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OVERVIEW Exact Sciences' (EXAS) announcement that Pfizer (PFE) would co-promote Cologuard ® tests through its, no doubt, robust sales organization was met with enthusiasm, sending the stock up 50% over the following week. A careful reading of the agreement between EXAS and PFE makes the excitement tough to justify. It is a one-sided agreement that grants PFE the rights to co-promote Cologuard through the primary care and gastroenterologist channels in the U.S. with generous fees but little downside risk for PFE. |
What EXAS Pays
SHARED MARKETING AND PROMOTION EXPENSES | Under the agreement EXAS, in addition to the $80 million it plans to spend annually on Marketing and Promotion of Cologuard, will commit to split the cost of additional Marketing and Promotion expenses with PFE on this schedule:
The current year has been pro-rated to account for an anticipated early October launch date.
PROMOTION FEE | To compensate PFE for the fair market value of its efforts in marketing Cologuard ®, EXAS will pay PFE a Promotion Fee. The Promotion Fee is calculated as:
0.50 * (Laboratory Service Revenue – Baseline Laboratory Service Revenue) * Gross Margin Percentage = Promotion Fee.
The Laboratory Service Revenue is defined as revenue received by EXAS for sale of Cologuard tests after disregarding any discounts, rebates, patient compliance incentives, etc. This definition means EXAS will be bearing the full cost of the gift cards they implemented last quarter and deteriorating their margins further.
Baseline Laboratory Service Revenue is defined in the agreement on the following schedule:
Anything above the Baseline amount will be subject to the Promotion Fee.
The Agreement stipulates that the Gross Margin Percentage shall not be less than 68 percent nor more than 74 percent.
SUPPLEMENTAL PROMOTION FEE | If the incremental Laboratory Services Revenue over and above the baseline amount, is not sufficient to generate a Promotion Fee of $37.5 million total for 2018 and 2019 and $30 million in each of 2020 and 2021, the EXAS will pay PFE any shortfall.
ROYALTY | For the 12 quarters following the end of the agreement, EXAS will pay PFE a royalty fee ranging from 0 to 3 percent applied to the Laboratory Services Revenue earned in the "tail period" 2022 through 2024.
In addition to these fees, EXAS is also responsible for the costs associated with training PFE sales representatives and designing and producing all training and marketing materials to be used by PFE. EXAS will also be responsible for all expenses related to customer services and support.
What PFE Pays
DETAILING | PFE is responsible for ensuring its sales representatives generate 625,000 details in each calendar year of the agreement and paying the costs associated thereto. If PFE delivers less than 562,000 Details in a calendar year, the Promotion fee will be reduced in the last quarter of the appropriate calendar year. If PFE delivers less than 450,000 Details, the agreement is subject to termination by EXAS.
INCENTIVE COMPENSATION | The Agreement requires PFE make available incentive compensation for sales representatives in “Position 2 or higher” weighted directly to Cologuard at not less than 30 percent of incentive compensation available. For sales representatives in position 3 or lower, the incentive compensation weighted directly to Cologuard will not be less than 25 percent.
IDN PROMOTION | PFE will deploy its Key Account Managers (KAM) that cover large Integrated Delivery Networks (i.e., large health systems) to support the uptake of Cologuard by IDNs. EXAS and PFE will agree on defined goals and key performance indicators for the KAM team.
Other Considerations
The budget for co-promotion of Cologuard will be determined annually through an agreed-upon Annual Marketing Plan. The Annual Marketing Plan is approved by the Joint Steering Committee after having been developed by the Joint Operating Committee. Approval of the Annual Marketing Plan must be by a unanimous vote of the JSC.
The Annual Marketing Plan for CY 2019 will consist of certain undisclosed categories which, at a minimum and as implied by the agreement, include a Sales Deployment Plan and an Advertising Plan. This year's Annual Marketing Plan shall include “a high-level summary of the Sales Deployment Plan and use of Shared M&P Expenses for the remainder of 2018.”
The Advertising Plan for the remainder of CY 2018 and CY 2019 will be the plan already adopted and budgeted by EXAS. The agreement notes that PFE has already executed its television/video media buying for broadcast year 2019 (Q4 2018 through Q3 2019), although PFE will do what it can to purchase time in the “scatter” (a spot market for advertising) market if feasible.
Also noteworthy is a carve-out in the agreement for the granting by EXAS of the exclusive commercial rights to promote and sell Cologuard outside the U.S. and, separately, inside the U.S. in the OB/GYN field. PFE has the right of first negotiation in the event EXAS notifies them of their intent to grant these rights to a Third Party.
The Good
EXAS will benefit from an increase in calls made to target Cologuard prescribers. Some of those calls will be made to large health systems which EXAS has not yet penetrated to any significant degree, such as the Mayo Clinic and several others seen below.
As EXAS consensus revenue estimate for Q4 2018 is $108.6 million and the Baseline Laboratory Services Revenue is established at $130 million, an increase in revenue this year resulting from the agreement with PFE up to $130 million will not be subject to any fees.
EXAS will no doubt benefit from PFE’s expertise and robust and experienced sales operation. Given the evidence of a faltering sales effort in our Cologuard tracker and other sources, the agreement with PFE may serve to maintain the status quo and prevent any additional deterioration in test volume and provider additions. However, EXAS will pay the Supplemental Promotion Fee for any shortfall in the Promotion Fee if Incremental Laboratory Service revenue does not justify the minimum payment.
The exclusion of the OB/GYN channel from the PFE agreement suggests that EXAS has at least contemplated an arrangement with another third party. Another co-promotion announcement may be perceived as a positive though we would likely have the same margin deterioration concerns discussed below. Given Kevin Conroy’s experience, Hologic (HOLX) may be a likely prospect for such a third-party co-promotion deal.
The Bad
For the privilege of accessing PFE’s sales organization, EXAS will pay handsomely. Assuming, EXAS increases revenue by $78 million in 2019, as updated guidance implied, and inflating that amount in 2020 and 2021 by the same 38 percent used to increase the Baseline Laboratory Service Revenue, EXAS will pay about $245 million for $335 million in Incremental Laboratory Service Revenue or a 27 percent margin. Making the same assumptions, their blended gross margin will deteriorate about -5 basis points.
The marketing strategy that appears to have benefited EXAS the most, Direct to Consumer, will probably not see any immediate material changes. The agreement notes that PFE’s advertising buys are complete for 2018 and most of 2019 so the advertising campaign for those years is the one currently employed by EXAS.
The agreement poses little to no risk for PFE. If their sales force is successful in generating additional revenue for EXAS, they receive 34 percent of the incremental revenue plus a royalty payment at the end of the term. If they are not successful and baseline Incremental Laboratory Service Revenue does not increase much, if at all, they will be paid the Supplemental Promotion Fee.
Great work if you can get it.
The Hazy
We spent the long weekend looking and were unable to come up with a significant co-promotion deal between a pharmaceutical and a diagnostic company. Let us know if you can name one. Pharmaceutical companies have, of course, used co-promotion deal in the context of joint ventures and shared R & D for years. They have also engaged in stand alone co-promotion deals which have often been spectular failures. Most recently, the co-promotion by GSK of Endo's testosterone replacement therapy resulted in a settlement with plaintiffs over aggressive marketing tactics.
Based on our observation over the years, co-promoting, cross-selling and all sorts of other "synergies" that look great on paper on a desk in the C-suite, are very difficult to execute to the mutual benefit of both parties.
Please call or e-mail with any questions.
Thomas Tobin
Managing Director
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Emily Evans
Managing Director - Health Policy
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