Exact Sciences Corporation

And welcome to the Exact Sciences fourth quarter 2023 earnings call. Please be advised that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Please be advised, we ask you to limit your request to one question. Thank you. I would now like to turn the conference over to Mr. Nate Harrell, Vice President of Investor Relations. You may begin your conference.

Thanks, Jeannie. Thank you for joining us for ExactScience's fourth quarter 2023 conference call. On the call today are Kevin Conroy, the company's Chairman and CEO, and Jeff Elliott, our Chief Financial Officer. Everett Cunningham, our Chief Commercial Officer, and Brian Berenik, our General Manager of Precision Oncology, will also be available for questions. Exact Sciences issued a news release earlier this afternoon detailing our fourth quarter financial results. This news release and today's presentation are available on our website at exactsciences.com. During today's call, we will make forward-looking statements based on current expectations. Our actual results may be materially different from such statements. Discussions of non-GAAP figures and reconciliations to GAAP figures are available in our earnings press release, and descriptions of the risk and uncertainties associated with Exact Sciences are included in our SEC filings. Both can be accessed through our website. I'll now turn the call over to Kevin.

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

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

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

Again, if you would like to ask a question, Press star, followed by the number one on your telephone keypad. And your first question comes from the line of Brandon Couillard with Jefferies. Your line is open.

Hey, thanks. Good afternoon. Two-parter for Jeff. First, on the first quarter revenue guidance, can you just unpack the $20 million headwind, I think, in the precision oncology business that you referenced? A little more detail on that. And then secondly, As we think about the guide for 24, what are you penciling in for kind of op-eds and gross margins for the year? Thank you.

Sure, Brandon. On the 20 million, this is an annual impact. Like I said, we, you know, Exact acts as a reference lab for others in the space. And some of those contracts, we're not surprised why some of these are rolling off as those labs take that work in-house. So that's over the year expected to be a $20 million headwind. Probably hurts Q1 a bit more than Q4. But that's the annual impact. The true growth drivers for Opitype over time are going to be continued uptake in the node positive indication. International, which had an awesome quarter in Q4, grew 48%. And then over time, this serves as the perfect foundation for new product launches like MRD and therapy selection. So the business is very healthy. We have a comparison item this year. On the margin side, you've heard me talk for years about gross margin expansion. This year, we expect continued progress. We've put in lab automation. The team did a fabulous job there of automating those labs. Many of you have seen it. If you haven't, you're welcome to come and tour facilities. They are state-of-the-art. Automating those labs further will help, we expect, as we grow this year. Leveraging that fixed cost is a big deal. broadly speaking, gross margin improvement, OPEX leverage, another hallmark. We've built a strong foundation, and you've seen the impact. Over the last couple of years, we've had significant adjustability, but down leverage. We expect that to continue again. Probably the highlight this year will be within G&A. I expect that to be our biggest source of leverage. However, I do expect leverage across all three lines, G&A, sales and marketing, and R&D.

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

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

Let me start with the second first. Yes, I have options that are expiring. They're 10-year grants, so they were granted in 2014. And I plan to exercise and hold while selling just enough to pay the cost of exercising and the taxes. But the goal is to hold the difference. And I will just say before handing it over to Jeff, You know, we came off a great year in 2024. The momentum is something that is generating enthusiasm across, you know, internally and also our important customer and patient base that we take care of. There's still 60 million people out there still this year, like there was last year, that are not up to date with screenings. And we have a huge opportunity there, and we're making incredible progress with health systems, payers, the brand awareness of Cologuard. It's an exciting time with precision oncology, continued growth, and no positive internationally, and then just a number of new product launches over the next two years, so we couldn't be more excited. Jeff, why don't you take the rest?

Catherine, on your phasing question, we've talked about this many times before. But as a reminder, primary care utilization typically impacted around the holidays. So basically, we lose about two weeks of the quarter around Christmas and New Year's. Two weeks for patients and physicians take off, go on vacations. So that's the fact that there's fewer office visits during that time. I mean, there's fewer Cologuard orders then. That means about 30 days later, when we complete that test, that's less revenue we'd recognize. So the holidays really impact Q1. So I would continue to expect a sequential step down, Q4 to Q1, as you model out forever. Think of our screening business down sequentially. This is very similar to what you see in precision oncology. The Oncotype brand continues to grow, but you do see that step down. It's related to position office visits around Christmas and New Year's are slower, which hurts Q1 revenue. So from a phasing standpoint, typically expect pretty strong growth in orders for Cologuard throughout the early part of the year up into May. Things typically flatten out over the summer months and then steep ramp again from Labor Day through Thanksgiving. That's what we expect this year. From a revenue standpoint, I would, again, I said in my remarks, 22% of Q1 revenue for screening this year. That's consistent with the historical average. When you look at a growth standpoint, from a growth standpoint, we're expecting 23% on a two-year stack basis, so two-year compounded growth in Q1. So as Kevin said, very strong trends here. You just have a phasing dynamic in Q1 to keep in mind.

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

Hey, good afternoon, guys. Thanks for kicking the questions. My first one is just a guidance clarification question. I think you guided to 16% screening revenue growth for the year, as I think you talked about back in January. Just keeping in mind a bigger opportunity for repeat orders this year, which I think, I don't have my model in front of me, but I think could be between 250,000 to 300,000 tests. What does this imply for first-time orders in terms of the growth there. It seems like it's a moderation there. And if that's the case, I just want to make sure that that is conservatism versus anything else. And then my second question is just a competition question. Obviously, some big readouts expected from blood-based competition coming up soon. As we head into that, I'm wondering if you'd be willing to share what you think the bar should be as we look at key data like advanced adenoma detection as those readouts come in. Thank you.

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

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

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

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

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

Well, so if you take a look at the FIT test, the reason that the FIT test models well is because it detects 24% of precancerous polyps. And it only has a 5% false positive rate, not a 10% false positive rate like most of the blood tests. If you have a 10% false positive rate, as you can imagine, you do that test every year, it generates twice as many unnecessary colonoscopies as a pit test. It also, if a blood test, let's say it detects in the teens in terms of pre-cancers, you It doesn't drive the life years gain, so you're in this difficult place to get onto this efficient frontier, as it's called. So, you know, you can do the rough modeling by comparing it to the FIT tests, and what you'll see is these blood tests generate a lot of false positives. They also generate not enough life years gain. And the cost of them is significantly more than a fit test. And certainly the guideline group considers these broad parameters when they look at including or not including as an A or B rated test. It's hard to become an A or B rated test. And so I'll pull back to the real value that we've created for Hologuard. is because we set the bar for the test that we were developing based upon these inputs from the start. That's the way we designed Cologuard, was to make sure that we would be at that efficient frontier of that modeling exercise. And that's why we feel very confident that for years and years to come, colonoscopy and Cologuard will be the two leading tests. And you're seeing that today as Cologuard takes share away from the FIT test colonoscopy volume, screening colonoscopy volumes haven't changed in a meaningful way in a decade. Right around 5 to 6 million screening colonoscopies per year. It's not changing now. The backlogs are growing. And so our challenge is to get to the patients. Our challenge is to make this, to hit the easy button. Our challenge is to make sure that every patient who turns 45 thinks about colon cancer screening and then thinks about colon cancer. And these are difficult challenges. And fortunately, we built a team, a technology platform that is built for purpose to achieve our goals.

Dan, this is Jeff. On 45 to 49, this is one of the many ways that EXACT is competitively unique is that we've had now almost three years of working to build awareness and penetrate this younger population. And what that means is it's approaching 20% of our screening revenue today. So it has been a massive growth driver. I expect that to continue when you look at the need here, as Kevin said, there's a relatively limited capacity for colonoscopies in this country. So when you add 20 million more people into the screening pool, like the guidelines did three years ago, Cologuard is the best option. So we are taking significant share there. It is above growth drivers, above the overall base of business, and I think that will continue for many years to come.

Yeah, and I'll add just maybe some field entail around the 45 to 49 segment. Our field organization knows this is a great opportunity to grow Cologuard, and we're helping our customers. I'll give you two examples. Around health systems, there are still some health systems that don't have the new guidelines in their health maintenance systems. And it's kind of set the easy button. We know where these health systems are. So we're targeting these health systems to make sure that they have it in their health maintenance system. The second is this is the data that our sales representatives have. Our sales representatives know by individual prescribers which health care providers are ordering Cologuard for the 50 plus audience but are not ordering it for the 45 to 49. So then they will gear their message to making sure that they know the new guidelines to making sure we get our fair share in that younger cohort. And then lastly, as I mentioned earlier, we have specific marketing campaigns for the younger segment, 45 to 49. We'll continue that in 24.

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

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

So on the first question, you are testing my memory of the ranking. Cologuard has the best ratio of any screening test. Cologuard has the best ratio of life years gained to unnecessary colonoscopies. Colonoscopy has the highest life years gained. Some of that is simply because of the assumptions in the model. It also has the highest number of unnecessary colonoscopies, the colonoscopy that is performed that doesn't find anything, which is the majority of colonoscopies. between the FIT test and Cologuard the FIT test done every single year which by the way only about three people in a thousand do the FIT test every year for a decade but if you model it that way compared to Cologuard every three years the FIT test detects about just like maybe seven or eight percent more life years or it saves 5% to 10% more life years than Cologuard. TSC blood falls off by like 25% because of the lack of sensitivity for finding precancerous polyps. And this is the challenge. So I'd go back and reread this part of the script and reread it again. This is the challenge to getting an A or B rated test. They don't hand out A's or B's very easily at the USPS deal. This isn't like grade inflation in some US colleges. This is, there is a standard, and it's driven off of this model. Pre-cancer detection matters.

So, PJ, this is Jeff. On your EBITDA question, look, we gave the guidance last summer, and we ended last year a lot further along towards our long-term goals. Remember, our long-term goal is for at least a 20% EBITDA margin in 2027. Last year, we were at 9%. We're way ahead of plan here. This year, we expect another three points improvement. Over time, I expect continued increase every year. That's what we built here. We built a foundation across our technology platform, our labs, our sales teams, you name it, to scale very effectively. When you look at the numbers this year, I do expect to see leverage again across all three major OpEx lines. Sales and marketing, after the last two years where that had come down in absolute terms, Everett's done a really nice job of leading this team, but we see such strong return on investment there that we are going to raise some investment there. It makes sense, too. It's the right way to grow this business. It's the right way to take care of patients and add value to the system. So we will invest in all three. We talked about last year, mid-year, we accelerated investment in our MRD program, given the near-term opportunity there. And as some of the bigger programs get towards market, the investment dollars do increase temporarily. And then G&A. G&A, I think, is the biggest source of leverage. We've got major initiatives there across our customer care teams, our customer experience teams, and IT. But over time, we'll not only help accelerate growth further, but also help us run the business more efficiently.

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

And I'm glad we're at the point that we are because our data and analytics get better as I speak. And that matches really nicely with our market structure to where the data analytics just don't sit at my level, but they go all the way down to the local level. So we can invest in resources smartly, and that's driven by our local leaders. They make the call in terms of where that opportunity of growth is, where we can grow our business, and continue to be a real value to our patients and customers.

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

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

No, we will make that cutoff. We will make that cutoff.

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

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

We don't know.

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

Hi, guys. Good afternoon. Thanks for taking the question. I want to go back to some of the comments on health system efforts. Obviously, it sounds like you guys are providing these systems a lot of value with some of the things that you're doing internally. But can you maybe just sort of talk structurally about those partnerships? Is there anything in those contractually or sort of what you guys have with those partnerships that can potentially ward off competition if that does come in over the next handful of years? Thanks.

Yeah, it's less about contractually and more about the value that we're bringing to health systems. Health systems, we've seen this over the past couple years, they're coming to us. And they're coming to us to solve healthcare problems and issues. One is around screening. And so we find that, and I also have health systems tell us on a daily basis, we need to go beyond the product. So the one thing, many things that we bring to health systems are great products, outstanding customer support of which they're looking for. We have an outstanding medical organization that partners with them. And so they love our surround set. And it fits Coligard, Oncotype DX, OncoXtra. And what's also exciting is our portfolio that drops right into our bag and we can sell portfolios to them. So it's all about partnership. And it really separates us from the competition in terms of our products, our portfolio, and all the surround sound that we can partner with them in helping them have better healthcare for their patients.

You know, it's incredible, the technology stack that we've developed that creates a competitive uniqueness. And that investment has been well over a billion dollars. It's about 100 different applications, internally built, externally sourced, that lead to this compliance engine that Everett referred to, the ability to automate things like reimbursement, prior authorization, campaigns to remind people to get screened, population health initiatives. This isn't a contractual-based relationship. It's a relationship based on real value for health systems patients. And it ends up leading to significant growth and profitability.

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

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

Hey, good afternoon. Thanks for taking my question. It's just two quick ones from me. One, I know you talked about Oncotype DX International growing 48% in the quarter, and I realize that Japan was just launched in October, but could you maybe unpack what Japan represented within that overall international and what type of traction you're seeing there? And then just secondly, Kevin, you talked about, I think at JP Morgan, you talked about the archetype business going from 600 million plus to a billion. You didn't give a timeframe, but I'm just wondering, could you maybe talk about some of the key drivers to get you there? Just given sort of the low to high single-digit growth we've seen, what kind of acceleration that you're expecting to get to that billion, and what are the key drivers for that? Thanks.

I think Brian can actually take both of this.

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

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

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

I'm going to hand this one over to Brian as well.

Thanks, Kevin. And thank you for all the questions about precision oncology. Welcome, then. Let me just say that I'll reiterate, Kevin mentioned at the top of the call that we're here in San Diego. And I'm so proud of the team that worked so hard over the last months and years to develop an organic MRD product, which we're now calling Onco2Tech. So hugely proud of the team here in San Diego and also equally proud of the team in our Phoenix lab who is working through the validation of that test at breakneck speed. So in terms of what you can expect from MRD, apologies, there's the sound of freedom behind us here in San Diego if there's noise in the background. What you can expect in terms of MRD, we are already having a very meaningful and material discussion with customers as well as Medicare on the payer side of the equation. We're excited to share the powerful data that we believe will help us secure Medicare reimbursement later this year. And then we're working very closely in the business unit with Everett and the commercial team to work through the commercial planning activities and very much look forward to introducing that test into the commercial team later this year or very early next year. And that timeline is very dependent on how quickly Medicare gets back to us on the reimbursement side of the equation, which can vary by a few months. But ultimately, that will determine when we really step on the accelerator from a commercialization perspective. One of the things that I'll add before, Jeff, you can comment on some of the contributions financially. I believe we are really competitively unique in the MRD space. We are thinking very creatively about how to integrate the portfolio, particularly the Oncotype portfolio, into our evidence development plans around Oncodetect. And then I'll take you back to the IT platform that Kevin mentioned earlier on the call. It'll allow us to do prior authorization, billing, and reimbursement, but it'll also allow us to bring forward a lot of the great tools that we're developing for Coligard around adherence, compliance. If you think about the work that they're doing, We're asking patients to do a test every three years. With respect to OncoDetect, we'll be asking a patient to do a test every three months, which is very difficult and challenging, particularly in the out years when a patient is tested negative for three, four years consecutively. We need to get that patient tested in year four and five. And I believe strongly that adherence and compliance engine can be ported over to support the patients around MRD and OncoDetect. Over to you, Jeff.

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

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

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

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

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

Your next question comes from the line of Puneet Sudha with Lering Partners. Your line is open.

Hi, guys. Jeff. Thanks for taking my question. Evan, if you could, you covered the blood competition questions very well. But just wondering, can you elaborate a bit on the expectations for the blue seed blood readout? I mean, should we expect that to be in line with the comments you made on blood broadly and maybe just around advanced adenoma performance there? How important is that in the blue seed blood readout? And just remind us how this assay is is positioned in your portfolio? Thank you.

Sure. Let me start with the last question first, Puneet. Our blood test, and we think as a class most likely, blood tests will receive at best a second-line screening claim by the FDA. That means, and you've seen this before with the septa-9 test, a test to be used when a patient refuses frontline tests that are in the USPSDF guidelines. So we know who the patients are that refuse high-quality tests like Cologuard and colonoscopy. And when they refuse those tests, there's an opportunity for us to help those patients at least get screened, even if the doc isn't going to get a quality credit or the Medicare Advantage plan, et cetera. So an uphill battle, no doubt. One of the things that's competitively unique about our approach is just the cost structure. It's a test that's built on a supercharged PCR platform, and that provides a cost structure that we believe will be best in class and provide real value to the health system and to those patients that get tested. So that will allow us, we think, to be that coupled with our commercial organization, our IT infrastructure to lead in this field. It's just, I'll take you back to 2014, 15, 16, when we first launched Cologuard. Without being included in the quality measures until I believe 2017, we were really limited in terms of the patients that we could address. And we believe that's going to be the case with any test that isn't in the guidelines or quality measures. So that's how we're looking at at things. In terms of what our expectations are for data, we're getting pretty close to that date, so we'll let the data speak for themselves.

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

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

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

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

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

Thank you. So I have a couple of questions on Coil Guard 2.0. First, can I get your latest thinking on what pricing could look like for that product? And then secondly, when would you expect the Blue Sea Study could get published?

In terms of publication of the Blue Sea Study, we would hope that would be in the nearer term You never can tell, but in the near term, in terms of pricing, all we will say here is we are creating value. In particular, we've developed a test that detects 30% fewer false positives that directly saves the healthcare system significant money. It saves patients from having to unnecessarily undergo an invasive procedure. And so, That's a tangible value, and because of the huge investment we've made and resetting a much higher bar, we expect to get value from that. But in terms of providing any specific pricing guidance, that is not going to happen until you see the day that it is priced by Medicare and commercial payers.

So that's all we can offer now.

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

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

Sure. This is Jeff. Thanks for the question. The success rate is a bit below what you said today. However, it is moving higher quickly. We see consistent progress every quarter. And, you know, the longer-term goal is to get to at least 70%. That's very good when you put it in perspective. For fit testing, for example, on the first go round, the first test is often at, say, 20% over time that, as Kevin talked earlier, only about three out of a thousand people complete the test every year for 10 years. So even where we're at today is a good outcome. We think we can do even better, though. Of the people who become eligible in a given year, It takes about three years, called three and a half years, for them to come back. So if 1.6 million people become eligible this year, some of those people become eligible in, say, December. Well, they're not going to probably get retested until next year. So if you look at the median time to rescreen, it's closer to three and a half years. Again, that time frame is coming in, but it doesn't happen immediately. It takes a little bit of time to go out and get that person back to the doctor and get them rescreened.

And if I could just add something from a customer standpoint, from a rescreen, when we look at our rescreen population, we give them that customer experience. Our customers, our doctors, healthcare providers, they build confidence in the brand and ordering Cologuard. And I see that as the rescreen population gets bigger, as we get more ordering prescribers, the rescreen population helps all around in terms of confidence, compliance, customer experience. And we're seeing that across the country.

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

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

Well, thanks, Mark. Others have gone at this. Ultimately, this is an FDA decision, and I believe they're getting input on this decision in a public forum in March. And, you know, I'm sure they're thinking hard about this. But, you know, what's the general sense? It's probably going to be in the 20-plus range. It's hard to tell. That is not, that is supposition at its best. But again, it goes back to the performance in the modeling and the modeling bar that Efficient Frontier is the fit test defines that in part with 24% protection. So you can't be too far away from that.

Uncle Liquid, I can, this is Brian again, I can take that one. So we're really excited about the technology that we inherited as part of the ResBio team, as well as the team that we inherited up in Kirkland, Washington, just outside of Seattle. So a very robust chemistry platform that has been developed over many years by that team. I'm really excited to get that in the hands of our commercial team. The team right now is working on validating that test and backbone so that we can get Medicare reimbursement as well as New York State approval. And we have a goal to submit to Medicare this calendar year for reimbursement on the onco-liquid side of the equation.

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

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