Exact Sciences Corp (EXAS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Exact Sciences Corporation second-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to JP Fielder, Senior Director of Corporate Communications. You may begin.

Thank you, Sean, and thank you all for joining us for Exact Sciences' second-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 second-quarter financial results. If you've 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 second-quarter 2016 financial results; then Kevin will provide an update on our corporate priorities.

During today's call will make forward-looking statements based on our 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 filings, which also should be accessed through our website.

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

Thanks, JP; and thanks, everyone, for joining us. During the second quarter we saw strong physician and patient demand for Cologuard. Our sales force continues to help drive this demand, and their efforts have been complemented by an effective direct-to-consumer marketing effort, which includes our national television campaign.

Solid commercial execution generated strong quarterly financial performance that included 161% year-over-year growth in revenue. Our ongoing attention to efficiency and expense control during the quarter resulted in meaningful improvements to our cost per completed test and cash utilization.

In June, the US preventative services task force included Cologuard in its recommendation statement, which is another step towards Cologuard becoming a standard of care in colon cancer screening. USPSTF's recent recommendations, coupled with Cologuard's inclusion in American Cancer Society, AGA, and NCCN guidelines, are all consistent with each other and will help fuel future growth.

In addition, the National Committee for Quality Assurance proposed broadening the HEDIS quality measures for colon cancer screening to include Cologuard. This would allow health plan systems and physicians to earn quality credit for using Cologuard this year. We will discuss these and other topics during this morning's call.

It's now my pleasure to introduce John Bakewell, Exact Sciences' Chief Financial Officer for our second-quarter financial review. John?

Thanks, Kevin, and good morning. We're quite pleased all around with our financial performance this quarter, and here are the highlights.

Second-quarter revenue results nicely exceeded our expectations. Completed Cologuard test volume totaled approximately 54,000, generating revenue of $21.2 million for the quarter for an increase of 161% compared with the second quarter of last year and sequential growth of 43% over Q1 of this year. Average recognized revenue per test increased to $391 for the second quarter, bringing our ASP performance year to date right in line with our goals for the full year.

We are delighted with our cost of sales results this quarter. Second-quarter cost of sales totaled $186 per completed test, sequentially improved by $41 per test from Q1's result of $227.

As you'll recall, Q1 cost of sales included incremental scale-up investments needed to prepare our manufacturing in our lab facilities for heightened future volume. The combination of careful cost control along with increased test volume during the second quarter drove significant per-unit COGS improvement. This improvement brings to light the underlying scale and leverage potential that's resident within our manufacturing and lab operations platforms. Altogether, our COGS performance and ASP improvement combined to deliver gross margin of 52% for the second quarter.

The second-quarter operating expenses totaled $56.2 million, a sequential increase of $2.5 million from Q1 of 2016. Second-quarter cash utilization totaled $38.5 million, considerably below both our Q1 2016 cash utilization of $44.3 million and the low end of our previously communicated range of $45 million to $49 million for the second quarter, primarily the result of our revenue performance combined with our ongoing cost-containment efforts. We ended the second quarter of 2016 with cash and cash equivalents of $224 million.

I will now turn the call back to Kevin.

Thanks, John. The efforts of our sales force, complemented by our direct-to-consumer marketing efforts, drove significant commercial progress during the second quarter. We expect this to continue through the year.

As John noted, we completed 54,000 Cologuard tests during the quarter. The number of physicians ordering Cologuard for the first time accelerated during the second quarter, increasing by 9,000 to 41,000 physicians since launch. This compares to an increase of 5,000 physicians in the first quarter of 2016.

Our compliance rate is now 68%. The 1% decline was caused by a higher mix of commercially insured patients, who comply at a lower rate than Medicare patients. We believe that broader commercial insurance coverage will drive higher patient compliance rates over time. We expect that 65,000 or more Cologuard tests will be completed during the third quarter. We continue to anticipate completing more than 240,000 Cologuard tests during 2016, generating revenue of $90 million to $100 million.

Let's turn now to our sales and direct-to-consumer marketing efforts. There are several key observations. First, we have experienced field and inside sales teams calling on primary care physicians' offices. The teams have strengthened and become more seasoned. Our sales team has become adept at leveraging physician relationships built last year and delivering our message about the comprehensive services supporting each Cologuard test. Third, because of the tenure and increased scale of our sales team, we are increasing both reach and frequency across a growing customer base.

Our digital advertising campaign also continues to build awareness of Cologuard among both physicians and patients. This campaign engages patients in particular through digital social media and print advertising.

Our direct-to-physician digital campaign is focused on ensuring that physicians see the results of our 10,000-patient clinical trial published in The New England Journal of Medicine. Our digital advertising campaign has been complemented by our national television campaign. During the second quarter, visits to our website, cologuardtest.com, and downloads of key documents such as patient discussion guides and physician order forms are up significantly.

Let's review our national television campaign. Our goals for this campaign are cost-effectively to increase total orders, generate growth in the number of new physicians who order Cologuard for the first time, and increase the rate at which physicians reorder. The focus of this television campaign remains on reaching those in Cologuard's target population and generating value by supporting our efforts to secure new physician customers and obtain new test orders.

The campaign has helped fuel the strong demand during the second quarter. We have reinitiated the campaign and expect to be on and off the air strategically for the rest of 2016.

There was great progress during the quarter on a number of fronts that directly affect our long-term growth outlook. The first is the publication of the final colorectal cancer screening recommendations by the USPSTF, which made two points very clear: first, the task force found convincing evidence that screening for colorectal cancer provides substantial benefits and assigned an A grade for screening average risk individuals between 50 and 75.

Second, Cologuard is listed among the seven recommended colon cancer screening methods. The task force made it clear that tests are not presented in any preferred or ranked order; the goal is to maximize the total number of persons who are screened. The task force also provided modeling data that demonstrate Cologuard being used every three years offers the best ratio of benefits to harms among the recommended screening strategies. We believe the final recommendations will position Cologuard to receive the benefits of an A-graded preventive service under applicable laws.

Cologuard's inclusion in the final recommendations has several important implications. As we have said, commercial insurers typically cover and pay for preventive services that are included in USPSTF recommendations.

In addition, the Affordable Care Act mandates coverage without patient cost-sharing for services that are graded A or B by USPSTF after a grace period of just over one year. Our conclusion that commercial insurers will be required to cover Cologuard without cost-sharing is supported by precedents established by federal regulators in the interpretation and implementation of the guidelines for tobacco cessation and contraceptive use under the same statutory provision.

In mid-July, NCQA the National Committee for Quality Assurance proposed to broaden the HEDIS quality measures for colon cancer screening to include Cologuard for three years of quality credit. Inclusion in these quality measures is another important step toward Cologuard becoming the standard of care for colon cancer screening. Primary care physicians and health plans are increasingly financially incentivized to demonstrate improvements in quality as measured by data such as colon cancer screening rates.

More than 90% of the country's health plans measure their quality based on HEDIS. The CMS STAR ratings, which guide quality measures for Medicare Advantage plans, are directly impacted by HEDIS. The proposal to broaden the colon cancer screening measure is subject to a 30-day public comment period, which ends on August 10. The updated measure is expected to be released on or about October 1. NCQA has a policy of developing quality measures for colon cancer screening methods graded A or B by USPSTF. If Cologuard is included in this October's update, health plan systems and physicians can receive quality measure credit for any patients who use Cologuard this year or in the past two years.

Now, we'd be happy to answer your questions.

(Operator Instructions) Brian Weinstein, William Blair.

First, kind of the obvious one with respect to guidance. You're obviously calling for a pretty big step-up in the fourth quarter. Can you talk about your confidence in the fourth quarter? What are you seeing? What are the programs that you have in place in order to ensure that that bump-up in Q4 is attainable, given the seasonality that we saw last year in the fourth quarter?

Yes, sure. Thanks, Brian. We believe, as we have said, that the back half of the year would be a strong part of our commercial performance. And we see the key drivers being, again, new physician adoption -- which is up significantly since the start of the television campaign -- and then also increased utilization by those same physicians.

So the thing that we really track is the reorder rate of a growing base of physicians. And we believe that the television campaign, which we are extending throughout the end of this year, will have a positive -- continue to have a positive impact on increasing the number of new physicians and also the reorder rate of the growing base of physicians.

We also believe that we'll see some impact in the back half of the year based upon the potential for inclusion in the quality measures, which drive performance. So we are excited about the opportunity for the back half of the year, and obviously there's a clear path forward to achieve our guidance of 240,000 tests.

Got it. And then with respect to PAMA, as things are clarified there, can you talk about the potential impact of PAMA on your business and, potentially, what type of ASPs that you guys should be thinking about going forward?

Sure, Brian. So PAMA is Protecting Access to Medicare Act. And last month, CMS issued final regulations regarding both the implementation and application of that statute's provisions. PAMA requires labs to report private payor rates for all lab tests, and these rates are used to drive a weighted medium that become Medicare's reimbursement rate. Although we are still assessing those final rules, our preliminary assessment, based upon the claims data for January 1 of this year through June 30 of this year, show that we expect certainty under PAMA that our Medicare rate will not materially change through 2020.

So PAMA is good news for the business. It provides a level of certainty for the next several years looking forward, and that's important as we plan for growth over that period of time.

Great. Thanks for the clarification. One last one, if I could sneak it in, on COGS. You guys have talked about getting to $190 kind of by the end of the year. You're already well below that -- well, not well below, but you're below that today. How should we think about the trend line for that going out through the end of the year? What type of improvement should we be seeing? And, really, is volume what is going to be driving this the most at this point? Thanks.

Hi, Brian, this is John. I'll take that question. You know, when we look at cost of sales, obviously, we ought to look at it on a completed test basis. The $186 that we reported for Q2 -- that was a very nice improvement over Q1. I want to just remind everybody that that Q1 result was impacted by investments that we had made in staffing and capacity in order to support volume.

They dampened that Q1 result, but at the same time they enabled this performance here in the second quarter. And we did experience some very good, favorable absorption during Q2, along with just some good cost center spending control within lab operations and manufacturing.

So now, when we look into the rest of the year, those cost containment initiatives should continue to positively influence our COGS per test. We don't expect that the second half of the year COGS per test will be as low as Q2 levels, but we do anticipate them to be in the mid to lower $190 range. And ultimately, it's volume, which is absorption, that ends up being the most significant determining factor of COGS and consequently gross margin.

Looking over time, the improvement trend isn't probably always going to be linear, because we do have to make those incremental investments from time to time. But we do expect a continued trend of reduction on a per-test basis as we move forward. But for the remainder of this year, you can think the low $190s is a realistic, achievable place for us.

Catherine Ramsey, Robert W. Baird.

Congrats on a great quarter. Just starting out, I was wondering if you could talk about any trends you saw during the quarter from doc additions per week, reorder rates, orders per doc kind of month-to-month? I know you started the ad campaign in mid-April. So if you do a month lag between an order and a completed test, that's about a month-and-a-half benefit from the ad campaign. So I'm just trying to figure out how we should think about what a full benefit would be for a quarter?

Sure, Catherine; this is Maneesh. As you know, when we initiated a pilot what we saw was really a strong increase in both the number of physicians and the reorder rate. And what was really encouraging was that coupled with the execution of the sales force -- we saw a continuation of that trend and that trajectory.

So what we have seen very directly is that increase in both new physicians and the reorder rates and we see that stabilized to increasing. And that leverage is what gives us confidence, not just in Q3 and Q4, but for what Kevin spoke to, which was the long-term stability.

If you think about the size of this market and the fact that there are over 200,000 primary care physicians that actively will be targets for us, there is a really long way to go. And we see an ability to sustain the levels of both doc additions and continued increase in reorder rates in the back half of this year -- but really over the next several years.

Okay, that's helpful. And then any color on progress with commercial coverage? And what are you hearing from payors following USPSTF update? I saw a news clip saying that Wellmark is now covering Cologuard. Is that correct as well?

Yes, so what this has done -- what the USPSTF clarity has brought is really robust conversations with essentially all payors, and it's reset that conversation. So, yes, we did get recently Wellmark to give us a positive coverage decision.

But the thing to keep in mind when you think about our private payor conversations is that these things just take time. Most payors typically review their coverage to policies on any measure, not just colon cancer screening, once a year. And so while it's an eternity -- the last month and a half that we've experienced since USPSTF became final -- from a private payor perspective, it's almost like it happened yesterday. And so we see a positive tone and a trend to the conversations, but we know that it's something that is going to take time. But overall, it's been very positive.

All right, great. Thanks, guys.

Thanks, Catherine.

Brandon Couillard, Jefferies.

Kevin, back on the TV campaign, can you give us any numbers around the ROI that you saw from the national campaign relative to the test market? And would it be reasonable to assume that the return or the relative impact is -- let's say flatlines in the second half of the year sort of relative to the initial bump that you would've seen from the national effort?

Well, we're not giving actual percentage increases based on -- but you can think about it roughly this way. Historically, the average weekly addition of physicians prior to the national campaign was around 500 physicians per week. That has increased to around 700 per week. It kind of is between 600 and 800, in that range.

And that has continued, despite the growing base of physicians who have ordered Cologuard at least one time.

And over time we think this campaign will continue to drive new additions. But importantly, over time it will also have the impact of creating awareness among patients who then go and talk to their doctor about Cologuard -- frequently, with a download in their hand of a patient discussion guide, things to talk to their physician about Cologuard. When they're talking to a current customer of Exact Sciences, it just is a great reminder to that physician to think about using Cologuard not only to that patient, but other patients that come in that day or that week.

It also, for patients who or customers who have never used Cologuard, as physicians who have never ordered Cologuard before, it's a great prompt of a conversation. And then we follow up with our inside sales team, calling those physicians and educating them and their office staff about Cologuard. So it is really a long-term driver. And in terms of quantifying the ROI at this point in time, we can start to estimate that. It's really hard to estimate where that will be a year from now. We do see the financial payback as being within one year, Brandon.

And over time that could increase -- or that time duration could shorten as you have a larger number of physicians who are ordering Cologuard. And you get these other important prerequisites for robust ordering, including broad insurance coverage and HEDIS measures.

So that's the overall dynamic. It's really hard to say what the ROI will be six months from now, or a year from now, or two years from now. We do know that the television advertising campaign is a wise financial investment.

Thanks. That's helpful. And a two-part question for John: first, in terms of the realized ASP you saw in the second quarter, was there something unique about the revenue mix there that would suggest that's not a run rate that's reasonable for the second half?

And then, secondly, any update can give us in terms of the cash burn or OpEx outlook for the back half of the year would be helpful. Thank you.

Sure. With respect to ASP, as we -- we have pointed this on the past: our ASP is subject to a certain amount of variability quarter to quarter. There are a lot of factors that influence that, including the timing of our cash basis revenue, and changes in payor mix, and what happens with our accrual and reserve activity from period to period.

And we had a cash -- we had an ASP of $372 in Q1, and that was a number that was probably lower than our anticipated baseline for the year. $391 -- I won't call out anything specific in that number, other than just to point to that variability.

And really, what we should do is look forward. If you recall, we pointed to a full-year ASP of around $377 as being a reasonable proxy for the full year. We are indeed seeing some improvement in our cash collections. And as a result of that, we are comfortable with moving off of that a little bit in an upward direction.

And we're thinking that for the remainder of the year, ASP pretty confidently will be in and around the $380 or so. So that's really what you should focus on for Q3 and Q4 is something in that $380 range. I think that represents a good baseline for now, with an expectation that over the course of time, as cash collections improve, that we'll see that number continue to rise.

With respect to operating expenses and cash burn, let me just focus on the line items within op expenses and our Q2 performance. Our sales and marketing expense went up by $4.6 million from Q1 levels, and that reflects our first quarter of -- our second-quarter national advertising and little bit of further expansion in our sales and marketing headcount, primarily in direct and indirect sales and in support and leadership functions.

But despite those increases, that line ran nearly $4 million lower than we had previously anticipated in the result. The reason for that was just further optimization of our program costs and the spending around those, and lower field sales support costs in the forms of travel and entertainment and some things like that. Within the other operating expense lines, if you look at R&D and G&A, they were sequentially lower than Q1 by about $1.5 million for R&D and about $500,000 for G&A.

And again, in comparison with our guidance -- our previously communicated guidance -- the G&A expense for Q2 was right in line. And R&D was just a little bit lower than planned, about $500,000 lower. And that is all just result of general expense control across the function.

When we look forward, with respect to R&D we'd expect Q3 spending to be right in line with Q2. G&A -- we expect a sequential increase of about $1 million to $2 million, which reflects primarily an increase in our IT infrastructure development. There's going to be some increased IT development cost during the quarter.

And then with respect to sales and marketing, we'd expect spending that's about $2 million lower than Q2 levels. And this reflects a modestly lighter television ad budget for Q3 as well as some continued progress with our cost containment initiatives.

And if you break that down, we'd expect this will bring our program costs spending down to roughly $15 million for the quarter. And the headcount-related costs should remain consistent with Q2 levels at right around $13 million per quarter.

And then bridging that into cash utilization, we would expect in Q3 that our cash utilization will be in a range of about $38 million to $42 million. And this reflects our -- what we'll expect to be improved P&L performance from Q2 to Q3, offset a little bit by the timing of some CapEx pending and also some heavier working capital requirements during the third quarter. So hopefully that helps.

Super. Very helpful, thank you.

Mark Massaro, Canaccord Genuity.

Great, thanks for taking the question and congrats on an excellent quarter.

Thanks, Mark.

My first question is around commercial health plans. And I understand the commercial health plans are all in different periods to review something -- a new test, for instance. Can you, Kevin, share your expectations around how investors should be thinking about health plans coming on now that Cologuard is included in USPSTF guidelines? And is it possible to think we may see a larger payor come on before the end of 2016?

Thanks, Mark. I would refer back to Maneesh's comments here -- that most plans evaluate each of their new -- you know, their policies on an annual basis. And so every plan has a different planned time of the year that they do that.

We aren't prepared to provide guidance as to whether a large payor will come on board in the back half of the year. We do expect to see additional payors sign contracts with us, bringing Cologuard in network in the back half of this year. Many of those payors look to USPSTF as a kind of target for, or guidance for, whether they cover a particular new screening test. And it just takes some time. I think Maneesh said it best; this just happened yesterday in their world, and it takes time.

And then on top of that, and I think it's really important to understand the progress of -- first there is a coverage decision. Then there is a certification of the laboratory. Then there is a contract typically entered into. And even after that contract is entered into, it does take time to educate physicians and patients that Cologuard is a covered service within their plans.

So I think this is something that will play out over time, but the trajectory is a strong one that will help drive our long-term fundamentals from a financial perspective.

Okay, great. And secondly, do you expect any material change to your sales and marketing team? And related to that, any update on Ironwood?

Well, first of all, I would just like to compliment the strong effort by the sales and marketing team. The performance this quarter is the result of a lot of work that has been done over the last two or three years. This isn't just one quarter's worth of performance. This is really the work done by an entire team over the last 2 to 3 years.

And I'll let Maneesh answer the rest of that question.

Before I answer the Ironwood part, I would specifically call out the sales team and thank them for their efforts, because sales team is what delivered this result. It's not just -- I know we spent a lot of time talking about the TV campaign, which is important, but the sales team has really executed. So my hat is off to them.

As far as the Ironwood, you know, Ironwood has just been a fantastic partner since the launch. And our sales team and our commercial execution that we have been able to just drive has, over time, really made the Ironwood contribution relatively smaller. And it has gotten smaller and smaller over time.

So they have been a great partner, and we have a continued relationship. And we are working with them to figure out what makes sense on a go-forward basis with our execution of our team and our commercial strategy, both sales and marketing. It's really made the Ironwood contribution much smaller.

So that's something we still need to figure out. We still are having active dialogue with them, and we will provide an update once we come to the conclusion. But the Ironwood team has just been fantastic to work with.

Great. And if I can, I would love to hear your comments, Kevin or Maneesh, about how you expect potential inclusion in HEDIS to possibly accelerate the rate of physician adoption -- and any other commentary around how you think health plans might receive specifically the HEDIS would be helpful. Thank you.

Yes. So HEDIS has very quietly become -- and the HEDIS measures have become -- an incredibly important part of driving the practice of medicine, especially around some fundamental areas that primary care physicians are involved in. So, for example, blood pressure screening is really important HEDIS measure.

We know that if you take certain steps from a preventative care standpoint, you can improve outcomes and decrease costs, which is an important goal of policymakers, who have implemented at the Medicare Advantage level financial incentives that are driving behavior. So, for example, CMS assigns a STAR rating system to Medicare Advantage plans consisting of one to five stars -- five stars being great; very few plans achieve five stars -- four stars achieving a bonus, which is about 5%.

And to put this in perspective, a typical MA member would -- CMS would pay about $10,000 to the Medicare Advantage plan to cover that member for a year. And a 5% bonus is $500. For United Health alone that was a $1.4 billion bonus last year. So these amount to significant dollars.

And it's a bell curve that establishes the cutoffs for the 1 to 5 STAR ratings. And there are multiple different quality measures that go into these ratings. Just a 10% improvement in colon cancer screening rates would increase the STAR rating for the colon cancer measure for 244 Medicare Advantage plans.

And again, remember that the four-star rating qualifies you for a bonus. There are 73 that are currently -- 73 of those 244 plans are currently rated 3.5 for the colon-cancer-specific measure. So that would cause these plans to be focused on their colon cancer screening rates, which is one of the measures where there's still a lot of room for improvement.

It's not only Medicare advantage that relies on the HEDIS system. Increasingly, commercial plans are entering into contracts with large provider groups that are very similar in structure to the Medicare STAR rating financial incentives. So if you are a practicing physician today, and particularly in the primary care space, you are watching your STAR ratings very closely. And that becomes increasingly true in the back half of the year, when there is a greater focus on performance.

I'd like to emphasize that the significant benefit from this comes as you look out over the next several years, in 5 years or 10 years, where we think because of the Cologuard's high compliance rate relative to colonoscopy, relative to the FIT test, relative to FOBT, relative to virtual colonoscopy, Cologuard is a quantum leap improvement in compliance.

Colonoscopy compliance in any given year is -- only about 35% to 40% of patients actually take their physician's advice and get a colonoscopy versus about in the high 60% with Cologuard. So this will be an important part of the overall marketing message to physicians, to payors, and to large group practices. And that will take time to play out. But it's a fundamental driver of the business long-term.

Terrific. Thanks for all the color.

Thanks, Mark.

Bill Bonello, Craig-Hallum.

A couple of follow-up questions. So back to be advertising campaign, I'm just wondering if you can give us any sense -- without being too specific, but any sense of volume progression over the course of Q2? I'm just trying to get a sense of when the national advertising campaign really began to impact test volume.

The national ad campaign, Bill, started April 11. And it more or less mimicked in terms of impact this -- the impact that the test campaign did, which was a gradual impact. After that campaign started, over time the test order impact increased.

Now, that again is coupled with the sales force efforts. But that is about halfway through the quarter from a test order to completed test perspective, which there is a 30 -- roughly a 35-day lag between a test order and a completed test. So obviously that campaign will also have an impact in terms of completed tests in Q3.

Okay, right. So not necessarily a full quarter of volume impact that you could attribute to the campaign in Q2?

Correct.

Okay, that makes a lot of sense. And then, just going back to the cash burn discussion, trying to think a little bit out beyond the next quarter, if we just fast-forward it at the projected Q3 burn, you've got about 5 quarters of cash on the books. Should we look for you -- you had expected Q2 to be the high-water mark. Obviously, with it being a lot better than expected, that doesn't seem to be the case right now. But should we expect for cash burn to diminish meaningfully in Q4? And thereafter, just how are you thinking about that a little longer?

Bill, we'll hold off on commenting on Q4 for now. We've given, I think, some pretty good insight into Q3. I will concur with your observation; we did guide to the back half of the year being lower than Q2, and that comment held until we beat our Q2 guidance considerably.

But I think you can expect overall cash utilization in Q4 to look not a lot different than what you see in Q3. We are committed to being very cost effective with our expense programs here at the business. But we're not prepared to offer up any specific guidance into Q4 or the out-years just yet.

Okay. So it sounds like that, though, if I'm hearing you right on that, there's also not necessarily a commitment to try to bring the burden down meaningfully from where it is anytime soon?

That's very much our commitment. And over the longer term, that's absolutely correct from a directional point of view. In terms of variability from one quarter to the next, I'll hold off for now on commenting.

But again, in Q3 we would expect to see a bigger contribution from P&L profitability than we saw in Q2. We have a little bit of CapEx and working capital timing that will dampen that a little bit, but CapEx and working capital aside, I think what you'll see -- you'll see continued downward cash utilization progress in the third quarter.

Okay, great. Excellent. Thank you very much. That's all we had.

Yes, and I just want to make clear here: we have a commitment to taking this business to profitability. And we obviously haven't provided guidance. Just in case in the transcript there is any question about how that question was asked, we do have a commitment over the next X period of time to move this business to profitability.

That's helpful. Thank you.

Thanks, Bill.

Isaac Ro, Goldman Sachs.

Thank you very much, appreciate you taking the question. Just want to ask another question along the last question regarding the progression of volume in 2Q. It sounded like from your prior comments there wasn't necessarily a significant inflection month-to-month, and that it was more of a steady increase following the DTC launch. I just wanted to confirm that was the tone that you were trying to convey, or if in fact there was a bit of an inflection that we should think about as we look towards a back-half ramp?

Thanks, Isaac. Yes, that's correct. There was -- and I wouldn't use the term inflection. There was a steady impact by both the sales force and the television ad campaign over the course of the quarter.

Great. And then maybe just on the spending side, you guys put a lot of detail around the preservation of capital, to your earlier point, towards profitability. And at the same time, you're obviously investing in the ad campaign. So how should we think about the incremental spend if we just isolate the ad spend the back half versus the first half?

You mentioned the 3Q dynamic, but just trying to take a more holistic view at the direction of spend. It's fair to assume, I assume, that -- I'm assuming that there will be a back-half increase versus first half?

Yes, Isaac, it will be slightly greater in the back half of the year than it was in the front half of the year. Really, I think the way you should think about it is Q2 and Q4 are weighted pretty heavily in terms of television ad spending, because the expectation is that we'll be on a majority of the weeks during Q4, and we were as well during Q2.

Bear in mind, Q1 was later than that because we were still in a test market mode. And in Q3 we are moderating our TV ad spend, and we'll be on and off in select weeks during Q3. But when you add it all up, we would be slightly higher terms of total spend in the back half of the year than we were in front.

Got it, thank you very much. Appreciate the color.

Eric Criscuolo, Mizuho.

Very nice quarter here. So just a question on the private pay contracts: when you enter into a contract with a private payor, do you immediately start to accrue that revenue? Or do you still have to recognize it as cash on a cash basis, and then you can accrue when you get some type of established pattern going?

So we need two things. So in addition to the contract, we need some level of payment history before we can move to an accrual basis. So obviously the vast majority is done today on a cash basis, which accounted for the variability you see in ASP. Over time, as we enter into these contracts and get both contract and payment history, we'll expect that to stabilize.

Okay, great. Thank you very much. That's all I have.

Sara Wojda, Gabelli & Company.

So I'm just wondering about the volumes between Q3/Q4. It's a little bit flatter going into Q3. Is that mainly because of the smaller spend on the ad campaign? And then, I guess, just going more into 2017, would we be seeing more similar sequential growth going in past this year?

So the Q3 -- we know we now have a full year and a half under our belt, with visibility into the colon cancer screening rates, people's visits to physicians, both physician vacations, rep vacations, and testing that's performed. And we see Q3 a little bit lighter. So you see a little bit of variability, but still really strong growth. But the biggest quarters for growth are typically going to be the Q2 time frame as well as the blend between Q3 and Q4, that September/October/November time frame before the holidays.

So that's a trend we will continue to see. The one thing that makes this difficult is just the sheer size and magnitude of this opportunity -- the rapid growth in underlying ordering physicians as well as the efficiencies we're seeing. So that's really why we just -- it's difficult to measure. But I'll just go back to the long-term trajectory over not the next quarters, but 2017 and 2018 being a terrific opportunity for growth.

Okay. And then secondly, just in terms of your compliance rate, it has ticked down a couple percentage points on an overall basis. Do you see it being similar going forward? And how do you plan to keep that a strong number?

You know, our compliance rates -- we have targeted 70%. We think over time there's an opportunity to improve beyond that. As we said, there was a 1% decline in the compliance rate. That's driven mainly by an increase relative mix of commercial payors. And there's still a majority of Medicare patients who are prescribed the Cologuard test.

As we see broader commercial insurance coverage, we expect to see higher compliance rate, and then the compliance rate will start to increase. And we are already starting to see that dynamic that is also being driven by the television advertising, where patients who respond to the television advertising seem to have a higher rate of compliance. So we think it trends -- you know, we're not quite sure where it would end up being at a low point, probably not much below 68%, but we than expected to start to increase and have the ability to go beyond 70%.

Okay, great. Thank you very much.

Thank you.

Chris Lewis, ROTH Capital.

I wanted to start on the task force inclusion. As those commercial payors begin to pick up coverage here, how should we think about pricing as those new commercial payors come on board relative to CMS rate? And can you talk about your strategy and what your strategy will be heading into those conversations on pricing? Thanks.

Sure. So our strategy hasn't changed at all. Our strategy is that Medicare is the largest payor in the US, and they deserve the best price. And so we haven't entered into any contracts below the Medicare rate, and we don't expect to in the future.

Other than that, we don't provide public comments about our specific contracting strategy. We do believe that Medicare, as the largest payor, deserves the best rate.

Understood. And then you introduced the total-office sales call targeting approach earlier this year. I was hoping you could just spend a minute talking about how that strategy is progressing. And what type of increased productivity from the reps are you seeing from that?

Sure, Chris. We introduced it, and it has proven to be fruitful. And that really is where I was calling out just the increased efficiency. Kevin mentioned we have seen an increase in efficiency and productivity in the second quarter, and a lot of that is due to having reps, while they're in an office, call on all the docs in that office. So we have seen an improvement.

We haven't spoken to the specifics of how much, but we think that there is more room to go there. And it dramatically increases the number of physicians we can reach with our sales force. So it's been positive. And we think that there's continued opportunity.

Okay, great. And just one more on the --.

Chris, to further Maneesh's point, one of the underlying -- one of the additional underlying reasons for the total office strategy is that the second position in an office orders at a higher rate than the first physician. So there's an efficiency reason to do this and leverage over time.

Understood. And then, just for the remainder of the year, if you look at the second quarter, obviously a nice beat versus kind of your volume expectations. But you left the full-year volume out, like, unchanged. So can you just walk us through the rationale of leaving that full-year volume outlook unchanged in light of the better-than-expected second quarter and your plans to extend the DTC campaign over the remainder of the year? Thanks.

Yes, sure, Chris. If you take a look at the pace here, from the first quarter, 40,000 tests; to second quarter, 54,000 tests; to a third-quarter 65,000 tests; to our fourth quarter, that would imply 81,000 completed tests. That pace is pretty consistent and gets you to around 240,000.

I don't think there is -- we don't think that if you exceed 240,000, it would be by much. And I really want to emphasize that there's still a lot of work to do in the back half of the year, starting today.

And then from a revenue perspective, as John may have mentioned, that implies that the $380 ASP -- that you're at the lower end of that $90 million to $100 million range, not at the higher end of the range. There's still a lot of work to be done in the second half of the year, and I think it's important to note that as we think about how this year progresses.

Okay, great. Thanks for the time.

Bruce Jackson, Lake Street Capital.

Thank you for taking my questions. First, was there any revenue booked in Q2 from tests that were performed in prior quarters?

Bruce, we actually have a good bit of disclosure on that in our 10-Q. I'll just point you to that, and you can take a look at what we provide. The amount is relatively low but there's good disclosure in our footnotes with respect to the timing of cash collections on revenue.

Okay, super. And then you mentioned that there was an increase in the commercial mix this quarter. Was it like a mid-single-digit increase? Can you give us just a little bit of flavor on how the mix may have shifted in the testing during the quarter?

Sure. So, you know, we had previously indicated that it had been really steady and consistent that right around 70% of the volume was Medicare. So without -- it hasn't been a significant shift, just because the patient population is skewed so heavily towards Medicare. But we have -- as you start get more commercial patients aware of and ordering Cologuard, that's really what has done it. It has been a small shift but an increase in the weight of commercial patients on a relative basis. But it's a small number.

Okay. That's it for me. Nice quarter.

Thank you. I would now like to turn the call back over to Kevin Conroy, Chief Executive Officer, for any concluding remarks.

The second quarter was a solid one for the Company, and we expect the growth of underlying demand for Cologuard and the outstanding execution by our team to continue. Both drove strong financial performance during the quarter, with improvements to our COGS, gross margins, and cash utilization. We also made good progress during the quarter on a number of fronts that positively affect our long-term growth outlook, including the inclusion of Cologuard as a recommended test in USPSTF's final recommendations and the proposed addition of Cologuard to the HEDIS quality measures. Both are anticipated to increase demand for Cologuard over time.

I'd like to emphasize a special thanks to everybody on the Exact Sciences team, who have continued to work incredibly hard to make Cologuard a standard of care and a potential to alter the colon cancer screening landscape. This is an important and worthy goal.

Today I'd like to thank all of you for joining the call and look forward to talking to you again in three months.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.