Operator: Good day and welcome to the Exact Sciences Second Quarter 2023 Earnings Call. Today’s 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. [Operator Instructions] I would now like to turn the conference over to Megan Jones, Vice President of Investor Relations. Please go-ahead.

Megan Jones: Thanks, Lisa. Thank you for joining us for Exact Sciences second 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, will also be available for questions. Exact Sciences issued a news release earlier this afternoon detailing our second quarter financial results. This news release and today’s presentation are available on our website at exactsciences.com. During today’s call, we will make forward-looking statements based on current expectations. Our actual results may be materially different from such statements. Discussions of non-GAAP figures and reconciliations to GAAP figures are available in our earnings press release. And descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings. Both can be accessed through our website. I’ll now turn the call over to Kevin.

Kevin Conroy: Exact Sciences’ world-class team is the driving force behind the most innovative growth engine in cancer diagnostics. Our scientists are using advanced technologies to harness the power of DNA, RNA and proteins. They are intensely focused on enhancing our current tests and developing new tests that can help transform cancer care. The scale of Exact Sciences labs, IT infrastructure, commercial teams and our depth of payer relationships will help those tests impact millions of patients while providing profitable growth for years to come. We made significant progress toward our mission to eradicate cancer during the second quarter, including being Great Place to Work certified for the fifth consecutive year, delivering more than one million test results to patients, generating core revenue of $617 million, an improvement of $119 million year-over-year, with an 18% decline in sales and marketing expense, producing $66 million of free-cash flow, a $190 million improvement, announcing positive top-line results from our BLUE-C study in which our next-generation Cologuard test exceeded our expectations for improved sensitivity and specificity, securing reimbursement for the Oncotype DX test in Japan, and initiating collaborations with the Broad Institute to support our molecular residual disease test platform and Baylor Scott & White to support our multi-cancer early detection program.

As a result of the outstanding results in the second-quarter, we’re raising our full year guidance for revenue by $54 million and adjusted EBITDA by $63 million. The second-quarter results show our team’s commitment to developing and enhancing tests that impact decision-making and supporting them with the highest quality evidence. Surrounded by a 2000 person commercial and customer care organization, we will provide the best customer experience for patients and their healthcare providers globally. This creates a flywheel that will power a unique combination of long-term double-digit growth and significant profitability. Jeff will now review our second-quarter results.

Jeff Elliott: Thanks, Kevin. Second-quarter revenue grew 19% to $622 million. Core revenue of $617 million grew 24% excluding COVID testing, the sale of our prostate business, and foreign exchange. Screening revenue of $463 million, increased 31%. We continue to see broad-based momentum in Cologuard adoption and traction within health systems. Since the beginning of the year, we’ve implemented about 40 new electronic connections with large US health systems, bringing the total to nearly 300. These connections will help healthcare professionals to order and view results seamlessly while giving patients access to results in Epic MyChart. They also enable electronic billing and reimbursement, and in the future, automated prior authorizations, improving the efficiency of our teams and systems for Cologuard and our whole suite of tests.

More than 9,000 new healthcare professionals ordered Cologuard during the quarter and more than 321,000 have ordered since launch. About 75% of all US primary care physicians have ordered Cologuard. So we don’t plan to provide the number of new physicians each quarter starting next year. Precision Oncology revenue grew 2% to $157 million. Growth was 7% excluding the prostate business sale and foreign-exchange. COVID testing revenue decreased 84% to $2 million. Second quarter GAAP gross margin was 71%. Non-GAAP gross margin, excluding the amortization of acquired intangibles, was 75%. Gross margin benefited from better cash collections due to improvements made to our billing systems. GAAP net loss was $81 million. Adjusted EBITDA was $67 million, an improvement of $113 million, driven by better-than-expected revenue, gross margin and operating expense discipline.

Cash provided by operating activities was $100 million. Free cash flow was $66 million, an improvement of $190 million. We ended the quarter with cash and securities of $776 million. Turning to guidance, we expect total revenue between $605 million and $620 million during the third quarter and $2.441 million and $2.466 billion for the year. This assumes screening revenue between $455 million and $465 million for the third-quarter and between $1.820 billion and $1.835 billion for the year. Precision Oncology revenue between $150 million and $155 million for the third-quarter and between $615 million and $625 million for the year and COVID revenue of $6 million for the year. Note that we discontinued COVID testing in July. For the year, guidance implies 22% core revenue growth with 28% growth in screening and 6% growth in precision oncology.

We’re increasing our adjusted EBITDA guidance for the year to between $170 million and $180 million, up $163 million from the start of the year. The Exact Sciences platform was built to drive double digit revenue growth and margin improvement for years. Second quarter shows this engine’s earning potential. Back to you, Kevin.

Kevin Conroy: Thanks, Jeff. Cologuard is helping to screen more Americans and reduce the suffering from colon cancer. Next-generation Cologuard will raise the performance bar in non-invasive screening and accelerate its positive impact. Next-generation Cologuard achieved a 30% improvement in specificity, a measure of the false positive rate, while improving sensitivity for the cancer and pre-cancer detection rates. This is a result of advanced technology, deep scientific insights and more than a decade of collaboration between our R&D team and Mayo Clinic. We are proud of our teams for their efforts to bring next-generation Cologuard to patients. We’re finalizing the FDA submission and we’re working to get it in patients’ hands in early 2025.

Once next-generation Cologuard is FDA approved, it will be supported by the best commercial team in diagnostics and the most dedicated frontline team members. This team has worked tirelessly to build relationships with healthcare professionals, connections to hospitals and a strong brand. This is a big opportunity to have an impact on this disease, because 60 million people are not up-to-date with colon cancer screening in the US. With our team’s commitment to getting more people screened and a more accurate test, Cologuard will help improve colon cancer outcomes and continue to fuel our growth. Our Precision Oncology team secured reimbursement for the Oncotype DX Breast test in Japan where 90,000 women are diagnosed with breast cancer every year.

About half of them are eligible for Oncotype DX, making Japan the biggest opportunity outside the US. With reimbursement now in place, Oncotype DX, can provide important answers to women who aren’t currently being tested. Our team in Japan will work to educate doctors, hospitals and communities about the value of genomic testing with Oncotype DX, so more women and their physicians can make better, personalized treatment decisions. A special thanks to the international team who is bringing this important innovation to patients in Japan. Our pipeline teams are focused on two of the biggest opportunities in cancer diagnostics, molecular residual disease and multi-cancer early detection. We’re working with the Broad Institute to enhance and extend our molecular residual disease platform called Oncodetect, with an exclusive license to technology developed at the Broad, will move from whole exome to whole genome sequencing and from looking at 50 to 100 mutations in a patient’s blood to hundreds, if not thousands of mutations.

This will provide best-in-class performance at a very reasonable cost point, allowing us to reach cancer patients at scale. Our multi-cancer early detection team is working to complete the ASCEND 2 trial, which will validate our multi-marker class approach in a large case control study including 21 cancer types. We expect to have partial results from the ASCEND 2 study this fall with a full readout early next year. We’re generating additional data to support discussions with regulatory agencies, guideline bodies and payers, helping secure access to this life-changing innovation for all patients. Our focus on eradicating cancer fuels the Exact Sciences team and is driving our financial results. We will continue to invest in our people, reaching more patients with our current tests and developing new cancer diagnostic tests.

Our scale platform will accelerate adoption of our tests, while sustaining double-digit revenue growth, improving operating leverage and meaningful cash flow for years. This is a rare opportunity to reduce the suffering cancer causes while delivering value to our shareholders. We’re just getting started. We’re now happy to answer your questions.

Operator: [Operator Instructions] We’ll take our first question from Derik de Bruin with Bank of America.

Derik de Bruin: Hi, good afternoon. And thanks for letting me get the first question. Appreciate it. So I’m going to do two. One financial question. Jeff, how should we think about OpEx trending in the back half of the year? And the other one. Just how do you think Cologuard 2.0 will be a tailwind? How much of a tailwind do you think it’ll be once FDA approved? I mean, are there docs now that were more likely to use 2.0 that were not using 1.0? Just sort of your thoughts on how that rolls off and how that impacts the business. Thank you.

Jeff Elliott: Derik, this is Jeff. I’ll take the first one on OpEx. Look, for the year, no change to the assumptions there, which is an overall increase in the mid-single digit range. The way you get there is really continued good management by Everett and team. We expect a sales and marketing decline for the year in total. R&D, probably in the mid-single digit range. G&A, as you remember, back in the start of the year, we talked there, there were some kind of moving pieces here related to primarily the Thrive earn-out, that is driving a big part of the growth this year. If you strip out that, which is non-cash now, obviously the payout would be several years into the future. If you strip out that and some other kind of unique one-time items, the growth there is also in the mid-single digits.

So, what that implies here for the back half is a bit of an increase in the second half versus the first half. As you recall last call — last quarter, we talked about accelerating some investments in MRD, given how quickly that market is moving forward and given our confidence in our technology and our approach there. Also with the growth that we’ve had, hiring is going to pick-up in the back half of the year, would help support that continued growth. I think there’s two questions there. I’ll turn it over to Everett for the second one.

Everett Cunningham: Yeah. Thanks, Jeff. And you talked about the strategy of Cologuard 2.0. Our first focus will be continuing to grow Cologuard until Cologuard 2.0 gets FDA approved. The great thing about our field force is we are driven by data and analytics and we use that daily in which we make our sales calls and we take notes on our sales calls. So we know which physicians that are out there that had the objection of, hey, the false positive rate is an objection. So once we do launch Cologuard 2.0, we will focus on going to those physicians first, and that’s just the power of our commercial organization, the data and analytics that we used to go to the right targets with the right message and the commercial team is excited to get Cologuard 2.0 in the bay.

Operator: We’ll take our next question from Catherine Schulte with Baird.

Catherine Schulte: Hey guys, thanks for the question. I guess maybe, Everett, another one for you. Jeff mentioned that about 75% of primary care doctors in the US have ordered Cologuard. So I guess, just how does your strategy change now that the primary focus will be on really deepening the penetration within accounts rather than adding new orders and would love any examples you can give there?

Everett Cunningham: Yeah. Thanks for that question. We’re not complacent at all with that number. We have 10% penetration with Cologuard. So we know that along with the 60 million Americans that have average risk that right now are not up-to-date to screening. So our commercial organization goes out every day knowing that there’s opportunities that are out there to continue to grow Cologuard. That’s our focus. And like I said before, we use data and analytics to not just concentrate on the reach of the physician, but we need to concentrate on the frequency and making sure that we get the message out there consistently because we know that there is more work to do to get our customers out there to write more Cologuard and get more people screened.

Operator: We’ll take our next question from Vijay Kumar with Evercore ISI.

Vijay Kumar: Hey guys, thanks for taking my question. Jeff, maybe, I’ll just limit one to the profitability question. You did adjusted EBITDA of $130 million in the first-half, you second half revenues on a dollar basis really don’t change a whole lot. I think the guide implies like $70 million-ish of EBITDA for the back half. Maybe talk about your incremental margins, incremental leverage here. You did mention G&A had some noise on earn-outs. When can we actually see G&A leverage similar to what we’re seeing on the sales and marketing side? Thank you.

Jeff Elliott: Thanks, Vijay. A lot there. I think we feel really good about the state of the business, especially the foundation we’ve talked so much about. The foundation was built to scale, built to scale the top-line and drive margin improvement and cash flow improvement for years to come in. That foundation allowed us to pull into profitability late last year and accelerate time to free cash flow positivity this quarter. So we feel good about the long-term prospects there. Take a step back here, what we’re guiding to for the year now is a $320 million rough improvement year-on-year in adjusted EBITDA that, when you compare that to the level of growth, it implies very strong adjusted EBITDA margins that we feel good about.

When you look at the guidance raise, specifically, the midpoint of adjusted EBITDA, is coming up by more at $63 million to the midpoint of revenue. So we are driving that leverage. To your question around G&A. In the quarter, there were a couple of one-timers. A legal settlement of $17 million that’s in the press release and also I mentioned before, the Thrive acquisition earn-out against the non-cash accretion line that, that can flip back-and-forth between a gain and an expense quarter-to-quarter. If you strip those two things out, G&A grew 2% in the quarter. So I think the team did a good job managing that relative to the 19% year-on-year growth in revenue. Still some work to be done in G&A, but with this foundation we have in place, we expect that number to come down as a percent of revenue nicely over time.

Operator: We’ll take our next question is from Dan Brennan with TD Cowen.

Dan Brennan: Great, thanks for — thanks for taking the questions, guys. Congrats. Maybe just on Cologuard. I guess, could you walk through some color on some of the notable drivers there, the rescreen in the 45 to 49? Did you see any impact from that three-year look-back where you had the COVID quarter three years ago on the rescreen? Just wondering how those two played out in the quarter. And then as well, obviously, you talked about only 10% penetration, but momentum has been really strong on clearing the backlog of colonoscopies and kind of the health systems electronic orders. So just get a little flavor for how a lot of those key drivers played out in the quarter and kind of what’s assumed for the back-half of the year? Thank you.

Jeff Elliott: Hey. Dan. This is Jeff. I’ll start, then Everett can jump in with some color. The beauty of this business is that there is a broad-based set of drivers here. So there’s not just one or two, it is broad. Rescreens is a big one we’ve talked about. Rescreens are growing nicely. We do have that headwind the team is managing through and the headwind here is because Cologuard is recommended by the guidelines to be done every three years. Three years ago, obviously was the onset of COVID and Cologuard orders were negatively impacted, especially in the early days of COVID. So you think back to April, May, June of 2020, Cologuard orders were actually down, they did recover nicely. What that means now three years later, when people are coming up to that rescreen, there is an impact on the business.

The total number of patients eligible for rescreen this year, that three-year repeat is 1.2 million, that’s the same as last year. The good news is when you look ahead to next year, it jumps to 1.6 million. So this is a temporary slowdown in that rescreen growth. And the team is doing a good job managing through it. So we are driving growth here. Just to think about the size of the headwinds, over the year, it’s over $50 million of revenue. Again, the headwind, it is temporary. A big part of that is in Q3. So again, team driving through that. Other drivers, things like Cologuard 45, this new age group, that is now part of the guidelines. A couple of years ago, the guidelines lowered from 50, down to age 45, adding 20 million more people. That age group is approaching 20% of all Cologuard revenue.

So a huge driver there. Everett can talk more about health systems. But the good news here is there’s a broad set of drivers here that we expect to continue for many years to come.

Everett Cunningham: Yeah. Thanks, Jeff. I will touch on rescreen in 45 to 49 and health systems. This is just a great example of the way our commercial team is working together and they treat it as a team sport, from our marketing messages specific to 45 to 49 and rescreen, our customer experience around those growth drivers of rescreen in 45 to 49 and our training. We continue to hone our message around this. The data and analytics that we’re using at the territory level in terms of the targets to go to, to grow these two type of growth levers has been tremendous and I’ve been out in the field and it just gets better every quarter. As far as health systems, we’re seeing a trend of health systems coming to us, to help them with getting people screened for colorectal cancer screening.

They’re getting measured by it and they know that they can’t do it alone with colonoscopy only. And we’re developing broader partnerships around those people of average risk that need to get screening and then have a colonoscopy backlog, they’re coming to us for help around getting those patient screen. And then lastly, I’ll just say, our brand, not just around Cologuard but around Oncotype DX, around our rare diseases and prevention genetics, our brand is solid. And they know that they can come to us for help.

Operator: We’ll take our next question from Brandon Couillard with Jefferies.

Brandon Couillard: Thanks. Jeff, two for you. The Oncotype approval in Japan. Will that be material incremental revenue contributor in the back half or is that more a ’24 dynamic? And then the improved cash collections, is that a material benefit to screening revenue growth of 31% in the quarter? And if so, can you call that out.

Jeff Elliott: Sure, Brandon. This is Jeff. On the first one on Oncotype, really proud of what the team did to make sure we got reimbursement and an access to this test to help out, as Kevin talked about, a significant number of women in Japan, which really — when you look at the size of this market, it could be our largest market outside the US. In the first full year, the revenue run rate could be in the $25 million to $30 million range. Obviously, with the time this is coming on this year, we’d expect maybe 25% of that given when this is going to launch. So small contributor this year but a very nice contributor over time. And importantly, a big win for patients. Second one on the ASP revenue per test. As you know, Brandon, there’s a lot of moving pieces when it comes to calculate an ASP, there is the true run rate that you accrue for on a quarter.

Think of this as your go-forward rate. The team has done a really nice job driving that rate higher over time and will continue to do so. I think Cologuard provides really good value and we want to make sure that we’re getting paid fairly for that. What happened in the quarter was in part going back on tests that were previously denied payment on and making sure that we could get paid on that because, obviously, we have done the work. So pulling through revenue from past quarters, it wasn’t material in the quarter. I did call it out because it’s a nice contributor, but not a material driver. It was in the first half of the year, it’s over $10 million of revenue. When you compare that to the back half of the year, expect maybe $5 million of contribution.

So first half, second half, there is a dynamic there, but again, not material to Q2.

Operator: We’ll take our next question is from Patrick Donnelly with Citi.

Patrick Donnelly: Hey guys, thanks for taking the questions. Jeff, maybe one just on kind of the seasonality and pacing of the year. I think the guidance for 3Q assumes screening is kind of flat, maybe even slightly down. It’s been a weird couple of years with COVID in terms of seasonality of the business. Can you maybe just refresh us in terms of the typical pacing? Obviously, 4Q, you get the holidays into 1Q, but just feels a little conservative in terms of that 3Q guides. Maybe just talk us through that and how we should think about the year. Thank you.

Jeff Elliott: Yeah. Let me start with overall kind of what the seasonality should look like, and then we’ll get into this year specifically. So in a normal year, and this is a trend that’s really general to primary care, not necessarily Cologuard specifically, primary care trends typically start the year slow as people come back from the holidays. Early January, a few people go out and get — seek primary care. They’re typically busy with work in their lives after the holidays. And then throughout that first quarter, things pick up all the way through Memorial Day, things — people start to normalize care seeking behavior and really preventative care through that first part of the year. When Memorial Day hits, kids often get off of school and families take vacations, even people without kids often go on vacations.

So trends typically are a little bit softer, think of flattish trends throughout the summer. Then about mid-August, maybe end of August, things tick back up as kids come back to school and vacations start to wind down. So growth in primary care trends typically ticks back up then and ramp steeply through November and then with Thanksgiving, things slow down and are fairly quiet into the holidays. For Cologuard now, remember, there’s a — think of about a 30-day time frame from the time a test is ordered at the — during [indiscernible] doctor’s office to when then, it takes us then 30 days roughly to send the kit out, collect that patient sample, get the sample back in our lab, process it and recognize revenue. So that means that we follow a similar trend of typical primary care with a 30-day lag.

This year, the dynamic to think about, it really comes down to that COVID headwind I mentioned before. COVID headwind on that three-year rescreen business that I talked about a few minutes ago, that’s $50 million for the year. The biggest part of that, the single biggest quarter is Q3. Q2 picked up some. Q4 picks up some, but Q3 is the biggest. The other dynamic is that we did have a strong start to the year. I mentioned the kind of the ASP benefit over $10 million in the first half coming down to maybe $5 million in the second half. So that’s going to affect the seasonal trends this year. But if you take a step back further, you look at the overall guide for the year, we’re talking about $400 million of incremental growth for Cologuard. That’s for screening.

That is the biggest year we’ve ever had. In terms of percentage growth, you’re talking 28% growth at the midpoint. So very strong growth throughout the year for our screening business.

Operator: We will take our next question from Dan Arias with Stifel.

Dan Arias: Hi, guys. Thanks for the questions. On MRD Oncodetect, Kevin, you had talked at the Analyst Day about an early access launch, I believe, in 4Q. At the risk of being too granular here on timing, do you see that taking place in the fall rather than closer to the holidays? And the reason I ask the question is just really to sort of understand whether ASCO GI can see having someone that can speak to be an early user or at least being made aware the assay to your point the market is just evolving so quickly. I’m just thinking about clinician feedback and data points around early use.

Kevin Conroy: Yeah. We expect the MRD test to be available by the end of the year, so I would think later in the fourth quarter than earlier. And then it’s going to take a little bit of time to get physician feedback given that we don’t expect until kind of mid to third quarter of next year apply for a MolDX local coverage decision, and then it typically takes about six months to get that. So in terms of being able to offer our Oncodetect test to patients covered by Medicare, that will take about a year. And also, as you know, our commercial payers today aren’t broadly covering MRD. So this is an opportunity that is going to take a little bit of time to play out. We’re bringing to patients and to physicians the very best test possible with the right evidence.

Operator: We’ll take our next question from Jack Meehan with Nephron Research.

Jack Meehan: Thanks. Good afternoon. I wanted to follow up on next-gen Cologuard. Could you just elaborate on the next steps there? I would like to know the timing when you think this portion of BLUE-C might get published in a journal and when you’ll be in a position to submit for the PMA approval?

Kevin Conroy: On the first point, we expect to submit to a journal in the near term, focused on next-generation Cologuard. I’m sorry, what was the second question?

Jack Meehan: Submitting for FDA PMA.

Kevin Conroy: So we expect to have the last module submitted before the end of this year. And then it’s probably — you can think six to nine months for or nine to 12 months, excuse me, for approval.

Operator: We’ll take our next question from Matt Sykes with Goldman Sachs.

Matt Sykes: Hi, thanks for taking my questions. Jeff, just maybe talk a little bit about the gross margin expectations for the balance of the year, just given the strong non-GAAP gross margin of 75%. How are you thinking about sort of COGS trends through the balance of the year? And then secondly, I know it’s far off, but I know you’ve talked in the past about Cologuard 2.0 and sort of the COGS savings for that. Can you just kind of remind us what sort of the magnitude is versus the current version of Cologuard and how that might impact sort of long-term view on gross margins? Thanks.

Jeff Elliott: This is Jeff. First on gross margin. Previously, we had guided to about 73% for the year. Obviously, based on the strength in the first half and the outlook for the rest of the year. I think now, something in the 73.5% to 74% range is more likely. So feeling good about that. Again, this platform was built to scale. And for those of you who came to Madison back in June, you saw the lab, the quality of the people in that team, the quality of the automation and we expect gross margin improvement for years to come. So feeling good about that. When you think of the second half specifically here, I would just note that in the first half, we did have some benefit from that ASP dynamic I talked about earlier, and also what we’d call our care gap business.

And I’ll turn it over to Everett for a second to talk about that. The care get business does carry a slightly lower gross margin. However, it does contribute nicely to EBITDA dollars. And it is an important business for us to be in. So we do expect that business to be a bit bigger in the second half versus the first and weigh a little bit on gross margins all else equal. Just to your second question on cost of goods for Cologuard 2, there — what we think now is that the cost per test of Cologuard 2 will be at least 5% lower than what it is today for Cologuard 1. It’s because of the 10-plus years of work that this team put in to identify more accurate markers in automation and efficiencies that we can build right into Cologuard 2. So it does help bring down the cost of goods.

And importantly here, it helps improve, as Kevin said, it helps reduce that false positive rate by 30%. So it does provide a lot of value for patients. Maybe Everett could talk more about the care gap program, why that’s so important to us.

Everett Cunningham: Yeah. Thanks, Jeff. And there’s a reason why we’re doing the care gap program first and foremost. We’re getting at really hard-to-screen patients. These are the patients that have been stubborn to get screening. And as I talked about the phenomenon around health systems, payers and health systems are coming to us for help. So it really strengthens our relationships with the payers and the health systems. And then lastly, because these patients are stubborn and hard to screen, it’s usually in that 50-plus cohort, and that’s really helping us lift our share with the 50 plus. And then lastly, our customers are coming back to us saying, we are a better — much better option than them. They like the three-year interval. They like our wraparound services. and this is a way that we’re again improving their screening rates in a very efficient and effective way.

Operator: We’ll take our next question from Andrew Brackmann with William Blair.

Andrew Brackmann: Hi, guys. Good afternoon, and thanks for taking the questions. Jeff, I think you called out a total of 300 systems who have implemented some form of electronic connections with you guys. How are you sort of thinking about the runway left there for more connections? And can you just sort of talk about the utilization difference that you see amongst that group versus those who have not implemented those connections? Thanks.

Jeff Elliott: Hey, Andrew. This is Jeff. I’ll start and then Everett can talk more about some of the commercial initiatives we have to drive that rate higher. When you look at the overall electronic ordering rate for Cologuard, today, it’s about 65%, maybe 65% of Cologuard orders come in electronically. Why that’s important? When you can make Cologuard easy to order, easy to get the result back to both the physician and the patient, not only is it a better experience, but also physicians order more. They order over 30% more — and over time, that’s a really strong foundation for us then to layer other tests in. So you can imagine a world where the same electronic foundation supports multiple billion-dollar franchises, whether it’s multi-cancer or MRD or Cologuard you name it.

Those same pipes that are being placed between our lab and the health systems can be leveraged for other tests. So — that’s a big win for us. There’s still ways to go on how far that — on driving that rate higher. Everett can you talk about how we’re getting there.

Everett Cunningham: Yeah, absolutely. Again, I go back to data and analytics. And as Kevin and Jeff said at the beginning, we’ve electronically connected about 40 large health systems so far this year. In the second half, we probably have about another 60 that we’re going to connect and it’s all about having that data down to the territory level and all of our sales reps having the targets where they need to go to. The last thing I’ll say is when I’m out in the field, I often hear physicians say, you have to make it easy for me to write Cologuard, to order Cologuard. And I only have seven minutes in a healthcare appointment to really talk to the patient. This is one way that we’re making it easier. Our partnering with Epic and the way in which we’re getting at our targets will serve as a growth lever moving forward.

Operator: We’ll take our next question from Puneet Souda with Leerink Partners.

Puneet Souda: Hey, Kevin, Jeff Everett. Thanks for taking the questions. I know Everett gets seven minutes. I get seven seconds here, so I’ll keep it short. Kevin, would love to know if you have early feedback from physicians and providers on the next-gen Cologuard data and what it means for them and updates from the field that you’ve had so far? And any early feedback on the payer conversations, too? Thank you.

Kevin Conroy: On Cologuard 2.0?

Puneet Souda: Next-gen Cologuard. Yeah.

Kevin Conroy: Yeah. So the next-generation Cologuard test, we do have feedback. We have feedback from KOLs, we have some feedback from payers and people are related. The reduction in the false positive rate, while increasing sensitivity for both cancer and pre-cancer is big. Now that — there’s a lot of work to do, but the initial feedback, we couldn’t be more pleased with. And what does this mean? This means that we believe, number one, that next-generation Cologuard will end up in the — fits within the current guidelines that already recommend Cologuard on particularly the USPSTF guidelines and the American Cancer Society guidelines. That’s important because those guidelines are the most important guidelines that implicate how health systems and payers are measured in terms of their quality measures.

So we believe it will be a very smooth transition from Cologuard to next-generation Cologuard. We also see that payers will be receptive to very quickly getting Cologuard adopted and paid for. We’ll also be working with the American Medical Association CPT coding group to make sure that the coding is smooth. We’ve been down this road before. We know how to do it. And the team is fired up to make sure that we do this in an efficient and impactful way because patients will benefit from next-generation Cologuard. So all the early signs couldn’t be more positive and the team can’t wait to bring this to physicians and patients.

Operator: Our next question comes from Dan Leonard with Credit Suisse.

Dan Leonard: Thank you very much. Good afternoon. Switching to Precision Oncology, possibly you could frame how much of the $10 million in revenue upside from your guidance midpoint in the quarter, how much of that was from partnered revenue versus revenue from your own Onco branded products? And then secondly, can you speak to the second half forecast in Precision Oncology, which I think at the midpoint, is a decline from the revenue you reported in the first half? Thank you.

Jeff Elliott: So, Dan, this is Jeff. I’ll take that one. The broader PO business has really good momentum. When you look at international, for example, international grew 26% in the quarter. So that’s even before Japan came online. So feeling good about that. Obviously, that — there’s no partner revenue outside the US. Even the — when you look at the global breast franchise grew in the double-digit range. So feeling good about that. But we typically don’t break out partner revenue and OncoExTra revenue. OncoExTra is off to a good start. It is early. So that’s not material yet. However, that product does help broaden out our portfolio and, importantly, help getting another product into this really talented sales team’s hands that over time will carry not only OncoExTra and Oncotype DX breast, it also carry MRD and hereditary cancer and other products.

So feeling good about the broader momentum there. On the seasonality question, the trend I talked about earlier with Cologuard, there’s a similar trend with mammography. Fewer women seek out mammograms during the summer, which means a fewer breast cancer diagnoses. Obviously, Oncotype is typically ordered after breast cancer diagnosis. So that trend Q2 to Q3, that’s kind of what you’d expect, a slowdown in Q2 to Q3 and then a stronger Q4.

Operator: We’ll take our next question from Mark Massaro with BTIG.

Mark Massaro: Hey guys, thanks for the questions and great to see everyone in Madison. So thanks for hosting that. I wanted to ask on MRD. I know that you’re planning to launch your initial tumor-informed Oncodetect MRD test in colorectal cancer, like you guys said in Q4 2023. Can you give me a sense for — I’m pretty sure that this is your — the test that you’ve been developing for some time now. I’m just curious where the Broad Institute comes in? Because, in that PR, you talk about the MAESTRO program and how this can detect thousands of patient-specific mutations. Obviously, MRD is early. So I’m just curious if you can just give us your sense for your confidence level between your first-gen product and maybe the second-gen product and/or your confidence level on sticking with tumor-informed versus switching over to tumor naive?

Kevin Conroy: The MAESTRO technology that we exclusively licensed from the Broad Institute will be used in the next generation of MRD. So the test that will be available at the end of this year is the base exact version of the technology. Think of that Broad technology as an extension, an enhancement using more mutations, creating a greater sensitivity at a similar specificity. And that technology would be used in the studies that we’ve talked about, including the West German Study Group, WGS, and the NSABP, which is the CORRECT-II study. So you have the Triad study and the CORRECT-II studies, which would use that next-generation version of our MRD test.

Operator: We’ll take our next question from Andrew Cooper with Raymond James.

Andrew Cooper: Hey, everybody. Thanks for the question and nice quarter for sure. I guess maybe first tagging on to one that I think Andrew — other Andrew asked. Thinking about the health system backlog, is there a point where these health systems have worked that down and what’s their ability to sort of refill that backlog? Is it an ongoing dynamic versus I think you’ve talked about in the past a little bit of, oh shoot, we need to get more folks screened for some of these rating dynamics that can make it a little bit seasonal. So just help us think about the runway there. What happens once they’ve worked that lower and how the trajectory goes for those that get a little bit more mature once they’re onboarded?

Everett Cunningham: Yeah. I’ll touch on that. To me, I — and if I said backlog, I think when we’re talking to health systems, confident, it’s a capacity issue. And they just know that they can’t do it alone. They have a — they have a screening population. They have quality metrics that they need to hit. And they know with that screening population, they cannot do it alone with the amount of GI physicians that they have and just their workload, that’s why they’re coming to us. They’re coming to us for help. They know that Cologuard is a great first-line option. And that’s where we’re coming in with not just Cologuard, but we’re coming in with our wraparound services that help them with compliance. We’re coming in with marketing tools and efforts that proactively go out to these patients. It’s like a surround sound that really helps them with getting their patients screened and also hitting their quality metrics, which benefits that health system tremendously.

Kevin Conroy: Just to add on to that, the long wait times for colonoscopy has become a nationwide issue. And that’s driven by, part one, is that 18 months ago, a little more than that now, the USPSTF guideline group lowered the screening age to age 45. As you know, that added 15 million to 20 million Americans into the screening population, all starting to need to be screened at once and that permanently increased the number of people who needed to be screened while that capacity, as Everett mentioned, is fixed. The other part of it is that capacity just isn’t growing. In fact, in some markets, it’s shrinking because we’re not seeing — we’re seeing retirements outpace the number of new physicians that are becoming GIs and entering the markets. And so there is that dynamic that Cologuard is just going to help address the sheer number of people that need to be screened for decades to come, we believe.

Operator: We’ll take our next question from Kyle Mikson with Canaccord Genuity.

Kyle Mikson: Yeah. Thanks guys. I want to go back to the financials and the model really. Jeff, can you kind of walk through market implications of this $50 million COVID headwind to rescreen revenue in the second half? I guess like for context, you’re guiding to a mid-single digit adjusted EBITDA margin in the second half. That makes sense given the rescreening revenue is higher margin. When that headwind lifts in the first half of next year, do you would think that margins would bounce back? But that’s kind of in line with how you talked about pushing margins higher over time. But you have other studies coming up in ’24 and beyond. So I guess just wrapping this up, how do we kind of think about the margin profile going forward in the context of all these moving pieces?

Jeff Elliott: Yeah. Thanks for the question. Well, just about a month ago, we gave long-term margin guidance of at least 20% in 2027. That’s adjusted EBITDA margins. We feel very good about our ability to get there based on the momentum we have today. But look, we’ve got work to do. There’s huge markets out there. You talked about COVID rescreen, the headwind there. Again, it’s over $50 million this year. A big part of that is in Q3. Yeah, I think it’s important to look at the guidance for Q3. What we’re guiding to is still for screening, 30% growth and over $100 million of incremental revenue, which — that’s almost exactly what it was in Q2. So there’s very strong growth here, and we’re going to make sure we make the right investments in this business to keep scaling. So I feel good about it. I do — as we scale, we’ll talk more about next year on a future call. But as we scale, I do expect margins and cash flow to improve for years to come.

Operator: We’ll take our next question from Liza Garcia with UBS.

Liza Garcia: Afternoon, guys. Thanks for squeezing me in. I guess just thinking. And I know kind of as we’re moving internationally into Japan, it’s a little bit different because it’s Oncotype and is the first mover. But you’ve spent so many years kind of honing the operational model with Cologuard. You’ve obviously had a lot of learnings. But kind of as you’re thinking about internationally and kind of the best way to tackle, kind of, what have your learnings been to kind of just given kind of obviously, the revisions that you’ve done in the operational leverage you’ve been like how you’re thinking about tackling internationally to be as effective as possible and kind of the margin profile to kind of get I guess, kind of what learnings you think you can leverage from your US experience into the international market kind of where I’m getting at.

Kevin Conroy: We have focused relentlessly on Cologuard in the US. And as a result of that, we have developed great scale, reach and a ton of learnings. Applying that outside the US, we haven’t provided guidance as to when Cologuard would be brought outside the US. There’s clearly a need though. Just if you take a look at the EU market, it is a significant opportunity because the colon cancer mortality rate is significantly higher in Europe than it is in the US. Screening — maybe 30% of the population is up-to-date with colorectal cancer screen. So there’s an opportunity there. We’ll wait until some point in the future to talk about what our plans are outside the US. Certainly the learnings that we have developed in the US and the focus that we’ve had will help as we export Cologuard outside the US.

Jeff Elliott: And Liza, this is Jeff. Just to add to Kevin’s answer here. That international foundation is strong today. To put some perspective around it, we have a team of over 200 people in our international team, really top managed team here. We do business in over 100 countries already. This has taken us years in fact, probably over a decade, to build up this global footprint. And what that’s getting us is strong double-digit growth for years to come. The base of revenue today is already over $150 million. With good margins, it is a nicely profitable business, largely on one product, and as Kevin talked about, adding more and more products to that will help improve the profitability. And this is one of the core reasons why back in 2019 that we sought out to really come together with Genomic Health, is this high-quality international footprint.

This sets us up for years to come to provide really a strong important leg of growth and importantly to help patients around the world.

Operator: We’ll take our next question from Alex Nowak with Craig-Hallum Capital.

Alex Nowak: Okay. Great. Good afternoon, everyone. I was wondering what are the latest time lines for Cologuard blood. And this is a question I’ve had since the Analyst Day. And since the Cologuard 2.0 data was so good, why pursue a different assay in blood altogether for colon cancer screening. Everett mentioned docs only have a few minutes with their patients. So does adding the test — does it potentially risk making the conversations a bit confusing for primary care in particular? Thanks.

Kevin Conroy: So Cologuard blood will be — or what we call our CRC blood test, it has been named yet. We expect middle of next year to have data. What is the role for a blood test. The role for a blood test, we believe, will be for patients who refuse a frontline recommended screening test per USPSTF guidelines. And there are people who refuse other — all forms of colon cancer screening. And for those patients, a blood test, which is clearly not going to be as good as detecting precancerous polyps or Stage 1 cancers as other frontline screening tests, there’s still a role for that, and it’s important to screen those individuals. We happen to know who those patients are. People have chosen Cologuard over colonoscopy and yet haven’t returned to test.

So it’s a discrete relatively small population on a percentage basis, but large in terms of the sheer number of people in the US, measuring in the millions. So we’ll be able to engage with those patients if they have not completed a Cologuard test, not completed a colonoscopy, work with their healthcare provider that we have a deep relationship with, work with the health system to do our best to get those patients screened. And so that’s — our mission is to eradicate colon cancer, and that’s going to — this is going to be an important tool that we have to help achieve that mission.

Operator: Thank you. And that does conclude today’s question-and-answer session as well as presentation. Thank you for your participation today, and you may now disconnect.

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Q2 2023

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