Exact Sciences Corp (EXAS) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Exact Sciences first-quarter 2016 earnings conference call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. J.P. Fielder, Senior Director of Corporate Communications and Investor Relations.

Sir, you may begin.

Thank you, Chanel, and thank all of you for joining us for Exact Sciences' first-quarter 2016 conference call.

On the call today are Kevin Conroy, the Company's Chairman and CEO, Maneesh Arora, our Chief Operating Officer, and John Bakewell, our Chief Financial Officer.

Exact Sciences issued a news release earlier this morning detailing our first-quarter financial results.

If you have not seen it, please go to our website, exactsciences.com.

Following the Safe Harbor statement, Kevin will provide an overview of today's call.

Next, John will provide a summary of our first-quarter 2016 financial results.

Then Kevin will provide an update on our corporate priorities.

During today's call, we will make forward-looking statements based on current expectations.

Our actual results may differ materially from such statements.

Descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filing, which also can be accessed through our website.

It is my pleasure now to introduce the Company's Chairman and CEO, Kevin Conroy.

Thank you, J.P., and good morning.

During today's call, we will discuss the success of our local television advertising test and the launch of our national television campaign.

We will review our continued progress with reimbursement coverage and contracting.

We also will highlight a new study that demonstrates Cologuard's positive impact on compliance in bringing new people into the colon cancer screening population.

First, John will review our first-quarter 2016 financial performance.

Thanks, Kevin.

First-quarter revenue results met our previously communicated expectations with completed Cologuard test volume totaling approximately 40,000, generating revenue of $14.8 million for the quarter for an increase of 244% compared with the first quarter of last year.

Average recognized revenue per test totaled $372 during the first quarter, which was consistent with recent historical results and in line with our goals for the full year.

First-quarter cost of goods totaled $227 per completed test.

First-quarter cost of goods reflects incremental scale up investments during the quarter to prepare our manufacturing and lab facilities for heightened future volume.

First-quarter operating expenses totaled $53.7 million, a sequential increase of $6.5 million from Q4 of 2015.

First-quarter cash utilization totaled $44.3 million, below the low end of our previously communicated range of $45 million to $49 million for the quarter, reflecting our ongoing cost containment and expense rationalization efforts.

We ended the first quarter of 2016 with cash and cash equivalents of $262.6 million.

I will now turn the call back to Kevin.

Thank you, John.

Let's review our first-quarter progress.

During the first quarter we concluded a successful television advertising test in five markets compared to five control markets.

Based on the success of the test, we launched a national television campaign that we will discuss in a moment.

The cumulative number of physicians that ordered Cologuard since the launch is now more than 32,000, up 5,000 in the first quarter.

After averaging nearly 400 new physicians a week in January and February, that number returned to approximately 500 a week in March.

We continue to make good progress with commercial insurance coverage and contracting, including recent wins on both fronts.

We also are seeing the initial impact of our efforts to ensure payment of Cologuard in states where coverage is mandated by state law.

Our compliance rate at the end of the first quarter was 69%.

Beginning with the first quarter, we changed the timeframe during which we calculate Cologuard's patient compliance rate, providing a more temporally meaningful measure of compliance.

We previously used data going back to Cologuard's launch, but recently changed to a 12-month window.

The rate is now derived from the 12-month period ending 60 days prior to the end of the quarter.

There was no difference between the first-quarter rate as calculated using the previous and new formulas.

The 2 percentage point dip in the compliance rate from last quarter was due to lower compliance during the December holiday period and a decision last year to no longer require a patient upfront co-pay.

This decision has resulted in a greater percentage of test orders translating into shipped Cologuard kits and a higher overall test completion rate.

Looking ahead to the balance of the second quarter, we anticipate completing more than 48,000 Cologuard tests.

We continue to anticipate completing more than 240,000 Cologuard tests during 2016 and generating revenue of $90 million to $100 million.

This outlook reflects our expectations regarding the effectiveness of the national Cologuard television campaign.

Let's turn now to our marketing efforts and our national television campaign.

Starting in late January, we evaluated the performance of our Cologuard television commercial over nine weeks in five test markets, versus five comparable control markets.

Our television buy was focused on reaching men and women ages 50 and older with an emphasis on those 65 and older.

The results of the local tests were outstanding.

On average, Cologuard order growth was 50 percentage points higher in the five television test markets compared to the control markets.

Also, new physician adoption grew 100 percentage points faster in the test versus control markets.

If you have not already seen our Cologuard commercial, I invite you to watch it at cologuardtest.com.

The creative goals of the ad are to demonstrate how easy it is to be screened with Cologuard.

The ad is very approachable, which is intended to reduce the fear and increase the comfort with colon cancer screening.

These two goals are tied directly to our mission of screening the tens of millions of people who are not screened regularly for colon cancer.

The Cologuard character that narrates the commercial can be leveraged in future ads.

We will continue to balance the performance of our advertising with our budget.

We have three goals for expanding our television campaign nationally: increasing total Cologuard orders, securing additional new ordering physicians, and increasing the order rate of the physicians who have already prescribed Cologuard.

Like the local test, our national television campaign will be focused on those 50 and older, with an emphasis on 65-plus.

As a result, we made a highly efficient national cable television buy where this audience is concentrated.

The buy includes cable channels such as CNN, the Golf Channel, HGTV, and nationally syndicated shows such as Jeopardy, Wheel of Fortune and Family Feud.

The national television campaign directly supports our existing public relations initiatives and marketing efforts, which are aimed at driving demand for Cologuard.

It also supports our sales and managed care teams, which are focused on increasing awareness of Cologuard among physicians and payers.

We will be monitoring our national campaign closely to decide the extent to which television advertising will be a part of our future marketing plans.

If the national campaign is successful, we may make additional television investments during 2016.

Now, let's turn to our progress with reimbursement.

Let me start with a recap of the US insurance market, both public and private, for our target demographic; men and women between the ages of 50 and 85 who are at average risk for colon cancer.

As we have shared with you before, of those 80 million lives, 46% are covered by Medicare, 46% by commercial insurance, and 8% by military and Medicaid programs.

Today, Cologuard is covered for 50% of the total population.

Focusing on the Medicare population, 100% of the 37 million average risk Medicare patients are covered, including the 31% of those who have a Medicare Advantage plan.

These plans are offered by private insurers that are approved and paid by Medicare to cover Medicare beneficiaries.

CMS provided us with written confirmation that where Cologuard is not within a Medicare Advantage plan's contracted network, the plan is required to offer Cologuard with in-network cost-sharing.

We have shared that communication with Medicare Advantage plans.

Focusing on commercial insurers, 25% of commercial insurance patients are now covered for Cologuard.

This includes three plans that recently instituted medical coverage policies for Cologuard: Harvard Pilgrim, John Hopkins, and Blue Cross Blue Shield of Louisiana.

These three plans join a growing list of commercial insurers that, together, cover more than 58 million people.

There are also many states that we believe mandate coverage of Cologuard by insurers regulated by state law.

More than half of the US population lives in these states.

A number of private payers, including some of the nation's largest, have acknowledged their obligation to cover Cologuard.

For plans subject to state mandates, the mandates override any otherwise negative coverage policies.

We also continue to make progress with Anthem.

We anticipate that we will finalize contracting with Anthem Central States, which is comprised of Indiana, Kentucky, Missouri, Ohio and Wisconsin by June 1. When this additional contract is completed, roughly 70% of Anthem's 38 million members will be in states where Exact Sciences is an in-network provider.

Our television campaign and other marketing efforts should increase physician adoption and orders for Cologuard in these areas.

Insurance coverage clearly translates into more Cologuard orders.

Our data show Cologuard is ordered more frequently by physicians in states where it is more broadly covered compared to states where coverage isn't as broad.

Finally, I would like to tell you about a study conducted in the USMD Health System in the Dallas area.

The study demonstrates how Cologuard can increase compliance in a noncompliant patient population, and detect pre-cancer and cancer before it reaches an advanced stage, when it costs significantly more to treat and outcomes are worse.

The study involved nearly 400 Medicare patients who were previously noncompliant with colon cancer screening.

After being offered Cologuard as a screening option, 88% of those patients completed a Cologuard test.

51 patients tested positive by Cologuard and were referred for a diagnostic colonoscopy.

Among the 46 patients who went through with a colonoscopy, 21 were found to have advanced adenomas and all four patients found to have colon cancer were diagnosed with curable stage cancer.

Three of these cancers were stage I and the other was stage II.

This retrospective clinical use study was not designed to calculate sensitivity or specificity, which would have required all Cologuard negative patients to undergo a colonoscopy.

If one was to estimate the false-positive rates in this study, it would be substantially lower than the rate in the DeeP-C study.

Cologuard's ability to expand the screening pool and help patients with undetected pre-cancer or cancer is at the heart of our mission.

We are always pleased to see studies like this, which highlight our progress toward achieving this goal.

We are now happy to take your questions.

(Operator Instructions) Brian Weinstein, William Blair.

This is Matt Larew in for Brian today.

Kevin, just first on the ramp moving forward, can you talk about maybe some initial response you've had to the national campaign or perhaps traction with the total office sales call?

What is it that gives you that confidence that you can make that substantial jump from Q2 to Q3 that's needed to hit the full-year number?

Let me take you back to the test campaign that we ran in five markets.

What we saw in those five markets was positive.

We saw a significant separation of 50 percentage points between the five test markets and their five comparable control markets.

And we also saw a similar increase -- actually, (technical difficulty) number of (technical difficulty).

The thing that you take away from -- you saw also a third thing, and a third thing was you saw an increase in the reorder rate of the physicians that had previously ordered Cologuard; so your current base of customers.

We have modeled this out and have looked at the impact based on a national campaign, and subject to similar dynamics in the national campaign, we believe that the goal of $90 million to $100 million in revenue and 240,000 tests is achievable.

We do want to just underscore the point that achieving that number requires a positive impact by the national test, or the national campaign.

And the national campaign just started three weeks ago.

So, it's too early to know what the outcome will be, but the facts dictate that television advertising works.

It drives patients to their physician's office.

Patients drive their physicians to try Cologuard.

And we also see our current customer base reordering.

So those three things we expect to see in the national campaign.

We want to be cautious about the impact because, at this point in time, we don't know.

The early weeks are positive, but we have a long way to go before we know the overall impact throughout the year.

Okay, thanks.

And then just on the spending associated with that campaign, obviously you talked about maybe $30 million in first quarter.

Sales and marketing came in a little light of that.

So can you discuss the cost of taking that ad campaign national?

Is that something that will be additive to the burn?

Or is that -- assume the reductions to offset it?

And then the follow-up would be the context of spending trends.

Do you have an updated view on what level of test volume is now needed to get the profitability?

This is John.

Let me take a minute and just provide color on our operating expense levels overall first with a quick focus on Q1 and then with our directional thinking on Q2, which will incorporate our thinking on the cost of the television program.

And then we will talk a little bit about cash utilization while we are at it here, as well.

So, starting with operating expenses, as I noted in my opening remarks, Q1 OpEx was in aggregate $6.5 million higher than in Q4 2015 levels.

This is better than what we were expecting for the quarter, and it accounted for most of our favorable Q1 cash utilization, which, as I said, came in favorable to our communicated outlook of a $45 million to $49 million spend range.

Focusing on specifics within our Q1 OpEx performance, almost $4 million of that $6.5 million sequential increase occurred within sales and marketing and that reflects, as we were anticipating, the cost of our television test marketing campaign which ran completely within the first quarter and the cost of our annual national sales meeting, which landed in Q1 as well.

It also reflects some further select expansion of our sales and marketing headcount primarily in our field and our inside sales functions.

The other op expense lines, within G&A, we saw an increase of $2 million.

Within R&D, we saw an increase of $800,000.

Both of those are driven primarily by headcount as well as by incentive compensation, which differed from Q4 to Q1.

In comparison with our previously communicated guidance, Q1 op expense for G&A was right in line with that -- with the expectations.

R&D was actually $1 million less than planned.

That was mainly due to the timing of our enrollments on our post-approval study.

So, now looking into Q2, we remain very mindful of the need for spending across all of our areas of the business to be both efficient and economical.

With respect to G&A, we're going to -- we expect to see Q2 expense stay relatively consistent with Q1.

Looking ahead for R&D, we anticipate Q2 spending to be consistent to slightly down from Q1, possibly as much as $1 million as we -- our aggregate R&D headcount is going to stay relatively flat and we approach the completion of our enrollment for the Cologuard post-approval study.

Within sales and marketing, we anticipate additional investments being made during the quarter in certain areas of the commercial team and also in the marketing programs.

During Q2, we will be focused in particular on further expansion of our inside sales function, and as a result, we anticipate modestly increasing our total sales and marketing headcount.

That will increase our headcount-related spending sequentially by about $3 million to a total of $15 million for Q2.

In addition, we anticipate marketing content and campaigns to total roughly $19 million during Q2.

That is an increase of about $6 million from Q1, and this increase reflects the incremental cost of our national television ad campaign.

It also reflects the timing related-shift of some of our Q1 favorability into Q2.

So, what does all that mean in terms of cash utilization?

Our cash utilization, which totaled $44.3 million in Q1, which increased from 7.7 -- by $7.7 million in Q4 -- that was driven mainly by those increases in operating expenses that I just mentioned.

Looking into Q2, we would expect that cash utilization to be in a range of what we estimate to be $45 million to $49 million for the quarter.

This reflects the expansion of our TV advertising to a national level program, the other incremental investments in sales and marketing that I noted, and it also reflects the carry-forward of some of that Q1 favorability into Q2 due to the timing of spending.

Thanks.

Jeff Elliott, Robert Baird.

Kevin, on the second-quarter guidance, have you assumed benefit from the national ad campaign or not, because it's kind of early still?

We haven't -- we've assumed some benefit, but that campaign started partway through what is Q2, understanding that the orders in Q2 that become completed tests shifted about one month earlier in time.

So, they are partially accounted for.

We want to be circumspect about the impact of the national ad campaign, not knowing whether it will accurately reflect the test campaign.

One thing to note about the expense.

This is going back to Matt's question of the national campaign.

It is significantly less expensive, about a third as expensive to reach the total television rating points in a national buy versus the test buy.

So, it's pretty cost-effective to go down this road of doing a national television buy.

Got it, that's helpful.

And then, you alluded to some progress on the ACS mandate states, I guess.

Can you give some more color there?

And then how are the insurance companies responding to this if you approach them and have these discussions?

What's the response to the ACS discussion?

It has been a very professional and productive conversation.

And has also -- and this is with large national.

We focused on the large national insurers.

It has opened the door for more meaningful discussions around contracting with Cologuard.

There is one national insurer that has loaded Cologuard into their system into approximately 20 states.

One thing that we want to make clear is this is not for all lives in those states.

It is for the fully insured lives, which represents roughly typically about a third of the total insured lives in -- commercially insured lives in those states.

It is -- it is important to the business.

What's more important to the business, of course, is in engaging with those conversations at a national level to secure a long-term agreement to cover Cologuard at a contracted price.

Got it.

And then, one last one for me is, we recently noticed that you have expanded Cologuard order into lab partners.

Are you -- you're offering that, we noticed on your website.

Can you tell us the thinking behind that?

And are there any early wins that you can talk about on that front?

Thanks.

One of the pieces of feedback that we get from customers is that they would like to see Cologuard to be easier to order.

And Maneesh and his team have started on a process of enabling that, by allowing Cologuard to be basically a reference test to our lab from that local lab.

And with that, I will turn it over to Maneesh to provide more color.

Thanks, Kevin, and Jeff, one of the things I would point to is our comments in areas or specific systems where Cologuard is easier to order -- athena, Practice Fusion, things we talked about over the last six months -- what we have seen in those scenarios where physicians can go click their drop-down menu and order and get results, we see that business double, all other things being equal.

So the real goal of this program -- and it is something we have initiated.

You see it on our website and we are having a lot of robust conversations, and we expect it to pay dividends over the course of the year.

But the goal is, if we can have those systems, do what athena and Practice Fusion did, we expect that to be helpful to the business.

But it will play out over the course of, I would say, the balance of the year.

Interest is there, and what spurs that interest is, again, it ties back to the TV test.

Patients are going to their doctors and doctors want to order tests through their own systems.

So, we think this dovetails nicely strategically, and look forward to providing an update on progress as the year progresses.

Great.

Thanks, guys.

Brandon Couillard, Jefferies.

Kevin or John, back on the TV campaign, could you walk through some of the ROI metrics from the plan in terms of the payback, what you expect there?

And, is it reasonable to assume that, in these markets, the compliance rate would be considerably higher?

And then lastly, is there some explanation between the delta between the 50% increase in orders and the 100% increase in docs?

Is that just a reflection of the lag in the measurement period?

Let me lead into that answer, and then I'm sure Kevin will want to add as well.

But the ROI metrics that we look to, it's obviously driven by the separation that we are seeing in terms of orders, which is driven in part by the new -- basically new physicians that we are bringing on.

And then, also, the increase in order rates that we are seeing among our existing physicians.

What's important to appreciate is that while advertising certainly improves your order rate in the period that it is running, it also creates a residual or an annuity effect that increases the overall book of business, if you will, for the Company over a sustained basis.

So, those are the metrics that we look to principally.

And that is what we are going to be measuring over the course of time.

We have seen, as Kevin noted previously, that there is a high level of effectiveness in this early period of time and we think that the sustained rate, the residual effect from our advertising campaigns, is going to stay with us as well as we move forward.

Yes, and to John's point, what this broadly says is that we are in the process of creating a brand that has a very strong -- creates a very strong and accessible impression with consumers.

These consumers talk to each other.

They tell their friends about Cologuard, an easy way to get screened, and we know that that is starting to happen and starting to have the impact that we intend this to do.

We think this plays out over a longer period of time.

It also creates a brand within -- among physicians.

We know there is a dynamic that physicians, after about the third time, they are asked by a patient or different -- by the time they are asked by the third patient about Cologuard, some of them pick up the phone and call us and ask about Cologuard and ask for more information.

We see an increase in the downloads from our website.

We are able to track that.

And then finally, it has a very clear impact on the reorder rate of current customers.

So, to a certain extent, patients and that brand creation effort is an extension of our sales force and is very highly complementary with the sales force that we have in the field, doing a great job of educating physicians.

So this is something that we think can have a significant impact and, in terms of how we look at the return on the investment over the short-haul, so I just spoke about it over the long-haul, over a shorter period of time, cash invested today in a television campaign should be returned in a six- to 12-month time period.

And given our strong balance sheet, we think that it is a very wise use of capital to further create the Cologuard brand and to drive awareness among patients, physicians, and our current customers.

That's helpful.

And then one more, Kevin; you mentioned in the script data around orders per doc in markets where you have broader reimbursement coverage.

Any numbers you can frame around that, relative to other markets where reimbursement is more limited?

And then secondly, any update to share as far as the renewal status of the Ironwood relationship?

Yes, I think Maneesh will want to jump in on that one, Brandon.

Yes, so on your first question, the data that we have seen is over a 12-month period in markets -- the 10 states that have the highest reimbursement coverage, we see a doubling, a 100% increase versus the rest of the country.

So as we -- it has taken time, but as we see that progressing and the progress that we announced on this call, that does take time to play out, but we do see it materially change the trajectory.

On the Ironwood side, again, as we said on the last call, we have been really pleased.

They have been a terrific partner to us, especially as it dovetails with our own -- we have got a terrific sales team and when you have more people talking about Cologuard and more physicians hearing about Cologuard from their patients through the TV, through our reps and through the Ironwood reps, that leads to nothing but good things.

So we think that that makes sense.

We do -- we have come through the first year of the agreement.

We have extended that over the next three months, and we are working with Ironwood to figure out what makes sense both for them and for us.

We will provide more color once we have it, but we have extended through this period of time.

We are optimistic the challenge with Ironwood is that it is just not as scalable for us; so it is productive, but it is not as scalable.

But we think it has been a great relationship to date.

Super, thank you.

Isaac Ro, Goldman Sachs.

It's actually Joel in for Isaac.

Appreciate the color you provided on the ramp-up in COGS.

But any updates on how we should be thinking about gross margin at scale and then maybe what realized ASP is baked into that expectation?

Hi, Joel.

This is John.

So, our cost of sales, as I think you are aware, is best reviewed on a per completed test level.

So on that basis, we look at the $227 that we reported this quarter and within that, what's reflected in there is incremental staffing and production capacity that we brought on for our lab and manufacturing function that is affecting absorption.

That was put in in preparation for future volume growth.

So we will see the absorption on that investment improve as we move through the year.

For the rest of the year, we expect cost of sales per test to continue to improve as that completed test volume increases.

We would expect to end our year below the $200 per test range, somewhere in the $190s, we would expect, which is consistent with the outlook that we provided last quarter.

So, at the end of the day, ultimately volume and absorption will be the most significant determining factors of our COGS per test, and consequently, of our gross margin.

And there will be some variability from time to time because we do make investments, and so our COGS improvement trend may not always be linear.

But we still have our sights set on ending the year below $200 per test.

And of course as we move out into the future, we would expect that, with volume improvements, we would eventually see a COGS per test somewhere in the $150 range and the terminal target for us would actually be down in the $130 range once we really ramp up in the out years.

Great, and then maybe just trying to understand the discrepancy, what looks to be about a 20% sequential increase in the number of physicians ordering Cologuard versus just the 5% sequential increase in 1Q volumes versus the 4Q level, is that just timing or is there any other moving pieces?

There are a couple of things going on.

One of the things that we see is there is a different -- there's a difference between new docs ordering for the first time, and that is what you see happening pretty consistently, those 5,000 new docs coming in.

And what we saw, and Kevin alluded to it earlier, was that base -- that big base -- of existing docs were ordering just a little bit less through the period of December, January and February.

That is really what you see impacting the first quarter.

What we have seen in the TV test market, Kevin outlined the goals of increasing orders and increasing physicians.

But what is really, really important is increasing the rate of ordering from that existing base.

And it really speaks to the efficiency of TV, because what we have learned is this is a change in the way physicians practice and it is highly dependent on being reminded.

That whole ordering base in the test market, we saw increase their average orders across those at the time, 27,000 and now 32,000 docs.

That really is what is going to drive what we believe will be the full year and our guidance for the second quarter.

We are seeing an increase in the physicians.

But more importantly, to bridge that gap, we are seeing an increase in the rate of ordering across the entire order -- existing ordering base.

Does that (multiple speakers) --?

Yes, thank you and (multiple speakers).

That's helpful.

Maybe just turning to reimbursement again, just help us understand how the outstanding suits with the various regional payers have impacted your ongoing contract negotiations.

Maybe any anecdotes there would be very helpful.

It is just our policy not to comment on current litigation.

What we have discussed in the past is that our goal is -- our main goal is to see payers in the states with state mandates comply with state law.

By taking assertive action, we have -- there has been a positive impact on the discussions that we are having across the country, and we expect those discussions to continue to be productive, getting insurers aware of their obligations under state law.

Great, thank you very much.

Bill Bonello, Craig-Hallum.

I just wanted to come back with a couple more questions around the national ad campaigns.

You gave us some helpful stats on how the markets -- the pilot markets compared with the other markets.

Can you tell us at all what type of growth you actually saw in those pilot markets?

If overall test volume was up about 5% sequentially, and you grew twice that, were those pilot markets growing 10% sequentially?

Is there any kind of average stat you can give on that?

Then I have a couple follow-ups.

Sure, this is Maneesh.

So, from an average stat, I think that Kevin highlighted earlier and I would reiterate that we saw a significant lift in orders, 50%-plus.

And you can calculate it was -- the test markets were about 6% of the country.

So it was really modest, and that's really the basis for why we believe in both the second quarter and the full year.

I don't know, does that -- hopefully that answers your question.

Well, maybe I misunderstood.

So you are actually saying that in the pilot markets, the year-over-year or sequential or something test volume growth was 50%?

No, no, so -- I'm sorry, let me clarify.

The test versus control, so we took equally matched test markets and control markets that were similar kind of in all ways for the first year-plus of launch.

They were identical size, identical coverage, demographic, Medicare coverage.

So, by selecting those, we were able to monitor over the nine-week period with only one variable, as close as we could, one real variable that was different, and that was the introduction of TV.

What we saw was, in that same nine-week stretch of time, the test market where we were running TV were 50% higher than those matched control markets during the same period of time.

Okay.

And so that makes sense.

I guess I was just getting back to -- and maybe they are just so different that an average doesn't make any sense.

I guess I was just trying to get back to, in those pilot markets, what was the actual growth statistic not relative to the other markets to the -- but what kind of growth were you seeing in those markets?

We have not provided that level of detail rather than just a separation between the two groups, the TV test and the non-TV markets.

Okay, that's fine.

And then just a question you got asked earlier and I'm not sure if you provided an answer.

If you did, just tell me and I will go read the transcript.

But I think you got asked earlier about whether the trends you have seen and your expectation of doing a national ad campaign have at all changed your thoughts about the revenue that you are going to need to get to breakeven.

I am not sure that you answered that.

We have not provided a breakeven analysis for guidance.

Suffice it to say, we have created room in our budget to do the television advertising, and it is a highly efficient way of utilizing cash.

So, it does -- I would say it doesn't have a negative impact on cash flow breakeven.

If anything, it brings that point in time forward.

But, it is too early to assess that, because we don't know the overall impact of the national campaign.

We will have a better idea internally.

I don't think that that is something that we are going to provide guidance on, because it is too variable at this point in time for us to commit to publicly.

Okay, that's great.

I will hold my other questions for later.

Thanks a lot.

Mark Massaro, Canaccord Genuity.

The first one is for Kevin.

Kevin, can you comment on your expectations on timing around the United States Preventive Services Task Force final recommendation?

Well, the Task Force is an independent federal advisory group and, as such, they -- and it is a group of highly capable, experienced physicians from around the country who all have full-time jobs.

The word that we had received earlier -- I guess late last year was that we -- the Task Force was expected to complete their final guidance before the end of the year, and we expected it to occur sometime in the second half.

We more recently understand that that could occur at a sooner timeframe, sometime this summer, but I want -- just want to caution that there is -- they are, I'm sure, working very hard to get their job done, and there is no specific committed timeframe that has been provided.

So, that's another way of saying sometime between this summer and the end of the year.

Okay, great.

And I understand that you guys are focusing on cost containment and rationalizing expenses.

A couple of comments on the -- or questions on the TV marketing spend; maybe I missed it.

What do you anticipate is the full-year national TV marketing spend budget?

And secondarily to that, can you comment if you remain committed on the items in your R&D initiatives beyond Cologuard?

Mark, we are still developing our view towards the back half of the year as it relates to the national TV campaign.

So we can't give you any specific guidance on the back half.

That said, what you said about our cost containment and rationalization efforts, that is worth commenting on and I think providing some directional guidance on.

What we can tell you, looking into the back half of the year, we are feeling quite confident at this time that what we've guided you to in Q2 in terms of cash utilization, is going to come out to be the highest cash utilization and operating expense level for a quarter this year.

And that when we look into Q3 and Q4, we are actually going to see marked decreases in both our operating expense spending as well as our cash utilization in comparison with our Q2 levels.

We have been really vigilant about expense control in our planning for the remainder of this year, and we have instituted cost-containment initiatives.

We've rationalized spending across a number of areas of the business.

And, as we move through the rest of this year, we are going to very closely continue to evaluate the efficiency and the effectiveness that we see on all the expenses in our business, including the national TV program, before making incremental investments.

So, irrespective of what decision we make with respect to national television in the back half of the year, a continuation or not, or what degree or not, we remain confident that the back half of the year is going to show an improved cash utilization op expense profile versus Q2.

Right, thank you for all that color.

I guess more specifically on the R&D pipeline, I know last quarter you announced that you terminated the agreement with MD Anderson for the lung cancer screening test.

Can you comment about your commitment to the lung nodule and pancreatic cancer R&D programs?

Mark, it's Kevin.

What we are looking at for R&D investments in the back half of the year is to slow them down.

Obviously a significant piece, about two thirds of our R&D expenses, are associated with supporting Cologuard, including the post-approval study that we have committed to the FDA on.

And we are focusing our R&D investments in non-Cologuard initiatives.

In terms of our Mayo Clinic collaboration, where we are able to achieve highly efficient clinical trials, so we are continuing with the trials to evaluate pancreatic cancer detection, esophageal cancer detection, our lung nodule program, we are also working with Mayo Clinic on -- albeit we are -- our investment that is being made is minimal, relative to what we thought we would make earlier in the year.

So we are really getting very focused from an R&D perspective.

And early next year I am sure we will make additional decisions about where to make investments.

Excellent.

And if I can just sneak one last quick question, I understand you changed the formula for patient compliance rate.

One question is, why did you change the formula, and secondarily, how should we think about that rate moving out to the balance of the year?

One thought I had is as you expand the TV marketing nationwide, presumably you are no longer hitting early adopters.

So, just curious what your thoughts are on maintaining.

A couple quarters ago you were at 73%, so I just wanted to get your feeling on the pacing of the compliance rate.

We actually feel still good about the compliance rate.

It is at 69%.

First, the reason that we made the calculation difference, because if we kept the compliance rate all the way back to the beginning of time forever, it would become less relevant to you and to us.

Because it would be muted by a period of time that dates back to the start-up launch, so we just have this rolling 12-month period that starts 60 days in the past and goes 12 months behind that.

That is the way that we measure compliance.

And you always know it is a 12-month period of time.

So if it fluctuates, it is fluctuating because of what's occurring during that rolling 12-month period, which just makes sense to us in terms of being informative.

In terms of it decreasing from 73% to 69%, part of that, I think, is just the impact of the significant decrease we saw in the last two weeks in December.

And part of that is because we made the very, I think, important and rational decision last year to remove the requirement that people who are commercially insured pay $50 before we ship them a collection kit.

The downside of charging the patient $50 before we even ship the collection kit is that the overall shipment rate of collection kits to patients dropped, and the overall number of tests completed was lower than it would be by removing that rate and so -- or removing that $50 payment.

That decision has had a net positive impact on the business, but it has had the effect of lowering the compliance rate slightly.

Over time, we expect the compliance rate to continue to be around the 69%-plus.

One thing we know, Mark, is that as a patient knows that they are covered with their insurance, the compliance rate increases.

So we think that, over time, the compliance rate will increase higher.

And one thing that I want to remind you is the compliance rate of Cologuard is significantly higher, by a long shot, of any other form of colon cancer screening -- nearly double the rate of colonoscopy and probably triple or quadruple the rate of the FIT test.

And it is because of the commitment that we have made to our customer contact center and being not only a product and a lab company, but also a compliance Company investing in getting people screened.

As you can see from the USMD study, it resulted in 88% of 400 people who had previously been totally noncompliant, Medicare patients -- they have been in the screening pool for almost 2 decades -- and finding four people with curable stage cancer.

So that commitment in that small population likely saved four lives, not including the 21 advanced adenomas that we found.

You simply can't get there without that strong compliance rate.

So, whether it is 69% or 73%, the point is that compliance is strong and we think, over time, with broader insurance it's going to continue to grow.

Great, thank you.

Bruce Jackson, Lake Street Capital.

First, going back to the Ironwood agreement, can you give us some metrics in the quarter as to how many doctors or tests they brought in?

Sure, Bruce, this is Maneesh.

We have not provided that level of granularity.

But what I would say is it has been productive, and as our sales team has grown and our efficiency has grown, that contribution has been smaller.

It has been consistent on an absolute basis.

It represents a modest portion of our overall physician gains and order gains.

Okay, and then speaking with the salesforce, I think you said you are planning to expand it a little bit.

Can you tell us, remind us, where is the field salesforce headcount as of the end of the quarter?

Where do you think it will be by the end of the second quarter?

I am not sure we provided the total number, but the sales -- field sales headcount calling on physicians has not really changed.

We don't expect it to materially.

What John alluded to earlier was our investment in inside sales.

And the reason that has proven to be really efficient for us is with the turn-on of national TV, what we have seen is more and more physicians that are ordering Cologuard for the first time, many of them without being contacted by a sales rep.

So, what has worked really, really well for us is in the areas where that is a building that a rep that we have in the field calls on, they go get that added to their target list, but, in many situations, these are warm leads for our inside salesforce to go out and call on, make sure they had a great Cologuard experience, and convert to regular orderers.

So, it's really, really important to understand, we've talked a lot here about TV, but it doesn't work -- it does not work without a terrific field sales team and a terrific inside sales team to pull through and make those regular orderers.

So that is really where the add is going to be, and bringing those folks into inside sales has been a really productive way for us to train folks and build a career ladder for them to eventually over time go out into field sales roles.

So, it has been pretty consistent and we will continue to evaluate it and provide updates.

Okay.

That is helpful.

And then, last question on the pilot campaign for the television ads, can you tell us a little bit more about maybe which cities they were in?

And if you cannot name the cities, just tell us roughly what the population size was and did you have local insurance coverage in place in sales and all that good stuff?

And was that controlled for?

What we would say is the television test markets were Atlanta, Tampa, Baltimore, Sacramento, and Milwaukee/Madison from a home perspective.

And so we don't have and have not shared what the control markets were, but that gives you an estimate of both size and coverage profiles which were consistent across.

Okay, great.

Thank you very much.

Eric Criscuolo, Mizuho.

So on the gross margin downtick this quarter, I get that there was some investments made.

But can you exactly describe what type of investments were made?

Was this just added equipment or added personnel that kind of has to be -- has to have some more pull-through on the test volume in order to soak that up?

Eric, it breaks down into kind of two main buckets.

One would be the addition of staffing.

We always like to staff up and be ready for future volume before that volume lands.

The second piece of it is we brought online some additional production capacity within our reagent manufacturing functions.

So, that was kind of a step function increase in cost associated with our ability to keep up with demand on the reagent side.

So those are the two components.

Got you, thank you.

And then, I guess, can you give some comments around the competitive dynamics that you expect to see going forward in the marketplace, given the news of a -- of the recent FDA approval of a new test for [clear] screening?

Sure, Eric.

We do not expect the Septin 9 test, the Epi proColon test to have a significant impact in the market.

I will remind you that that test has been available through Quest as a lab developed test pre-FDA approval, and has not made a significant impact.

The main reason for that is the data surrounding a one-marker blood-based test is unimpressive.

The specificity is 79%.

That means one out of five people who get the test have a false positive and go on to colonoscopy, and if you do the math around that on an annual basis, that leads to a lifetime false positive rate that is about -- you would end up with about seven to eight unnecessary colonoscopies, which is more than you would get if you just underwent colonoscopy every 10 years.

So it's really hard to make a test work with a blood-based test that -- to work with that high of a false-positive rate, coupled with only picking up four out of 10 stage I cancers and an overall sensitivity of only 68%.

So, it got a very limited FDA approval.

It's only to be used after all other guideline-recommended tests are to be used.

When you take a look at the other blood-based tests in the market, it's really -- or that may potentially come to the market, their -- proclaims a sensitivity specificity is poor.

Applied Proteomics offers a lab-developed test for colon cancer which, again, has a 78% specificity and modest sensitivity across all stages.

VolitionRx, similar; 78% specificity with unimpressive sensitivity.

If the world is going to get a blood-based colon cancer screening test, it is going to have to be really specific.

It cannot -- an annual test cannot generate more false-positives than a FIT test, which is only about one in 20 or 5%.

And so far, with what we have seen over the last six or seven years, maybe 10 or 12 different companies attempt to develop a test.

It has all been about a 20%-plus false-positive rate.

So, we think that the real competition are people who choose not to get screened.

And what we are seeing is that Cologuard is having a positive impact.

I spoke with a customer last week who said their group did 1,000 Cologuard tests last year.

And they expect over time, as Cologuard eventually gets into the quality measures, to dramatically increase the number of Cologuard tests that are performed.

And the main reason that they like it is you have a highly sensitive test, 94% sensitivity for curable stage cancers, used every three years with a false-positive rate that is virtually identical to the FIT test.

I think as an important medical technology like a screening test, it's really important to remember, it all comes back to performance characteristics.

You can't throw something out there that performs poorly and expect it to be widely used and widely reimbursed.

Thanks, Kevin.

I appreciate the color there.

And then speaking of the quality metrics, can you maybe give some additional commentary on the timing of those or your expectations for those releases going forward?

As we have said in the past, we really don't have a clear -- we won't have clear insight into the quality metrics until after the USPSTF finalizes its guidance, and we think that could be 2017 or 2018 before Cologuard is included in those quality measures.

In the meantime, we see a strong uptake of Cologuard and we think it sets the stage well for a future period of time when physicians get quality credit for performing of Cologuard tests.

Great, thank you very much.

Chris Lewis, ROTH Capital Partners.

First, Kevin, last call you introduced the total office sales call targeting approach.

Can you just talk about how that strategy was received in the field during the quarter?

Yes, the total office call was -- is an important part of how we will work with our salesforce going into the future and it is having a positive impact.

What we are seeing is that physicians, the second ordering physician in a current customer's office, orders at a significantly higher rate than a physician that happens to be in a small office and is the first to order.

So there is -- being out in the field you see it, physicians in a group practice talk to each other.

So it's early, though.

We will have a better idea towards the end of the year.

Okay, great.

And then ASP has ticked down a little bit sequentially.

You have talked about kind of the cost side, but in terms of ASPs, can you just talk about if there is anything to look into with that sequential decrease, albeit small, but how should we think about ASPs trending going forward?

There is nothing that you should be looking to in Q1 that is indicative of a trend.

We reported $372.

That is down slightly from Q4, about 1% from $377.

We pointed out in the past that that ASP number is subject to a certain amount of variability from quarter to quarter.

There are a lot of different factors that can way on it.

There is the timing of cash-based -- basis revenue, lots of different accrual and reserve activity that can vary from quarter to quarter.

So, I would caution against regarding that slight Q1 decline as any indication of a downward trend.

At the end of last quarter, we pointed to where we exited 2015, which was at $377 as a pretty reasonable proxy for our full-year average, and nothing has changed in our thinking about that.

So, I would encourage you to continue thinking about something in the upper $370s as a full-year benchmark.

All right, thanks a lot.

Drew Jones, Stephens Inc.

Trying to gauge the best way to determine a return on the DTC.

Is it maybe -- could you tell us what did a dollar spend in the test markets equate to in terms of dollars in revenue?

And does that change dramatically as you go to a nationwide effort?

Think about it this way.

If you drew a line where you saw an increase in test orders due specifically to the television campaign, and you saw that increasing while the television is on, and when you turn the television off, that line does not drop back to zero.

It starts to decline again.

What we don't know is where would that line decline to as a result of all those new physicians in that territory that otherwise would not have ordered because they would not have heard of Cologuard.

So, you really have to do math over a longer period of time than just during the test period, which is important.

So you want to look at that over the course of the year and see what your payback is, not over nine weeks.

Okay, understood.

And whether there is a 5% tail, a 25% tail or a higher tail, we don't know.

But it is important to model that out.

And that is why I referred earlier, I believe, to a payback in the range of six to 12 months depending on those assumptions.

We think that that is a really wise investment.

Maybe the most efficient investment we made in sales and marketing, but it is obviously coupled with our strong sales force and marketing efforts.

So you can't pull it all apart, but we like the return in that timeframe.

That just makes prudent sense.

You keep building the stronger, larger base of customers with the higher [reorder] rate.

That bodes well for topline growth.

Again, we have to be circumspectful about it.

We do not know yet.

And then last one for me, are you guys still exploring the possibility of substituting for the NDRG marker?

And if so, what are the regulatory requirements to do that?

What's the impact on the data you have gathered on Cologuard to date if that did occur?

With MDX Health?

Is that what you are asking?

Yes.

So, with MDxHealth replacing the NDRG4 marker, that program is underway.

We are making good progress.

It is approximately a two-year program with a fairly modest R&D investment.

We identified a slew of markers that performed better at tissue level than NDRG4.

And we expect to finalize which marker we would insert instead of NDRG4.

I want to emphasize that we already collected stool samples that we preserved during the DeeP-C study, and we have multiple samples per patient banked that would be amenable for testing during this two-year process where we complete the product development, do the testing, submit to FDA PMA supplement and then change Cologuard.

We don't expect the performance to change in a meaningful way one way or the other because NDRG4 is only a partial contributor to the overall performance of the test.

Thanks, guys.

Jeff Elliott, Robert Baird.

John, really a question on ASPs for rev rec.

Given the commentary earlier about the letter from CMS to the Medicare Advantage plans, does that have implications for rev rec?

I think before you walked us through I think maybe half of the rev could be recognized upfront, half would be recognized on a cash basis.

But in light of that letter, does that change rev rec on those MA plans?

Jeff, that's a great question.

Thanks for asking.

The real question I guess is what will it do to our collection rate on a Medicare Advantage sale.

What we have seen over the course of the last several quarters is continued improvement in our average cash collected, so much so that we have actually come off of our recognition of -- and when we were recognizing upfront 50% on a Medicare Advantage sale, we've actually gotten comfortable increasing that just a bit.

On a net basis, it really doesn't have an impact in a current quarter when you do that, because you also have to pay attention to the corresponding reserves that you need from a bad debt perspective, etc.

But yes, we have been able to take our accrual percentage on Medicare Advantage up slightly.

So, that is just a good sign that our collections are maturing in that particular part of the business and we are gaining confidence in the ultimate ability to collect on our Medicare Advantage program.

Okay.

Any chance we can get an update on the mix of Medicare versus commercial in the quarter?

Thanks.

We have not offered up that level of breakout in the past.

It is relatively unchanged since last quarter.

Okay, thank you.

I am showing no further questions at this time.

I would like to turn the call over to Mr. Kevin Conroy for closing remarks.

Thank you for joining us on today's call.

We look forward to updating you on the progress of our national television campaign and our continued progress with reimbursement coverage and contracting.

We hope to see many of you in San Diego later this month at the Digestive Disease Week conference.

Finally, I want to thank the incredible team of dedicated professionals at Exact Sciences who are committed to our mission of eradicating colorectal cancer.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.