

Thank you

Speaker 1

for standing by. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Exact Sciences Corporation Q1 2023 Conference Call. All lines have been placed on mute to prevent any background noise after the speakers' remarks. There will be a question and answer session.

Speaker 1

With me now is Vice President, Investor Relations, Megan Jones. You may begin your conference.

Speaker 2

Thanks, Jordan. Thank you for joining us for Exact Sciences' Q1 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, will also be available for questions. Exact Sciences issued a news release earlier this afternoon detailing our Q1 financial results.

Speaker 2

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.

Speaker 2

I'll now turn the call over to Kevin.

Speaker 3

Thanks, Megan. I'm incredibly proud of our team, their dedication to our mission and the record quarter they delivered. During the first Quarter core revenue grew $148,000,000 year over year or 33%. We're raising our Full year guidance for revenue by $110,000,000 and adjusted EBITDA by $100,000,000 We now expect to turn Free cash flow positive during this year ahead of our previous target of next year. In the Q4 of 2014, the first It took 3.5 years to screen our first 1,000,000 people with Cologuard.

Speaker 3

This year, We've already screened more than 1,200,000 people. Cologuard has transformed the way that we screen for the number 2 deadliest cancer in the U. S. And we still have a huge opportunity to make an impact with 60,000,000 people who are not up to date with The platform we've built will continue to change the way cancer is detected and treated. We're just starting to realize its full potential.

Speaker 3

Our first quarter results demonstrate the power of focusing on what is best for patients and our customers. At Exact Sciences, this means we develop tests based on a deep understanding of the biology of the disease and science, Generate the highest level of clinical evidence supporting the test use and Build the operations necessary to deliver an amazing customer experience. Combining these with an investment in strong brands enables Durable revenue growth, industry leading gross margins and growing profits. A portion of those profits We'll support investments in the next wave of life changing diagnostic advancements, creating an unstoppable innovation engine. Other highlights from the Q1 include delivering more than 1,000,000 total tests including a record number of Cologuard results, Generating $46,000,000 in adjusted EBITDA, an improvement of $136,000,000 year over year, Launching Onco Extra, our enhanced therapy selection test and making progress toward completing Blue Sea, Our pivotal study to support our next generation Cologuard and colon cancer blood tests.

Speaker 3

Jeff will now review our Q1 results.

Speaker 4

Thanks, Kevin. 1st quarter revenue of $602,000,000 grew 24%. Core revenue of 598,000,000 Grew 33% excluding COVID testing, the sale of our prostate business and foreign exchange. Screening revenue of $443,000,000 increased 45%. The majority of screening revenue upside came from broad based momentum in Cologuard adoption with additional benefits from a relatively mild flu season Enhancements made last year to our patient compliance program and billing systems.

Speaker 4

During the quarter, 10,000 new healthcare professionals ordered Cologuard, bringing the total to over 312,000. Precision Oncology revenue increased 2% to 155,000,000 Growth was 8% excluding the sale of our prostate business and a $1,000,000 FX headwind. COVID testing revenue decreased 86% to 4,000,000 1st quarter GAAP gross margin was 71%. Non GAAP gross margin excluding the amortization of acquired intangibles was 74%. Gross margin benefited from fixed cost leverage in our lab and improvements made to the Cologuard patient compliance program and billing systems.

Speaker 4

GAAP net loss was $74,000,000 Adjusted EBITDA was $46,000,000 an improvement of $136,000,000 driven by better than expected revenue and gross margin. We ended the quarter with cash and securities of about 700,000,000 Turning to guidance, we expect total revenue between $589,000,000 $604,000,000 during the 2nd quarter and 2.38 And $2,420,000,000 for the year. This assumes screening revenue between $443,000,000 $453,000,000 for the 2nd quarter And $1,770,000,000 $1,795,000,000 for the year Precision Oncology revenue between 145 $150,000,000 for the Q2 $605,000,000 $620,000,000 $620,000,000 for the year and COVID revenue of $5,000,000 for the year. We plan to discontinue COVID testing after the Q2. For the year, this implies 19% core revenue growth with 25% growth in screening And 5% growth in precision oncology excluding the sale of our prostate business and foreign exchange.

Speaker 4

We are increasing our adjusted EBITDA guidance by 100,000,000 now expect between $100,000,000 $125,000,000 for the year. We now expect to turn free cash flow positive during the year, 12 months ahead of our original target and then generate full year positive free cash flow next year. I'll now turn the call back to Kevin.

Speaker 3

Thanks, Jeff. There are 60,000,000 Americans on screen for colon cancer, and Cologuard is the only solution to get them screened accurately, easily, and in the Screening rates have been persistently low for decades. This problem has been intensified by the addition of nearly 20,000,000 people Capacity for screening colonoscopies in the U. S. Is relatively fixed and health systems are motivated to increase screening rates.

Speaker 3

We estimate it would take 10 years for gastroenterologists to screen everyone who is due today with colonoscopy alone. Health systems, which represent more than half the market, are recognizing the opportunity to partner with us To address their screen rates and related quality measures, they rely on Cologuard as an essential part of their screen toolkit and are embedding it in their workflows. We have implemented more than 275 electronic ordering interfaces Connecting health systems to Exact Sciences. Our data show that Cologuard market share is about 50% higher in the largest 400 health systems versus independent practices in smaller systems. Cologuard will continue to screen more Americans and help eradicate this preventable disease.

Speaker 3

Our precision oncology portfolio guides treatment decisions for more than 200,000 cancer patients every year. Our Oncotype DX test helps early stage breast cancer patients determine whether they will benefit from chemotherapy And our Onco Extra test helps late stage cancer patients determine their best treatment options. A consistent focus on high quality tests, top tier clinical evidence and physician education has cemented Oncotype DX As to this life changing information, the Oncotype DX test generates durable, high margin revenue and cash flow. This supports adoption of new tests such as Onco Extra and molecular residual disease tests. We're making progress in our 3 most impactful pipeline programs: colon cancer screening, multi cancer early detection and molecular residual disease.

Speaker 3

In colon cancer screening, we are on track to share top line data this summer from our BLUE C trial for our next generation Cologuard test. We recently ran next generation Cologuard on approximately 7,700 blinded deep sea samples, And the results give us confidence in our goal to improve specificity in precancer sensitivity. As a reminder, DEEP C was our pivotal study supporting Cologuard's FDA approval in 2014. This second prospective study will provide valuable evidence supporting next generation Cologuard's Clinical value and competitively unique position. In multi cancer early detection, we plan to share 2 additional sets of case control data Further validating our comprehensive multi marker class approach.

Speaker 3

In molecular residual disease or MRD, We shared data detailing our tumor informed and tumor agnostic approaches at the American Association of Cancer Research Conference last month. We plan to enhance our algorithm and generate additional evidence before making our tumor informed approach Available in colon cancer. We will continue developing tests based on a deep understanding of the disease and science, Generating the highest level of clinical evidence supporting their use and leveraging the operations we've built to deliver the best customer experience. This innovation engine built on the broadest, most capable platform in cancer diagnostics will support continued revenue growth, Industry leading gross margins and growing profits. This will allow us to solve the biggest problems in cancer

Speaker 1

We'll pause for just a moment to compile the Q and A roster. As another addition, there is only one question per participant. There will be no follow-up questions. Your first question comes from the line of Brandon Couillard from Jefferies.

Speaker 5

Hey, thanks. Good afternoon.

Speaker 6

Kevin, what would you say would be the 1 or 2 things that you think were most impactful In the Q1 in terms of driving the revenue outperformance. And Jeff, if we look at the guide for the balance of the year, it seems to imply the screening revenue is Flat over the next three quarters for the balance of the year. Is that informed by March or April orders or just being conservative in where we are at this point in the year?

Speaker 3

Thanks, Jeff. Why don't I take it and hand it over then to Everett, who will hand it over to Jeff. So there are just many drivers that have seen the strength in Cologuard testing. It's investments that we've made Over the last 9 years, and it's also just tremendous execution over the past few quarters. So it's really wonderful you hand it to the entire team to make this work.

Speaker 3

These are investments in our Our commercial team, an incredible sales team and marketing capabilities, our labs, operations, the brand building we've done, The R and D team who have brought innovations into our lab, into the product, Our digital compliance team, analytics, it's just so exciting to see so many strengths across The entire company, Cologuard, Oncotype and the prevention genetics business. Everett?

Operator

Yes, I'll add some color to that. As Kevin said we've made many investments over the years. I've been out in the field over the last few quarters and one thing I'm seeing is I'm seeing that momentum of the investments Pickup. And the confidence in our sales organization, the messaging that they have around the product It's just so clear with the customers. The other thing I'll mention is with the customers.

Operator

The customers are now realizing especially in the screening space That we can partner with them. They're trying to hit screening and other metrics out there around quality And they know that they can't do it alone. So how they partner with Exact Sciences and our organization to hit those metrics, we're seeing that pick up over the last few quarters. And the last thing I'll mention is around just our targeting around our top customers. Our health systems, as Kevin said in his statements, They drive a lot of our volume and the focus that we have with calling on the right health systems with the right message And ensuring that we're being again a partner and ensuring they can screen the right people, to me, I see that picking up over the last few quarters.

Operator

I'll pass it

Speaker 4

to Jeff. Thanks, Sohrab. So Brandon, on your question on the phasing and guidance, I would just take a step back and look at the what we've built here. Over 9 years, We built out Cologuard to over $1,700,000,000 of revenue. And again, here we are 9 years into launch growing over 25% for the year.

Speaker 4

So we feel really good about the quarter we've delivered. We're raising the top line guidance by well north of the Q1 beat. So that speaks to the optimism for the rest of the year. On the phase in 2 things to keep in mind. 1 is really around Q1.

Speaker 4

Q1 beat our own internal expectations, a very strong quarter. The majority of that was underlying momentum that Kevin and Evert just talked about. We also got some benefit from a mild flu season, impossible to quantify that, but it did help as we talked about in our last earnings call. And there was a couple of smaller things that contributed. We also previously talked about the carryover benefit From enhancements to our patient compliance engine and our billing systems.

Speaker 4

Those went in place in last year. We got a little bit of benefit in Q1 from that. What I think of the rest of the year now, there's a typical summer seasonality. During the summer, fewer people go out for physicals, still that Therefore, there's incrementally less growth between Q1 and or Q2 and throughout the year because that summer seasonality. This year, there's one new dynamic to lay on top of that.

Speaker 4

That's related to the impact from COVID 3 years ago, hurt the Cologuard business primarily in Q2 Q3 of 2020. Now flash forward to 2023, when rescreens are about 20% of Cologuard revenue, The contribution from rescreens is somewhat muted this year because of that COVID impact from 3 years ago. The brunt of that takes place in the 2nd and third quarters. So from a phasing standpoint, you expect you would expect a flatter year this year. However, When you jump ahead to next year now, 3 year rescreens reaccelerates because next year now you go from having 1,200,000 people eligible this year, newly eligible Cologuard rescreen patients, which is the same as last year.

Speaker 4

Next year, you jump up to 1,600,000 more So that rescreen contribution should accelerate again next year.

Speaker 3

Yes. And Jeff, if you're not too nervous about me referring to numbers here. In Q2 of 2020, there were about 275,000 Cologuard tests. And in Q2 of 2021, there were about 575,000 Cologuard tests. So that bounce back is going to occur.

Speaker 3

This is just a one time artifact that will have Some impact, but the team is awfully excited about the year. And I if I could encapsulate the biggest Change that has occurred is health systems are coming to us asking for help. And that has strategic implications For everything we're doing at Exact Sciences, addressing the entire cancer continuum. That's exciting with every product In our pipeline that we're working on and it fires up the R and D team and the commercial team and the lab teams. And so we can't wait.

Speaker 1

Your next Question comes from the line of Patrick Donnelly from Citi.

Speaker 7

Hey, I got Jason on for Patrick. Maybe just one on the adjusted EBITDA guide moving up 100,000,000 Just wondering if you can talk about that strength in the quarter, the embedded assumptions for the rest of the year. I think GAAP OpEx declined slightly in the quarter And just the gross margin? Thanks.

Speaker 4

Yes. So we're pleased with what the team could deliver in the Q1, dollars 46,000,000 which exceeded The original guidance for the year. I'd point back to what Kevin talked about. We've been at Exact Sciences building for 9 years now This foundation, the foundation that allows for robust top line growth, margin expansion, cash flow generation, This foundation is scalable, it's robust, and you're seeing it now. You're seeing it in the numbers, and you should continue to see it in the years to come.

Speaker 4

We're pleased with how that unfolded in the Q1. That allowed us to raise the EBITDA guidance by $100,000,000 just 1 quarter in. So when you think about the I would highlight the incrementals. The incremental adjusted EBITDA margin this year is about 80% now. So you're seeing the efficiency of this platform.

Speaker 4

What we've assumed is we talked to the top line numbers, No change to the assumptions baked in for gross margin around 73% and for OpEx, No change there, still on a GAAP basis in the mid single digit range. So again, you're seeing the power of this platform really unfold. We can deliver top line Growth, gross margin expansion, OpEx leverage and now free cash flow for the first time.

Speaker 1

Your next question comes from the line of Catherine Schulte.

Speaker 8

Hey guys, thanks for the questions. I guess, could you just talk to the cadence of Cologuard orders Throughout the quarter and any commentary on trends you saw in April May so far?

Speaker 4

Sure, Kevin. This is Jeff. Happy to take that one. I typically don't get into intra quarter commentary, but you can hear from our comments The majority of the upside was driven by broad based momentum, which speaks to there is no kind of big one timer at the end of the quarter. So this is broad based throughout The commercial team did just a fabulous job of staying disciplined week on week on week driving the growth, Continue to advance the marketing campaign.

Speaker 4

So this was just a really strong quarter top to bottom. There's not like one big theme that came in. And obviously, when you look at the guide here, we beat by call it $50,000,000 $60,000,000 We're raising guidance by $100,000,000 So that speaks to the optimism That we're seeing in the numbers and for the rest of the year.

Speaker 1

Your next question comes from the line of Vijay Kumar.

Speaker 5

Hey guys, thanks for taking my question. I had a 2 parter, Kevin. First one for you on your comment on health systems. Is that what we're seeing here when you look at this Q4 and Q1 Uptick in Cologuard numbers, any sense on what percentage of revenues are perhaps physicians are employed by health systems? And are we at the early stage here or are Kinnecock with penetration of health systems where we are?

Speaker 5

And then my second one, Jeff, for you on the EBITDA guide, the $100,000,000 to $125,000,000 and it looks like you guys have Achieved half of it in Q1. Why wouldn't that Q1 sustain into the back half given the revenue guide raise?

Speaker 3

Let me start. I'll take the first part of that question. So health systems have seen a dramatic increase in the electronic Ordering rate. The dynamic is typically about halfway through the year, the health systems get hyper focused on their quality Colon Cancer Screening Quality Measure and they are increasingly reaching out to us to ask us Today, if you focus on the 400 largest health systems, almost 2 thirds of them Have implemented electronic ordering and resulting. That keeps getting better over time, the ease of use, the reporting, the data they get And then how we use that together fuels a deeper relationship with those health systems.

Speaker 3

Everett, do you want to add

Speaker 9

to that?

Operator

When I think of health systems and our execution over the past couple of years, I think about the investments that we've made. We've increased Our strategic account management towards our top health systems. We have a very disciplined way that we review our plans for health systems all the way From Kevin all the way down to the people that are calling on health systems. And the other thing I would mention with health systems are it's a local strategy. We have not only calling on the C suite of the health system, but the way in which we're deployed, the pull through of the representatives with affiliated physicians of those And making sure that we can execute that health system strategy that's leading to more growth.

Speaker 4

Vijay, it's Jeff. I'll take the rest of it. From a percent of revenue standpoint for Cologuard, think of it in the 60% range for health systems and that number is up nicely from where it was say So the team has done a nice job there. Overall penetration rate for Cologuard is in the 10% range. Based on what Kevin talked about for health systems, Probably a bit higher, but the key takeaway here is there's a long ways to go here.

Speaker 4

With 16,000,000 people on screened, we've got years and years of strong growth for Cologuard ahead of us. Good question on the adjusted EBITDA number. Thanks for noticing, dollars 46,000,000 really strong results in the Q1. That came in better than we expected. That's in part due to the higher level of revenue and gross margin in the Q1 than we expected.

Speaker 4

It's also in part due to the way that our operating expense assumptions Phase through the year, our plans call for us to hire throughout the year. And so that's part of why you're not going to have you can't take the Q1 And multiply times 4 and get to the adjusted EBITDA number for the year. Also, we've chosen to reinvest some of the incremental margin that we're generating into accelerated programs. One I'd highlight here is MRD. That market is unfolding and our R and D efforts have reached a point where the team said, hey, now is the right time to up the investment here, to accelerate our path to market.

Speaker 4

So, that's part of why the phasing for just the EBITDA, you can't just take Q1

Speaker 1

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

Speaker 10

Hi, guys. Good afternoon and thanks for taking the question. Kevin, appreciate the commentary around Cologuard 2.0 running that against samples from deep sea. Maybe just sort of give us a bit more color around what you saw in those results compared to previous data that we saw. And then I guess as we just closer to the top line readout here this summer, can you just sort of level set us on how you're thinking about any degradation from those previous studies to this pivotal?

Speaker 10

Thanks.

Speaker 3

Thanks, Andrew. We'll release that data and all I will say is the data gives us confidence Going into the Blue Sea study, as you remember, the main goal is to improve the specificity. Specificity is calculated 2 different ways. One is if you take a look at kind of all comers, that in Cologuard, the current version of Cologuard 87%. Our goal is to improve that 89%.

Speaker 3

If you only look at people with what we would call clean colons, no small Polyps, non adenoma polyps would still send off some signal. If you exclude those, then we would expect the specificity to be 90% or greater. So that's We also remain we continue to expect cancer sensitivity to be Equal to or better than Cologuard and the precancer sensitivity to be we hope to see an improvement there. That would be a great result. Andrew, I just want to drive home the point.

Speaker 3

We ran the study against all of the available samples that we had from DEETC. That study was from 10 years ago, so we didn't have access to all of the samples, but we ran them against all of the samples We had available and didn't select out any for any particular reason and that was blinded. And that gives us a second prospective study, which as you know, when you're looking at guidelines and evidence development is very, very important.

Speaker 1

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

Speaker 9

Thank you. Good afternoon. I was hoping you could talk a little bit about The regional dynamics for Oncotype DX that you're seeing at

Speaker 11

the moment, just looking at

Speaker 9

the 10 Q, it looks like the international growth in the quarter was really strong. I was just wondering if that was offset, how the U. S. Performed as well. Just any commentary as

Speaker 11

to what's going on would be great.

Speaker 4

Sure. And Jack, thanks for the question. This is Jeff. When you look at the growth in the U. S, given our Strong market share there.

Speaker 4

I think the way to think about growth is somewhere just north of incident. So incidents in this U. S. Is probably around 3.5% growth per year, so somewhere in that kind of low to mid single digit range is for the Oncotype franchise is the right way to think about it. Internationally, it's a different story.

Speaker 4

Internationally, the overall penetration rate there is probably in the 25% range. So we expect strong double digit growth for years to come internationally. The next big driver of growth would be launch in the Japan market, which we expect mid year. So that should open up the 2nd largest market outside the U. S.

Speaker 4

So that one can be a little choppier given the dynamics of new markets coming online, but there's still a long runway ahead. Longer term, perhaps the most exciting opportunity for the broader precision oncology growth comes to some of the pipeline tests that Kevin talked about MRD. That market is as you know much larger even than the Oncotype market. So that's a big driver that we're looking forward to. And also don't forget that within the broader PO umbrella, we have our broader advanced therapy selection platform that is growing nicely.

Speaker 1

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

Speaker 12

Afternoon, guys. Kevin, I wanted to look out

Speaker 13

a little bit and ask about this Braidwood Case that looks like it's working its way towards the Supreme Court here and is relevant for these USPSTF recommended tests. It sounds like it has the potential to jam up the works for Cologuard, but it also sounds like some of these industry groups are coming out and expressing confidence in Just continued coverage. I mean, obviously, nothing is finalized there. But what are you hearing? How are you handicapping the risk to the out years?

Speaker 13

Even if you don't think it's meaningful to coverage, do you think it could be

Speaker 3

a factor on pricing at all? I'd love to just get your thoughts there. No. I don't think that that Supreme Court decision is going to have a negative impact on Cologuard. And the main reason for that is that preventive services and HEDIS measures and the incentive structure around preventive services Remains intact regardless of what the Supreme Court might do there.

Speaker 3

And since Cologuard is embedded into those quality measures. There is still a very, very strong bias in the health systems to Screen people with tests that are recommended tests. So that doesn't change anything. Health Haters aren't going to change their view about whether to cover Cologuard because of the spring court case. They Love the benefit of Cologuard in terms of the it's less expensive than colonoscopy.

Speaker 3

They save money in any given budget year And that's a real positive. So, I don't think that that's going to impact us. I sure hope the Supreme Court Leaves that law in place, I think it's very positive for other tests that may come down Through the arduous process that Cologuard went through and but It's certainly not going to have an impact on Cologuard. We're Policymakers in D. C.

Speaker 3

Too are evaluating avenues to move the plaintiff's arguments in that case. And I think are looking at ways to even reform the oversight and appointment of USPS staff members. There's a lot In the works, but the whole healthcare ecosystem relies on USPSTF as a critical part of guideline recommendations. Don't think that's going to go away.

Speaker 1

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

Speaker 11

Hi, this is Wolf on for Derek. Thanks for taking questions and congrats on a really solid quarter. I was wondering if you could offer some color on the 45 to 49 group. Where is penetration at compared to the 8% that you posted last quarter? And can you talk to what kind of contribution you saw this quarter and how you expect that group to Play out for the balance

Speaker 5

of the

Operator

year. Yes. So what I love about the 45 49, is it gives us a really good entree into the office to talk about this cohort. We are in line with delivering on our Full 45 to 49 rescreen priorities. And the reason why we're executing well is because it's been a consistent focus area of ours over the last couple of years.

Operator

We've done a good job of not proliferating growth strategies, but making sure that we stick to the 45% to 49%. And just to mention ReScreen. ReScreen this year will be 20% of our revenue. So these are big growth opportunities for us. It's Consistent messaging that we have with our physicians making them aware of the new screening age and we're going to continue to do that for the full year.

Speaker 4

This is Jeff. Just to add to what Everett said, penetration has really been a highlight for this younger age group and no surprise. Colgate really fits into that younger person's lifestyle Very well. Overall penetration rate there now is 10%. So it's in line with Cologuard for all ages.

Speaker 4

So it just shows you The demand those younger age group has, we see that continuing. In fact, if you look out at just 3 years, the combination of rescreen And 45, we expect to contribute around $1,000,000,000 of revenue. So this is a huge driver for us today and it will be for years to come.

Speaker 1

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

Speaker 14

Hi, good afternoon. Thanks for taking my questions. Congrats on the quarter. Everett, maybe one for you just going back to the health systems. Can you maybe talk about sort of how that market is shifting in terms of sort of the largest system versus the independent practices?

Speaker 14

And just how much scale and infrastructure it takes to actually gain a new health system? I would assume there's Many different decision points and an enterprise led sales very different than sort of what you're doing with independent practices. Can you maybe talk about how you've kind of gone after The newer health system clients that you've brought on board and how much scale and infrastructure that actually takes to do?

Operator

Thanks for that question. What we've seen, especially after the pandemic, is we see kind of a consolidation of health systems, health systems buying other health systems. And we feel that we are well staffed, if you will, and deployed to make an impact at Health Systems. As I said earlier, we have a strategic account management team in all of our businesses, screening, precision oncology and prevention genetics. We've invested in this team not just in the number of strategic account managers, but in the way in which we train them, the marketing materials that they get That allow them not just to call on physicians, but it allows them to call on the C suite of those organizations because that's where a lot of decisions are made.

Operator

In terms of scale, I love the way that we're structured because the health systems team with the strategic account managers and the representatives are on the same team now. So when something is the decision is made at that health system highest level, it is so much easier for us to now pull that through And generate growth. And the last thing, I'll just reiterate that Kevin said, health systems are now coming to us. They know that they can't do this alone. And so the relationships that we have at that health system because of the Many years of investments that we've made, the relationships that we have, they're coming to us for how can we help them hit their quality metrics, How can we help them get and hit their screening percentages?

Operator

And we're seeing that just gain momentum over the last year.

Speaker 1

Your next question comes from the line of Dan Brennan from TD Cowen.

Speaker 12

Great. Thanks for taking the questions. Maybe just on profitability and free cash flow. You kind of pulled forward the free cash flow to 2023 and obviously profitability a lot stronger in Q1. Can you just give us a sense of some of the trade offs here?

Speaker 12

Top line growth is really strong, but as we look ahead, say, beyond 2023, kind of how much of this kind of progression Path is sustainable. Obviously, you'll remain positive. Just wondering kind of where margins could get to and kind of remind us as we get towards the Investor Day kind of what kind of outlook We could expect to get in terms of timing. Thanks.

Speaker 3

Thanks, Dan. What you're seeing here is a Fundamental turning point, what you saw in Q1 was the power of the platform that we've been building for many years. We've been investing and investing. By the way, very much appreciate the support of investors along the way there because we're building something special and it's a platform that allows us To both grow and generate profitability, so we don't have to make significant trade offs going forward. We continue to invest Right now in a bright future.

Speaker 3

And if we see opportunities to drive revenue growth By making investments, we'll continue to do that. We're in a position to do that, and we want to do that to achieve our mission. Jeff?

Speaker 4

So Dan, when you look at the Q1, I think this is indicative of what's become. You saw strong top line growth, Strong gross margin improvement and disciplined OpEx. In fact, when you look at total revenue of 24%, OpEx down 1%, That speaks to the power of the platform that we've developed over a 9 year period. So going forward, this platform was designed to scale efficiently. We've been front loading And things like our lab, our sales and marketing teams, our IT and digital infrastructure, That will allow us to scale.

Speaker 4

I can't comment on future years right now. But our goal wasn't just to get the free cash flow positivity. Our goal is to get there, punch through and keep generating incremental growth year on year. So that is the plan.

Speaker 1

Your next question comes from the line of Puneet Souda from SVB Securities.

Speaker 15

Hey, guys, and congrats on a strong quarter here. So first one, and I'll keep it to 1 actually. I don't know if you had an opportunity to look at this, but Any data that you're seeing in terms of the feedback from the field in terms of the 45 to 49 year old? Are they gravitating more towards the Cologuard versus colonoscopy? Sort of help us understand the dynamic there.

Speaker 15

This The new population that's entering the market, maybe just give us a sort of sense of the performance of the Tested there too for 45 to 49 year old with respect to methylation. So it would be helpful if you can provide color on those points. Thank you.

Speaker 4

Preet, this is Jeff. I can start and others may want to jump in. But when you look at the relative demand here, look, it's strong across the board. Cologuard has been the fastest diagnostics launch in history, the first diagnostic to get over $1,000,000,000 and So the demand is significant and look there's a long ways to go with 60,000,000 people that are on screens. From a relative standpoint, if you compare 45 to 49 versus 50 and over, we've talked about 45 to 49 achieving the same Penetration rate in about a year and a half, two years that it took the 50 and over age group to get to and closer to 9 years.

Speaker 4

So The demand there is robust. If you just think about it, I'm in this age group now. I know that I've got a lot of commitments with family, with kids and outside of work, I don't want to take off 2 days for a colonoscopy. That's why that's one of the reasons I choose Cologuard. It fits into my lifestyle better.

Speaker 4

Actual survey work and real demand supports that. From a performance standpoint, the label is the label and that was established With Cologuard in deep sea that we've referenced today on the call, we have run an additional prospective study In this younger age group, the study wasn't designed to demonstrate cancer sensitivity. So it's not something that we talk about. So the label is the label and look forward to continued success in this younger age group.

Operator

And I'll just add what Jeff said In terms of the 45 to 49 year old, our messaging in the field is fantastic. They are the Cologuard patient. You talk about the only solution from a screening standpoint that has accuracy, effectiveness, then you can do it in the privacy of your home. A lot of 45 to 49 year olds, they're on the go. This is the perfect product, not just from a selling standpoint, but we're also messaging from a marketing standpoint.

Operator

Our latest campaign, the MiWay campaign and our messaging is geared towards this younger patient, this younger population. And then our customer experience lever that we have in terms of surround sound outreach, not just through TV, but through digital and social media It's very well geared towards that €45,000,000 to €49,000,000

Speaker 1

Your next question comes from the line of Kyle Tim from Canaccord Genuity.

Speaker 11

Yes. Hey, guys. Thanks for taking the questions. Congrats on the great quarter here and the cash flow news as well on EBITDA. So just question on next generation Cologuard.

Speaker 11

With this flu seed readout coming up pretty soon here, I was curious about precancer sensitivity. Just given the importance of that metric as you included in a bunch of the CDW posters this past week, where I think you noted the threshold of like 40% Sounds like a baseline there. Do you think that the precancer sensitivity in Blue Sea, there's going to be like a game over for some of the emerging options? I mean, obviously, it probably means blood, but I mean that's kind

Speaker 5

of open ended. And then just one

Speaker 11

other question on next generation Cologuard. What's the path there for HETIS? Since the Cologuard a few years, but that's been a huge I think so. We'll be curious to hear that.

Speaker 3

I'm sorry. What's the path forward to heat us for what?

Speaker 11

Cologuard's next generation.

Speaker 3

Yes. Let me take that one first. I think that, Polar Bear 2.0 fits within the current Definition of USPSF. So, it doesn't really have to go through another cycle. It just is an improvement on the current Technology that's already included in those guidelines.

Speaker 3

Presumably, it will be. We'll wait until This summer to share the data. In terms of the importance of the evidence that Cologuard set, I'll go back to what we have said. From a regulatory standpoint, Cologuard is the PMA level product. That means It's the highest level of rigor for any medical device or diagnostic because it's cancer.

Speaker 3

And so the way the regulatory the Agency, FDA looks at this is typically you need to have at least as good as performance. You can't have degradation in a product. Or at best you would get a secondary screening plan, which hampers your ability to Commercialize that in a meaningful way. Pre cancer sensitivity is important. You think, well, how important could it be?

Speaker 3

Well, You can see from our DDW poster or abstract, 80% of the Benefit of screening comes from finding and removing precancerous polyps, 80% of the benefit. So if you look at on a population level, the difference between, Let's call it like 15% pre cancer detection and 40% pre cancer detection is you are On a population level, that inferior test only is achieved Somewhere around 40% of the life years gained of 60%. 60% of the life years gained as a test with 40 plus percent pre cancer detection. It's critically important. And this is what the Guideline Group looks at.

Speaker 3

They looked at very sophisticated models, which answer the question, what's the impact of a new screening modality? I believe that the blue seed data has the potential to set a new bar. Now what do we think about our blood program? Because I think there's an embedded second question there. And our blood program is if we end up with a secondary screening claim with the test that's built on a proprietary PCR platform, We can deliver at cost the testing to patients who just refuse other forms of screening.

Speaker 3

I think that we all know family members, friends who have avoided screening and they've been diagnosed. We at Exact Sciences happen to know Who those patients are? In combination with our health system partners, we can deliver a solution To people who refuse other more better forms of Screening. So, we're in a great position with Cologuard as the leading product. Adding a blood test, we think, is going to help

Speaker 1

Your final question comes from Alex Nowak of Craig Hallum Capital Group.

Speaker 16

Okay, great. Good afternoon, everyone. Maybe to end on a note here about the upcoming Analyst Day, You have a lot going on, whether it be the Blue Sea study, MRD, focus on profitability. You shared

Speaker 11

a lot with us so far with these earnings calls here. But what new

Speaker 16

do you want to unveil at the Analyst Day? Any preview?

Speaker 3

Alex, you have to come here for the good stuff. We really can't wait to show off our team, our lab, our pipeline products, The commercial activities, we haven't had an Investor Day in, I think, it's 7 years. So we're really excited To bring everybody together and look forward to hosting you and other investors here in Madison.

Speaker 11

Thanks for the update.

Speaker 1

For its final moments.

Speaker 3

Since joining Exact Sciences in 2009, there are many Accomplishments that bring me pride and make me thankful for being part of this team. Today's announcement of our Q1 results Mark's a high point. We made incredible progress in our mission of eradicating cancer and delivering great results for the shareholders Who have supported and believed in us. The Exact Sciences team takes pride in innovation, quality, integrity, accountability. And most of all, we believe that teamwork fuels the culture that leads to superior results.

Speaker 3

The best part is yet to come in the Exact Thank you to all of the team members who made Q1 such a powerful quarter, and we look forward to delivering again in the future. Thanks.

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Earnings Conference Call
Exact Sciences Q1 2023
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