Exact Sciences Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Exact Sciences Corporation World Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, please press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I will now hand the conference over to your speaker, Mr. Eric Hosnack. Thank you. Please go ahead, sir.

Thank you, Kathy, and thank all of you for joining us for Exact Sciences' fourth quarter 2020 conference call.

On the call today are Kevin Conroy, the company's chairman and CEO, and Jeff Elliott, our chief financial officer. Exact Sciences issued a news release earlier this afternoon detailing our fourth quarter financial results. This news release and today's presentation are available on our website at exactsciences.com. During today's call, we will make forward-looking statements based on current expectations. Our actual results may be materially different from such statements. Reconciliations to gap figures are available in our earnings press release, and descriptions of the risks and uncertainties associated with exact sizes are included in our SEC filings. Both can be accessed through our website. It is now my pleasure to introduce the company's chairman and CEO, Kevin Conroy. Thanks, Eric. We are thrilled to announce that Megan Jones, our head of investor relations, had healthy twin girls on Friday, and we congratulate Megan and her husband, Chris, on this great news. Last year, we continued to transform Exact Sciences and advance our mission to eradicate cancer. We strengthened our R&D capabilities in our cancer test menu by adding the Thrive, Base Genomics, Paradigm, and Biomics teams to the Exact Sciences family. Because of our team's resilience throughout the pandemic, we tested more than 4 million people across all of our tests and generated nearly $1.5 billion in total revenue. We'll talk today about how we've evolved into a leading cancer diagnostics company with the broadest and most advanced capabilities, relationships, and foundation. Backed by these strengths, we're confident in the long-term growth of Cologuard Oncotype DX in our future tests, including minimum residual disease, liquid biopsy, and multi-cancer screening tests. We plan to extend our leadership throughout the cancer continuum, addressing the largest patient impact opportunities and diagnostics. Cumulatively, this represents a combined total opportunity of $60 billion. Our people, scientific platform, and leading tests place us at the forefront of earlier cancer detection and precision medicine. Our CFO, Jeff Elliott, will now review our financials. Thanks, Kevin. Good afternoon. Fourth quarter revenue was $466 million. Screening revenue was $250 million, a 9% increase driven by Cologuard volume growth. 8,000 new healthcare providers ordered Cologuard during the quarter, and nearly 227,000 have ordered since launch. Precision oncology revenue was $118 million. COVID testing revenue was $99 million, consistent with our guidance. Fourth quarter GAAP gross margin was 74%. Non-GAAP gross margin, which excludes amortization of acquired intangibles, was 79%. Non-GAAP gross margin increased two points sequentially on volume leverage in screening and precision oncology. Sales and marketing expense was $167 million. G&A expense was $145 million, including $12 million related to the termination of the biocardist agreement. R&D expense was $446 million. Based on the relevant accounting rules, the base genomics acquisition was expensed rather than capitalized. Excluding this impact, R&D expense was $34 million. Net loss was $437 million, also impacted by the base genomics acquisition. Adjusted EBITDA was $88 million, bringing the full year amount to $169 million. This demonstrates the profit-generating potential of our business model and the robustness of our foundation. We did the quarter with cash and securities of $1.8 billion. On a pro forma basis, factoring in the January acquisition of Thrive and Tardis License, our year-end cash balance was $1.4 billion. Turn into our 2021 outlook. Due to COVID uncertainties, we are not providing formal revenue guidance. We expect first quarter screening revenue to decline sequentially because of typical seasonal trends. Primary care utilization is lower in December and early January because of the holidays. This impacts screening revenue in the first quarter due to the normal lag between a Cologuard order and a completed test. In 2020, first quarter screening revenue was down 4% sequentially. we expect the sequential decline to be slightly more this year because of the year-end spike in COVID that lasted through January and is now tapering off measurably. As a result, we have a positive growth outlook for 2021 as the COVID vaccine becomes more widely available and other growth drivers take hold. For precision oncology, we expect to see modest sequential growth in the first quarter as breast cancer diagnoses continue to recover. We expect COVID testing revenue to be down sequentially in the first quarter. COVID testing in the state of Wisconsin, where most of our volume is from, has decreased about 50% from its peak, and COVID cases are down nearly 90%. Year-to-date, we've done approximately $15 million in COVID testing revenue. Based on recent trends in COVID cases, we expect our COVID testing revenue to decline further going forward. We plan to continue offering COVID testing as needed to help support our employees and communities. Moving to OpEx, this year we plan to increase our investment in growth, given our confidence in the long-term outlook for Cologuard and Aquatype and the potential of our pipeline. For the full year, we expect sales and marketing expense of $800 to $850 million. This includes expanded advertising for Cologuard with a campaign to reach the 45 to 49 age group. and the addition of a women's health field sales team. We've also assumed Pfizer field sales activity starts to normalize in the first half of the year. Due to the nature of this partnership, as Pfizer's field activity increases, so will our partnership fees. For G&A, we expect $550 to $575 million before considering integration costs. Investments include headcount to support growth, multiple IT projects, and the Thrive acquisition. For R&D, we expect $375 to $400 million, including roughly $50 million related to the TARDIS license. R&D includes investments to support our multi-cancer and MRG programs and the full-year impact of Blue Sea, which is our study for Colograd 2.0 and our colon cancer blood test. We expect around $95 million for intangible amortization. And we expect CapEx to be around $125 million. I will now turn the call back to Kevin. Thanks, Jeff. Our mission is to eradicate cancer and the suffering it causes. Our teams are working to bring to patients and physicians a complete end-to-end menu of life-changing cancer tests. Achieving this starts with great science and scientists. We have an accurate and adaptable platform to support tests at every step, from screening to recurrence monitoring. Our scientific platform is matched by the depth and breadth of our sales and marketing capabilities. We have more than 1,000 team members in our global commercial organization with deep relationships spanning five specialties and large health systems. Our lab and IT systems deliver valuable patient insights and a seamless customer experience, allowing us to be an end-to-end provider of cancer diagnostics for patients and physicians. Each new test we develop will be supported by this unrivaled foundation. Cologuard has several exciting long-term growth drivers, including the opportunity to screen people earlier and positively impact an alarming trend in colon cancer incidence. Since the mid-'90s, there has been a 51% rise in colon cancer in adults younger than 50. There are nearly 19 million eligible Americans age 45 to 49, and most of them have never been screened. As a result of this, the United States Preventive Services Task Force issued draft guidelines lowering their recommended screening age to 45, which we expect to be finalized by the middle of this year. Last month, we shared prospective data showing Cologuard specificity was over 95% for patients age 45 to 49. That means the false positive rate was only 5% in that age group. This very low false positive rate, combined with the convenient at-home nature of Cologuard, makes it very well suited to screen this age group. While commercial payers typically follow finalized guidelines, we're excited to see that Humana last week started covering Cologuard at age 45, joining Aetna as the other major health plan to do so. This is a step in the right direction for patients who prefer an accurate, non-invasive screening option. We have an innovative and comprehensive marketing plan in place to emphasize the importance of getting screened earlier and to make Cologuard their number one choice. Cologuard is a highly sensitive and specific test, and Cologuard 2.0 raises the accuracy bar, expanding the growth opportunity in colon cancer screening. Our goals with Cologuard 2.0 are to at least maintain cancer sensitivity increase pre-cancer sensitivity, and decrease false positives by 30%. We expect these enhancements to improve revenue and cost of goods by 5% to 10% per test. We're also developing a colon cancer blood test to provide another option for patients to get screened. Our goal is for Blue Sea, our prospective 10,000-patient trial, to support FDA approval for both Cologuard 2.0 and our colon cancer blood test. Blue Sea will collect blood and stool for our blood test, Cologuard, and a fit test, allowing us to compare performance of all three in one trial. The study is progressing with more than 100 high-quality sites enrolling patients. These programs will deepen our leadership in colon cancer screening over the long term. We believe multi-cancer screening will be an incredibly impactful weapon in the war on cancer. We are thrilled to have a team of talented scientists and leaders from Thrive join us as we expand on the power of early detection from colon cancer to multiple cancers at once. We believe combining ExactScience's methylation-focused approach with Thrive's mutation approach will provide a powerful screening test to patients. We plan to make our multi-cancer screening test available through our screening teams. We'll leverage our primary care sales and marketing, lab, IT, regulatory, and customer experience capabilities to offer the best solution to patients and physicians. Our precision oncology team is a foundation we can build on as we expand into minimum residual disease, recurrence monitoring, and therapy selection. With Oncotype DX, we have a world-class brand, deep relationships with oncologists, international strength, and an unmatched evidence generation engine. The Oncotype DX tests also generate durable, high-margin revenue and powerful cash flow to support future tests. We're thrilled to announce we've agreed to acquire Ashayan Analytics to help accelerate the development of our oncology portfolio, including minimum residual disease and other sequencing-based tests. Ashayan is a CLIA-certified and CAP-accredited sequencing lab based in Phoenix, Arizona. Ashayan developed GEM-Xtra, one of the most comprehensive genomic cancer tests available. and provides access to whole exome, matched germline, and transcriptome sequencing capabilities. This breadth of knowledge will support our efforts to develop innovative diagnostics across the continuum. Ashayan was born out of Translational Genomics Research Institute, or TGen, as was our recently licensed TARDIS technology. TARDIS is a highly sensitive, patient-specific approach that can detect very small amounts of tumor DNA in blood. The talented team at Ashayan will be instrumental in advancing TARDIS for minimum residual disease testing. With Ashayan, we've added a high-quality team, lab, and unique capabilities to help us lead in precision oncology. We also announced plans for a 10-year research collaboration, bringing in the expertise of PGEN and City of Hope. City of Hope is a National Cancer Institute designated comprehensive cancer center. This collaboration complements our continued relationships with Mayo Clinic and Johns Hopkins University, better positioning us for years to come. We transformed exact sciences in the past year and are now well-positioned to fulfill our mission of eradicating cancer and the suffering it causes. By detecting cancer earlier across the continuum, we can drastically improve outcomes and significantly decrease treatment costs. The acquisitions of Asciion, Thrive, Base Genomics, Paradigm, and Biomics enhance our R&D capabilities, and add to our deep pipeline of life-changing cancer diagnostics. These enhanced capabilities, along with our established lab, IT, and commercial infrastructure, will allow us to deliver a complete end-to-end menu of high-quality cancer tests to patients in need. We're now happy to take your questions.